20 December 2012

Rwanda: Lack of Business Support Services Hampering SMEs Access to Finance

Experts say that lack of access to business support services is slowing down efforts to boost the fragile sector that is seen as a source of employment and key driver of private sector growth.

Dr. John Matovu, a consultant says that most small and medium enterprises (SMEs) cannot access formal sources of funds to finance their business due to lack of necessary instruments to enable financial institutions to offer credit.

"There is still a challenge of access to and affordability of Business Development Services which would help most SMEs access finance to grow," he told Business Times.

Matovu says that financial institutions always need key requirements which include a business plan, monthly cash flow projections, audited books of accounts, and a track record of the firms' banking transactions, which most SMEs cannot manage.

Another consultant, Job Opar said: "With banks' bureaucratic procedures, most SMEs find themselves in an access to finance twist where they cannot give up neither from looking for loans nor being able to put right what is required."

According to a research; Leveraging Capital markets for SME financing in Rwanda by African Development Bank, only 30 percent of the SMEs have a business plan.

Again, about 40 percent of them use retained earnings to finance their operations, 30 percent use trade credit while 25 percent indicate that they make use of bank loans.

"The range of products accessed is also limited with most of the SMEs surveyed indicating a heavy reliance on term loans," the report says.

Matovu believes that this is both an indication of limited diversification of financial products but also the fact that SMEs lack the necessary requirements to access other financial instruments.

Moreover, most SMEs are informal and not incorporated indicating that they cannot sue and cannot be sued which constrains them from accessing finance particularly from the formal sources.

The experts are hopeful that extending business development services to SMEs will turn around the current situation thus resulting in increasing financing for the sector.

"Measures to increase access to finance should be coupled with interventions to expand access to business development services so as to ensure a holistic approach to SME growth and development," Matovu explains.

Nevertheless, efforts to help SMEs and startup entrepreneurs to write good business plans has been boosted resulting into many of them accessing finance from financial institutions.

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