The International Finance Corporation (IFC) estimates that sub-Saharan Africa has a profound ‘missing middle’, a critical gap between micro enterprises that subsist and larger SMEs that thrive. Businesses in the ‘missing middle’ are too large for microfinance but too small or informal to access bank loans or venture capital. As a result, these enterprises remain operational but are structurally unable to scale and reach their potential.
The ‘missing middle’ is not a coincidence. Rather, it is the result of business environments that prioritize business creation while neglecting the ongoing structural support essential for business growth. Unlocking the full potential of MSMEs requires growth policies that recognize their starting point—addressing challenges of formalization, capacity building, and access to resources—and dismantle the structural funding barriers that limit their ability to scale. Only with this comprehensive approach can the ‘missing middle’ truly shrink.
The growth plateau is a structural problem, not particularly a business problem. The typical explanation offered for MSMEs getting stuck in the middle is a variation of the same idea: businesses lack access to capital, and if capital were available, growth would follow. This explanation is incomplete, and the evidence increasingly shows that capital-focused interventions in isolation produce disappointing results.
A closer look at a 2022 systematic review of MSME-supporting programs across sub-Saharan Africa, published in the Journal of Development Economics, found that access-to-funding interventions alone produced modest, often temporary improvements in business performance. The businesses that sustained growth trajectories over the years were those that consistently received integrated support, combining funding with business development services, management skills training, and market access facilitation.
The policy implications are significant. If capital alone were sufficient, the influx of funding channelled into African MSME markets over the past two decades should have produced a far more substantial middle tier of growing firms than currently exists. The continued presence of the large ‘missing middle’ is evidence that something structural in addition to capital constraints is at work.
What an Effective Growth Policy Should Look Like for the ‘Missing Middle’
Addressing the ‘missing middle’ demands a policy framework that extends beyond start-up support and funding. It involves tackling the perceptions of risk held by financial institutions and investors regarding MSMEs—sometimes accepting delayed returns on investment or evaluating risks and rewards with a broader perspective. This approach calls for reimagining institutional frameworks for finance, reforming procurement policies, and significantly expanding investment in capacity-building services.
Reimagine new financial institutional frameworks
The financing needs of a business transitioning from micro to small, or from small to medium, differ from those of a start-up, and most current financing instruments are not designed for this stage of transition; this model needs to be reimagined. The current financing model looks at MSMEs as highly risky, not completely untrue, but this view needs to be replaced with one that is more impact-centered and future-driven. Patient, growth-oriented capital, delivered through vehicles that do not impose the collateral requirements that disqualify most growing MSMEs from conventional lending, must become a priority for development finance institutions operating in this space.
The financing gap can be addressed through solutions that direct capital to the private sector while working with it to ensure it reaches these businesses, sometimes by overhauling the rules of the lending game. The World Bank Group, for example, is taking action by addressing structural barriers by tackling currency mismatch, demonstrating that MSME finance can deliver multiple objectives simultaneously, and thirdly, by changing the risk calculus.
Additionally, blended finance, expanding guarantee programs for banks to lend to underserved sectors, is also a strategy to develop institutional frameworks to increase access to finance for the missing middle. Blended finance has emerged as a powerful tool to bridge the financing gap for Africa’s ‘missing middle’—by strategically combining public, philanthropic, and private capital, blended finance structures can mitigate perceived risks and attract investment into sectors and enterprises that would otherwise be overlooked. This approach is particularly relevant for MSMEs, whose growth is often stymied by the high cost of capital and investor wariness.
However, as blended finance solutions become more prevalent, the risk environment for Africa’s missing middle is also changing. MSMEs today face a complex landscape of risks—from currency volatility and regulatory uncertainty to supply chain disruptions and shifting consumer demand. Investors and policymakers must recognize that risk profiles are not static; they evolve as MSMEs move from startup to scale-up, and as markets themselves become more dynamic. Effective blended finance instruments should be reimagined with built-in flexibility to account for these changing risks, offering tailored capital structures and risk-sharing mechanisms that adapt as enterprises grow.
Ultimately, unlocking the potential of Africa’s missing middle depends on innovative financing that is responsive to on-the-ground realities—flexible enough to manage evolving risks and tailored to the environments in which MSMEs operate. Only then can innovative finance fulfil its promise of enabling sustainable growth for Africa’s current and next generation of entrepreneurs.
