The Missing Middle: The Structural Financing Gap That Keeps SMEs Small

Small and medium-sized enterprises (SMEs) are central to Africa’s economic growth, employment, and innovation. Across the continent, SMEs account for over 90% of businesses and employ roughly 60% of the workforce, serving as critical engines of industrialisation, diversification, and social mobility. Despite their importance, most remain trapped in a cycle of constrained growth. The primary obstacle is a structural financing gap, often referred to as the “missing middle”,a segment of businesses that is neither microfinance-eligible nor venture-capital ready. This financing gap is systemic, persistent, and a major barrier to achieving inclusive economic transformation.

The “missing middle” comprises SMEs that have progressed beyond micro-enterprises but remain too small, insufficiently documented, or operationally opaque to attract institutional investors or formal bank loans. Microfinance institutions typically lend in the range of USD 100–5,000, suitable for start-ups or subsistence-level businesses. Venture capital and private equity, in contrast, target high-growth enterprises capable of generating outsized returns, often with sophisticated management teams, intellectual property, or export potential. SMEs operating in the USD 50,000–500,000 range commonly manufacturers, service providers, or agricultural processors,do not fit either category.

The missing middle is thus less a reflection of market failure in terms of capital availability and more a structural misalignment of the financial ecosystem. Banks perceive these SMEs as high-risk due to limited collateral and financial documentation, while private investors dismiss them as insufficiently scalable. Consequently, enterprises with substantial potential for employment generation, innovation, and regional value-chain integration remain trapped in low-growth operations.

Economic and Social Implications

The financing gap has profound and multi-layered consequences for Nigeria’s economy. SMEs that cannot access growth capital remain small and operationally constrained, limiting their ability to modernise, adopt new technologies, expand their workforce, or enter new domestic and international markets. In practice, this means that while these businesses survive, they do so on the margins. In Nigeria, over 80% of SMEs operate informally, a direct reflection of the inaccessibility of formal financing channels. Informal operations may provide livelihoods, but they rarely contribute meaningfully to structural economic development, industrialisation, or consistent revenue generation for the state. Without sufficient capital, these firms are unable to invest in productivity-enhancing processes, scale operations, or implement standards necessary to compete regionally and globally.

The financing gap also reinforces inequalities within the private sector. Entrepreneurs with access to personal wealth, family networks, or informal support structures are able to circumvent formal financing constraints, enabling them to invest, grow, and capture market opportunities. In contrast, equally talented but less connected entrepreneurs face systemic exclusion, unable to translate ideas into scalable businesses. Over time, this produces a bifurcated economy: a small cohort of well-capitalised, high-growth firms co-exists with a majority of underfunded SMEs that remain stuck in survival mode. This dynamic not only limits overall productivity growth but also concentrates economic opportunity and influence within a narrow segment of the business community, entrenching social and economic inequities.

From a macroeconomic standpoint, the “missing middle” significantly constrains national competitiveness and structural transformation. SMEs are critical engines of value addition, innovation, export diversification, and localised supply chains. When these firms are capital-starved, the economy loses its capacity to move up the industrial ladder, diversify production, and reduce reliance on raw commodity exports. This stagnation is particularly detrimental in the context of regional integration initiatives like the African Continental Free Trade Area (AfCFTA), which aims to harmonise trade standards, integrate markets, and stimulate intra-African commerce. A finance-constrained SME sector is ill-equipped to scale production, meet regional demand, or compete with larger, more mature firms from other African economies. Consequently, the unrealised potential of SMEs not only limits domestic industrialisation but also diminishes Nigeria’s role and influence in continental economic integration, undermining broader strategies for sustainable growth and competitiveness.

