5 February 2013

Zimbabwe: RBZ Shot in Arm for SMEs

ZIMBABWE'S small and mid-sized businesses received a boost last week after the Reserve Bank of Zimbabwe directed that banks should reorient their portfolios such that advances to the SME sector should constitute at least 30 percent of the total loan book.

After the contraction of the formal economy, Zimbabwe has experienced phenomenal growth in the SME sector.

But many small to medium-sized companies have been finding it difficult to access credit due to stringent collateral requirements and exorbitant cost of credit.

This is despite huge potential held by the SME sector in terms of creating employment, driving economic growth and widening the country's export basket.

According to the Reserve Bank, businesses to be classified as SMEs should have an asset base ranging from US$10 000 to US$2 million and an annual turnover of US$30 000 to US$5 million.

Given the banking sector loans of US$3,5 billion as at December 31, 2012, an allocation of 30 percent to the SME sector will translate to loans of US$1,05 billion.

The RBZ assumes that if US$40 000 is loaned to each borrower, a total of between 25 000 to 30 000 clients would benefit thus creating more than 500 000 jobs per year.

"The SMEs sector requires adequate funding to unlock its potential as a source of rapid economic growth, poverty reduction, bridging current supply gaps in the economy and uplifting living standards in Zimbabwe," said RBZ Governor Dr Gideon Gono when presenting his 2013 Monetary Policy Statement on Thursday last week.

"The take-off of the SMEs sector in the mining, manufacturing and services sector requires that the banking sector realign its loan portfolio to accommodate the SMEs sector.

"Given the benefits of a vibrant SME sector to the economy, it is imperative that banks are supportive of this sector through tailored products including loans and advances especially supply contract and order financing."

SMEs can be the answer to the country's worsening trade deficit.

Zimbabwe's foreign trade has always experienced a deficit with an increase in demand every year for foreign goods for national development as well as for consumption and with a static trend in export growth.

Last year, Zimbabwe's exports stood at US$3,6 billion while exports totalled US$7,8 billion, according to official statistics.

Economic analysts welcomed the move by the central bank saying many stakeholders had been reluctant to support SMEs and would "rather be comfortable to call them informal sector" yet these were the businesses commanding European economies.

They also noted big companies tended to compete with small to medium-sized firms instead of forming business linkages that will result in a win-win situation.

"On the financing side, it is a positive move by Dr Gono," said a Harare-based economic analyst. "But more has to be done to complement this. Complementary policies are required to deal with bottlenecks affecting the SME sector."

The European Commission, for instance, came up with various laws to promote entrepreneurship and improve the business environment for SMEs, to allow them to realise their full potential in today's global economy. In June 2008, the Small Business Act for Europe (SBA) reflects the commission's political will to recognise the central role of SMEs in the EU economy.

The commission works on broad policy issues affecting entrepreneurship and SMEs across Europe and assists SMEs through networks and business support measures.

It helps existing and potential entrepreneurs to grow their businesses, giving special attention to women entrepreneurs, crafts and social economy enterprises. There are about 23 million SMEs in the region which represent 99 percent of businesses and are a key driver for economic growth, innovation, employment and social integration.

Comesa Business Council secretary-general Mr Trust Chikohora said the announcement by Dr Gono would go a long way in helping SMEs secure funding.

"It is quite a noble pronouncement because SMEs usually find it difficult to secure funding," he said.

"At the moment institutions that offer finance to SMEs like the Small Enterprises Development Corporation are undercapitalised so they are not able to adequately service the sector." He said micro-finance institutions were offering short-term credit at high interest rates.

"With banks, SMEs can easily access funds at reasonable interest rates and this will allow them to grow and actively participate in the growth of the economy. The move would also help to formalise the SMEs sector," said Mr Chikohora.

He added that the SMEs have the potential to stimulate economic growth and should they be formalised, they would generate more deposits for local banks. It is estimated that more than US$2 billion is outside the formal banking system.

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