Africa does not simply have a shortage of capital. Its deeper problem is that the capital mobilized by its financial systems does not consistently reach firms in the form, at the maturity, and on the terms they need to invest, expand, and enter new markets. This situation is aptly captured in the expression “Africa’s missing middle.” At one end are micro and very small businesses, increasingly reached through mobile money, microfinance, and digital lending. At the other are established corporations with substantial assets, audited accounts, predictable cash flows, and long-standing relationships with banks. Between them lies an expanding universe of firms that have survived the start-up phase and are ready to grow but lack the collateral, financial history, or governance structures conventional lenders typically require.
The paradox is clear: firms need finance to become bankable, while banks often want them to become bankable before financing their growth. The result is a financing wall that can appear precisely when a firm is ready to invest, expand production, enter a new market, or take on a larger contract.
Financial institutions have good reasons to be cautious. They manage the savings of households and businesses and must protect them while managing credit risk. Lending to growth-stage firms is generally more difficult to assess. For many of them, lenders lack reliable information on financial performance and repayment histories, collateral is difficult to enforce, and insolvency procedures are slow or uncertain. As a result, lenders tend to compensate for the higher perceived risk by tightening lending conditions, charging higher interest rates or simply avoiding these firms. But risk is only part of the problem. The financing needs of a business also change as it moves from operating to investing and from serving existing customers to entering new markets. A business that needs working capital today may need machinery finance tomorrow, longer-term investment capital as it expands, and trade or supply-chain finance when it enters regional markets. Financial systems often struggle to adapt as these needs evolve.
Banks in Africa have historically relied heavily on relatively short-term deposits, while growing firms often require medium- to long-term financing to invest and expand. Evidence compiled by the World Bank shows that this maturity mismatch was particularly pronounced in the past: during 2005–2009, more than 80% of deposits were sight deposits or had a maturity of less than one year, while less than 2% had a maturity exceeding ten years. More recent evidence, however, suggests that the maturity structure of bank lending has improved considerably. By 2021, short-term loans accounted for only 17% of lending in the median African country for which data were available.
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This improvement matters: Africa’s financing problem cannot simply be reduced to a persistent shortage of long-term bank lending. Yet access to longer-term private finance can still be constrained by how banks allocate their balance sheets. When governments borrow heavily from domestic banks, government securities may offer more predictable returns and lower perceived risk than lending to growing private companies, creating incentives for banks to allocate a greater share of their balance sheets to public-sector financing. Recent concerns in Kenya about the impact of rising government borrowing on private credit illustrate how this dynamic can constrain the availability of finance for businesses.
These constraints cannot be resolved simply by asking commercial banks to lend more to businesses or take more risk. The real challenge is to create a financial architecture capable of sharing risk, extending maturity, and converting better information about firms and transactions into finance.
Development finance institutions play an important role in this architecture by providing credit lines, guarantees, and other de-risking mechanisms to local banks. By changing the risk, maturity, and cost of finance, they can help close gaps where commercial finance alone is unwilling or unable to lend. But building the financial continuum requires more than bank lending and development finance. Other forms of capital, such as venture debt and mezzanine finance, can fill gaps between conventional bank lending and equity finance, especially in some of Africa’s more developed financial markets. Yet the availability of instruments is only part of the equation. High interest rates and exchange-rate volatility can make otherwise viable investments difficult to finance, particularly when firms borrow in foreign currency while earning revenues in local currency. A broader continuum therefore also requires deeper local-currency capital markets and non-bank sources of private credit that can absorb risks and maturities that deposit-taking banks are not well positioned to carry.
Firms, however, need more than long-term investment finance. They also need working capital to finance production before payment is received. A firm may have secured a large export order but lack the funds needed to purchase inputs and produce the goods. Trade and supply-chain finance can provide that working capital.
The WTO 2023 annual report shows that trade finance reaches less than 40% of total merchandise exports in Africa, compared with 80% in developed markets. Previous WTO-IFC research focused on West Africa points to the constraints behind this gap: trade-finance applications face high rejection rates, with insufficient collateral and perceptions of borrower risk among the main obstacles. UNCTAD similarly identifies trade and supply-chain finance as underutilized instruments for addressing the financing constraints of medium-sized African firms. Their value lies in linking finance directly to commercial activity: lenders can assess the order, buyer, inventory, or payment due from a customer, rather than relying exclusively on the firm’s balance sheet.
There is a demand-side constraint as well. Some growing firms are not yet sufficiently transparent, formalized, or well-governed to attract external capital on viable terms. They may have incomplete financial statements, weak bookkeeping, limited separation between business and personal finances, or informal governance arrangements. For some, remaining informal may even be rational when the immediate costs of formalization outweigh its commercial benefits.
The challenge for firms is not simply obtaining finance, but finding the right form of finance for the investment or transaction at hand. This is why Africa’s financing problem is not simply a “missing middle” but a missing continuum of capital. A firm may need working-capital facilities to fulfill an order; leasing or bank debt to acquire productive assets; trade and supply-chain finance to support commercial transactions; private credit, venture debt, or growth equity to fund expansion; and eventually capital-market funding. The point is not that every firm should use each of these instruments, but that viable pathways should exist as their risks, assets, cash flows, and financing needs evolve. The objective is to ensure that viable firms do not hit a financing wall when they are ready to invest, expand, and enter new markets. Building that continuum requires more than financial products. Governments and regulators must strengthen the infrastructure for assessing and managing risk: reliable credit information, enforceable collateral, efficient insolvency procedures, and clear rules for leasing, factoring, and supply-chain finance. Financial institutions and technology providers can complement these reforms by using digital transaction data to assess firms that lack conventional credit histories or collateral. Experience in Ghana, Ethiopia, and Nigeria shows that providers are already using orders, purchases, inventory, and payment data to assess merchants and determine stock-financing limits. Commercial activity itself can therefore generate information that makes growing firms progressively easier to finance. Digital transaction data can be powerful for short-term working-capital finance, but it is less capable of solving the financing problem for large, long-lived investments such as factories or heavy machinery. The information needed to finance a purchase order is not necessarily the information needed to underwrite a seven-year investment loan.
The relevant policy question is therefore not which financial instrument Africa should promote, but what prevents capital from reaching a viable firm at a particular point in its development and which financial, regulatory, or risk-sharing mechanism can remove that constraint.
This matters particularly for regional integration. The African Continental Free Trade Area (AfCFTA), which entered into force on 30 May 2019, brings together 54 of the 55 African Union member states, with Eritrea the only non-signatory, and is laying the foundation for a continent-wide market. Together with the African regional economic communities, it is expanding the market opportunities available to African firms. But market access alone is not enough: firms need capital to respond to those opportunities. A food processor may need new equipment before it can meet the standards of a regional supermarket chain. A logistics company may need financing to purchase additional trucks before serving another market. Market access and finance are therefore complements, not separate policy domains. Trade policy can remove barriers to entering a market, but finance determines which firms have the capacity to enter it. If capital cannot follow firms as they expand across borders, market integration risks becoming an opportunity that only the already well-capitalized can exploit.
Africa’s challenge is therefore not simply to mobilize more capital or expand financial access. It is to build a continuum of capital that allows finance to move with the firm: from operations to investment and from investment to expansion into new markets. Without that continuum, the continent may succeed in opening markets without creating enough firms capable of competing in them.
