Imani Development has been collaborating with the Frankfurt School of Finance & Management in providing Technical Assistance to the European Investment Bank (EIB) Financial Sector Operations in Southern Africa to improve Micro-, Small-, and Medium-Sized Enterprises (MSMEs) access to finance and microfinance.

On 13 October 2016, EIB, the European Union Delegation to Zambia, and the Frankfurt School hosted a conference entitled “Supporting Growth of M/SMEs in Zambia” with the objective to educate local MSMEs on existing funding facilities in Zambia and on the EIB interventions in improving access to finance. The conference also allowed for MSMEs and supportive Financial Institutions to network and engage with one another.

The full Conference Report can be found here: Conference Report – Supporting Growth of MSMEs in Zambia

Imani Development’s Managing Director in Malawi, Mr John McGrath, moderated the first panel discussion on MSME Finance. The panel discussed a range of factors aimed at alleviating poeverty in Africa, and in line with this experts gave a number of short presentations: “An Introduction of EIB credit lines and new products to come” by Mr. Ryno Byleveldt – Business Analyst, EIB Pretoria; “Collateral registration issues” clarified by Mr. Christopher Mapani, Assistant Registrar PACRA; “Alternative sources of finance” addressed by Mr. Lang’a Mweene, Suppex Capital Advisory; and “The issues of financial services” presented by Mr. Didier Mark Mwanza, Focus Financial Services.

Some of the key points raised by the panel during their debate were:

Panel Discussion Points

  • There is a need for private sector intervention if MSMEs are to grow and contribute towards poverty alleviation. The key element in poverty alleviation is private sector growth itself; the change comes through an increase of disposable incomes of players in the private sector.
  • Other interventions cited that factors the alleviation of poverty are resource mobilisation and conflict reduction, mainly in terms of the business environment.
  • However, access to finance was mentioned as the biggest barrier to growth of MSMEs, therefore there is an obvious need to close the MSME financing gap. Financial institutions contribute to MSME growth, thus banking and non-banking institutions can help ease some of the challenges faced by MSMEs.
  • EIB’s intervention for private sector growth is done through the provision of credit lines, guarantees and technical assistance programs to local financial partner institutions. EIB also provides business development support to micro enterprises and SMEs.
  • Growth-oriented micro and small scale businesses are considered to be the future of any economy. In order to support MSMEs in Zambia, the Bank of Zambia has introduced an Act that supports the use of moveable assets as collaterals to enable MSMEs access to credit, because most MSMEs do not possess fixed assets. The Act is to provide a legal framework for the use of moveable assets in order to access credit.
  • The new law also establishes a centralised collateral registry in which all security interests such as leasing and hire purchase will be registered and therefore provide assurance in terms of priority (first to file acquires priority). This joint initiative of BOZ and EU will address issues of enforcement through the judicial system as well as outside the courts.
  • The system, however, does not directly address the issue of high interest rates – but it is hoped that it can indirectly attend to this matter as well.
  • The creation of a well-functioning, competitive market of lending institutions is essential to help local companies and MSMEs access alternative sources of finance. The general opinion of commercial financial institutions is that the default risk of MSMEs is too high, and that MSMEs should have a sufficient level of capital. Improvement of the capital structure can come from alternative sources of capital.
  • Alternative sources of funding are important because financial institutions do generally not adapt their offers to the needs of MSMEs well. For example, inflexible fixed repayment schedules – whereas alternative lenders are able to provide “patient” capital, which can give room to MSMEs to repay the funds according to their abilities.
  • Some of the problems faced by MSMEs are caused by commercial financial institutions, which bid for cheaper development-related funding with the intention to lend them on to MSMEs at significantly higher interest rates.
  • Products such as Invoice Discounting, Order Financing, Bridge Financing and Operating Leases were presented as alternative financing for viable growth-oriented MSMEs who may not be able to meet the conditions and requirements for regular installment loans at financial institutions.

Questions and Comments from Participants

  • It was mentioned that funds come from EIB. How can an entrepreneur access these funds, and how can one negotiate interest rates on EIB loans with financial institutions that fix their own interest rates?
  • Despite the fact that Zambia has a credit bureau (CRB), one observes that credit defaulting, shoddy work and low performance characterise most MSMEs. Therefore one needs to assist MSMEs augmenting their performance. What measures have been put in place to ensure that when MSMEs get the money they will perform?
  • 95% of MSMEs are not qualified and lack information on how financial institutions operate, and it seems that financial institutions have a tendency of changing goal posts. Few MSMEs in Zambia can grow into bigger enterprises. Which financial institution will accept to provide funds at lower interest rates and how safe are MSMEs if we have failed to grow our own MSMEs with local funds?

Final Considerations

  • Interventions have to be balanced on cost effective basis by bringing in long term and medium term payment plans. There is a need to enhance the market in order to provide funding and this has to be done on a sustainable basis.
  • Lending institutions should understand how to monitor performance. Projects must be monitored by local or international partners, which will help ensuring performance.
  • It is important for the MSMEs to put themselves in the bankers’ shoes to understand how financial institutions work. MSMEs need to know the relevant requirements for a loan application and how to gather and prepare them. Rom a business point of view, financial institutions will always ask for proper risk management capabilities of the business owner and/or manager.
  • Funding from EIB is meant for businesses in Zambia, therefore EIB partners with Zambian financial institutions in order to break some of the barriers to make it easier for MSMEs to access funds.
  • Operating leases do not give a client ownership of the equipment at the end of a project, however, another option is when equipment purchased by a lending institution is given to an MSME to use and they return it when the project is completed so that another client can use it.

The full Conference Report can be found here: Conference Report – Supporting Growth of MSMEs in Zambia.

Through this collaboration with the Frankfurt School of Finance and Management we continue to support the EIB in improving access to  finance for MSMEs. Read more about the EIB’s work in Southern Africa and the Indian Ocean Region here: The European Investment Bank in Southern Africa and the Indian Ocean