ROLE OF THE BANKING SECTOR IN PROMOTING GROWTH & DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES

ADDRESS

BY

DR. C. L. DHLIWAYO

ACTING GOVERNOR

AT THE 2ND SME BANKING & MICROFINANCE SUMMIT 2014

MARCH 2014

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SALUTATIONS

§ The Minister of Small and Medium Enterprises and Cooperative

Development, Honourable Sithembiso Nyoni;

§ President of the Bankers Association of Zimbabwe, Mr. G.

Guvamatanga;

§ The organizers of this summit;

§ Distinguished Guests

§ Ladies and gentlemen

INTRODUCTION

1. It is indeed an honour and great privilege for me to address you on

the Role of the Banking Sector in Promoting Small and Medium

Enterprises Growth & Development, on the occasion of the 2nd

SME Banking & Microfinance Summit 2014.

2. Ladies and gentlemen, as you would know, SMEs are recognized as

one of the key drivers of ZimAsset and an engine for economic

growth by virtue of their contribution to employment and wealth

creation, income generation and the strategic linkages with large

companies across economic clusters.

3. As in most developing countries, the SME sector in Zimbabwe

forms a significant part of the economic activities. Nevertheless,

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they face a number of problems, including limited access to

finance from formal sources.

4. That is why this summit on Small and Medium-Scale Enterprises is

not only very important for SMEs, but also important for the

financial sector, the Government and all other stakeholders in the

SME subsector.

5. As Reserve Bank, we recognize that our role is to promote an

efficient, effective and sound financial sector capable of providing a

wide range of demand-driven financial services including financing

requirements of the SME sector.

6. Ladies and gentlemen, allow me to start by briefly highlighting the

role of the SME sector in the economy and then move on to discuss

the banking sector initiatives towards promoting SME development

and growth.

ROLE OF SME SECTOR IN ECONOMIC DEVELOPMENT

7. The Reserve Bank recognizes the critical role played by SMEs in

the economy and the need for the banking sector to support them.

8. The FinScope SME survey conducted in 2012 revealed that the

micro, small and medium enterprises sector, with 2.8 million owners

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of enterprises, provide employment to over 2.9 million employees

and contribute 60% to the nation’s Gross Domestic Product.

9. Among the key conclusions drawn from the survey was that the

SME sector plays an important role in alleviating poverty,

notwithstanding that for many players their incomes are very limited

and well below the Poverty Datum Line.

10. The survey noted that increased SME growth has a direct effect on

GDP growth due to increased output, value addition and profits.

SME growth also impacts GDP indirectly, through increased

innovation and macro-economic resilience of the overall economy.

11. A stronger SME sector can bolster the country’s resilience by

broadening and diversifying the domestic economy, thereby

reducing the vulnerability to sector-specific shocks.

12. SMEs provide not only employment for the community, but also

tailor-made products in appropriate sizes and quantities suitable for

the community customers. The proximity to the market, keeps the

transport and marketing costs low which enables SMEs to sell their

wares and products at competitive prices.

13. SMEs are flexible and innovative and can easily adapt not only to

the changing production techniques but also to changes in market

tastes and preferences.

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14. The high dependence of SMEs on local skills, raw materials and

production techniques enable the country to save on foreign

currency while promoting the exploitation of local resources for

both the local and export markets.

15. Ladies and gentlemen, literature on the successful turnaround of the

Asian and other developing economies has emphasised the key role

played by SMEs in the economic recovery process.

16. I will now draw your attention to some of the measures being

undertaken by the banking sector to promote SME growth.

BANKING SECTOR SUPPORT TO THE SME SECTOR

17. The financial sector plays a central role in the growth and

development of the economy through mobilization and deployment

of financial resources.

18. The financial services sector in Zimbabwe which largely comprises

the insurance sector, the securities sector, the banking sector and the

microfinance sector, has a significant role to play in the promotion

of the development of SMEs.

19. My discussion will, however, be confined to the banking and

microfinance sectors which fall under the supervisory ambit of the

Reserve Bank.

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20. You will recall that, in 2006 the Reserve Bank, in collaboration with

other key stakeholders developed the Financial Inclusion

Framework in order to improve access to financial services by

marginalized communities in remote areas of the country, including

SMEs.

21. While the banking sector embraced the Financial Inclusion

Framework, implementation has been hampered by the difficult

economic environment. Notwithstanding this, the role of banks in

the mobilization and deployment of surplus investible funds to the

SMEs sector remains critical.

22. There is evidence in our market that some banks have navigated

around the well known challenges facing SMEs and are serving

them profitably. In this regard, a number of banking institutions

have established dedicated SME departments or units to provide

customized financial services and capacity building to SMEs.

