West Africa Eyes Entrepreneurial Future

February 7, 2011

  • 16 West African countries amend business and lending regulations to draw thousands of entrepreneurs into the formal economy
  • $250 million in credit expected to become available to the private sector
  • Female entrepreneurs may be the most likely to benefit from the new rules

February 7, 2011—West African countries have some of the biggest barriers and constraints to private business in the world, according to an international ranking. But recent changes to business laws in the region may help pave the way for a more entrepreneurial future, say observers.

A bloc of 16 (soon to be 17) countries is moving to increase access to credit and reduce hurdles to business startup in an effort to improve the overall business climate.

The countries unanimously approved legal changes in December 2010 that will likely make an estimated $250 million in credit available to small businesses, mainly through expanding the definition for loan collateral, according to internal World Bank research.

Thousands of entrepreneurs may also join the formal economy rather than operate off the books (untaxed and unregulated) as a result of new streamlined business registration requirements, say World Bank Group business climate experts.

“Small and medium-sized enterprises are the heart of the African economy,” Togo’s Minister of Justice M. Biossey Kokou Tozoun said in December. “It is therefore essential that small entrepreneurs can turn to banks for loans and that everything be done to encourage them to formalize.”

Pierre Guislain, director of the World Bank Group’s Investment Climate department, says the reforms are a “great step in the right direction.”

“We hope this reform will be the spark that sets a larger process in motion and prompts countries to place a higher priority on improving their business environment.”

Female Entrepreneurs ‘Most Likely’ to Benefit

One of the “major breakthroughs” of the legal reform is the creation of a new business category – entreprenant -- that will simplify procedures for micro- and small business owners who can’t afford to hire lawyers to register their businesses.

" Small and medium-sized enterprises are the heart of the African economy. "

M. Biossey Kokou Tozoun

Minister of Justice, Togo

“We believe women will be the most interested in this new status, especially in rural and semi-urban areas. It will ease their access to formal credit and social benefits,” says Lionel Black Yondo, who manages a Bank Group project assisting the reform effort, along with Xavier Forneris.

Under the new rules, banks may now accept a much wider range of assets as collateral, rather than just real estate, to which most people do not have formal title. Businesses may more easily pledge all kinds of present and future movable goods, including accounts receivable, cash flow or equipment. Banks will  be able to better manage and limit risk, and lend in a more secure environment, says Yondo.

He says, as a result, banks will be able to lower the cost and increase the volume of credit in the region, helping to support private sector development and economic growth.

Guislain adds that the changes, along with a broader set of reforms such as modernization and computerization of the region’s registries for companies and collaterals, “will create a new regime that allows people to get out of informality without having to pay the transaction cost of being a formal, regular business.”

Countries Seek Better Business Ranking

West African countries have consistently ranked in the bottom quarter of 183 countries surveyed for the World Bank Group’s Doing Business index, which measures nine indicators on the ease of doing business. In the 2011 report, Burkina Faso, the strongest improver among the 16 countries over the last five years and one of 10 top reformers globally in 2008, had the best overall rank at 151, while Chad was last globally at 183.

At the same time, countries in the region have large informal economies, estimated at between 30% and 50% of gross domestic product (GDP), meaning many businesses and workers are not subject to regulation and taxation. 

While being "informal" allows businesses to keep more of their profits, it also eliminates or reduces their access to bank financing and government business services. Governments also lose out on budget revenue that could help fund infrastructure improvements and other public goods and services.

Changes Enacted for 16 Countries

Individual countries recently have taken steps to improve their business climate ranking, but the latest sweeping reforms were enacted by the Organization for the Harmonization of Business Law in Africa (OHADA), a unique organization in Africa that enacts common business laws for all 16 member countries (a 17th member, the Democratic Republic of the Congo, is expected to join OHADA soon).

OHADA oversees eight business laws (general commercial, secure transactions, company law, arbitration, debt recovery, bankruptcy, accounting and transportation of goods by road). Any change in these laws requires unanimous agreement among all countries and applies throughout the entire bloc.

The World Bank Group joined the legal reform effort four years ago, at the request of several governments. The effort was also backed financially by the Bank Group’s Foreign Investment Advisory Service (FIAS) program and France.

"The first amendments to OHADA Laws adopted this past December are the direct result of the bold initiative and hard work of OHADA, its Permanent Secretariat, the national commissions, and all the experts who have been mobilized around the program,” says Xavier Fomeris, co-manager of the Bank Group's project assisting OHADA.

Raising Awareness

The World Bank Group plans to assist countries in a public information campaign, funded partly by a proposed technical assistance grant, to raise awareness of the new regulations, particularly among businesses and banks.

The Bank also plans to, among other things, help OHADA “create business regulations that will facilitate and remove bottlenecks to intraregional business, including allowing businesses from one country to do business in another country without having to go through lots of procedures and red tape,” says Guislain.

“There are a number of countries in West Africa that can go way beyond the reforms introduced by OHADA, and where our teams are helping governments improve their business environment,” he says. “The hope is that those efforts take off and significant improvements are achieved, leading to other countries to follow suit gradually.”