Tackling Institutional Challenges in Africa

In the previous article, the writer explored the institutional challenges that hinder diaspora-led entrepreneurship in Africa. In this follow-up piece, attention will be turned to the efforts being made to address these barriers and foster a more conducive environment for diaspora-led investment on the continent.

Africa is experiencing a growing wave of diaspora-led initiatives, with entrepreneurs and change-makers from the continent’s diaspora taking bold steps to address social and economic challenges. However, the institutional landscape remains fraught with hurdles, such as difficulty in gathering information, lack of credibility, and limited access to risk capital. To fully harness the potential of these initiatives, targeted solutions are essential. Below, we explore ways to address these institutional challenges and highlight real-life case studies demonstrating successful strategies.

1. Establishing “Non-Stop Shops” for Diaspora Enterprises

One key solution to overcoming the challenges of information access and resource constraints is the establishment of “non-stop shops”—dedicated centres that provide comprehensive support to diaspora entrepreneurs. These hubs could serve as a central place for gaining vital business information, networking with local stakeholders, and accessing risk capital.

Such platforms would not only centralize access to resources but also foster collaboration between diaspora entrepreneurs, local businesses, and investors. By building a one-stop shop that integrates government agencies, financial institutions, and private sector players, the diaspora would find it easier to navigate Africa’s complex institutional environment.

The African Development Bank (AfDB) launched the Diaspora Investment Program to support Africans living abroad by providing access to information, investment opportunities, and financial instruments. Through this program, the AfDB connects diaspora entrepreneurs with local financial systems and key market players, providing the needed infrastructure for business growth. By integrating financial services with networking platforms, the AfDB’s initiative highlights the importance of non-stop support systems for diaspora-led enterprises.

2. Creating Credible Intermediary Platforms

Another major challenge diaspora entrepreneurs face is a lack of credibility when operating within African institutions. Often seen as outsiders, despite their origins, diaspora-led initiatives struggle to gain the trust of local partners, government agencies, and investors. One way to tackle this is by creating credible intermediary platforms that validate the work of these entrepreneurs and bridge the trust gap between them and local institutions.

Such platforms can offer certifications, due diligence services, and track records of diaspora-led ventures, allowing them to demonstrate credibility to potential partners and investors. These platforms could also advocate for regulatory reforms that promote transparency and accountability in African markets.

Impact Investment Exchange (IIX) Africa, a social stock exchange, plays an intermediary role by providing credibility to social enterprises and diaspora-led ventures. IIX conducts rigorous assessments and due diligence on enterprises seeking investment and connects them to impact investors. By building trust and transparency, IIX has enabled many diaspora entrepreneurs to scale their ventures by tapping into new sources of capital. This model could be replicated across other sectors to support diaspora-led initiatives.

3. Improving Access to Risk Capital

Access to risk capital is one of the greatest institutional hurdles diaspora entrepreneurs faces in Africa. With few risk capital providers and a high perception of investment risks on the continent, many diaspora-led initiatives struggle to secure the funding necessary for growth. Addressing this requires a multifaceted approach that includes innovative financing mechanisms and policy frameworks that incentivize investors.

First, governments and development agencies could create diaspora-specific venture funds, which would de-risk investments through guarantees or insurance schemes. These funds could partner with impact investors or philanthropic organizations to lower the barrier to entry for investors in diaspora-led ventures. Second, impact bonds, blended finance structures, and crowdfunding platforms can help diaspora entrepreneurs access alternative sources of capital.

In 2017, Nigeria launched a diaspora bond aimed at mobilizing funds from its citizens abroad to finance infrastructure projects and development initiatives. The bond was successful, raising $300 million. Such financial instruments demonstrate the potential for African governments to create risk-sharing mechanisms that give diaspora investors more confidence to channel funds into local enterprises.

4. Leveraging Technology for Information and Relationship Building

Technology offers a critical solution for overcoming the institutional challenges related to information access and relationship building. Diaspora entrepreneurs often struggle to navigate fragmented markets, but digital platforms can play a transformative role in providing real-time, accurate information about local regulations, market trends, and funding opportunities.

By leveraging blockchain technology for transparency and accountability or developing online incubators and accelerator programs, diaspora entrepreneurs can form virtual networks, learn from peers, and build relationships with key stakeholders without the need for frequent travel. Technology can also facilitate partnerships by creating trust-based systems for cross-border collaborations.

VC4A (Venture Capital for Africa) is an online platform that connects African entrepreneurs, including members of the diaspora, with investors, mentors, and partners. By offering market insights, legal support, and a networking hub, VC4A has created an invaluable digital space for entrepreneurs who may not have the physical resources to navigate African markets. The platform helps solve the problem of information fragmentation by offering a one-stop-shop for business intelligence and relationship building.

5. Institutional Reforms for Diaspora Engagement

Finally, governments must play a proactive role in creating policies that encourage diaspora investment and entrepreneurship. This involves developing frameworks that lower bureaucratic barriers, enforce legal protections for businesses, and create a stable investment environment.

Countries can establish diaspora desks within key ministries to facilitate communication, address concerns, and ensure that diaspora investors receive timely and accurate information. In addition, governments can create tax incentives, simplify business registration processes, and ensure that diaspora entrepreneurs have access to local markets without undue restrictions.

Ethiopia has developed one of the most robust diaspora engagement policies in Africa, offering incentives such as dual citizenship privileges, tax exemptions, and access to priority investment sectors for its diaspora. The government has also established a diaspora affairs office that coordinates investment initiatives and supports Ethiopian entrepreneurs abroad. This policy has led to significant investments in key sectors like agriculture and manufacturing.

In conclusion, tackling the institutional challenges faced by diaspora-led initiatives in Africa requires a multi-dimensional approach that incorporates government reforms, technology, and the establishment of credible support systems. By implementing non-stop shops, building intermediary platforms, improving access to risk capital, and leveraging technology, Africa can fully harness the potential of its diaspora to drive sustainable development and economic growth.

The continued success of diaspora-led initiatives lies in the ability to foster trust, enhance access to resources, and create an enabling environment that promotes entrepreneurship. With the right support, Africa’s diaspora entrepreneurs can be the engine of innovation and change that propels the continent forward.