By Calvin Manika
ENOCK Choto, a small and medium entrepreneur runs a hardware in Harare and he recently opened a bank account with a local bank intending to own a business account and for compliance with the laws of running businesses in Zimbabwe. But, the most drive for Choto was being able to acquire a loan from the bank and boost his business. However, barely two days after starting the loan application process, the government banned all lending activities by the banks.
“I had planned a deal and I knew the bank was to help me and would repay according a deadline with my suppliers and I am a start-up, so it was a hard experience,” Choto said.
Choto thinks the government should consider the plight faced with start-ups especially under the current economic conditions and they must be considerate on supporting local business.
“When the government makes a decree, it is binding and the ban was with immediate effect meaning that any start-up without a strong financial muscle cannot grow and operate in an unpredictable environment. Though five days later it was suspended, my deal was already affected,” Choto said.
On 7 May this year, President Mnangagwa ordered that banks were to suspend their lending activities with immediate effect. The banning of lending activities was announced among other austerity government measures to arrest the soaring inflation in the Southern Africa country which has resulted in the increase of prices of basic commodities.
For the past two decades, the Government of Zimbabwe (GoZ) has been coming with measures to fight money laundering and foreign currency parallel market. Within two weeks, the ban on banks lending activities was uplifted. However, the move which shook the business fraternity and the industry has already taken off banking confidence from business start-ups and their chances to survive in case the ban is imposed again. Bringing light to the government’s position, President Mnangagwa justified the move.
“In order to minimise creation of broad money that is prone to abuse for purposes of manipulating the exchange rate for financial gains, and to allow current investigations, lending by banks to both the government and the private sector is hereby suspended with immediate effect until further notice,” Mnangagwa said.
Within hours after the ban, big companies had already started feeling the effects. One of the companies which came out open was Tongaat Hullett through a letter to its suppliers, sugarcane farmers. Charles Maphisa, a banker said, credit is the primary source of income for a bank.
“When Tongaat Hullett feels the effects to an extent of opting to suspend its operations, imagine start-ups. They will be automatically off the game because capital loans are essential for business operations,” said Maphisa.
In a statement, The Zimbabwe National Chamber of Commerce (ZNCC) said no investor will be interested in an economy where bank credits can be frozen overnight.
“Surely, this is not an ideal measure to control the growth in broad money supply and no investor would be attracted to such an economy where lending can be suspended overnight,” ZNCC noted.
Generally, money laundering is seen as critical to the effective operation of transnational and organized crime. Maphisa said, money laundering affects the country’s economy, government, and social well-being.
“The economic effects of money laundering include, undermining the legitimate private sector; undermining the integrity of financial markers; loss of control of economic policy; economic distortion and instability; loss of revenue; and reputation risk. But, in the case of Zimbabwe, business start-ups and the rest of the business community condemns the Nicodemus approach of the government on economic decisions which affects them,” Maphisa said.
On 12 May, 5 days after the suspension of banks lending activities, the Reserve Bank of Zimbabwe (RBZ) reversed its directive to stop banks’ lending activities after Tongaat Hullett’s Zimbabwe units and other companies which include Surrey, Fivet and Dairiboard Holdings stopped credit sales and advances to suppliers. The re-consideration by the executive was welcomed by the business starts-ups.
Bank lending is the most common source of external finance for Small and Medium Enterprises (SMEs) and entrepreneurs, which are often heavily reliant on traditional debt to fulfil their start-up, cash flow and investment needs.
Most of the business start-ups in Zimbabwe are seeking to de-leverage and improve their capital structures.
The long-standing need to strengthen capital structures and to decrease dependence on borrowing has become more urgent, as many firms were obliged to increase leverage in order to survive the recent economic and financial crisis caused a free-falling economy and exacerbated by Covid-19 pandemic.
While bank financing will continue to be crucial for the SME sector, economists underlined that there is a broad concern that credit constraints will simply become “the new normal” for SMEs and entrepreneurs.
It is therefore necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to enable them to continue to play their role in investment, growth, innovation and employment.
“Through asset-based finance, firms obtain funding based on the value of specific assets, rather than on their own credit standing. In this way, it can serve the needs of young and small firms that have difficulties in accessing traditional lending. Asset-based lending, which provides more flexible terms than collateralised traditional lending, has also been expanding in recent years, in countries with sophisticated and efficient legal systems and advanced financial expertise and services,” said Leroy Shoriwa, a Harare based economist.
According to Zimbabwe National Financial Inclusion Strategy, global, regional and national-level policy makers are increasingly embracing financial inclusion as an important priority for fostering socio-economic development.
“These policy makers recognise the strength of financial inclusion as a driver of economic growth. The products and services offered by the banking institutions are complemented by products and services offered by Savings and Credit Cooperative Societies (SACCOS), insurance companies and the capital markets,” notes the strategy.
The SACCOS provide loans based on an intimate understanding of the business model and the Small and Medium Enterprises Development Corporation (SMEDCO) Infrastructural Development Bank of Zimbabwe (IDBZ) borrower, rather than collateral; loans and funding suited to the specific needs of the borrower, and and capacity-building services and support to borrowers who are members in most cases.