{"id":164,"date":"2025-11-12T09:39:41","date_gmt":"2025-11-12T09:39:41","guid":{"rendered":"https:\/\/blogs.gre.ac.uk\/nusc\/?p=164"},"modified":"2025-11-14T05:18:16","modified_gmt":"2025-11-14T05:18:16","slug":"why-do-african-smes-still-avoid-external-finance-even-when-its-available","status":"publish","type":"post","link":"https:\/\/blogs.gre.ac.uk\/nusc\/2025\/11\/12\/why-do-african-smes-still-avoid-external-finance-even-when-its-available\/","title":{"rendered":"Why Do African SMEs Still Avoid External Finance\u2014Even When It\u2019s Available?"},"content":{"rendered":"\n
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Based on research by Andrew Hansen-Addy<\/a>, Mario Davide Parrilli <\/a>and Ishmael Tingbani<\/a><\/em><\/p>\n\n\n\n

You are running a small, family-owned business in a bustling African city. This business was built from scratch by you through hard work and by reinvesting all your profits. Today, your business needs funding to break into new markets, and you recently heard that new government reforms have made it easier to access loans. Banks are more open, paperwork is simpler, and funding is finally within reach. But you don\u2019t apply. Why?<\/p>\n\n\n\n

This is the paradox at the heart of SME finance in Africa: access is improving, but uptake remains stubbornly low<\/strong>. A new study<\/a> led by NUSC colleague Dr. Andrew Hansen-Addy<\/a>, with Prof. Mario Davide Parrilli <\/a>and Dr. Ishmael Tingbani<\/a>, dives deep into this puzzle\u2014revealing why increased access to finance doesn\u2019t always lead to more borrowing, and what that means for SME policy, resilience, and growth.<\/p>\n\n\n\n

Small and Medium Enterprises (SMEs) are often hailed as the backbone of economic growth in developing countries. In Africa, they account for around 70% of GDP and 80% of employment. Yet despite their importance, many financially constrained SMEs continue to rely on retained earnings rather than external finance\u2014even when the regulatory business environment improves and access to funding is better.<\/p>\n\n\n\n

Examining 17 years of data, with over 30,000 observations across 30 African countries, Hansen-Addy and colleagues find evidence of a pattern \u2013 African SMEs shy away from external finance even when these are more accessible in enabling business environments. Why? External finance, while more accessible, remains unaffordable<\/strong> for many African SMEs \u2014especially when interest rates are high or collateral requirements are steep.<\/p>\n\n\n\n

This research<\/a> challenges the assumption that improving access alone will solve SME financing gaps. Instead, it suggests that:<\/p>\n\n\n\n