DEVELOPMENTAL SME PROJECTS
INTERVENTION TO SUPPORT THE YOUTH,
WOMEN AND OTHER DISADVANTAGED
GROUPS
SUPPLEMENT TO
THE FIRST HALF 2006
MONETARY POLICY REVIEW STATEMENT
DELIVERED BY DR G. GONO, GOVERNOR
OF THE RESERVE BANK OF ZIMBABWE
July 2006
CONTENTS
PAGE
1. Introduction ..........................................................................................................2
2. Common Challenges Faced by SMEs ................................................................4
3. Measures To Address The Challenges ............................................................... 4
4. Experiences Of Other Countries In Promoting SMEs ...................................5
5. Contextual SME Issues In Zimbabwe ................................................................7
6. Reserve Bank Interventions In the SME Sector ..............................................8
7. Conclusion .......................................................................................................... 11
8. Annex 1: Sectoral Breakdown Of Examples Of SME Projects That Qualify
For Support ........................................................................................ 13
9. Annex 2: Provincial Natural Endowment-Based SME Projects ............... 17
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1.0 INTRODUCTION
1.1 The role of Small and Medium-sized Enterprises (SMEs) is critical for strengthening
economic performance and employment creation, particularly in developing
countries such as Zimbabwe.
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1.2 In Africa and the world over, SMEs contribute very significantly in terms of
employment creation and growth.
1.3 For instance, in Indonesia, SMEs account for 98% of employment creation and
growth with Japan and Thailand contributing 81% and 78% respectively.
1.4 SMEs are, thus, impeccable engines of economic growth which complement the
efforts of the private and public sector to enhance the national development process.
1.5 SMEs have provided practical solutions to such challenges as poverty and declining
household incomes to meet family basics such as food, school fees, and access to
health services, among others.
1.6 Key drivers to consider in the case of nurturing and supporting SMEs are their labour
intensity nature, capital saving capacity, harnessing of local resource endowments
and reliance on fewer imports, flexibility and adaptability, innovativeness and strong
linkages with other sectors of the economy.
1.7 The high level of adaptability also makes it easy for SMEs to thrive in any environment,
hence they become an appropriate business model to promote rural development
which will decelerate rural-urban migration that is currently giving headaches to
many governments in the world.
1.8 Reflecting the sector’s central role, SMEs represent over 95% of enterprises in
most Organization for Economic Corporation and Development countries (OECD)1
and generate over 50% of private sector employment.
1.9 Governments, therefore continue to apply an array of policies and programs to
promote entrepreneurship and boost development of SMEs. These programs
generally aim to alleviate the challenges faced by SMEs and seek to identify and
implement best practice policies.
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Australia Austria Belgium Canada Switzerland Germany Denmark Spain Finland France Great Britain Greece Ireland
Iceland Italy Japan South Korea Luxemburg Mexico Netherlands Norway New Zealand Portugal
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2.0 COMMON CHALLENGES FACED BY SMES
2.1 The SMEs sector, while playing a critical role in economic growth and development,
is confronted with a number of challenges which include the following:
i. Access to finance remains the critical challenge facing SMEs worldwide.
Accessibility and availability of finance is very limited, as the majority of
SMEs are owner capitalized;
ii. Limited access to finance is a major obstacle to development of SMEs in
Africa. Their inherent higher perceived risk and lack of collateral make
financial institutions reluctant to lend them;
iii. SMEs also lack the capacity to conduct research and development needed to
commercialize ideas and grow businesses;
iv. Weak business structures;
v. Poorly defined legal and regulatory frameworks;
vi. Poor marketing channels;
vii. Difficulties in adapting to environmental changes;
viii. Insufficient management resources; finance, Human Resources and
technology; and
ix. Absence of supportive institutional structures;
3.0 MEASURES TO ADDRESS THE CHALLENGES
3.1 In view of the challenges faced by SMEs, it is imperative that tailor-made support be
given to this critical sector. Effective interventions include the provision of financial
support and entrepreneurial development training, as well as mentorship frameworks.
3.2 Financial Support include the following:
• Diverse credit finance (loan programs);
• Equity finance;
• Credit Guarantee Schemes for SMEs; and
• Tax breaks for SMEs
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3.3 Under entrepreneurial and management support, the following are the main areas
that need intervention;
• Start up business support;
• Business diversification support;
• Strengthening of management base;
• SME turnaround support, and
• Mentorship programmes and sub-contracting by bigger corporates.
4.0 EXPERIENCES OF OTHER COUNTRIES IN
PROMOTING SMES
4.1 Findings from empirical studies on the role of SMEs in economic development in a
number of countries have revealed the following:-
a) The financial sector has a major role to play in the creation and delivery
of practical solutions to the challenges of sustainable development.
b) The SME and microfinance sectors have to be supported – financially and
technically - to become part of the formal economy which will play a crucial
role in the deepening of the financial sector and mobilization of financial
resources.
c) Bangladesh, Uganda,India,South Korea, Malaysia and the Philippines provide
exciting empirical evidence as on the microfinance revolution as a
development intervention.
d) Public-private partnerships (PPP) are valuable mechanisms for developing
practical responses to African challenges.
e) Access to financial services is necessary to address problems faced by
SMEs.
f) Capacity building in the SME sector by banks is necessary to ensure long
term business planning and management.
