Financing of SMMEs: Assessing SADC DFIs

1. FINANCING OF SMMEs (AN ASSESSMENT OF SADC DFIs) Presentation at the SMME Award Conference,CapeTown 23rd October, 2008 by JW Nyamunda Programme Manager SME Development

2. Introduction • Studies have revealed that more than 50% of African economies are predominantly SMMEs (interpreted to include the informal sector). The reasons for focusing on SMMEs are various, among these are: • Employment generation and poverty alleviation capacity: according to the Organization of Economic Co-operation and Development (OECD, 2000), SMMEs account for 60 to 80% of jobs in both developed and developing economies and for most new jobs created; and • Engine of economic growth and development: SMMEs are a vehicle for increased private sector participation in economies; multi-sectoral and promote forward and backward linkages: they provide the ideal industrial base for economic diversification and specialisation and increase competitiveness of the domestic market; and they are critical for increased export drive.

3. FINANCING SMMEs What are the Issues? • Access to Finance • Unlocking Access

4. SOURCES OF INVESTMENT

5. CLASSIFICATION OF SADC FINANCIAL SYSTEMS

6. Bank Liquid Reserves to Bank Assets Ratio

7. UNLOCKING ACCESS TO FINANCE • Enhancing Risk Assessment and Management • Addressing the Risk return Profile • Addressing High Costs • Meeting the Needs of SMMEs • External Factor • Perceptions of Banks by SMMEs

8. Some Evidence from the Africagrowth Survey • In terms of the location and accessibility of the banking facilities to the SMMEs, 70.59% indicated that they were satisfied as opposed to 29.41% who stated they were dissatisfied. • Friendliness of the staff: here, an overwhelming majority of 85.30% expressed that they were satisfied while 14.70% stated that they were dissatisfied. • Access to credit: a moderately high number of the respondents, representing 52.94%, indicated their satisfaction whereas 47.06% expressed dissatisfaction. • Financial advisory service: here, about 35.29% indicated that they were satisfied whilst majority of the respondents, about 64.71% expressed dissatisfaction. • Value vs. the service charge: majority, 73.53%, were dissatisfied with the service charges whilst about 26.47% expressed satisfaction. • Overall relationship with the bank: in this case, most of the respondents, 70.59% indicated that they were satisfied whilst the 29.42% indicated they were dissatisfied.

9. Challenges From the Survey • Difficulty in accessing competent banking staff on business issues; • Petty bureaucratic procedures resulting in delays in service delivery; • Long queues at enquiries • Banks being not very supportive to SMMEs • High bank charges and high demand for security

10. DFIs AND DEVELOPMENT FINANCING Primary function of the DFIs was to intermediate development finance from the World Bank, other multilateral development banks (MDBs) and donor sources for investment in projects under various government-led sustainable growth and poverty alleviation initiatives.

11. DEV. FINANCING Cont’d By mid-1980s, the relevance of DFIs began to be questioned by the MDBs and donor institutions. This followed the DFIs poor and deteriorating financial performance reflected by huge non-performing portfolios and for some, insolvency.

12. DEV. FINANCING Cont’d Governments reacted in different ways to this situation with some DFIs being closed down while others were restructured to restore viability. In a few cases, some DFIs assumed commercial banking functions and thus deviated from their original mandate.

13. DEV. FINANCING Cont’d Most African governments have remained committed to intervening and addressing the financing gaps. This has been achieved through the establishment of new and in a number of cases specialized or sector focused DFIs. In some quarters the gaps were viewed as transitional and that over time, as financial systems matured, the DFIs would evolve and assume commercial, investment or universal banking activities.

14. SADC DFIs CLASSIFICATION

15. DFIs Total Assets by Sector (2006-USD million)

16. SADC DFIs TRANSFORMATION • Continued government subventions: predominantly for DFIs in the SMMEs and rural agriculture sectors but these fell short of funding requirements due to fiscal constraints. • Portfolio restructuring: scaling down of lending activities and suspension of new projects with some governments opting to convert their loans to equity or preferential shares. • Mandate change/Diversification of activities: Some DFIs switched to commercial banking, placing them under the banking act and the direct supervision of central banks. This trend, however, has tended to exacerbate the availability of long-term finance for development projects, including those targeted at SMMEs. Among SADC DFIs that have commercial banking functions are the Agricultural Bank of Zimbabwe (Agribank), Tanzania Investment Bank (TIB) and Swaziland Savings and Development Bank (Swazibank). • Closure and new DFIs: Some governments opted to close non-performing DFIs altogether or alternatively to restructure and reassign them new mandates. These include, Namibia, Zimbabwe and, more recently Malawi and Tanzania.

17. LENDING BY SADC DFIs

18. DFIs Sectoral Lending (USD-Millions)

19. SADC DFIs Lending to SMMEs-2005

20. DFIs LENDING TO SMMEs(USD’000)

21. ROLE OF SADC DFI NETWORK • Collaborate on cross-border & in-country project financing • Pool resources to mobilize intra- & extra-regional funds for development projects • Share experiences • Where viable take equity in each other’s institutions • Invest jointly in new structures where necessary • Collaborate on appropriate institutional mechanisms to facilitate cooperation and development finance in SADC

22. DFRC’s Role & Responsibilities • Secretariat of Network • Facilitator & Coordinator of cooperation in Network • Initiate fund raising strategies, both project oriented & across the board • Institutional strengthening • Capacity building, including project-related secondments, mentorship & training • Policy Research & Advisory Services

23. DFRC SME PROGRAMME • In recognition of the pivotal role SMMEs play in the development and growth of the private sector of member states and to the attainment of the SADC region’s goals of employment generation, poverty eradication, gender empowerment and overall economic growth, the DFI Network through its Secretariat the DFRC has as part of its Strategic Business Plan agreed to focus on SMME development as one of its key focal areas. The core focus of the DFRC SMME programme is to: • Assure the DFI Network members’ sustainability through stronger SMME clients and • Assist the DFI Network to aggressively promote private sector activity through SMME support and in doing so address the regional challenges of high unemployment, poverty and gender inequities.

24. SME PROJECTS • SMME MENTORING • SME STANDARDS &TRADE • SME/BIG BUSINESS LINKAGES • SME BUSINESS CONFIDENCE INDEX • ADVISORY SERVICES-DFIs Credit Rating

25. CONCLUSION SMMEs play an important role in the economic development of countries and hence the need for the sector to be supported and well developed. It is in this regard that the governments of SADC member states and the SADC DFI Network and its DFRC are investing quite substantially in this sector.

26. THANK YOU QUESTIONS?