FINANCIAL resources are scare, and this scarcity holds true for all manner resources and is particularly applicable to our country which, at the moment facing severe resource constraints in both the private and public sectors.
BY Clive Mphambela
The financial services sector finds itself in the midst of trying to balance competing demands for financial resources from all corners of the economy. The MSME sector is one of those sectors which is crying out for funding.
The tremendous structural transformation of the economy that took place during the last decade has seen the informal sector taking the stage in terms of policy formulation in Zimbabwe.
Challenges of Financing MSMEs
Access to finance has been cited as a major obstacle to the growth of MSMEs in most countries. The challenges faced by SMEs in accessing finance may be broadly categorised in terms of supply side, demand side and regulatory constraints.
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The supply side constraints faced by Financial Institutions in Financing SMEs include the following: *The high transaction costs emanating from processing of many small loans *The perceived high risk and uncertainty due to informalisation of operations, *The onerous documentation requirements and perceived cumbersome lending processes in loan creation. *The difficulty in accurately assessing SMEs cash flows by financial institutions. *Economic factors such as liquidity constraints, sovereign risk and the resultant high interest rates. *Most SMEs are perceived to have a higher probability of default than larger firms. This may in turn lead banks to be generally more selective in supplying loans to them. *The SMEs are a heterogeneous group with diverse players and different levels of development and sophistication of enterprises. They are also highly fragmented and located “all over the place”. *Difficulty in obtaining the information necessary for assessing the risks of new and unproven ventures, which depend on skills of the entrepreneur. *The probability of failure for new small ventures as a consequence is considered to be high. *The lack of detailed data base of SMEs players across the country means that funders are not sure of how many, where and how these players operate.
The demand side constraints points mostly to firm characteristics and owner perceptions which inhibit SMEs access to external finance. These factors include:
*Non-collateraliseable fixed assets, *Reluctance of SME players to admit new partners to expand capital base, *Lack of transparency in operations as owners keep these as secrets, *Failure to maintain proper books of accounts, *Reluctance to register their business *General opaqueness of the operations of SMEs since there is no governance framework. The regulatory constraints include the following factors; *The lack of detailed data base of SMEs players across the country means that funders are not sure of how many, where and how these players operate. *Lack of regulatory frameworks that can be used by the banks to assess risk such credit reference system and collateral registry among others *Tight regulations on KYC information required of which the majority of the SMEs don’t have.
*Lack of operational credit guarantee scheme in the country. The operationalisation of PCGs is crucial to SMEs success, and support can be provided to design and capitalise such facilities.
In-depth knowledge about the players in the sector would assist in devising funding strategies and intervention measures that adequately respond to the needs of the sector. This requires that the potential financiers understand the following imperatives:
The nature and dynamics of the sector in terms of product and service offering; Funding requirements; Risk profiles Level of profitability; Accounting practices; Varied compliance levels with local authorities’ by-laws The size of various enterprises.
The funding challenges faced by the diverse players in the informal sector also vary. Thus any strategy for intervention to support these businesses would need to take note of the diversity of the sector in order to avoid blanket statements that paint all businesses with one brush.
The SMEs of which the majority are in the informal sector also suffer from negative perception. These businesses are considered as high risk and some of the activities are perceived as illegal in nature.
There is need for a shift in the mindset of the various stakeholders to understand that there are not all bad apples in the informal sector. Not all activities in this sector are illegal; some are genuine and require assistance as they are serving the same purpose, which was served by our erstwhile big industries.
Clive Mphambela is a Banker. He writes in his capacity as the Advocacy Officer for the Bankers Association of Zimbabwe. BAZ expressly invites other stakeholders to give their valuable comments and feedback related to this article to him on clive@baz.org.zw or on numbers 04-744686, 0772206913