Bwalya K E Ng'andu: Financing small- and medium-scale industries in
Africa
Keynote speech by Dr Bwalya K E Ng'andu, Deputy Governor (Operations) of the Bank of
Zambia, to the United Nations Economic Commission for Africa Expert Group Meeting on
"Financing small- and medium-scale industries in Africa", Lusaka, 26 June 2012.
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The UNDP Resident Representative, Ms Khanni Wignaraja;
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Director of UNECA, Southern Region office, Ms Beatrice Kiraso
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The AfDB Representative, Dr Fred Kwesiga;
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Officials from the Ministries of Finance of various countries;
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Officials from various central banks; Development Banks, Commercial Banks
and other financial institutions;
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Private Sector Representatives
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Participants;
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Ladies and Gentlemen;
I would like to firstly express my appreciation to the Director of UNECA, Southern Region
Office for extending an invitation to me to deliver the keynote address at the start of the
Experts Group meeting of Financing Small and Medium Scale Industries. I commend
UNECA for this great effort to bring together this assembly of high level officials and experts
from Government, the financial sector, private sector and academic institutions to discuss the
vexing problem of enhancing financial flows to the SME Sector in Africa.
I note from the very elaborate programme for this meeting that you will in the next three days
cover a wide spectrum of issues some of which will focus on factors that constrain SMEs
access to finance and some of which will focus on what needs to be done to change this
situation. The meeting is, therefore, an opportunity for us to face a number of challenges that
characterize this sector. These will include revisiting strategies and approaches to SME
financing currently in use as much as it will require a review of current institutional
arrangements through which finance is directly delivered to SMEs, on one hand, and those
which indirectly obstruct or facilitate this flow of resources, on the other.
However, I believe that probably the greatest challenge before this assembly is to attempt to
narrow the gap between analysis of the problem and the implementation of measures and
actions that work. Meetings, workshops, seminars, etc. on SME financing are plenty at
national, regional and international levels. Some of you have had the opportunity to attend
several of these meetings in the past. Indeed, some of you have become experts at talking
about the subject. Barely two weeks ago, the Bank of Zambia held a financial sector forum
here in Lusaka at which views of various stakeholders on what needs to be done to address
binding constraints to the SME sector were considered. The fact that the discourse on SME
financing continues underpins two significant positions.
Firstly, it gives recognition to the fact that we are all aware of the potential of this sector in
generating employment, promoting economic growth and reducing existing poverty levels. In
low income sub-Saharan African countries, SMEs and micro-enterprises make up about 90%
of all enterprises. However, due to the various constraints they face, their overall contribution
to GDP can in some countries be as low as 20% although estimates show that this could be
scaled up to 60% with the greater realization of the sector's potential. Contribution to
employment can be as high as 63%. For most low income countries, SMEs are the main
source of jobs and income after subsistence agriculture. Particularly significant is that they
are a great source of livelihood for women who own more than half of SMEs while over 70%
of Africa's rural population survives through the formal and informal SME sector. There is
little doubt, therefore, that SMEs form a solid basis for sustainable economic development on
our continent.
Secondly, the continued discourse on SMEs reminds us of the possibility that we have
probably done more talking about the problem than fixing it. Although the development of
SMEs is varied extensively across Africa, what is clear is that in most countries a major
obstacle to their growth is the lack of sustainable and cost effective financial products. South
Africa and Mauritius in this region and North Africa have done a commendable job in
developing flourishing SMEs sectors. Part of the reasons for success in these countries can
be attributed to their modern financial systems and clear policies that support the growth of
the sector. However, the fact still remains that for most African countries, a sustainable way
of financing SMEs has yet to be found.
As I mentioned earlier, the programme for this meeting is broad and extensive. But I would
wish to draw your attention to a number of broad areas of reflection which I believe can help
in delivering greater finance to the sector.
The first area is that there is a need to accept that not all banks can or should even be
expected to provide SME financing products. The cost structure and skills orientation simply
make some financing institutions completely unsuitable to deliver SME products cost
effectively.
