Over 10 million youth enter Africa’s labor market each year, yet only 3 million formal jobs are available, making it an uphill battle for most youth to secure decent employment. Compound this problem with mismatches between labor market supply and demand — and the informal nature of African economies — and it is no wonder that 30 percent of youth are unemployed and over half of those in the labor market are underemployed.
Most observers agree that the African labor market cannot absorb the growing number of job market entrants. Many youth-serving organizations (YSOs) and others believe that self-employment and entrepreneurship provide better economic opportunities for young people, while creating jobs for their peers.
In theory, this may be true. But in practice, the potential of entrepreneurship training has not been fully realized.
Many YSOs offer entrepreneurship training focused on equipping youth with the technical know-how to develop their business ideas. Financial services and financial literacy are often afterthoughts of technical training, and youth are left not knowing the importance of savings or how to use financial services to their advantage.
This needs to change if we want to see more young people become successful entrepreneurs. Financial access is a persistent challenge for young entrepreneurs in Africa. Most young people who venture into entrepreneurship do so in the informal sector, where there are fewer barriers to entry. Yet those in the informal sector have a harder time accessing financial services and may find it more difficult to expand their enterprises, create more jobs and transition to the formal sector.
To begin with, young entrepreneurs need access to a full range of financial products and services — not just loans — tailored to their specific needs. YSOs that facilitate access to finance tend to focus on providing new entrepreneurs with loans or small starter grants, which are often linked to guarantee funds, to launch their businesses. These can distort the market and are not sustainable over time. What’s needed are products and services developed in partnership with financial services providers (FSPs) that allow young entrepreneurs to develop a relationship with an FSP and, once that relationship has matured, to access affordable services such as loans to help build their business.
But access to useful financial products alone is not enough.
Building young entrepreneurs’ financial capabilities is also key, as it equips them with the knowledge, skills and attitudes to manage their personal finances, plan for their financial futures and eventually manage their own business. Financial education allows youth to recognize how to invest in themselves and become more empowered and confident innovators, all leading to increased job creation, income and economic growth.
The ideal way to deliver these services is for YSOs, FSPs and others to work together to integrate financial services and education with entrepreneurship training from the start. As outlined in CGAP's "The Role of Financial Services in Youth Education and Employment," without the right set of integrated financial and nonfinancial services to help new or evolving entrepreneurs, the vicious cycle of failed enterprises continues. Technical and soft skills training are critical for job creation, but financial inclusion also plays a very important if less obvious role.
Young entrepreneurs will be more likely to succeed if they are provided with integrated services that empower them with the technical know-how to put their business ideas into practice, the business acumen and soft skills to make that practice profitable and the financial savvy to identify and leverage financial services that will allow them to be self-sufficient and manage their resources.
Providing these services requires YSOs, FSPs and other institutions to ensure their trainings are coordinated, complementary and holistic. It also requires these partners to coordinate their efforts with regulators and policy makers to ensure comprehensive solutions align with country priorities. UNCDF has played a convening role in developing partnerships among YSOs, mobile network providers and FSPs, and we believe that this approach can have a positive impact for youth if actors commit to working together to achieve shared objectives.
A forthcoming CGAP-UNCDF case study outlines how UNCDF uses a partnership approach to youth financial inclusion. One important step toward collaboration is having FSPs discuss the design of trainings with other partners for their input. FSPs could also engage with trainees once they enter programs to get a sense of their needs and challenges to effectively design products and begin building a relationships with them. Likewise, YSOs should design programs in partnership with FSPs, so the access-to-finance component is not overlooked or left to the last minute, when it is too late to apply sustainable and market-driven approaches to financial inclusion.
In theory, it’s a good idea. And in practice, it could just work.
Ata Cissé is a youth finance regional specialist with UNCDF based in Dakar, Senegal.This post is part of CGAP's "Financial Services in Youth Education and Employment" blog series. The series explores the challenge of youth financial inclusion from a variety of angles, including the ways young people are using digital financial services, strategies that financial services providers are using to reach more young customers and the changing role of funders in this space.