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Demand side constraints point mostly to firm characteristics and owner perceptions which inhibit SMEs access to external finance

Sanderson Abel—

Scarcity entails that resources are never adequate to meet the unlimited needs of any society. This definition holds true for the country which is currently facing resource constraints in both the private and public sector.The financial services sector finds itself in the midst of trying to balance competing demands in order to cater for the whole economy. The SME sector is one of those sectors that require financing. The sector is peculiar in that it is now the engine of economic growth after the tremendous structural transformation that took place in the economy over the last decade.

According to the World Bank, Formal SMEs contribute up to 45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included.

According to the Finscope Survey 2012, Zimbabwe has 2,8 million Micro, Small to Medium Enterprise owners in Zimbabwe (18 years and older), owning 3,5 million businesses, employing a total of 2,9 million people (all ages, excluding the business owners themselves).

As such, the sector contributes to employment with a total of 5,7 million people working in the sector. Considering an estimated adult population of about 5,9 million, almost all adults in Zimbabwe engage in small business activities (either as individual entrepreneurs, MSME owners, or employees).

Access to finance has been cited as a major obstacle to SMEs growth in most countries. The challenges to SMEs access to finance may be categorised in terms of supply side, demand side and regulatory.

The supply side constraints faced by SMEs include the following:

Higher transaction costs emanating from processing of many small loans

Perceived high risk and uncertainty due to informalisation of operations,

Documentation requirements and perceived cumbersome lending processes

Difficulty in accurately assessing SMEs cash flows you financial institutions

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.

Difficulty in obtaining the information necessary to assess 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 SME sector also vary. Thus any strategy for intervention to support these businesses 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 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. Simultaneously to stimulate the flow of bank credit and to create well-developed markets for a range of alternative financing sources to complement the role of banks in financing the SME sectors.

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008