Access to finance for inclusive businesses in Zambia
The Riverside Pub in Lusaka has a problem: it regularly runs out of beer. This naturally has a detrimental effect on business, and the owner is seeking investment to overcome the problem: namely, the $20 he needs to add an extra crate to his regular order from the distributor. At a rough calculation this investment would pay itself back within months, and earn 150% profit within a year, yet so hard is it for businesses in Zambia to access finance (or accumulate their own capital in a culture where seemingly everyone has demands on your money) that the owner has yet to find the tiny scrap of funding he needs, and customers continue to be turned away.
Located in the shanty district of Ng'ombe, and so called because it sits above one of the rubbish-filled gulleys that drain the shanty of rainwater and effluent during the wet season, the Riverside Pub is perhaps a somewhat extreme example of a cash-strapped business. However, the problem of access to finance affects Zambian businesses at all levels: five of the seven inclusive businesses baselined so far for BIF projects identified it as their biggest constraint.
To help inclusive businesses overcome this constraint, BIF Zambia recently organised a survey of financing options available, the initial findings of which were presented to a group of businesses in Lusaka on 23rd October.
Surprisingly, on paper Zambia is a borrower's paradise. Total lending by banks in Zambia has increased steadily in the past decade, with many banks specifically targeting micro, small and medium-sized enterprises (MSMEs), and government is committed to supporting them. And the legal and institutional environment for a thriving finance sector is in place: World Bank surveys on the ease of doing business actually rate Zambia the 8th best country in the world for access to credit.
That last statistic brought laughter and incredulity from the assembled inclusive business practitioners. They certainly don't find it easy to access credit. And they are not alone: in a 2010 Finmark survey, 55% of Zambian MSMEs reported access to finance as their main obstacle. In rural areas, 85% of MSMEs don't have access to a financial product of any kind, not even a bank account.
The problem is one of scale. Nearly all commercial lending in Zambia goes to large companies, with only 4% going to MSMEs (though this figure is growing rapidly). Small companies may be unable to show the three years of audited financials that the banks generally require, or may not have revenue streams robust enough to pay off the 22% interest rates typically charged. Equity, the other possible source of finance, is also the sole domain of larger businesses. For the few private equity providers currently active in Zambia, any deal not measured in millions of dollars is not worth the transaction costs.
At the very small end of the scale, help is available from microfinance institutions, but these are of little use to inclusive businesses: the amounts on offer are too small, and effective annual interest rates can be over 100%. As the name suggests, microfinance loans generally go to micro traders rather than SMEs, and an estimated 90% of borrowers spend the money on consumption rather than investment. The Deputy Governor of the Bank of Zambia noted in a recent interview that the microfinance sector in its current form makes very little contribution to economic growth in the country.
It appears therefore that there is a gap in the market: very small or very large loans are easily obtained, but loans of around $20,000-$150,000 - exactly the sort of money needed by many start-up inclusive business projects - are not.
What is being done to fill this gap? Donor-funded loan guarantees are one option for businesses too small or risky to access finance on strictly commercial terms. Sida and USAID are already partnering with major Zambian banks such as Zanaco to provide such guarantees, and an African Guarantee Fund for SMEs will shortly be launched by the African Development Bank (AfDB) with funding from Spain and Denmark. For these schemes to be effective, awareness is important: currently many borrowers and lenders do not realise that such guarantees are available. Other donor-driven initiatives include DFID's forthcoming Access to Finance project, which is budgeted to spend $14 million on "inclusive finance" in Zambia. And for high-impact inclusive businesses that need a bit of matching grant funding to help get them off the ground, there's always Innovations Against Poverty.
For SMEs to work effectively with lenders, and avoid the high rates of borrower delinquency which have historically left banks unwilling to lend to SMEs at affordable interest rates, financial education is also needed. Major banks such as Barclays, Stanbic and Zanaco already have financial education programmes for SMEs in place, while at the same time educating their own staff to better understand the circumstances of smaller clients. Other measures that will help banks deal more effectively with SME clients include the new Unified Collateral Registry being put in place by the Bank of Zambia, expansion of the Credit Reference Bureau (which currently holds records for only 5-7% of Zambia's citizens), and the pioneering of new methods for assessing the creditworthiness of small entrepreneurs seeking unsecured loans. Stanbic bank, for example, is now using psychometric tests based on Harvard's EFL to assess the psychology of potential borrowers.
So although life remains difficult for inclusive businesses in search of access to finance, money is out there, and getting it is slowly becoming easier - that is, for those inclusive businesses that are genuinely deserving of funds. However, as pointed out by Kieran Archer, one of the authors of the Access to Finance study, in a recent blog, better access to finance will not help unless a business is ready for investment - with secure legal, commercial and financial foundations and a sound business plan.
The Riverside Pub probably has none of these things. But I'm tempted to give the owner the $20 anyway. I'm tired of turning up at the pub and being told there's no beer.