Micro, Small and Medium Enterprises (MSMEs) are an important driver of economic growth and industrialization in Zambia. The 2017 Financial Deepening Report indicates that MSMEs represent about 70% of Gross Domestic Product (GDP), about 88% of employment and 97% of all businesses in Zambia. However, MSMEs have often been constrained by limited access to finance, that is necessary for them to investment of other ventures necessary for growth.
In many cases, MSMEs tend to be small with very little initial invested capital. Henceforth, they are less likely to access the much-needed bank loans or attract suitable investors necessary for growth. They instead rely on internally generated funds and cash from family and friends to launch and run the business in its initial stages. In an attempt to mitigate financial constraints experienced by MSMEs, the Government of the Republic of Zambia has put in a number of funding opportunities necessary to support the growth of the MSMEs in Zambia, through the National Technology Business Council (NTBC), the Zambia Development Agency and the Citizens Economic Empowerment Commission. Furthermore, Government introduced a ministry dedicated to the development of MSMEs.
MSMEs can be financed directly though lending and grants or indirectly by financing institutions whose work is key to the development of MSMEs. Such institutions are usually research institutions which help MSMEs to innovate. Financing research activities to support growth of MSMEs could be done through instruments such as research levies. For example, Kenya levies a tax on its tea, coffee and sugar industries to support the Tea and Research Foundation, Coffee Research Foundation and the Kenyan Sugar Board.
However, considering the nature of MSMEs, it would be retrogressive to introduce additional levies since most companies struggle to stay in business due to exorbitant regulatory fees and taxes. Therefore, it would be more effective to direct a percentage of taxes collected towards MSMEs development through supporting research, innovation and marketing. Such reforms will not only support the growth the MSMEs but also enhance tax compliance. High tax compliance levels entail more revenue for the government which could be used to further finance the research institutions and spur innovation.
Another model of financing MSMEs is venture capital. Venture capital is private equity or type of financing provided to start-ups or small businesses by investors. Venture capital does not always come in form of finance. Venture capital can also be in form of technical or managerial expertise. One of the advantages of venture capital is that it enables the providers of capital, called venture capitalists, to provide the mentorship required for a business to flourish. A notable example of a successful venture capital story is the Silicon Valley where a sizable number of companies have been funded through venture capital.
Much as venture capital has the advantages highlighted above, it is risky. Some projects may fail to provide the expected return on capital. To increase the chances of venture capital succeeding in Zambia, government can be more aggressive on utilising both tax and non-tax measures to support the small business. Such measures could include local content through public procurement. By ensuring that a sizable portion of public expenditure is directed towards procuring goods and services from local producers, local content strategy assures local businesses of a readily available domestic market. Once local businesses are producing and selling, they will be able to generate enough revenue to sustain them and provide a return on capital provided by the venture capitalists. This model, has the long term effect of encouraging venture capitalists to invest and invest more in small scale businesses.
To conclude, MSMEs play a pivotal role in the development trajectory of many countries. Despite being an important contributor to employment and GDP, MSMEs have continued to face challenges, particularly with access to finance. The article has demonstrated possible financing measures that could be utilized. These include direct financing, indirect financing and venture capital. While indirect financing involves financing an institution whose work is geared towards supporting MSMEs, venture capital involves monetary and non-monetary investments directly into a small business. Further, to increase the success rate of venture capital, and indirect financing, government can utilise non-tax measures such as public procurement to support the growth of local MSMEs.
