Understanding challenges affecting SMEs
SMEs play a key role in transition and developing countries. These SMEs typically account for bulk of all firms outside the agricultural sector. They constitute a major source of employment and generate significant domestic and export earnings. As such, S
POLICY efforts targeted at SMEs have often justified with arguments that; SMEs are an engine of innovation and growth, they help reduce poverty as they are more labour-intensive, but they are constrained by institutional and market failures
The importance of SMEs in Zimbabwe is acknowledged in the ZimAsset Blue print. The blue print 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.
Of 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.
SMEs, due to their size, are particularly constrained by limited access to finance, cumbersome bureaucratic pro- cedures 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 SME support, i.e. an enabling environment for SME development consisting of functioning macro, meso and micro level institutions.
SME also make decisions about financing and display attitudes that have an important bearing on financing decisions.
The economics literature on enterprise financing has identifed various obstacles that may prevent SMEs from obtaining adequate financing and these also characterise SMEs in Zimbabwe.
Constraints regarding SME 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 MSMEs 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 to allow the bank to continuously monitor their business 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 MSMEs 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 SME to make the best possible use of available sources of funding; In order to resolve the constraints currently bedevilling the financing of the MSME sector in Zimbabwe, a holistic all stakeholder approach is required.
There is a recognised need to take steps to increase the capacity of financial institutions to construct profitable MSME lending programmes, while prioritising the development of innovative solutions to address collateral issues.
This would include initiatives such as the acceptance of more flexible forms of collateral, particularly for SMEs with few fixed assets.
This should be done without jeopardising the lending policies of the various financial institutions.
The Ministry of Small, Medium Enterprises and Cooperative Development should set up a consolidated database or register for all MSMEs in Zimbabwe which should include the following; the sector in the which the MSME falls, the province, the list of directors, the address of operations, value of assets or the MSMEs and other pertinent issues.
Alternatively the SMEs should develop their own SME organisations and pool 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 MSMEs 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.
Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. BAZ expressly invites players in the MSME sector to give their valuable comments and feedback related to this article to him on abel@baz. org.zw or on numbers 04-744686 and 0772463008