Unlocking Africa’s Growth: Addressing Capital Challenges

In 2019, back home in Zimbabwe, I worked with a group of friends who aspired to enter the property development space. They had the technical know-how but lacked the capital to launch their venture. I stepped in to help them develop a compelling capital-raising thesis that demonstrated the value the business could generate. With persistence and a clear narrative, we secured $1 million from a local bank. Today, that business is a recognized brand in Zimbabwe’s property development landscape.

Just a few weeks ago, I came across news that my first employer, OK Zimbabwe, once the country’s leading retail chain, was on the brink of bankruptcy and needed to raise $30 million to stay afloat. This contrast between entrepreneurial success and corporate distress within the same economic environment inspired me to reflect on and write about the capital access challenges facing African businesses.

Access to capital is a fundamental driver of business expansion and economic development. Across Africa, a burgeoning cohort of entrepreneurs is poised to address local challenges and scale up innovative solutions. However, securing adequate funding remains a significant impediment despite increasing investor interest and a dynamic entrepreneurial landscape. This funding shortfall is not merely a financial issue but is deeply rooted in structural factors, including policy constraints, risk perceptions, and institutional inefficiencies. To fully harness Africa’s economic potential, it is imperative to transform capital access from a barrier to a facilitator.

Africa’s economic potential amidst capital constraints

Africa is endowed with the world’s youngest population and rapid urbanization. The continent’s median age is approximately 19.2 years, underscoring the youthful demographic poised to drive innovation and economic expansion. In 2022, African startups secured approximately $2.2 billion in funding, marking a 25% increase from the previous year (techpoint). However, this capital influx is concentrated in a few countries and sectors, leaving many regions and industries underfunded. Small and medium-sized enterprises (SMEs), which constitute approximately 95% of registered businesses and contribute approximately 50% of the total GDP of sub-Saharan African countries, continue to face funding challenges. This disparity threatens to exacerbate economic inequalities and stifle inclusive growth.

Policy and regulatory challenges

Entrepreneurs often navigate complex, inconsistent regulatory environments. Business registration processes can be protracted, and tax policies may lack predictability. Such regulatory uncertainties can deter investments and increase operational costs for startups.

• Perception of elevated risk: Africa is frequently perceived as a high-risk investment destination because of factors such as political instability, currency fluctuations, and governance issues. This perception can lead to heightened return expectations from investors and a reduced pool of available capital, particularly in early-stage ventures.
• Limitations of traditional banking: Conventional banking institutions in Africa tend to favor collateral-based lending, which poses a challenge for startups that lack substantial assets. Even when financing is accessible, interest rates can be prohibitively high.
• Underdeveloped capital markets: Many African capital markets are characterized by low liquidity and limited instruments, restricting avenues for equity and debt financing. The scarcity of exit options for investors further dampens enthusiasm for early-stage investments.
• Macroeconomic and financial instability as a capital access barrier: Zimbabwe illustrates how fragile macroeconomic fundamentals can severely restrict access to capital. In recent years, the country has experienced triple-digit inflation, with the Consumer Price Index peaking at over 191% year-on-year in mid-2022, according to ZimStat, Zimbabwe’s national statistics agency. To combat this, the central bank raised its policy interest rate to 200%, the highest in the world at the time. This monetary tightening, while necessary, rendered formal credit virtually inaccessible. Moreover, Zimbabwe’s currency has depreciated by over 95% since 2020, creating uncertainty for both borrowers and lenders. Domestic credit to the private sector hovers around 8% of GDP, compared to 32% in Kenya and 22% in Rwanda, according to the World Bank. SMEs in Zimbabwe often operate informally and lack collateral due to unresolved land tenure issues. In contrast, countries like Kenya have leveraged mobile-based credit systems to expand lending access, while Rwanda’s policy consistency and investment climate reforms have bolstered investor trust. Zimbabwe’s situation reinforces how macroeconomic volatility and weak institutional frameworks can severely constrain entrepreneurial finance.

Institutional and ecosystem constraints

Entrepreneurs often lack access to supportive ecosystems including incubators, accelerators, and mentorship networks. In addition, gaps in financial literacy can impede effective engagement with potential investors. On the investor side, a limited understanding of venture investments in local contexts can widen the capital access gap.

Despite the constraints, several African startups have successfully overcome capital barriers and scaled their operations. Flutterwave in Nigeria, a fintech company, raised over $170 million in 2021, reaching a valuation of over $1 billion. In Kenya, Twiga Foods raised $50 million to scale its agricultural supply platform, enhancing value chains and food access. These examples demonstrate the potential for startups to thrive when provided with access to capital. More regional case studies are available through the Cornell Emerging Markets Institute.

Emerging alternative funding mechanisms

Despite the challenges, several innovative funding avenues are gaining traction.

• Angel investors and syndicates: Local and diaspora angel networks increasingly provide capital, mentorship, and strategic connections.
• Crowdfunding platforms: Digital platforms enable entrepreneurs to raise funds directly from a broad base of supporters, democratizing access to capital.
• Diaspora investments: The African diaspora is a significant source of remittances, with over $100 billion flowing into the continent in 2024 (Afridigest). Structuring remittances into formal investment vehicles provides a substantial opportunity.
• Fintech and digital lending: Technological advancements facilitate new forms of microcredit and peer-to-peer lending.

Strategic recommendations for enhancing capital access

To mitigate these structural challenges, a coordinated multistakeholder approach is essential.

1. Regulatory reforms: Streamlining business registration processes, ensuring tax policy consistency, and strengthening investor protection frameworks can improve the investment climate.
2. Risk mitigation initiatives: Establishing credit guarantee schemes and blended finance models can help reduce investment risk and attract private capital to emerging sectors.
3. Development of capital markets: Efforts to deepen financial markets, such as creating SME-focused equity boards and regional bond markets, can expand financing options. Countries like Kenya and Nigeria have seen results from reforms in this area. Meanwhile, Zimbabwe’s Victoria Falls Stock Exchange (VFEX) offers a glimpse of innovation, using US dollar-denominated listings to attract foreign investors, but broader uptake will require monetary stability and regulatory trust.
4. Capacity building: Financial literacy programs for entrepreneurs and training for local investors can bridge knowledge gaps and enhance the effectiveness of capital deployment.
5. Ecosystem support: Strengthening support structures such as incubators and accelerators, particularly in underserved regions, can provide entrepreneurs with the necessary resources and networks to succeed.

Africa’s entrepreneurial landscape is vibrant and holds immense promise. However, to translate this potential into tangible economic growth, the systemic barriers to capital access must be addressed. Through collaborative efforts involving policymakers, financial institutions, investors, and development partners, it is possible to build an ecosystem in which African businesses can thrive and contribute significantly to the continent’s economic development.

About the author

Jacob Chizunza is a second-year MBA student at Samuel Curtis Johnson Graduate School of Management and an Emerging Markets Institute Fellow. He has over eight years of experience in finance, audit, and investment banking, having worked at Deloitte and PwC and as an investment banking associate. His clients have included BlackRock, Blackstone, and Apex. He interned with Evercore’s energy group and serves as the portfolio manager for utilities and telecommunications in the Cayuga Fund. Passionate about entrepreneurship through acquisition, he is focused on acquiring and scaling small accounting firms. Chizunza is also involved in Mureza, a startup developing electric vehicles for emerging markets.

All views expressed in articles published on the Emerging Markets Institute webpage are those of the author(s) and should not be taken as reflecting the views of the Emerging Markets Institute.