The Herald (Harare)

6 January 2014

Zimbabwe: Challenges of Financing Small to Medium Enterprises

opinion

These SMEs typically account for bulk of all firms outside the agricultural sector, constitute a major source of employment and generate significant domestic and export earnings. As such, SME development emerges as a key instrument in poverty reduction efforts. The importance of SMEs in Zimbabwe is identified economic blue print guiding the economy in the next five years identified one of its key strategies as fostering strategic linkages and formalisation among SMEs and cooperatives across all sectors of the economy.

This is an identification of the importance of the sector especially given that the majority of the bigger firms are currently downsizing and in the worst scenario are closing shop. Notable importance is the linkages that the SMEs have with the bigger corporates.

Further the Zim-Asset programme highlights that the main thrust of the SMEs and Co-operatives policy will be development and provision of funding for indigenous business ventures especially start-ups and those run by previously disadvantaged individuals. In order to achieve financial inclusion of innovative youth and women in the formal sector, SEDCO will be recapitalized to finance the development of these projects.

SMEs, due to their size, are particularly constrained by limited access to finance, cumbersome bureaucratic procedures in setting up, operating and growing a business, poor state of infrastructure and lack of effective institutional structures. The removal of these constraints is a daunting task calling for holistic SMEs support, that is, an enabling environment for SMEs development consisting of functioning macro and micro level institutions.

SMEs also make decisions about financing and display attitudes that have an important bearing on financing decisions. The economics literature on enterprise financing has identified various obstacles that may prevent SMEs from obtaining adequate financing and these also characterise SMEs in Zimbabwe. Constraints regarding SMEs financing appear on both the "demand side" and the "supply side" of the financing market. These constraints are outlined from both perspectives below;

Demand side constraints

Demand side constraints are those that directly emanate from the SMEs side. These include the following:

SMEs face a more uncertain competitive environment than larger companies -- they experience more variable rates of return and higher rates of failure.

SMEs are comparatively less equipped in terms of both human and capital resources to withstand economic adversities.

There is the problem of inadequate accounting systems, which undermines the accessibility and reliability of information concerning profitability and repayment capacity.

SMEs usually have insufficient personal savings resulting in low initial promoters equity

Lack of reliable information on the operations of the majority of the SMEs

Inability of entrepreneurs to articulate business plans due to lack of sophistication and skills.

There is the problem of valuation of businesses as the entrepreneurs prefer to value their business against the actual value prevailing on the market

Entrepreneurs are reluctant for the bank to monitor its business in an on-going basis thus hindering value enhancement

Uncoordinated business ideas and plans leading to Non-bankable projects by entrepreneurs

Supply side constraints

Supply side constraints are those constraints emanating or encountered from the supply side i.e. financial institutions. Some of these constraints are outlined below;

Inability of banks to provide long term funds due to mismatch between tenor of bank deposits and loans being sought

Fluctuating and prohibitive interest rates which makes some of the projects non-profitable

Inability of the customers (SMEs) to satisfy high credit risk standards, including security/collateral as articulated in policy guidelines for the bank

>High non-performing loan book leading to the slowdown in advancing financing to the SMEs as they are perceived to be risky

Most of the entrepreneurs to go to the banks unprepared for the scrutiny of their operations

The poor quality of projects submitted for financing;

The inability of SMEs to make the best possible use of available sources of funding;

In order to resolve the constraints currently bedevilling the financing of SMEs sector in Zimbabwe a holistic all stakeholder approach.

These would include the need to take steps to increase the capacity of financial institutions to construct profitable SMEs lending programmes, while prioritizing the development of innovative solutions to collateral issues. This would include initiatives such as the acceptance of more flexible forms of collateral, particularly for SMEs with few fixed assets without jeopardising the lending policies of the various financial institutions.

Government fiscal space allowing, the ministry responsible for the SMEs would set up a fund to act as loan guarantee schemes for SMEs. This would require that the Ministry sets up a consolidated database or register for all SMEs in Zimbabwe which would include the following; the sector in the which the SME falls, the province, the list of directors, the address of operations, value of assets or the SMEs and other pertinent issues. The advantage of an effective government loan guarantee scheme would be that the bank can be able to relax some of the collateral requirements and might devote to say more emphasis on cash flow assessment on borrowing capacity.

Alternatively the SMEs should develop their own SME organisations and pull resources together which they can deposit with financial institutions in the country. These resources would then be used as collateral for the borrowing to be undertaken by the members. This would allow the SMEs to self-regulate themselves as members would need to prove that they are willing and able to repay the loans from the banks before they can be guaranteed through the group facility.

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe.

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