The January 2016 Monetary Policy Statement is the most pro-small business MPS to date. The Reserve Bank of Zimbabwe is clearly taking decisive steps towards making financial services available to the previously disadvantaged entrepreneurs, women, youth and rural enterprises. In this article, I present (8) reasons why the MPS should make you smile.
1 . All banks have been directed to seriously up their game in lending to Micro, Small and Medium Enterprises (MSMEs). The RBZ has issued the following instructions to financial institutions:
- Microfinance Institutions (MFIs) must re-orient their loan portfolios from consumptive lending towards financing the productive sectors. Simply put, “All MFIs should increase their lending towards small businesses.”
- All banking institutions shall establish a dedicated MSME business unit. Traditional banking is too rigid to accommodate the needs of small businesses. The establishment of an MSME Banking Division in all banks is a step towards establishing banks that are more relevant to our “new” economy.
- Banking institutions are required to set their annual target lending to MSMEs categorised by gender, enterprise size and business sector among other variables, and submit their targets to the Reserve Bank by 31 March 2016. I see some arm-twisting by RBZ here…but I am not complaining.
2. Women emerge as the winners. RBZ directs that:
- Priority should be given to potential women entrepreneurs in respect of business loans.
- Banking institutions should consider establishing separate ‘Women Entrepreneurs’ Dedicated Desk’ with necessary and suitable manpower and provide advice and training on MSME financing.
3. Youths can also smile as RBZ directs that all institutions should establish a youth empowerment desk. In addition to loans and banking services, youths should be able to access business related advice and other valuable services.
4. Lower interests on business loans. The central bank has directed that all-inclusive interest rate for productive lending should not exceed 15% per annum. That 15% must include all the establishment management and insurance fees which are typically deducted upfront. My calculations show that a bank loan at “18% interest rate” effectively has an interest rate of about 25% when upfront charges/deductions are taken into consideration.
5. Default interest rates should not exceed 18% on productive lending. When a loan is in default, the Bank can hike the interest payable and begin levying penalties on you. Most of this is contained in the small print on the loan contract you sign.
6. If you have a good credit history, you will soon be able to borrow at lower interest rates. The RBZ is establishing a credit reference system. In the ideal setting, the interest rates payable on your loans should be determined by your performance on previous loans. Credit reference systems can facilitate that.
7. Forget real estate, you can now borrow on the back of your car, machinery and stock. Maybe not “now” but “soon”. The RBZ is working on a registry system that allows you to use movable assets as collateral when borrowing from financial institutions. Presently, most small businesses are typically unable to access bank loans because they do not have qualifying security (typically real estate, with “proper title deeds”).
8. More foreign investment options for your mining, agriculture and manufacturing MSME. Going forward, foreign investors are now permitted to inject capital into local entities with the view of participating in profit sharing arrangements. If you have a foreign investor for your business, it is important that you contact a financial advisor to explore this option.
Traditionally, banking shuns serving MSMEs because the risk profiles and high associated costs which make it an economically unviable market. MFIs are thriving because they are able to serve that market…and they do so at a premium. The nature of MFI legislation in Zimbabwe, makes it difficult for RBZ to push such directives to MFIs, moneylenders and loan sharks. MFIs clearly need these directives on interest rates more than banks.
Banks, Are you on board?
Banking is a business and these guys are in it for a profit. Every new product must be justified by proper market research and feasibility studies. Unless these new lending directives prove economically viable on a bank by bank basis, I can foresee most financial institutions dragging their feet. Yes, they will make noise about their plans and targets but nothing meaningful will materialize.
This “new” thrust is not really new. If MSME banking was viable, all banks would be doing it. It is that simple.
Furthermore, I do not see some “foreign” banks quickly adjusting their business to accommodate MSMEs. You are better off setting your sights on a local bank, for now.
All excitement dies the moment you realize that the impact of these measures on the entrepreneurial landscape shall be limited. This is because of the (necessary) reliance on banks to fully come on board. These institutions need to be convinced of the profits or economic benefit from commencing MSME lending and establishing new divisions. I feel most banks shall make half-hearted efforts and employ other clever tactics so that they are not seen to be antagonizing the regulator.
They are a few banks on the market that already have MSME divisions and MSME products. These few banks have done their research and are convinced that it can be profitable for them. For a selfless and genuine service, you are better off engaging the banks already in the business. I would not want you to waste time with a bank that does “MSME lending” but has set minimum requirements that excludes YOU, the average entrepreneur.
My objective was to simplify the Monetary Policy Statement for the average entrepreneur. I hope I have succeeded. I apologize, I could not resist adding my opinions and bursting a few bubbles. Just being real.
Let me have your thoughts.
Remember, we can do BIG things…