Africa must continue to reduce business capital needs, says World Bank

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Sub-Saharan Africa has made strides in making it easier to start a small business by reducing minimum capital requirements – but other countries are moving even faster.

This is a key finding of Doing Business 2020, published by the World Bank at the end of October.

The report assesses business regulations in 190 economies around the world. Overall, the economies of Sub-Saharan Africa increased their average Ease of Doing Business score by 1 percentage point compared to last year, while the economies of the Middle East and North Africa increased. increased their average score by 1.9 points.

Only two African economies make it to the World Bank’s top 50 to facilitate business. Of the last 20 countries, 12 are in sub-Saharan Africa. The report found that sub-Saharan Africa was the region implementing the most reductions in minimum capital requirements, with most of the reductions being made by the 17-member Organization for the Harmonization of Business Law in Africa.

The problem is that while incremental improvements are made slowly, the rest of the world does not stand still and waits.

  • The Central African Republic reduced its minimum capital requirement from 527 percent of per capita income in 2004 to 35 percent, according to the report.
  • But Jordan and Saudi Arabia have even bigger cuts, from over 1,000% of per capita income in 2004 to zero now.
  • Minimum capital means entrepreneurs have to find more money, which can negatively affect an entrepreneur’s decision to start a business, according to the World Bank report.
  • Higher requirements for minimum paid-up capital are associated with lower rates of business creation, he notes.

Obsolete tool

The minimum capital was originally designed to protect investors in European companies, the concept was first developed in the UK House of Lords in 1855 to protect investors in UK railways.

  • Nowadays, countries with paid-up minimum capital requirements tend to have stronger protection from minority investors, according to the World Bank.

In the context of sub-Saharan Africa, where around 16 million new jobs must be created each year to absorb new entrants into the labor market, the tool appears obsolete. For young African job seekers to have a chance of finding employment, many jobs will need to be created by small and medium-sized enterprises (SMEs).

But small businesses are not heard at the height of their importance.

  • The Africa Investment Forum held this month in Johannesburg was dominated by large companies and organizations who spoke about the importance of small businesses and the challenge of further integrating Africa’s informal economy. in the formal sector.
  • Small businesses – not to mention informal traders – were conspicuous by their absence.

It is “absolutely” necessary to give more voice to small businesses at such events, said Amadou Wadda, vice president of the Africa Finance Corporation, in an interview in Johannesburg. Small businesses “can fight youth unemployment,” he said. “We must encourage SMEs.

Conclusion: Minimum capital requirements for businesses continue to hamper job creation and the expansion of formal economic activity in sub-Saharan Africa.

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