Structural Drivers of the Gap

Several interrelated factors underpin the persistence of the missing middle:

Collateral and credit assessment limitations

Conventional lenders rely heavily on collateral and formal financial histories to evaluate creditworthiness. However, most SMEs,especially those at the transition point between micro and small-scale,lack the formal structures that banks consider essential. Their assets are often informal, undervalued, or intangible (such as customer relationships, digital tools, or brand equity), none of which fit neatly into collateral frameworks designed around land, buildings, or machinery. Additionally, many SMEs lack audited financial statements or long operating histories, primarily because they function within informal systems or have limited administrative capacity. As a result, banks perceive these firms as high-risk, not because of weak fundamentals, but because existing assessment tools cannot capture their true value or potential.

High transaction costs

The economics of lending also deter financial institutions from serving this segment. Assessing, monitoring, and supervising loans in the US$50,000–US$500,000 range requires nearly the same level of due diligence as multi-million-dollar loans. Yet the returns are far smaller. Banks must deploy staff to conduct site visits, review financial documents, assess management quality, and perform compliance checks,activities that are labour-intensive and costly. For most institutions, the operational cost of underwriting such loans exceeds the attainable profit margin, making this financing segment unattractive. Consequently, banks gravitate toward either micro-loans, which can be highly standardised, or large corporate loans, which justify the cost of due diligence.

Regulatory and institutional weaknesses

Even when SMEs demonstrate promising business potential, weak institutional systems magnify perceived risk. Inconsistent enforcement of commercial contracts, lengthy judicial processes, and underdeveloped credit information systems limit lenders’ ability to recover losses in cases of default. In countries where collateral registry systems are fragmented or land titling processes are opaque, lenders face additional uncertainty over their ability to claim pledged assets. These institutional weaknesses do not merely increase risk,they introduce unpredictability. And in finance, unpredictability is often more damaging than risk itself. Faced with uncertain recourse mechanisms, lenders adopt excessively conservative credit policies that effectively shut SMEs out.

Investor mismatch

The rise of private equity and venture capital across Africa has created a new pool of capital, but one that is structurally misaligned with the needs of conventional SMEs. Investors in these asset classes typically seek rapid scalability, technology-enabled business models, and prospects for outsized returns within defined exit horizons. Traditional SMEs,such as manufacturing firms, agro-processors, logistics companies, and service providers,rarely fit this mould. They grow steadily, not exponentially; they create jobs, but not “unicorn valuations”; and they prioritise long-term market presence rather than quick exits. Despite their centrality to economic diversification and job creation, these firms often remain invisible to investors seeking high-growth ventures, leaving a vast portion of the SME landscape structurally underfunded.

Country Case Studies: Nigeria, Kenya, and South Africa

Understanding how the financing gap manifests across different African economies provides useful insight into both its systemic nature and the policy levers that may help close it. While each country has unique institutional and economic characteristics, the pattern is consistent: SMEs form the backbone of economic activity but remain structurally excluded from growth-oriented finance.

Nigeria

Nigeria presents one of the clearest examples of an economy where SMEs drive employment yet struggle profoundly to secure formal financing. SMEs account for over 96% of all businesses and provide roughly 84% of national employment, making them pivotal to livelihoods and economic stability. However, only an estimated 7–10% of these enterprises can access any form of formal credit. The vast majority rely on personal savings, family loans, rotating savings groups, and microfinance institutions whose lending caps are typically insufficient for businesses looking to transition from survival mode to operational expansion.

This financing constraint is especially acute in capital-intensive sectors such as manufacturing, agro-processing, and light industry. These sectors require machinery, working capital, and steady inputs,needs that exceed microfinance ceilings but remain below the thresholds that commercial banks view as profitable or that private investors consider scalable. As a result, many Nigerian SMEs remain perpetually stuck as small-scale producers, unable to upgrade their equipment, standardise production, or meet volume requirements for national or regional markets. The consequence is a structurally fragmented private sector with limited participation in value chains that could otherwise drive industrialisation under the AfCFTA.

Kenya

Kenya has made deliberate attempts to address SME financing gaps through government-led programmes and blended finance mechanisms. Initiatives such as the Youth Enterprise Development Fund, the Women Enterprise Fund, and the SME Credit Guarantee Scheme represent progressive policy responses designed to broaden access to credit for underserved groups. Development partners and Kenyan banks have also experimented with innovative risk-sharing structures, mobile-based lending models, and partial credit guarantees.

