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Sanderson Abel
The concept of scarcity in economics espouses that available resources will never be able to meet the unlimited needs of any society. The situation currently prevailing in the economy shows that the demands for finance of the various sectors cannot be met with the current supply of limited financial resources. The banking sector currently finds itself trying to balance the equation in its quest to resolving financing needs of productive sectors of the economy.

The scarcity of liquidity in the economy is stifling development of the country as the sectors are looking for working capital and long term capital inflows.

Sources of funding under a multi-currency regime
Under the multi-currency regime the ability of banks to lend to the private and public sectors is a function of the different sources of liquidity. The main sources of liquidity for the economy are export earnings, diaspora inflows, offshore credit lines, foreign direct investment inflows and capital transfers including grants. These sources of financing have continued to dwindle, while at the same time the funding expectations from the various sectors continue to grow.

The SME sector is one of those sectors that is craving for more funding given the tremendous structural economic transformation that the economy has undergone over recent years. At the same time the pivotal role the SME sector plays cannot be downplayed.

Thinking outside the box
With scarcity of financing mechanisms, there is need for players in the various sectors of the economy to start thinking outside the box on how they can finance their various operations. The SMEs are not spared, hence the need for them to become innovative in the sourcing of finances.

Innovative financing should ensure the availability of stable long-term financing. These financing resources must be predictable over the time frame required by the sector players so as to make long-term planning possible.

Successful and sustainable innovative financing mechanisms require that the SME sector should be well organised.

Resources have a tendency to follow where there is recognisable order and formal structures.

The tobacco farming sector is a good example of a well organised sector. With properly organised structures, the players in the SME sector should be in a position to organise borrowing under group structures rather than as individuals by using accumulated resources in savings as collateral.

Under this arrangement, the accumulated savings resources of the group can act as the guarantor of the members borrowing.

Various players in the SME sector can formalise their structures and come up with registers of a dedicated membership so as to build resources through monthly/quarterly contributions from members.

These contributions would then be used as seed funds which can be placed in a bank and form the bedrock of any borrowing that these organisations can undertake on behalf of their members.

Innovative financing would have little chance of success if potential contributors are not convinced that their contribution would add value to their business ventures and if there is lack of transparency on how their contributions are being managed.

Another very important mechanism that these groups could take advantage of is lease finance.

A lease is a contractual arrangement between two parties whereby a party that owns an asset lets another party use/hire the asset for a predetermined time in exchange for periodic payments.

Leasing focuses on the lessee’s ability to generate cash flows from business operations to service the lease payment, rather than on the balance sheet or on past credit history.

This explains why leasing is particularly advantageous for the majority of SMEs that do not have a lengthy credit history or a significant asset base for collateral.

The equipment obtained through leasing could be shared among group members in a transparent manner so that all members have equal access.

Further, the innovative methods of financing should also be able to draw funds from a much wider range of sources than conventional financing.

Properly organised SMEs should utilise the advantage of strength in numbers, ability to be organised and develop bankable proposals which should be used to attract debt finance. Under this arrangement, the SMEs sector should be able to approach institutional investors such as insurance and pension funds as venture partners.

This organised framework assists the potential investors or funders to view the organisation as a single entity rather than as various fragmented institutions.

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