SPECIFIC COUNTRY EXPERIENCES
4.2 The Nigerian Central Bank has increasingly exercised its power as a regulator in
line with internationally accepted norms and has been at the forefront on influential
programs such as the Small and Medium Industry Equity Investment Scheme (SMIEIS)
aimed at boosting equity investment in SMEs.
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4.3 Since 2001, all Nigerian based banks have been mandated by the SMIEIS to set aside
10% of the pre-tax profits to finance SMEs. Funds are invested as equity, either as a
cash injection or conversion of existing debts owed to participating banks.
4.4 In South Africa, a partnership between ABSA, First National Bank, Nedbank Group
and Standard Bank and the Government was initiated in 2003 to develop low cost
transaction accounts, enabling the banks to cover at least 70% of the un-banked
market (low income group) in a relatively short time.
4.5 Japan’s SME policy was structured in 3 phases as follows:
i. Reconstruction period;
ii. High growth;
iii. Stable growth period.
4.6 The Reconstruction period saw the establishment of Government financial institutions
for SMEs, credit insurance system, formation of SME business associations such
as the Chamber of Commerce and Industry.
4.7 The high growth period was aimed at upgrading the structure and improving the
productivity of SMEs through the enhancement of facilities and promotion of sub-
contractor SME’s as well as support measures for start ups, new businesses and
business innovation.
4.8 The Stable Growth period was geared towards fostering the diverse and vigorous
growth of independent SME’s and meeting the demands of the global economy.
4.9 The Canadian Government offers financing programs to support the creation and
growth of SMEs through a loan guarantee program and state owned financial
institutions.
4.10 The range of financial services spans from:
i. Traditional term debt financing (5-20 years loans to finance capital assets); and
ii. Provision of pure equity financing through venture capital, among other innovative
structures.
4.11 China’s SMEs were historically constrained by lack of financial support.
4.12 China, however, recognized that vibrant SMEs are an essential part of sustained
economic development and worked on improving the operating environment.
4.13 Consistent with this, the Chinese central government created a network of credit
guarantee agencies in the late 1990s and tasked the SME Bureau to oversee them.
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4.14 China’s growing credit guarantee system was a step in the right direction, especially
since the banking system’s lending decisions were strictly on a commercial basis.
4.15 The most remarkable aspect of China’s small and medium enterprises is their rapid
growth despite their inability to tap the official financial system.
4.16 Today, Chinese experts estimate that SMEs are now responsible for about 60% of
China’s industrial output, employing about 75% of the workforce in China’s cities
and towns.
4.17 SMEs are responsible for creating most new urban jobs, and they are the main
destination for workers laid-off from state-owned enterprises (SOEs) that re-enter
the workforce.
4.18 Many of the SMEs are private firms, started by enterprising individuals. Furthermore,
some of the SMEs have moved into market segments once dominated by state firms.
4.19 In New Zealand, the concept of SMEs is also vibrant. The significance of the SME
sector in New Zealand has, thus, been increasing, with further opportunities presented
by globalisation and technological development.
4.20 Reflecting this significance, SMEs accounted for 29.7% of total employment in
February 2005, with the number of people employed by SMEs increasing by 7%
between 2004 and 2005.
4.21 New Zealand’s SME sector also accounts for quite a significant proportion of the
country’s output. The SME contribution to output increased from 37.2 % in 2003 to
39% in 2004 accounting for 23.8% in value added output.
5.0 CONTEXTUAL SME ISSUES IN ZIMBABWE…
5.1 Whilst in Zimbabwe, Government has made commitment to the full development
and the full transformation of the SME sector over the years, there has not been a
comprehensive intervention programme that recognizes the need for our Youths
Women and other disadvantaged groups to be supported in developing entrepreneurial
capabilities.
5.2 This development, largely a result of resource constraints cannot be allowed to
remain uncorrected.
5.3 A peculiarity worth noting is also that Government nurtures students for at least 11
years (7 years in primary school and 4 years at secondary level) and yet, thereafter,
there seems to be limited frameworks that unlock the wealth invested in those 11
years.
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5.4 Against this background, the Ministry of SMEs ought to play a very strategic role in
the development of the sector.
5.5 Support activities ought to range from policy initiatives, technical capacity building,
and financing among other numerous and significant interventions, and as the Central
Bank, we have seen it fit that we facilitate this process through the provision of an
SME Development seed fund.
5.6 It is, however, important to note that a strong institutional framework supporting the
development of SMEs is already in place in Zimbabwe, as evidenced by such long-
standing institutions as SEDCO, Empretec, and UNIDO, the ILO arms, among several
other institutions currently providing technical and financial support to the sector.
5.7 The turnaround of the Zimbabwean economy calls for a holistic approach building
on these existing strengths so as to realize sustained growth and overall economic
performance across the board.
