Key Commercial & Legal Issues that affect Startups and SMEs in Nigeria and across Africa

Introduction

In 2024, startups and small and medium-sized enterprises (SMEs) across Africa find themselves at a crossroads, teeming with potential but confronted by formidable challenges. As the continent becomes a vibrant hub for innovation and entrepreneurship, managing the complexities of the business framework becomes crucial for growth and sustainability. Here are five key challenges faced by startups and SMEs in Nigeria, South Africa, Kenya, and Ghana, along with relevant laws and initiatives shaping their ecosystems.

1. Regulatory Framework and Compliance

Nigeria: The Nigeria Startup Act, implemented in late 2022, aims to create a supportive environment for startups through tax incentives and the establishment of a startup investment seed fund. However, compliance with the Act’s requirements, such as obtaining a “startup label” and adhering to specific reporting standards, can be complex and resource-intensive.

South Africa: The Companies Act 71 of 2008 and various amendments focus on simplifying business registration and protecting investor interests. However, frequent changes in the regulatory framework can create uncertainty for startups and SMEs, making it challenging to stay compliant.

Kenya: The Startup Bill, 2020, aims to provide a regulatory framework to foster growth in the startup ecosystem. It includes provisions for incubation, financial support, and networking opportunities. Startups must meet certain criteria to benefit, which can be a hurdle for nascent businesses.

Ghana: The Ghana Enterprises Agency (GEA) Act, 2020, restructured the National Board for Small-Scale Industries to better support SMEs through regulatory reforms, training, and access to finance. Compliance with these new regulations is crucial but can be challenging for small businesses.

2. Access to Funding

Nigeria: There has been a notable decline in venture capital investments in Nigerian startups, as investors prioritize sustainable business models over rapid growth. High interest rates further complicate the investments, affecting valuations and access to capital.

South Africa: Despite government initiatives like the Small Enterprise Finance Agency (SEFA), access to funding remains a significant barrier for startups. The economic downturn has led to tighter credit conditions and reduced investment activity.

Kenya: The establishment of the Kenya Development Corporation (KDC) aims to provide long-term funding to SMEs. However, startups still face challenges in securing early-stage investment due to stringent lending criteria and high interest rates.

Ghana: The National Entrepreneurship and Innovation Plan (NEIP) provides funding opportunities for startups. Despite these efforts, many businesses still struggle to meet the collateral requirements imposed by traditional lenders.

3. Economic and Infrastructure Challenges

Nigeria: High inflation, volatile foreign exchange rates, and inadequate infrastructure, particularly in power supply, significantly increase the cost of doing business. Frequent power outages force businesses to rely on expensive alternative power sources, reducing productivity.

South Africa: Similar to Nigeria, South Africa faces infrastructural challenges, with electricity supply issues being a major concern. The economic downturn and rising operational costs due to inflation further burden SMEs.

Kenya: Infrastructure improvements are ongoing, but many areas still suffer from unreliable power and poor road networks. These issues hamper business operations and increase logistical costs.

Ghana: While Ghana has made strides in improving infrastructure, challenges remain in rural areas where access to reliable electricity and internet connectivity is limited, affecting the scalability of startups.

4. Technological Adoption and Digital Transformation

Nigeria: The adoption of digital technologies is critical for competitiveness. However, many startups lack the resources to invest in advanced technologies. Initiatives like the Nigerian Digital Economy Policy and Strategy (2020-2030) aim to address these gaps by promoting digital skills and infrastructure.

South Africa: The Fourth Industrial Revolution (4IR) Commission seeks to drive digital transformation. Nonetheless, digital adoption among SMEs is uneven, with many lacking the necessary skills and resources to leverage new technologies effectively.

Kenya: Known for its fintech innovations, Kenya is ahead in digital adoption. Yet, the digital divide persists, with rural startups having less access to digital tools and internet connectivity.

Ghana: The National Digital Transformation Agenda aims to improve digital infrastructure and skills. Despite these efforts, many SMEs struggle with digital transformation due to high costs and limited access to technology.

5. Market Access and Competition

Nigeria: Market access remains a challenge due to the dominance of larger firms and complex supply chains. Initiatives like the African Continental Free Trade Area (AfCFTA) offer new opportunities, but SMEs must contend with competitive pressures and regulatory complexities to benefit.

South Africa: SMEs face stiff competition from well-established firms. Government programs aim to promote local products and services, but market penetration remains difficult for many startups.

Kenya: Kenyan SMEs benefit from regional trade agreements, but competition from more established firms in the East African Community (EAC) poses significant challenges. Government support is crucial for enhancing competitiveness.

Ghana: Access to larger markets is facilitated by the African Continental Free Trade Area (AfCFTA), yet local SMEs often struggle with scalability and competition from imported goods. Government initiatives focus on improving the competitiveness of local businesses.

Conclusion

In 2024, addressing these issues requires coordinated efforts from governments, financial institutions, and international organizations to create a conducive environment for business growth and innovation. By tackling these challenges head-on, the potential for these businesses to drive economic growth and innovation in the region can be fully realized.