Are Zim enterprises financially excluded when they don’t want to be included? Only 14% apply for loans

Like with all other things in Zimbabwe, trying to answer the question of what the unemployment rate is is tricky. It depends on who you ask. 

If we only count those who are formally employed with pension provision and whose taxes are deducted by employers, we arrive at a very high unemployment rate.

We could classify subsistence farmers and those in the informal sector as employed and boom, we have a lower unemployment rate than South Africa and Botswana. 

Official stats say only 5.3% of Zimbabweans over the age of 15 and available to work were not working in 2020. In South Africa that figure was 28.7% whilst it was 17.7% in Botswana. 

If that’s the case, why would Zimbabweans be fleeing to those countries where unemployment is an even bigger problem? Makes you wonder how accurate the Zim statistics are or at the very least, the quality of employment in the country.

If you rush to Mbare and grab some veggies to sell by your gate, you are employed in Zimbabwe. Only problem is that with very few formally employed, most Zimbabweans are doing the same. Meaning the vending space is crowded, leading to low sales and low profits.

Recently we discussed how 43% of micro, small and medium enterprises (MSMEs) in the country are in wholesale, retail and vending. Everyone has to be an entrepreneur in Zimbabwe but unfortunately, the govt does not make it easy.

The Sivio Financial Inclusion of MSMEs report shares even more.

52% of MSMEs unregistered

There are various reasons why just over half of all MSMEs are unregistered. 89% of the MSMEs indicated that there are restrictions to compliance. The main reasons are the cost to register and the complexity of the process. 

I think we can add unwillingness to pay taxes as another reason. Especially now that there is an Intermediated Money Transfer Tax which they pay whenever they make any payments.

This unregistered status leaves these MSMEs unable to access formal financial products. None of the medium sized enterprises surveyed were unregistered whilst 66% of the micros and 21% of the small were.

There are a lot of viable businesses that never get off the ground because of lack of capital to establish them. We also have some that need capital injections to grow but are unable to find such credit.

80% of MSMEs funded from personal savings

The average salary in Zimbabwe is US$230. For micro enterprises the figure is $115 whilst it’s $207 for small enterprises and $345 in medium-sized companies.

So, if those are the salaries Zimbabweans are getting, you can see just how difficult it is to save enough to start a business. Yet, this is the only source of capital available to most Zimbabweans as evidenced by the fact that 80% of MSMEs are funded from personal savings.

The other major sources of capital to establish businesses are;

-loans from locally based family and friends (11%), 

-remittances from family and friends (8%), 

-rotating and savings groups (marounds etc) (11%),

-fellow business colleagues (10%),

This comes from entrepreneurs not being able to access loans from banks and microfinance institutions (MFIs). Only 7% of MSMEs got funding to establish their businesses from banks and only 6% got theirs from MFIs. That’s comparable to the 5% that got theirs from loan sharks, which is a sad statistic.

Govt and banks should do better

I think the govt needs to overhaul the company registration process to make it easy for anyone to register a company. The websites and portals they have created for this purpose should always be up and running. 

This would help us see that banks have been hiding behind the fact that they can’t lend to these unregistered companies as it’s too risky. 

I imagine that in many cases, if my experience is anything to go by, most of the registered companies started out unregistered and only registered as they grew and stuff like lack of tax clearances started hampering their progress.

Banks just do not have any interest in lending to fledgling companies. We went out into the field and found out that microfinance institutions are essentially loan sharks, charging exorbitant fees. 

To be fair though, entrepreneurs are not bothering with applying for loans to start their businesses, only 14% applied from those surveyed. They feel it’s a waste of time as they are unlikely to get the loans.

Banks can’t lend if no applications come in. In that light, if only 14% of MSMEs applied for loans and 7% got lending from banks and 6% from microfinance institutions we really can’t fault the financial service providers. 

That’s not to say they can’t improve though.

The proof is in the order finance

What really drives home the point that the formal financial institutions only cater to large businesses is the fact that none of the small enterprises claimed order finance companies as a source of funding.

Think about it. Small businesses that have secured an order still can’t get funding from financial service providers. 

That’s like you finding someone who agrees and signs to buy a product from you for $100. You can get the product for $80 but you don’t have the money and approach a friend with the signed ‘intent to buy’ document. You tell your friend that the payment can be made into their account with them transferring $20 (profit) less any interest you agree on to you.

That’s about as low risk as lending can ever get, especially when the person who has agreed to buy can be counted upon to pay up. If your friend still won’t finance the order, there are deep seated reservations at play. 

We can’t have small businesses getting 0% of their funding from order finance companies. That shows an attitude problem, something that is not fixed by small companies getting registered.

Venture capital

I appreciate that the world over, banks do not really have an appetite for lending to fledgling companies. We find that in the US, venture capitalists fund most startups. Which is why we can’t lay all of the blame at the feet of banks in Zimbabwe.

We need to have a vibrant VC economy and organisations like Dream VC can help us understand how to do that. 

Financial inclusion

However, we also need the formal financial services sector to loosen the purse strings. We can understand their reluctance to lend to a company that’s starting out but we find that they don’t lend to established MSME businesses either.

When asked about key sources of funding for ongoing business operations only 5% got it from banks and 4% from microfinance institutions. 

We need banks to lend so entrepreneurs know they can get loans. We also need entrepreneurs to apply for loans so banks can lend. The govt should help the two parties meet.

That said, we cannot ignore the cultural attitude towards credit. Before hyperinflation, Zimbabweans used to buy on credit more and I imagine they borrowed to start businesses more too. That changed.

Some were bankrupted when interest rates shot up to match high inflation rates.

It might just be that some Zimbabweans are not financially included because they don’t want to be. We should remember that we have a large population of the formerly banked.

The Sivio report found that 64% of MSMEs did not have bank accounts. The main reasons were that they were unregistered (24%), high bank charges (18%), risks in banking in Zimbabwe (14%). Just from this we see that at least 32% of MSMEs do not even want bank accounts. 

In the end, the reality on the ground is that the informal economy has dollarised. The informal economy is a cash economy and banks really have no place in it. 

With the govt increasing transfer taxes on USD accounts there is no chance the informal economy will bank their proceeds. 

The question then becomes, can we say these MSMEs are financially excluded when they have no use for bank accounts and are not interested in loans from banks?