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Getting to bottom of MSMEs financial access: Need for different approach and philosophy

THERE is a growing consensus between business experts, economists and policy makers and of late politicians that SMEs are economic growth drivers.

Based on this consensus, the SME sector that is in good physical shape, strong, vigorous contributes exceedingly to the country’s economy by creating higher production capacities, creating more attired job opportunities, introducing private enterprise and innovative skills and in the long run increasing exports.

SMEs’ active role in emerging countries, ascertains SMEs as the vehicles through which the government policies of the emerging nations, namely to grow and prosper, can be achieved while creating what can be termed as wealth creation across many individuals and industrialist.

Micro, small and medium enterprises, unquestionably, account for over 90 per cent of businesses globally.

Many studies known without listing them endorses that by 2019, an estimated total number of formal and informal micro, small and medium enterprises reached an estimated 420- 510 million, with the majority of businesses stretching between 365-445 million located in developing markets.

MSMEs play a critical role in the global economy and in our region. This sector overtime is the source of significant and contributors to economy in terms of taxes and multiplier effect and produce the majority of jobs widely scalable for many population.

SMEs are central tools to address the challenges of job formation, sustainable economic growth, equitable distribution of income and the overall simulation of economic development.

Even though SMEs are a great sponsor to an overall value added in the emerging market, the way a business is conducted and participates in the marketplace, has of late changed by globalization and digitalization.

The driving forces behind these changes are communication and information and of late effects of Covid-19. This has brought about in a brand new economy, referred to as the knowledge economy, that when critically examined is departing from tradition business norms.

Much as it might cause debate, the most critical asset in the economy is knowledge. It is what we buy and sell in the market.

The adoption of information communication and technology among SMEs surveys in an attempt to single out what are the causes of their failure shows that the high growth rate in most economies during the 1990’s-2019’s which led to the rise in employment and productivity, was because of the early and fast adoption of the information and communication technology but importantly conducive business environment suitable for SMEs level.

Fiscal and monetary incentives also did play a great role to enable these SMEs attains their potential. In an attempt to analyse banks loans portfolio and their exposer of reported audited accounts to MSMEs for example in Kenya, Rwanda and Tanzania to mention a few, indicates that the share of MSME lending in the overall loan portfolios of banks varies between 5 and 20 percentage.

It is not an intention to create a discussion on what will have to be a minimum share of banks’ lending to MSMEs, let say 35 per cent of the loan portfolio, but if that would have been the case, then notwithstanding known challenges facing MSMEs, their multiplier effect could be of great importance to the economy.

It well known that the country’s economy is currently faced with difficult times as it is hit by both domestic and global challenges. This feeling expresses extensive uncertainties for the fortunes of the economy of Tanzania if something seriously isn’t been done to ensure its SMEs business environment is ready for SMEs to attain its full potential.

It has been shown by the economic headwinds of the previous few years that the world is both uncertain and changing and with effects of Covid-19 changes might cause more disruptions. Tanzania like any other middle income country needs to trim its sails and alter course accordingly, is acceptable with SMEs policy that will provide justice to the sector.

Envisioned areas that the new policy for SMEs might look at is to take cognisant that managerial and financial reasons are among the leading causes pointed out of SMEs failures that also include a lack of business, financial management and the marketing skills.

Lack of business and management skills although might be regarded as soft skills, is in my opinion, are amongst the major causes of SMEs failure because without these skills, their businesses are bound to fail.

It isn’t my intention to put banks into test, but new research is beginning to show that some banks not all are failing to support SMEs access to finance above existing traditional appraisal system because themselves doesn’t have or are not interested to try new financing instruments available in the market that could be of use to SMEs.

There could be deficiency of innovation on new products and services amongst the commercial banks and other financial service providers that can place themselves to treat SMEs as a core and strategic business.

With right capacity building, both for supply side and demand side, certainly, there is real room for potential for banks and niche banks to overcome the opaque nature of SMEs through rapport lending and for large and multipleservice banks to offer a wide range of products and services on a large scale through the use of new instruments supported by technologies, business models and risk-management systems suitable for SMEs.

To get to the bottom of access to finance to MSMEs, particularly as Tanzania line up to implement next five years development plan to centre more on exporting market, financing SMEs requires a different approach and philosophy on how they are financed.

Heaping on banks and other traditional FSPs will not address critical needs and dynamic forces of MSME financing needs.

There is a need for alternative and innovative practices of financing are desirable, explicitly for micro, small, medium and the new start-up realm that are entirely calculated inversely, and they can’t meet the traditional financing gauges of banks and MFIs.

These alternative instruments can be structured differently since can both have debt and equity features while can also provide technical facilitative and direct financing instruments. Best practice in other markets such as Kenya has shown that the funding gap to MSMEs and start-ups can be best bridged by a mix of financing instruments, some of which are relatively new in our markets.

Their use in our market requires a review or development of new regulations to support their growth, but a caution to regulator to take is that over regulation can lead to dwarfing their best use.

The existing SME development Policy 2003, when judgementally scrutinized put emphasis on lending to SMEs by banks and MFIs as the main focus of increasing access to finance to MSMEs, with a mere citing of venture capital, without providing any details on how that would be achieved.

TODAY’S  article   is  a  continuation  ...

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Author: Dr Hilderbrand Shayo

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