Business

Risks And Misconceptions Of Doing Business In Africa

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The common misconceptions about Africa label the continent as huge homogenous island dominated by corruption, poverty, and conflict. This representation of Africa is not only stereotypical but also factually incorrect.

The African continent is diverse in its social, political, and economic structures. The majority of African countries are peaceful and their citizens enjoy access to education and healthcare. When it comes to politics, most of the African countries conduct free and fair elections with peaceful handovers of power to democratically-elected leaders.

Despite ongoing bribery and corruption challenges, a number of African countries rank among the most corrupt-free nations in the world. According to the 2018 Corruption Perceptions Index, Botswana (34), Cape Verde (45), Rwanda (48) and Namibia (52) rank better than countries like Italy (53), Saudi Arabia (58), Argentina (85) or Brazil (105).

While it is true that several African countries still receive foreign aid, it is also important to note that many African countries do not depend on aid. The African continent is rich in natural resources which allows many countries to export raw products. Another misbelief about Africa is that it is a homogenous market that shares a common socio-economic and cultural background. The third largest continent is however home to a diversity of cultures spreading across a variety of linguistic, religious and tribal backgrounds.

Despite the progress and developments of the recent years which created innumerable business opportunities, investors in Africa still encounter structural challenges, hampering their ability to make long-term investment decisions. Furthermore, the public debt levels in Africa have been on a constant rise. While debt relief programs have reduced significant debt since the mid-2000s, borrowing has intensified once again.

As a result, the debt-to-GDP ratio in Africa has shown a dramatic increase over the recent years. In addition, the majority of African countries are commodity exporters and are therefore vulnerable to commodity price fluctuations. Even though African citizens are opening up to the opportunities of the internet, most Africans are yet to completely adopt online shopping as part of their daily lives.

One of the main reasons behind the apprehension towards online shopping is the lack of trust in online products and services. The fear of fraud further keeps them from spending money online. For instance, phishing is a common issue in Nigeria. As a result, the population is skeptical about registering their credentials online. Without being able to attract the majority of adult consumers, the e-commerce sector is therefore mostly dependent on the younger population.

Even though Africa has shown tremendous growth in internet penetration, particularly mobile internet, the cost of power and broadband still poses a challenge. Despite of free Wi-Fi hotspots cropping up in every major city of the continent, affordability still presents an obstacle to comprehensive internet access.

While Facebook is free on some telecom networks, watching content in the form of videos can be expensive. With a large part of the population struggling with the high cost of data and bandwidth, video and multimedia-based internet businesses in Africa are still long-term investments rather than quick wins.

The cost of electricity is high throughout Africa and characterized by frequent power outages. This affects particularly small businesses, as purchasing and maintaining backup generators is expensive. Another crucial element is logistics, which is a factor particularly e-commerce companies struggle with.

The continent’s transportation and delivery system is not equipped to handle the increasing volumes of the growing online industry. The roads in many African cities are not paved, and the terrain is often difficult to traverse, creating obstacles for e-commerce merchants seeking viable delivery methods.

Even though companies like eBay and Amazon are establishing their market presence on the continent, they still largely rely upon the local postal systems to deliver products to their customers, even though most of them are malfunctioning. As a result, many companies have started using private delivery services which further increases the cost of doing business.

Another challenge in establishing a business in Africa is the lack of a homogenous market. As much as the continent is celebrated for its diversity in terms of language and culture, it is a challenge for firms to establish a uniform strategy across the continent.

As a result, businesses are left with no option but to define country-specific approaches to deal with operational barriers such as languages, cross-border payments, cultural differences, policies, regulations, and other factors. Illiteracy poses another hurdle in the realization of Africa’s business potential.

The e-commerce market is largely targeted to literate people as illiterate citizens may be unable to participate directly on websites that require reading and writing. Countries like Niger, Chad, and Burkina Faso, for instance, have literacy rates below 30%. With such low literacy rates, the pool of potential customers becomes limited, but also opens the doors to new innovations, such as products based on voice-enabled devices like Google Home or Amazon’s Alexa

Despite the availability of digital money transfer platforms, the majority of African citizens still prefer to pay in cash. Compared to digital payment methods, paying in cash is more familiar and tangible. Many people are therefore willing to run the risk of loss and theft associated with cash.

When it comes to e-commerce, Cash-on-Delivery is not only expensive, but it also involves a high level of risk. A courier not only becomes responsible for the company’s cash, but is also at risk of becoming the victim of a crime. Further, Cash-on-Delivery makes it easier for customers to decline the delivery and refuse payment.

One of the biggest challenges faced by investors in Africa is the lack of appropriate talent. The skills gap spans across all areas, particularly technology. Staffing a business can be expensive on its own, but training staff costs time and money. Executives find it particularly difficult to get traditional management skills.

The more complex the job role gets, the more difficult it becomes to find qualified professionals. As the private sector continues to show steady growth, companies will face challenges not only in recruiting top talent but also in retaining it.

The process of setting up a business in Africa usually requires adherence to a number of country-specific regulations. While some governments are becoming more supportive of the startup ecosystem, African countries in general need to be more proactive in order to attract investors. Most of the African countries have a wide range of confusing regulatory, political, and trading laws which keep changing frequently.

Further, strict import regulations combined with multiple currencies contribute to the high import costs, thus limiting the businesses’ abilities to conduct seamless trade with overseas suppliers. While the logistics infrastructure in most African countries is poor, moving between different African countries is a challenge by itself. With varying local regulations, running a pan-African business requires numerous visas and licenses.

When it comes to mobility in terms of cross-border payments, they not only tend to be inefficient and slow, but also prove to be expensive for all parties. Each African country has its own laws and regulations within its domestic banking system, and the lack of a transcontinental regulatory framework diminishes the ability of banks to seamlessly transfer funds.

Despite the discussed challenges, many things are moving in the right direction. A number of governments have started investing in solar power, with companies like PEG Ghana, M-KOPA, and Off Grid Electric making considerable progress. This is bound to not only making electricity cheaper, but also ensuring that more urban households gain access.

With regards to internet connectivity, some African governments have already entered into public-private partnerships to roll out internet services. As a result, 4G/LTE is becoming increasingly prevalent at cheaper data rates. In order to address the challenge of the increasing skill gap, a variety of public and private training initiatives have been launched across the entire continent, particularly in areas like software development. For instance, initiatives like Andela, Moringa School, and codeX are already on their way to build on the future of the ICT sector in Africa.

On the issues of regulations and lack of mobility, African governments have started being more supportive of both foreign companies and local start-ups. Some reforms are already underway, such as the African Continental Free Trade Area (AfCFTA).

Furthermore, the governments are actively accelerating their business formation processes, which will prove particularly helpful to e-commerce businesses. Like any other continent, Africa has its difficulties when it comes to conducting business within its boundaries. However, the African governments are taking active measures through sustainable reforms which are expected to pay off.

Africa’s middle class is estimated to grow to 1.1 billion by 2060, and would be representing 42% of the continent’s population. The increasing pace of urbanization is also expected to have a positive impact on the disposable income, thus increasing the demand for modern goods and services.

The African business climate certainly has its challenges, but doing business on the continent will prove profitable for patient investors and entrepreneurs with innovative ideas to tackle some of the structural gaps.

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