SMEs transition key in uplifting economy

The transition of SMEs to big business or corporate is pivotal in any economy in the world. It is actually the relative measure of how well an economy is performing as SMEs are the seed-bed of business growth, innovation and pillars of employment creation.

SMEs contribute half of the World's Economic Output and employ two-thirds of the global workforce.

In Zimbabwe, SMEs contributed $8,58 billion to the country's GDP in 2016 and employ more than 5,9 million people (Over 75 percent of the total workforce of 7,8 million people).

Furthermore, SMEs now make up over 70 percent of ZIMRA's database of registered tax payers while contributing only 20 percent in taxes.

All commercial banks and retail enterprises in Zimbabwe now have a dedicated SMEs Desk signifying the role small businesses are playing in the local market.

This is partly because only a sizeable chunk of yester-year corporate giants is still standing in our economy.

There is no universally accepted definition of SMEs in the world but the World Bank defines SMEs as businesses that employ less than 300 people and have an annual turnover that does not exceed $15 million.

In the UK, SMEs employ less than 250 people and in China or US, the number can go up to 3 000 depending on the sector.

In Zimbabwe, ZIMRA classifies SMEs as businesses that employ between 5-40 people with annual turnover and assets from as low as $50 000 to $2 million.

The local tax net has been cast wide and can include literally any economic activity that brings income to the business owner.

The key challenge with Zimbabwean SMEs, however, is that only a few transition to big businesses that can be accounted for in the formal economy.

As such they rarely create wealth that can be passed on to the next generation. Of the 15 (out of 100) small businesses that make it after five years of operation in Zimbabwe, only 2 become big businesses. The rest stay as SMEs and evolve from one specialty to the other till they die with the owner(s) or are taken over by new management.

The growth of companies such as Nyaradzo Funeral, Nush Paints, Untu Capital, Road Angels, Croco Motors, Surface Wilmar, Pacific Tobacco, Tendo Electronics and Gtel to mention a few, in the last 10 years show genuine cases of ingenuity that is rare in struggling economies.

With the right policies and economic fundamentals these success stories can be replicated across all industries in our economy.

According to information obtained from RBZ, only 3,78 percent of the total loans and advances by Zimbabwean banks go towards the SMEs sector. Even though funding without clear business models and sufficient collateral can be counter-productive, the small size of financial advances leads to the huge challenge that is bedevilling most of the promising small businesses in our country.

SMEs mainly lack capital to expand their operations in line with growth in product demand. Various initiatives by SEDCO, ZimTrade, Local Banks, Corporates and RBZ (National Financial Inclusion strategy) aimed at capacitating SMEs, Women, the Youth and Rural businesses require government support.

If SMEs can provide 60 percent of national GDP in a subdued economy, how much can these small businesses contribute with the right support in a stable economy?

By supporting SMEs through sustainable policies, the country can improve on the much needed transition our economy is lacking. Far reaching benefits such as poverty alleviation, financial inclusion, development of marginalised regions and growth in the tax base cannot be underestimated. Some of the key strategies to help SMEs transition include:

Local procurement

The government needs to walk the talk in developing local capacity when parcelling tenders. Procurement from Zimbabwean companies has downstream benefits to SMEs as most corporates outsource from small businesses. Registered and compliant SMEs should also be rewarded with supply contracts as a development strategy rather than import virtually all products and services from the developed countries and the Far East.

All imports into Zimbabwe represent thousands of jobs lost at home and created in the exporting country.

Credit and Export Facilitation

It is a financial fact that interest rates charged on loans locally are quite steep. A quick analysis on non-performing loans and businesses taken over by financial institutions in Zimbabwe paints this picture.

Even ZSE listed companies are not spared as very few companies can borrow to invest at an average of 18 percent and get sufficient return to pay back the loan and manage cash flows.

Most big businesses have been sourcing capital at cheaper rates to invest from off-shore banks, thus creating forex shortages locally in the process of debt repayment.

SMEs need competitive interest rates that can allow them to grow gradually and invest in machinery. Export facilitation should also be enhanced through ZimTrade for all small businesses that have quality exports but lack financial capacity to ship their products.

Factory or Trading shells

One of the features afforded to SMEs in developed economies are cheap facilities for small businesses or startups in strategic industries.

In the US, India and China, tech hubs and export zones have been established, in Germany and Japan, manufacturing shells are built for free. Besides the obvious benefits on cost, the quality of products will tremendously improve due to agglomeration and technical inspections.

Imagine SMEs in furniture manufacturing, steel making, minerals and agriculture processing housed at one complex where basic infrastructure such as water, electricity and shelter are provided for at subsidised rates. This will certainly push more businesses out of the SMEs zone to the Promised Land.

Victor Bhoroma is business analyst with expertise in strategic marketing and business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or Skype: victor.bhoroma1.