Home » Business » Financial Support for SMEs Essential

ZIMBABWE’s economy has gone through structural changes over the past four years, with the small to medium enterprises and informal sectors now dominating the economic landscape. Of late, policymakers and economic commentators have been talking about the shift and we think it is time to make sense of it.

The SME and the informal sectors are thriving despite the liquidity challenges which continue to hamstring big business.

And with over 70 percent of the population living in the rural areas and the bulk of the urban population operating in the informal sector, it is clear the sectors have become the biggest employer in the country.

Finance Minister Patrick Chinamasa rightly pointed out that the SME sector is the new economy that should be fully supported.

That being the case, one would expect that the bulk of money in the economy be channelled towards financing these emerging sectors. Productive lending and not consumptive lending, should be of paramount importance to stimulate recovery and growth.

Micro-finance is key in providing funding for SMEs and informal businesses and it is our belief that the bulk of the loans should be skewed towards productive lending.

According to the Reserve Bank of Zimbabwe, loans in the micro-finance sector increased to $157 million in 2014 from $151,8 million in the quarter ended September 2014.

The central bank, however, said that the sector’s loan portfolio remained skewed towards consumption. The Reserve Bank said just above half of the loans aanced went towards consumptive lending, which predominantly comprised salary-based loans.

It added that it was disturbing that micro-finance institutions are shying away from SMEs and the informal sectors.

The micro-finance institutions are obviously giving salary-based loans to workers because they want to minimise their risk exposure, which does make business sense.

This approach, however, creates a spending culture which is not sustainable either to the economy and the industry.

However, while business may be brisk at the moment, it is not sustainable and as time moves on it will reach a dead end.

Some micro-finance institutions have already reached this point since most of these transactions are once-off business arrangements. The SMEs and informal sector is the economy and should be regarded as such.

It would make a g business case for micro-finance institutions to come up with financial products tailored to the specific needs, risks and peculiarities of the SMEs and the informal sector.

Lending money to the SMEs is supporting the productive sector, which sustains employment and even guarantees business for the same institutions.

Undeniably, consumptive loans carry less risk and make a lot of sense for financial institutions to give preference to customers under this category, particularly in our environment.

But we believe it is time for the micro-finance institutions to carefully consider the benefits that could be derived from financing these thriving sectors in the long term.

However, we need reforms in the whole financial sector to come up with a new model of banking that suits the current situation of the economy.

Micro-finance institutions on their own are certainly not sufficient we also need banks to finance the sector.

At the same time Government should also expedite the formalisation of the SME sector into the formal economy, which will help address the issues of risk as well as ensuring that the sector contributes meaningfully to the economy.

Source : The Herald