The Sunday Mail
When dealing with SMEs, banks should have a level of entrepreneurial proficiency within their own workforce.
SMALL and medium enterprises are critical for economic and social development. Beyond creating jobs and fostering social stability, they are a hub for innovation; a birthplace of future industry and ways of doing business.
Perhaps more importantly, they offer ambitious and self-driven citizens the opportunity to create wealth. All the aforementioned form a plethora of reasons why SMEs are invaluable to an economy.
Hence, it is only fitting that when it comes to matters of financing SMEs, elevated competence and attention is necessary.
I should offer my congratulations in advance for the initiative to hold the Third Zimbabwe SMEs Banking and Micro-finance Summit next week.
The event promises to deal with great emphasis, issues relating to SME finance. It follows that I would take the opportunity then to offer a few considerations which I hope will add weight within the discourse and eventual actions to be taken after consensus.
First, I would emphasise a macro-focused perspective to be shared by all economic stakeholders when approaching SME finance. Such a perspective is imperative because it seems that we are lacking congruence between policymakers and financial institutions serving SMEs.
For instance, our national focus is to reduce our current deficit and import bill, yet you will find that many banks are depending on profits made from micro financing cross border traders who import clothing, or import Brazilian hair for beauty salons.
Evidently, there is need for financial institutions’ strategies to divest from short termism, and instead be designed with a balanced concern for long term macro-economic growth.
Moreover, Government-backed banks should look to excel in their sectorial role. In other words, for a country with an infrastructure deficit, the Infrastructure Development Bank of Zimbabwe should move away from broad commercial banking strategies and specialise in serving SMEs involved in infrastructure activities such as timber, brick moulding and housing development.
Likewise, if we can agree that small-scale subsistence farmers with less than US$500 income need financial inclusion, then it is concerning that Agribank is one of the banks aggressively fighting to serve the cross-border segment instead.
This leads well into the second consideration, which is market segmentation. It is imperative for banks to consider segmenting SMEs to achieve customised product development.
Financial institutions must be mindful that SMEs are diverse in scale, industry, cash cycles and operational dynamics. That means that market offerings should strive to correspond with this variety of clientele.
Loan conditions must be made with workable expectations. For example, certain start-up SMEs have business cycles which inherently require upfront capital expenditure like research and set up; it would be unreasonable then for banks to expect and charge interest for quick payback.
Different businesses bring unique cost structures. Proficient bankers must be diligent in trying to accommodate varying degrees of financing based on respective SME demands.
Third, it seems that many loan officers across our banking sector function as an automated machine; they politely receive client requests and punch out a standardised response of already drafted loan conditions.
This is bad business.
Isn’t it ironic that for a country that claims to be starved off finance, we have a high level of defaults? Granted much of it has to do with macro-economic factors, a considerable extent is due to the lack of quality loans; poor financial utilisation.
When dealing with SMEs, banks should have a level of entrepreneurial proficiency within their own workforce.
Not only does this help banks to understand how to best pick which SMEs to finance, but more importantly, in a country without a tradition of venture capitalists who offer technical business consulting to new SME founders, banks must be willing and able to facilitate this essential service.
The reality in this country is that most SMEs are driven by sheer will and determination. However, many lack technical and entrepreneurial strength.
So just as import as finance is consulting. Beyond simply hedging default risk with collateral, which many SMEs in this economy do not have, banks should rise to the challenge of adding their own business consultancy to mitigate the possibility of loan defaults.
A bonus consideration is risk management; specifically systemic risk. I trust that many bank executives are familiar with investment portfolios. Well, a similar perspective applies to the assets that appear on our bank’s balance sheets.
One must be informed on the environment that an asset is expected to earn a return or risk making a loss. SME loans have a risk profile based on our macro-economy. Thus a risk assessment must comprehend what factors are contributing to defaulting loans.
Our economic structure is extremely dependent on performing state enterprises. Such dependence leaves an overwhelming risk exposure to the operations of these state enterprises.
Unfortunately, it has become typical for state enterprises to be inefficient, heavily in debt and mismanaged.
As many SMEs function within value chains dominated by state enterprises or wait for business from the state enterprises themselves, the SMEs succumb to the pressures of the industrial dead-weight passed on by these giant laggards.
We must reduce this systemic risk that affects our SMEs performance and chances of accessing finance.
A few weeks ago, it was concerning to hear the CBZ boss announce that the bank is divesting from interest income activities because of low returns.
I credit these shortcomings to State enterprise exposure. I suggest that banks act as a unit to pressure a reassessment of our economic structure and the contribution of state enterprises.
Structural reforms do not come from policymakers alone. They arise as a response to consensus from important economic stakeholders such as the banking sector.
Hopefully, banks executives buy into this matter and are bold enough to push for action.
