SMALL AND MEDIUM Enterprises (SMEs) play a key role in the economic development of countries across the globe through employment creation and contributing towards poverty alleviation.
A 2012 FinScope survey established a number of findings on Zimbabwe’s SMEs sector. These include that the sector employed an estimated 5,7 million people with the majority being women and contributed more than 50% to the country’s gross domestic product (GDP).
Only 14% of SMEs owners were banked, with only 18% of SMEs business owners formally served by both bank and other formal non-bank products/services.
This sector is thus a key part of the Zimbabwean economy.
However, one of the recurring barriers to growth and development of the sector is limited access to funding in the banking sector. It is therefore crucial to review the sector’s access to finance and the banking sector since the findings from the 2012 FinScope study.
What has changed since the 2012 study?
According to a recent Reserve Bank of Zimbabwe (RBZ) report titled Zimbabwe National Financial Inclusion Journey 2016-2020, the number of SMEs with bank accounts increased by 102,48% from 71 730 to 145 237, between December 2016 and September 2020. Lending to the sector also grew from US$131,69 million as at December 31, 2016 to US$2,03 billion as reflected below.
Notwithstanding growth in terms of lending to the sector, between 2016 and 2020, the country underwent a series of macro-economic reforms, which saw the re-introduction of the Zimbabwean dollar. These changes ushered in increases in inflation and currency depreciation as the economy adjusted.
Factoring in the exchange rate effect for 2020, loans to the SMEs were US$24,7 million. Thus, loan advances to the sector declined in real terms between 2016 and 2020 by about 82%.
The share of small businesses loans to total loan advances also marginally declined since 2018.
This finding dovetails with the above finding that loan advances declined in real terms.
An increase in bank accounts held by SMEs would have been anticipated to translate into increased lending to the sector.
The RBZ came up with a number of initiatives promoting innovative financial products for SMEs. Important to highlight is also the fact that the increase in the number of bank accounts might have been triggered by the liquidity crisis that started in 2017 forcing the unbanked population to open bank accounts to circumvent the cash crisis as the economy was operating using electronic money.
The growth in nominal value of credit to the sector was largely driven by microfinance institutions (MFIs). The RBZ Microfinance Quarterly Industry Report of December 31, 2020 shows that 71% of loans between December 2016 and December 2020 by MFIs were advanced to SMEs sector as the high perceived risk associated with SMEs made them unattractive to the conventional banks. MFIs compensated for this high risk by charging higher interest rates than commercial banks.
This partly explains the decline in lending to the sector as SMEs shun the high interest rates charged by MFIs.
Foreign currency access
Access to foreign currency is also critical for SMEs as some heavily rely on imported raw materials and consumables for their operations. Post-introduction of the foreign exchange trading action system (Feats) in June 2020, the RBZ introduced SMEs Feats in August 2020 to cater for the needs of SMEs.
Since January 2021 to October, the sector has been allocated US$246 million or 19% of the total auction allotments and the number of bidders have been exponentially increasing since the introduction of the SMEs Feats in 2020.
The RBZ must be commended for setting up the SMEs Feats, however, the fact that a good number of SMEs remain unbanked, implies that a significant number are still financially excluded from the auction.
Excluded SMEs have to source their foreign currency requirements from alternative sources, which attract a higher premium than the auction, affecting such businesses’ ability to grow.
Challenges faced by SMEs
SMEs continue to face a number of challenges when accessing funds from lending institutions. Conspicuously, they lack collateral security, which is a pre-lending requirement by many financial institutions.
This forces SMEs to either have to self-finance or find informal means of financing their businesses or be subjected to extremely high interest rates by banks and MFIs.
SMEs lack information on bank requirements and are unable to create bankable project proposals. This forces SMEs to rely on cash-based transactions for trading purposes. Coupled with this, lack of good corporate governance structures within the sector also inhibits small businesses from accessing bank loans.
Often, they do not keep records of all business transactions and do not produce financials required by lending institutions when applying for loans.
A number of SMEs are not formally registered due to the high cost of government regulation thereby disqualifying them from accessing loans from formal lending institutions.
Financially included SMEs sector
Worth noting is that there has been a significant increase in the number of SMEs with bank accounts since 2016, attributed to a number of measures put in place by the RBZ to promote financial inclusion as well as the liquidity crisis.
However, this increase has not translated to an increase in loans to the SMEs sector but these have actually declined in real terms.
Given that the lack of collateral security required by formal lending institutions expose SMEs to high interest rates, the RBZ must expedite the process of creating a collateral registry to remove this barrier. Concurrently, SMEs have to develop a savings culture to allow them to build secure assets that can be used as collateral security.
Lending institutions, like banks, have to devise innovative funding models for SMEs. While they are commended for developing specialised units and MFIs, it is important that they can reduce loans misuse by paying directly to suppliers.
Group lending schemes can be explored as the risk of non-payment is reduced as there is already a natural selection process that eliminates potential defaulters from becoming members of the group.
Lending institutions needs to understand that it is in their best interest to bring SMEs into formal banking system as this will mean more business in the future.
Banks need to come up with strategies to reduce charges to attract more SMEs into the formal banking system. The current situation where the banking sector relies on bank charges for their revenue is not sustainable. This is why some innovative foreign remittance companies are taking over the remittance and foreign currency business while local banks focus on charging high fees.
Finally, access to finance is only one of the challenges faced by SMEs, more still needs to be done by government to address some of the challenges such as ensuring macroeconomic stability, providing incubation hubs and training for SMEs, amongst others.
Zengeni is a senior researcher at the Competition and Tariff Commission (Commission). The views expressed are the authors’ own and do not necessarily reflect the views of the commission. — email@example.com