The implication of this is that greater effort must be placed on developing financial institutions
that see SME financing as the core business and therefore set out to develop the expertise
required to finance the SMEs successfully.
Fairly often the discussion on SME financing is reduced to two diametrically opposed
positions. On one hand, SMEs are considered by banks as representing a high risk and
therefore, should be avoided or only dealt with cautiously and at a premium price. On the
other hand, banks are accused of being inflexible and risk averse and consequently
irrelevant to the sector.
It is important to understand where the truth lies in these two statements in order to advance
the cause of SME financing. Firstly, it is a fact that SMEs present higher credit risk than
well-structured corporate entities. SMEs may not have proper accounting records, may have
severe governance issues which undermine accountability, have poor access to markets,
poor skill levels including financial illiteracy by promoters, lack collateral which the lender can
rely on in the event of failure, may not even exist in an appropriate legal form and even the
assessment of the viability of a project might be difficult. Lending to SMEs can be a lenders
nightmare for bankers. But it is also true that banks which are structured to deal with
corporates are risk averse and inflexible when they deal with SMEs. Often when they bring
inappropriate risk assessment tools, they may focus too much on collateral rather than
project viability. They may even regard SME financing as peripheral to their business.
Because of their limited knowledge of SMEs, they experience failure which itself reinforces
the notion that SMEs are risky. What we want are financing institutions that are structured to
respond to the unique characteristics of SMEs. Specialised SME lending institutions are
more likely to handle the risk problem presented by SMEs as a challenge to be overcome
with appropriate products and credit risk management strategies and not as a basis for
inaction or avoiding the sector altogether. In short, lending strategies which ensure success
with corporates do not necessarily ensure similar success with SMEs. Appropriate SME
financing institutions must at the very least make lending to SMEs the core business.
The second area of reflection that I would urge this meeting to consider is that of building
appropriate financing models that have been shown to work in Africa or other developing
countries so that we all benefit from the best practices available. In South Africa, for instance,
franchising which allows the use of brand names and building capacity have been an
important driver of SME financing since it reduces the perceived risk of business failure.
Warehouse receipt financing which guarantee loans with agricultural stock are extensively
used elsewhere but not as much in Africa. In some countries in Asia, the use of the SME
cluster model has helped to increase SME financing by building greater confidence between
lenders and SMEs. The cluster model is based on members of an SME entity seeking
financing together and providing collective guarantees to financial institutions. The cluster
also ensures credit compliance by members while facilitating constant interaction with
financial institutions. Naturally, one must guard against the temptation to adopt other
experiences without serious reflection - but, what appears desirable is the need to build
financing models that are appropriate and therefore can deliver sustainable financing. We do
not always require to re-invent the wheel in this process.
The third and last area of reflection for me is that we must understand that the constraints
that limit the flow of finance to SMEs is sometimes beyond the scope of what financial
institutions can do or outside the inherent adverse characteristics of SMEs. There are factors
which exist outside the financial system and beyond SMEs which nonetheless affect
resource flows. These might include poor infrastructure, bureaucracy which makes it difficult
to carry out business, an unattractive tax regime and unclear or unfavourable government
policies. Acquiring an appreciation of these factors and appropriately dealing with them can
help to foster the efficient use of available financial resources by SMEs, increase their
success in the application of credit and therefore give positive feedback to financing
institutions which itself encourages them to lend more to the sector.
Let me conclude by wishing you all a fruitful three days of deliberations and to reiterate my
challenge to you to attempt narrowing that undesirable gap between the identification of
problems and the delivering of practical solutions that will enable the flow of appropriate and
sustainable financial resources to SMEs to enable them to play their wealth creation and
development role in Africa. For me, the SME sector can be a great engine for economic
development in Africa. Meetings like this can help in making them become just that. But we
must also go beyond just paying lip service to the sector and show true and real commitment
to making the sector strong on our continent. I suspect that to go beyond lip service might, in
some instances require a paradigm shift on the part of financiers, governments and the
players in the SME sector itself.
I thank you for your attention!!!