Small and medium-sized enterprises (SMEs) continue to face tighter lending conditions, higher collateral requirements, and limited access to formal trade finance, despite evidence suggesting their credit risk profile has remained relatively stable.
According to a new African Development Bank (AfDB) report released in Brazzaville on May 27, SME-related default rates, averaging 8-10 percent, have shown limited volatility over time.
The report, Trade Finance Supply in Africa: Post-COVID Trends and Emerging Opportunities, notes that SMEs account for at least 80 percent of businesses and employment, and more than half of GDP.
However, their share of banks’ trade finance portfolios fell from about 34 percent in 2019 to 19.5 percent in 2020 during the COVID-19 shock, before partially recovering and stabilizing at around 21–22 percent between 2023 and 2024.
Despite this economic weight, SMEs across African markets are still widely classified as high-risk borrowers, a perception that continues to shape lending decisions. The report shows that while SME defaults remain higher than the overall trade finance portfolio, they are relatively stable, rising from 8.0 percent in 2020 to just under 10 percent in 2023, before easing to 8.8 percent in 2024.
New client defaults remain lower, at around 2.6–3 percent, while approval rates for SME trade finance applications have stayed steady at about 63 percent over the 2020–2024 period.
The AfDB notes that this risk perception has translated into stricter lending terms, including higher interest rates, shorter repayment cycles, and tougher collateral demands, effectively limiting SME participation in formal trade finance systems.
However, the report adds that many SMEs continue to repay consistently, even during periods of macroeconomic stress such as currency volatility and tightening global credit conditions, suggesting that the risk profile may be more stable and more predictable than commonly assumed.
According to Solomon Quaynor, the Vice President for private sector, infrastructure, and industrialization at AfDB, the Bank is intensifying its focus on job creation, warning that limited financing for SMEs could undermine Africa’s ability to absorb its rapidly growing youth population into productive employment.
“Every year, 11 million young Africans enter the labor market, but only three million get formal jobs. If we are going to reverse that trend, we need to create at least 1.6 million jobs every month,” he said.
Quaynor said job creation has become the central focus of the Bank’s long-term development strategy, particularly through sectors such as agriculture and SME-led enterprises.
“In the last 10 years, our operations have helped create 25 million jobs, with at least 40 percent going to young women, and agriculture is a key sector for employment generation, especially among young people,” Quaynor said.
According to the report, defaults are largely driven by external pressures rather than poor business management. Delayed payments from buyers, limited working capital, weak cash buffers, and exposure to exchange rate volatility continue to strain SME balance sheets.
With little financial cushion to absorb such shocks, many otherwise viable businesses become vulnerable during periods of stress.
However, lending models still tend to group SMEs under broad high-risk classifications, without fully accounting for sector performance, repayment history, or export track record.
This has contributed to a widening gap between perceived risk and actual default behavior, with direct implications for how credit is priced and allocated across the sector.
The tightening of SME financing has reduced access to trade finance, limiting investment in production, logistics, and export capacity, particularly in key sectors such as agriculture and light manufacturing.
Over time, this constraint will weaken value chains and slow down efforts to expand intra-African trade and industrialization, according to the report.
“If you want young people to continue creating solutions either in agriculture or any other sector, show them that money, access to finance, markets, and modern value chains remain critical to making the sector attractive,” Quaynor said.
He also highlighted that improving access to finance for SMEs will be essential not only for trade growth but also for addressing unemployment and accelerating economic transformation across the continent.
The findings suggest a need to rethink how SME risk is assessed in trade finance. Strengthening credit information systems, expanding trade guarantee schemes, and improving risk-sharing mechanisms could help align lending practices more closely with observed default behavior.
Without such adjustments, SMEs risk remaining structurally excluded from a system that depends heavily on their participation in driving trade-led growth, the report highlights.