23. Accordingly, the number of SMEs accessing loans from banking

institutions increased from 5,658 as at 30 June 2013 to 9,067 as

at 28 February 2014, representing a 60% increase.

24. The value of loan disbursements also increased from $208.66

million as at 30 June 2013 to $211.02 million as at 28 February

2014.

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25. Loans and advances to SMEs constituted 6.02% of the total banking

sector loans as at 28 February 2014, representing an increase from

5.57% as at 30 June 2013.

26. Apart from the provision of funding to SMEs, banks also offer

§ business advisory services;

§ Short-term insurance;

§ Invoice discounting;

§ Support for trade exhibitions;

§ Capacity building through SME seminars;

§ Matching local SMEs with foreign suppliers and

§ Financial planning & management services.

27. In addition, the banking sector has undertaken various strategic

initiatives aimed at enhancing support to SMEs such as:

a) Negotiating off-shore lines of credit;

b) Introduction of viability-based lending;

c) Reduction of savings account charges;

d) Technical training of bank staff in SME financing;

e) Provision of SME training workshops; and

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f) Customization of credit policies to suit SMEs needs.

28. In recognition of the largely informal operations and the mobile

nature of some SME business, the Reserve Bank relaxed the Know

Your Customer account opening requirements to encourage use of

banking services by the sector.

29. The Reserve Bank continues to encourage banks to leverage on

technology to attain greater outreach and penetration while keeping

the cost of providing financial services to a minimum.

30. In this regard, we are pleased to note that as at 31 December 2013, a

total of 3 million customers were registered for mobile banking

services, a phenomenal increase from 1.7 million as at 31 December

2012. The total value of mobile banking transactions was $2.09

billion as at the end of 2013, compared to $382 million as at end of

2012.

31. In Zimbabwe, as in most developing economies, the SME sector

also accesses financial services from semi-formal and informal

financial institutions.

32. Currently, it is estimated that the microfinance subsector in

Zimbabwe provides financial services to 150 188 clients through

334 outlets and had a loan portfolio of US$164.20 million as at 31

December 2013.

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33. Though microfinance institutions have largely been concentrated in

major urban areas such as Harare, Bulawayo, Masvingo, Gweru and

Mutare, a number of them have opened branches in Matobo,

Beitbridge, Checheche, Gokwe and Kariba in an effort to reach out

to areas shunned by conventional banks as they are considered

remote.

34. Further, some SMEs in remote areas are now able to access loans

from microfinance institutions through mobile payment platforms.

35. Ladies and gentlemen, notwithstanding the abovementioned

successes, I would like to highlight some of the major constraints

that hinder access to finance by the SME sector.

CONSTRAINTS TO FINANCING SMEs

36. Financial support to SMEs has remained limited, due to a number of

factors, hindering their ability to grow and contribute meaningfully

to the economic recovery of the nation. These factors include the

following:

Problems Associated with Banks

a) Limited branch network: The high costs associated with

establishing conventional banking services in remote areas has

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resulted in banks shunning these areas. Resultantly, remote areas

where a large number of SMEs are located are unbanked or

underbanked.

b) Banks' risk-averse behaviour: Banks are reluctant to lend to

SMEs which are perceived to be high risk due to high rates of

business failure. The absence of robust credit reference bureaus for

tracking defaulters has compounded the risk-averse behaviour of

banks as most SMEs, particularly start-ups, lack borrowing history.

c) Lack of understanding of SME needs: Inadequate understanding

by banks of the nature and operations of SMEs hampers their

ability to assess business viability and financing needs of SMEs.

Resultantly, banking institutions fail to offer appropriate banking

products to suit SME needs.

d) Cumbersome administrative procedures: The relatively large of

SMEs and the small loan amounts required make SME financing

cumbersome and expensive to administer.

e) High lending rates: Due to the high risk associated with SMEs,

banking institutions levy a risk premium, resulting in high

borrowing costs. The high interest rates levied by MFIs are also

not conducive to the development of SMEs.

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Problems Associated with SMEs

a) Lack of suitable collateral: Due to the perceived risk associated

with SMEs, banking institutions demand collateral which most

SMEs, particularly start-ups are unable to avail. On the other hand,

microfinance institutions which conventionally are expected to

place less reliance on collateral, are also demanding security from

the SMEs. As a result many SMEs are left to rely on informal

sources of funds such as family, friends, supplier credit and

customer advances because the formal banking sector prefer

selected customers such as large corporations with collateral, thus

crowding out SMEs.

b) Inadequate financial records: Many of SME enterprises are

owner- or family-operated. As a result, they do not keep business

and personal finance separate. Further, many SMEs do not have

adequate skills to ensure compilation of financial records and

accounts. This is compounded by the lack of investment in

information technology and accounting systems.

c) Inconsistency in Product/Service delivery: Most SMEs lack

adequate skills and technology to ensure production of

standardized quality products and/or services. In addition, SMEs

fail to establish forward and backward integration with key

stakeholders such as suppliers and their markets. This limits their

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chances of survival, particularly in the face of fierce competition.

d) Informalisation of Operations: Many SMEs have weak

corporate governance systems resulting in lack of professionalism.