Reforming procurement policy
Developing accessible frameworks and clear, verified pathways for MSMEs to compete for and secure government contracts—paired with targeted capacity support—stands out as one of the most impactful policy interventions available. Beyond strengthening management capacity, perhaps the most powerful yet underutilized lever for MSME growth is structured market linkage between small firms and established, stable buyers. The anchor firm model, in which a large enterprise, public institution, or development program serves as a reliable buyer of MSMEs output, has consistently delivered strong results across Africa.
Examples include Kenya’s advances in supermarket supply chains, South Africa’s preferential procurement framework, and Rwanda’s coffee and horticulture linkage programs—all of which show that institutional demand can unlock MSME growth in ways financial support alone cannot. When a small business has a guaranteed buyer for a defined volume of output, securing working capital becomes easier, investments in quality and capacity become less risky, and growth shifts from a gamble to a rational, strategic response.
African governments and their procurement agencies possess immense, yet largely untapped, potential to serve as anchor buyers for MSME output. With public procurement accounting for 15 to 30 percent of GDP in most African economies, even a slight shift in procurement policy favoring verified MSME suppliers could be transformative. Such a move would dramatically expand market access without requiring subsidies, creating dependency, or undermining commercial viability—instead, it would foster organic capability through genuine market engagement.
Invest at scale in capacity-building services
Governments and development partners must invest at scale in management and business development services delivered by qualified providers like KilSah Consulting, independently evaluated, and held to performance standards equivalent to those applied to financial intermediaries. At the heart of the growth ceiling for most MSMEs is a management capacity problem that current policy frameworks systematically underinvest in addressing. IFC research consistently identifies management quality as one of the primary constraints on MSME growth in emerging markets, and it is more consistently predictive of growth outcomes than access to finance alone.
The policy implication is that business development services, encompassing management training, financial literacy, strategic planning support, mentorship, and organizational development, should not be positioned as complementary to capital access programs or as the soft component of enterprise development. They should be positioned as co-equal strategic investments, with the same level of funding commitment, program sophistication, and outcome measurement as capital access programs.
In most African government budgets, very little, if any, is earmarked for MSME capacity-building. For development agencies, capacity building sometimes plays a minor role in plans to get MSMEs out of the middle, or even into the middle. Business development services are chronically underfunded relative to their demonstrated impact. The political economy explanation is straightforward: capital disbursements are visible and easily quantifiable in annual reports, whereas the management improvements that allow businesses to utilize capital effectively are diffuse, harder to attribute, and slower to manifest.
This creates a persistent bias in program design toward capital delivery over capacity building, even when the evidence points in the opposite direction. Investing in Training of Trainers and creating a database of verified Enterprise Support Organizations would help foster an environment in which MSMEs can access the capacity support they need.
Conclusion
The ‘missing middle’ is not a mystery—it consists of real people running real businesses facing tangible challenges. The causes of the finance gap are well understood and documented. As long as MSME policy in Africa is evaluated mainly by the number of businesses created, rather than those that achieve growth, the result will remain a broad base of micro-enterprises and only a thin layer of businesses driving true structural transformation. Governments genuinely committed to harnessing the economic power of small businesses for inclusive growth must shift their focus from business creation to enabling sustained growth.
Despite their potential, countless MSMEs remain “stuck in the middle”—unable to overcome the structural barriers that restrict their growth and impact. Addressing the challenges facing Africa’s ‘missing middle’ requires more than incremental policy adjustments; it demands a comprehensive reimagining of the starting conditions for these enterprises and the opportunities available to advance them. By tackling both the initial hurdles and the structural ceilings, policymakers can foster an environment in which MSMEs are empowered to scale, innovate, and drive meaningful change across communities and economies.
When growth policies are attuned to the realities of MSMEs, the prospect of sustainable, inclusive economic transformation for these firms becomes attainable. The journey from the margins to the mainstream begins with bold, integrated policies—strengthening institutional frameworks, reforming procurement processes, and investing consistently in capacity building—to unlock the full potential of Africa’s ‘missing middle.’
Written by:
Israel Essien
Staff Writer
