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Risky business in Zambia

 Street News Service 29 November 2019

In Zambia, up to 70 per cent of the population is employed by small and medium sized companies (SME). But as Samba Yonga reports, this crucial backbone of the economy is being starved of the funding it needs. (1437 Words) - By Samba Yonga

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SNS(EU)_Risky business in Zambia

 Trading at the Zambia/ Zimbabwe border. The step from informal to formal business proves difficult for many in Zambia, mainly due to a lack of funding opportunities. Photo: DFID

A report just published in Zambia reveals more than 90 per cent of the country's small and medium sized companies (SMEs) are reporting funding difficulties.

The study was done by the Zambia Chamber of Small and Medium Business Associations (ZCSMBA) - a USAID funded project which provides capacity building, networking and business advice for around 90 business associations across the country. The report suggests that start-up activity in the country is at a virtual standstill, with 95 per cent surveyed saying they are unable to generate the working capital required to finance growth.

Like economies around the world, but particularly developing one, SME success is vital in Zambia.

Government agency Zambia Development Agency (ZDA), the organisation responsible for facilitating investment opportunities in Zambia, last month suggested the cost of doing business poses the greatest challenge for SMEs.

Financial institutions quite simply see SMEs as too risky, as Cornelius Mushili, a credit analyst at leading finance house Blue Financial Services explains.

"Inadequate collateral cover, low turnover and lack of financial backing is what weakens the credibility of SMEs and as much as we are looking to finance expansion and contribute to SME growth we have to ensure that the numbers make sense," he says.

ZCSMBA's figures show Zambian's resultant SME funding bottleneck suggests start-up funds for 95 per cent of those surveyed is now from their own resources and informal borrowings.

In the over 20 districts that ZCSMBA operates, it has a membership of around 200,000 registered businesses. Three quarters of those are sole proprietorships and family businesses and 90 per cent are just 5-10 years old, making them predominantly first-generation, the type of SME most likely to fail anyway.

After 30 years of a faltering economy, Zambia has seen an average 4.8 per cent rise in gross domestic product over the past decade, driven mainly by construction, mining and agriculture.

In his current presidential ad campaigns current President Rupiah Banda claims to have boosted annual export earnings to more than US$5.6 billion.

However, that promising progress continues to be threatened by a variety of issues, which will if they remain unchecked, hamper any further progress. Top of the list remains energy and infrastructural problems, and lack of progress towards key institutional reforms.

On top of that inconsistent energy supply, such a basic for many SMEs in the country, only 28 per cent of rural areas have access to mobile phone services. Although there were plans to extend coverage to 77 per cent of the population by the end of 2009, reforms in this area have remained very slow.  And the sparse population distribution makes the installation of infrastructure very costly.

Penias Chabwela, the M&E coordinator at ZCSMBA, explains that for there to be meaningful development and growth in Zambia's SME sector, economists are urging finance to become much more readily available.

As the survey figures illustrate, the sector employs up to 70 per cent of country's labour force and contributes to the treasury through payment of taxes, levies, rates and licence fees; it also contributes to national foreign exchange earnings through cross-border trade; provision of goods and services to support other sectors of the economy such as construction and building, tourism, information technology and others all which is huge potential for creating wealth.

Chabwela points out that SME development is viewed as one of the sustainable ways of reducing high levels of poverty, and improving the quality of life for households through wealth and job creation.

"It makes sense that this sector be put as a high priority for facilitating capacity to operate.

"At the moment ZCSMBA provides on the ground support for SMEs that seem high risk. We act as guarantor for a loan that they might want to access in order to help them expand. The idea is to get the companies to a stage where they are credible and are operating at optimum level."

But at the moment it is actual new finance that's the stumbling block, as many businesses, such as International Technical Express Shoe Manufacturers, are finding out.

Typical of a Zambian SME, it was started by its owner William Chisoko. He had a fabulous idea of starting a shoe manufacturing company after he noticed a gap in the market for safety boots in the heavy industrial sector.

Through capital injection from the Citizens Economic Empowerment Fund (CEEC), a fund created by government to support local businesses in Zambia, he managed to produce and supply mining companies with his safety shoes and soon the company also started packaging for export to countries like the Democratic Republic of Congo and Malawi.

On paper it sounds like he is making a good living for himself and expanding his business. But in reality, he admits he is struggling to keep his company afloat, let alone turn a profit.

In the last two years he has seen the cost of production double, and the strain of keeping up with supply of demand is threatening to push him over the edge.

"Though I have demand for my product, it is increasingly difficult to meet it. The cost of raw material is killing me. All the materials I use except leather is sourced outside Zambia so the cost of materials really eats into my capital as I have to pay high taxes for bringing in the material."

"I use a lot of electricity and in the past few years the price of electricity has become so high, all of these costs build up. My company is understaffed, I do not have enough hands to help me as it is but I have recently had to let go of four staff because I could not manage to pay all of them on time," Chisoko explains.

At property development company House to Home, it's a similar story. Owned by Raphael Bwalya since it started seven years ago, despite a relatively strong property market, he still struggles to expand his business because he is hampered by lack of funding.

His plan was to borrow money from the bank to refurbish rundown houses in up-market residential areas and then put them on the market for sale at a profit.

Despite a well-researched business plan, after doing the rounds of financial houses he's drawn a blank, with the common reason that his company is not large enough and he's too much of a risk.

"The only word I can use to describe business in Zambia [for SMEs] is 'difficult'," he says.

"I have tried to go to the bank, presented them with viable business plans, offered substantial collateral and complied with their long list of requirements but still all I get is a 'no'.

"They say they feel the business idea is good - they just can't risk giving me a loan.

"How are we supposed to develop our enterprises if we are faced with such stringent rules?"

The 2010 Human Development Index indicates that Zambia has slid back in the quality of life citing reasons such as lack of economic diversification, mismanagement and high prices of essential commodities as major factors to the detriment.

Economic growth and personal stability is at the heart of growing the middle class; but many suggest that if the middle class is unable to take advantage of the current low inflation rate, many will simply not survive, without an easing in funding conditions.

If the timeline is followed, by 2015 Zambia's poverty level should be at 35 per cent. However, with the country's SME sector - the lifeblood for many not only to get out of poverty but to remain out of it - in such financial stagnation, many fear that is nowhere near possible.

Member of parliament Mark Mushili acknowledges the huge obstacles:

"The much talked about economic growth is not correlating with what is on the ground with the poor people. It has not translated into actual wealth.

"The inflation rate is at 8% but if you compare to the interest rates and the cost of commodities, it is at least three times higher than what the inflation rate indicates it should be. This means poor people such as small and medium enterprises are unable to invest in businesses as they will not have the capacity to acquire the loan let alone pay it back."

His rhetoric question sums up what many in the country feel: "Economic growth and wealth of people is at the heart of growing the middle class and if the middle class are unable to take advantage of low inflation rate, of what benefit is it to the people? What good do high export earnings do if it does not trickle down to the people?"

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