In addition, most SMEs do not have adequate succession planning

structures which are required for sustainable business operations.

e) Weak Managerial Capacity: Many SMEs lack skilled manpower

and managerial capacity. This results in limited ability to manage

the operating environment in a sustainable manner.

f) Diversion of Funds: SMEs often divert funds from the intended

business purpose resulting in high default rates. As such SMEs are

perceived to have a poor debt repayment culture. Due to the

relatively high incidence of non-performing assets in the SME

sector, banks become too cautious to lend to the sector.

g) Undercapitalization: Most SMEs lack capital to start up or grow

projects to sustainable levels.

h) Highly-fragmented sector: The SME sector is characterized by

small business enterprises. The absence of vibrant industry

associations results in inadequate representation on matters

affecting the sector.

37. Ladies and gentlemen, against the background that SME activities

contribute significantly to economic development, and that the

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sector has immense untapped potential, the financial sector has a

critical role to play. Without finance, SMEs cannot acquire new

technologies, or expand to serve markets adequately.

38. The myriad of economic challenges we face, aggravated by

continued existence of economic sanctions, call for home-grown

solutions. SMEs with their flexibility and expertise can be the basis

upon which the nation’s economic recovery can be attained, in line

with Zim Asset.

WAY FORWARD

39. Ladies and gentlemen, there is need for carefully chosen, transparent

and well-designed interventions, especially in expanding access to

such critical resources as capital, skills and industry information, to

help small businesses move on faster growth paths. There is, thus,

great scope for banks and other financial institutions to improve the

provision of services to the SME sector.

40. This is a challenge to all the stakeholders in the financial sector. The

banks need to develop more innovative ways of lending to SMEs

profitably, while the SMEs must also strive to make themselves

more attractive to banks by improving their record keeping,

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financial management and adopting modern techniques of doing

business.

41. Allow me to outline the high level areas of intervention that can be

explored in order to create a business-conducive environment.

Stakeholder Recommended interventions

Banks need to:

§ Understand the dynamics of SMEs

§ Design new and innovative approaches for reaching out to SMEs including exploring value chain financing.

§ Design appropriate products for SMEs

§ Provide appropriate training to their staff to respond to SME needs  

SMEs need to:

§ Present themselves to banks as viable businesses

§ Prepare credible project proposals

§ Establish a relationship with their chosen bank

§ Maintain better financial records and produce financial statements

§ Operate their businesses with more discipline

§ Educate themselves about banks'

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requirements.    

42. These strategic interventions coupled with the creation of an

enabling investment climate, should improve the credit flow to

SMEs.  

43. The Government, with the support of development partners, should

continue to create the necessary enabling environment as

highlighted in the table below:  

Stakeholder Recommended strategic interventions

Government needs to:

§ Create an enabling policy, legal and regulatory environment

§ Address issues of market failure through capacity building of SMEs

§ Create a framework for providing public information

§ Simple and favourable fiscal regimes

§ Simplifying registration and other administrative barriers to investment  

§ Facilitate establishment of a credit rating infrastructure

§ Source suitable lines of credit

§ Government/donor support in capacity building

• Technical assistance

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• Skills/technology transfer

• Research and product development

• Sustainable domestic consulting and

business support services

• Supporting development of

independent associations

• Developing SMEs’ capacity to

manage the environment on a

sustainable basis  

Donors need to:

§ Support the Government, SMEs and microfinance institutions in a coherent and coordinated manner.  

§ Dissemination of market and trade information

§ Promoting regular public/private dialogue  

 

 

CONCLUSION

44. In conclusion Ladies and Gentlemen, I wish to reiterate that SMEs

are critical to the social and economic transformation of our country

due to their ability to be flexible, innovative and easily adaptive to

changes in the economic environment.

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45. As such, well-designed interventions to promote SME development

neatly dovetail into the key objectives of ZimAsset.

46. To the SMEs, I wish to encourage you to be professional in your

business conduct thereby improving your rating by financial

institutions for purposes of accessing funding and other support

services.

47. To my colleagues in the banking sector, we need to be flexible in

our approach to banking this key sector of the economy. There is

need to develop relationships which will facilitate sustainable

growth of SMEs.

48. With these remarks Ladies and Gentlemen, I wish to express my

sincere gratitude for this opportunity to address you.

I THANK YOU