Despite these efforts, the financing gap remains significant. Estimates indicate that around 60% of Kenyan SMEs are still underserved, particularly those operating outside major urban centres. SMEs in peri-urban and rural areas face documentation barriers, limited collateral, and inconsistent financial records, making them appear high-risk despite their economic relevance. Moreover, mobile-based micro-lending products, while improving access to short-term capital, do not meet the medium- to long-term financing needs required for equipment upgrades, market expansion, or productivity improvements. These structural limitations hinder Kenya’s ability to scale its entrepreneurial ecosystem beyond small retail and service-based operations.

South Africa

South Africa’s financial system is comparatively more sophisticated, with a wider array of banking products, development finance institutions, and government-backed incentive schemes. Yet the missing middle persists, particularly among black-owned SMEs and businesses located in historically marginalised regions such as townships and rural provinces. Access to finance is shaped by the legacy of apartheid-era inequality, which has left many entrepreneurs without the intergenerational assets or collateral needed to qualify for mainstream credit.

Government programmes such as the Black Industrialists Scheme, the Small Enterprise Finance Agency (SEFA), and various grant-based incentives have expanded opportunities, but structural barriers remain. SMEs in manufacturing, services, and emerging technologies often confront stringent collateral requirements, complex application processes, and high interest rates that limit their ability to scale operations. Many enterprises are able to start up but struggle to transition into medium-sized firms capable of contributing significantly to domestic production or export competitiveness. As a result, South Africa’s SME landscape remains dualistic: sophisticated, well-capitalised firms coexist with a large cohort of underfunded businesses constrained by historical and structural disadvantages.

Innovative Solutions and Policy Approaches

Addressing this requires a coordinated, multi-pronged strategy that tackles both the demand- and supply-side constraints that inhibit SME financing. No single intervention can close the gap; rather, a combination of innovative financing models, data-driven credit tools, regulatory reforms, and regional integration mechanisms is necessary to unlock the full potential of SMEs across Africa.

1. Blended Finance Mechanisms

Blended finance has emerged as one of the most promising approaches for mobilising private capital toward SME financing. By combining concessional funding from development finance institutions (DFIs) with commercial lending, blended finance mechanisms help de-risk SME portfolios and incentivise banks to lend at scales and terms that would otherwise be unattractive. Instruments such as partial credit guarantees can absorb a portion of potential losses, making lenders more willing to extend credit to businesses perceived as marginally risky. Subordinated loans,where DFIs accept lower repayment priority,help improve the capital structure of SMEs while encouraging commercial banks to participate in financing. Co-lending arrangements, where public and private-sector actors jointly finance SMEs, create shared accountability and reduce the funding burden for any single institution. Several African markets, including Ghana, Kenya, and Rwanda, have already demonstrated that well-designed blended finance tools can significantly expand access to growth capital when complemented by strong governance and transparent risk-sharing frameworks.

2. Digital and Data-Driven Credit Assessment

The limitations of traditional credit assessment frameworks,largely built around formal records and physical collateral,have excluded millions of SMEs that operate with informal structures yet possess strong commercial potential. The rise of digital finance provides an alternative path. Transaction data from mobile money platforms, point-of-sale systems, e-commerce platforms, and supplier payment histories can help construct a more holistic picture of an SME’s financial behaviour, cash flow stability, and growth trajectory. Fintech firms across East and West Africa are already leveraging algorithmic credit scoring to assess borrower risk in real time, enabling faster and more inclusive lending decisions. Expanding national credit registries to incorporate alternative data sources will further improve visibility into SME creditworthiness, reduce information asymmetries, and lower the cost of loan origination. Over time, these data-driven models can significantly broaden the pool of SMEs considered “bankable.”

