Aside from the already known challenges of high interest rates and lack of collateral, micro, small and medium enterprises (MSMEs) in Zambia face other constraints when accessing finance. Hardly are these challenges pointed out, but their importance cannot be overemphasized because they border on enterprise formalisation. According to the 2019 Bank of Zambia (BoZ) Credit Market Monitoring Report, MSMEs accounted for only 2.5% of the total loan disbursements by financial providers, which is a meagre proportion to effectively facilitate MSMEs growth.
Enterprise formalisation is described by the International Labour Organisation (ILO), as a process that firms go through when formalising their business. To bring the definition closer to home, formalising a business in the Zambian context entails registering with the Patents and Companies Registration Agency (PACRA), Zambia Revenue Authority (ZRA), National Pensions Authority (NAPSA) and other relevant Government statutory bodies. Most businesses end with PACRA registration, without registering with other relevant statutory bodies.
A study conducted in 2012, by the International Growth Centre (IGC) on MSMEs in Zambia, estimated that there were about 1.02 million informal MSMEs, along with about 30,000 formal MSMEs, showing the high rate of informality. Even though MSMEs tend to have much higher rates of job growth, they are also more likely to go out of business or remain stunted due to financial constraints as was shown in a 2014 study done in Iraq. The results found in the Iraq study are synonymous to the current situation with SMEs and financing constraints in Zambia.
Clearly, informality remains one of the biggest hurdles constraining MSMEs. Informality in this case is simply referring to companies that are, in law or in practice, not covered or insufficiently embraced. Currently, it is likely that the actual numbers of informal MSMEs stands above the 1.02 million that was reported in 2012. Formal lenders or development organisation are unwilling to give loans or grants to companies which are not in compliance with the law.
Not only are informal SMEs non-compliant with the law, but they also do not keep records of accounting or subscribe to generally accepted accounting practices. Take Nigeria for instance, Ikem, Chidi and Titus conducted a study on financial challenges of SMEs in 2012 and the results showed that SMEs’ access to finance was largely dependent on the quality of accounting information they could generate which was determined by their accounting practices. Additionally, financial institutions were reluctant to consider loan applications from businesses with no accounting records, with others further requiring audited business accounts.
Most informal MSMEs also lack good corporate governance structures, as they are mainly sole proprietorships without an active board of directors. That means the decisions in most of these MSMEs are made by the owner without any structured process or controls. Without corporate governance; the structure of rules, practices, and processes used to direct and manage a company, the risk of non-continuity of the company beyond the life of the owner is extremely high. Therefore, having good corporate governance allows for and gives confidence to money lenders and grant giving institutions to give financing to a business
Aside from the usual loans from banks, non-traditional and diversified sources of finance for MSMEs have emerged in recent years, ranging from government empowerment funds, venture capital firms and developmental partners. These non-traditional sources of finance offer finance in form of debt, equity and grants mainly to MSMEs who meet certain criteria, especially related to the Sustainable development Goals (SDG’s). Therefore, most of these non-traditional sources of finance require that MSMEs write a project proposal to demonstrate why they should be financed.
Informality of MSMEs in Zambia entails that most of the SMEs lack the technical skills and expertise to write a project or grant proposal with a clearly outlined needs analysis and value proposition. Consequently, MSMEs are therefore also missing out of getting finance from these non-traditional sources because of insufficient expertise to correctly pen proposals which could benefit from non-traditional financing.
In as much as lack of collateral and high interest rates are posited as the biggest hindrances to MSMEs accessing finance, lack of business formalisation presents an even bigger risk if not addressed properly. Once formalised, MSMEs are covered by the law, adhere to good corporate governance practices and subscribe to generally accepted accounting practices in order to be compliant with statutory requirements. Additionally, they obtain proper record keeping as required by statutes and are in the process helped to keep their house in order. Therefore, formalisation can give a boost to the prospect of MSMEs getting access to finance.
The Government, through the Ministry of Small and Medium Enterprises Development, therefore, needs to determine a policy agenda that formalises MSMEs in Zambia, before all other interventions are taken. Once done, the Government can then allocate more funds for loaning SMEs through the Citizen Economic Empowerment Commission (CEEC). With strengthened governance structures, proper record keeping and compliance with regulatory obligations the Government would then have assisted to strengthen the criteria for MSME’s accessing loans. As an Association, ZAM works with SMEs to help them build systems, improve their record keeping and also be compliant with regulatory requirements.
