after 1999, close to a decade after the collapse ; the economic scale of earlier recapitalizations was small relative to that of banking sector ’ s real estate exposure so that these half - hearted measures failed to adequately recapitalize the japanese banking sector. 4 / 11 bis central bankers'speeches in turn, this misallocation of loans translated into significant negative effects for the real economy. because zombie lending kept distressed borrowers alive artificially, the respective labor and supply markets remained congested ; for example, product market prices were depressed and market wages remained high. sectoral capacity utilization also remained low, which destroyed the pricing power and attractiveness of investments for healthy firms competing in the same sectors. ricardo caballero, takeo hoshi and anil kashyap ( 2008 ) showed that, as a result of these spillover effects, healthy firms that were operating in industries with a high prevalence of zombie firms had lower employment and investment growth than healthy firms in those industries that did not suffer from zombie firm distortions. they estimated that due to the rise in the number of zombie firms, typical non - zombie firm in the real estate industry experienced a 9. 5 % loss in employment and a whopping 28. 4 % loss in investment during the japanese crisis period. joe peek and eric rosengren ( 2005 ) were among the first to provide evidence that this inadequate recapitalization of the japanese banking sector had major consequences for the allocation of credit to the real economy. specifically, they showed that firms were more likely to receive additional loans if they were in fact in poor financial condition. they interpreted this finding as being consistent with the ‘ zombie lending ’ incentives of undercapitalized banks. figure 2 shows that the percentage of zombie firms increased from roughly 5 % in 1991 to roughly 30 % in 1996. in related work, mariassunta giannetti and andrei simonov ( 2013 ) found that banks that remained weakly capitalized after the introduction of the recapitalization programmes provided loans to impaired borrowers, while well - capitalized banks increased credit to healthy firms. the authors estimated that the credit supply to healthy firms could have been 2. 5 times higher in 1998 if banks had been recapitalized sufficiently. 5 / 11 bis central bankers'speeches the european story in recent years, the eurozone has been following a similar path to that of the japanese economy in the 1990s and early 2000s. starting in 2009, countries on the periphery of the eurozone

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. * * * • the undp resident representative, ms khanni wignaraja ; • director of uneca, southern region office, ms beatrice kiraso • the afdb representative, dr fred kwesiga ; • officials from the ministries of finance of various countries ; • officials from various central banks ; development banks, commercial banks and other financial institutions ; • private sector representatives • participants ; • 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 lu