3. Policy and Regulatory Interventions

Governments play a pivotal role in shaping the financial ecosystem that supports SME growth. Thoughtfully designed credit guarantee schemes can give lenders confidence to engage with SMEs while minimising fiscal exposure. Tax incentives,such as accelerated depreciation for machinery purchases or reduced tax rates for re-invested profits,can encourage SMEs to scale operations. Simplified and digitalised business registration processes reduce the administrative hurdles that push firms toward informality, making it easier for SMEs to build the compliance profiles required for formal lending.

Further, improving contract enforcement, strengthening commercial courts, and streamlining bankruptcy procedures can materially reduce the legal uncertainties that drive risk aversion among lenders. Policies that enhance SME access to business development services,such as technical training, financial literacy, and export readiness programmes,can also improve loan performance by enabling businesses to manage capital more effectively. When these interventions align with broader national development strategies, they create a more predictable environment for SME financing.

4. Alternative Capital Providers

Between microfinance institutions (which typically offer small loans with high turnover expectations) and venture capital firms (which focus on high-growth, high-return opportunities), there exists a vast funding space suited to SMEs entering growth or consolidation phases. Alternative capital providers,including growth-stage funds, mezzanine financiers, private debt funds, and impact investors,are increasingly filling this void. These actors offer hybrid instruments such as revenue-based financing, quasi-equity, structured debt, and convertible notes that provide flexible repayment terms aligned with the realities of SME cash flows. By tailoring financial products to SMEs’ operational needs,rather than imposing rigid collateral requirements,these providers support sustainable growth and reduce the pressure to scale too rapidly. Impact investors, in particular, have shown willingness to accept moderate returns in exchange for measurable social and economic impact, making them ideal partners for financing SMEs that drive job creation and local value addition.

5. Integration with Regional Economic Strategies

As Africa deepens its regional integration through the African Continental Free Trade Area (AfCFTA), SME financing must evolve to support cross-border expansion and participation in regional value chains. Access to finance alone is insufficient if SMEs cannot meet export standards, navigate customs procedures, or identify cross-border market opportunities. Integrating financing solutions with market access support, export facilitation, and capacity building is therefore essential.

Regional instruments such as trade finance facilities, cross-border guarantee schemes, and pan-African investment funds can help SMEs move beyond domestic markets. Cross-border SME networks can also provide platforms for shared learning, joint ventures, and access to buyers in neighbouring countries. Ultimately, aligning SME financing with AfCFTA’s objectives ensures that capital flows translate into meaningful participation in continental value chains, enabling African SMEs not only to survive but also to scale across borders.

Final Thought

The persistent gap in growth-oriented financing is a structural constraint with far-reaching economic and social consequences. When SMEs are unable to access the capital required to modernise, expand, and strengthen their operations, they remain locked into low-productivity activities. This limits their capacity to generate employment, contribute to industrialisation, participate in regional value chains, or take advantage of emerging opportunities under frameworks like the AfCFTA. In effect, a large segment of the private sector functions below its potential, slowing overall economic transformation.

Closing this financing gap demands systemic innovation rather than isolated interventions. Blended finance mechanisms can mobilise private capital by reducing real and perceived risks. Digital and data-driven credit assessment tools can extend visibility to enterprises previously excluded from formal lending. Policy and regulatory reforms can create a more predictable environment for lenders and investors,while alternative investment vehicles, such as mezzanine funds, private debt, and impact capital,can offer flexible financing that aligns with SME realities. These solutions are most effective when deployed together, reinforcing one another to create a coherent, supportive ecosystem for business growth.

For African economies, expanding access to growth capital is not merely desirable; it is foundational. Without it, the continent risks entrenching a dual economic structure: a narrow tier of well-capitalised firms coexisting with a vast number of underfunded enterprises struggling to scale. Overcoming this divide is essential for fostering inclusive, broad-based development and unlocking the full potential of Africa’s entrepreneurial landscape. Only by addressing the financing barriers at scale can African countries build resilient, competitive, and innovation-driven economies fit for the future.

Maryjane Eze is the Chief of Staff to the Executive Chairman of the Sixteenth Council and a Research Fellow at the Africa Program of the Council