6.0 RESERVE BANK INTERVENTIONS IN THE SME
SECTOR
6.1 In order to reinforce the broader macro-economic policies being implemented, it
has become necessary that a meaningful programme be introduced to tackle the
setbacks of high unemployment levels among our youths, as well as poverty levels
among the low income groups of our communities.
6.2 Within the framework of addressing the gender issues, as part of the country’s
strategy to fulfill the Millennium Development Goals (MDGs), the SME programme
should also cultivate broad -based empowerment avenues for women and other
disadvantaged groups.
6.3 Empirical research shows that the socio-economic challenges of rising crime,
escalating HIV/AIDS infection rates and other stresses are positively correlated
with unemployment and poverty levels.
6.4 In this regard, therefore, National programmes ought to be tailor-made towards a
broad-based attack on poverty through job creation.
6.5 To this end, therefore, the Reserve Bank of Zimbabwe is pleased to unveil a Z$16
trillion SME fund to promote the activities and projects of this critical sector. The
Central Bank encourages rural banking initiatives by mainstream banks, and we stand
ready to introduce appropriate incentives to those banks that assume this National
Developmental role.
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Applicable Interest Rate
6.6 The SME Development fund programme will extend concessional financing support
to qualifying SME projects at an interest rate of 70% per annum.
6.7 We call upon the Banking Sector to match this allocation dollar for dollar, though
their applicable interest rate needs not be the 70%, as banks ordinarily take into
account aspects of their overheads and other considerations in managing their lending
activities.
6.8 If the banking sector matches the $16 trillion provided by the Reserve Bank, the
Nation would benefit from the resultant $32 trillion resource-base for the SME
sector.
6.9 For maximum National impact, these funds will be allocated across all provinces,
based on population distribution and known economic activity concentrations.
6.10 Assuming an average support to the tune of $250 million per project, the total number
of projects that would stand to benefit would be around 128 000, and if each is
assumed to employ 7 people, then total direct employment creation and/ or sustained
will be 896 000, which is equivalent to around 3 years of school levers, at an average
of 300 000 per year.
6.11 If one assumes that each employed person supports about 4 people, including self,
then the overall beneficiaries will be 3 584 000, outside direct agriculture.
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6.12 The SME fund will seek to create jobs for the Youth, promote value-addition and
greater focus on export promotion.
6.13 The following activities will be the focus:
(a) Agro-processing to support the Agrarian Reform;
(b) Construction industry to fight inflation being caused by rental increases;
(c) Mining sector development;
(d) Animal husbandry and raising of chickens; and
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(e) Other SME activities, as expanded in Annex 1.
7.0 CONCLUSSION
7.1 Success of any macro or micro-economic policy intervention largely hinges on the
passion and intensity of implementation.
7.2 In coming up with this eclectic, practical intervention to the country’s current set-
backs of unemployment and low income levels, particularly in rural communities,
the overriding objective is to cultivate a solemn realization among us as Zimbabweans
that meaningful development has its roots in the SME sector.
7.3 As a Central Bank, we are under no illusion, though, that such development will
come on a silver platter without the need for sustained macro-economic policies
that reduce inflation; macroeconomic policies that attract investment inflows; and
interventions that rejuvenate the export sector.
7.4 Our humble contribution is to plant a seed, which seed will require watering from
all Zimbabweans to germinate into the proverbial fig-tree that has meaning to the
majority of our population.
7.5 Our firm inclination is that economic policies that have no effect on the majority
poor are not much helpful to the cause of human development.
7.6 The essence of humanity, thus, begins and ends on the often overlooked pivots of
food sufficiency; access to decent housing; access to good health facilities and
equally importantly, simple peace of mind.
7.7 Without sources of income, our Youths are rendered idle hives of tomorrow’s
destruction.
7.8 Without jobs, our Youths cannot have peace of mind.
7.9 Without a means of livelihood, the 60-70% of our majority currently residing in
rural areas will fast lose the meaning of our hard-earned political independence; and
soon they will demand their fair share of the National cake from those that bask in
the armchairs of wealth.
7.10 Yes, through Government’s far-sighted Land Reform Programme, many of yester-
year’s unemployed are being absorbed into agriculture as the mainstay of the
economy.
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7.11 This notwithstanding, the country’s developmental prospects will be made brighter
through micro-level interventions that create a lasting buffer against the vagaries of
drought.
7.12 Through a comprehensive SME programme, our rural communities will become
masters of their own economic destinies, which in turn would free the need for
food hand- outs in times of drought or provision of subsidized inputs from Central
Government.
7.13 As a minimum contribution towards making this, our dream come true, we call upon
all stake-holders, both in the Public and Private sectors, to share this Vision and see
the virtues of a growing SME sector.
7.14 We also call upon the banking sector to assume a greater role in building the
developmental base of the economy through the adoption of credit risk
management systems that have a human face.
7.15 Shunning the SME sector is no different from a builder who fails to see the collective
strength of minute bricks , which when bound together create an unshakable wall.
7.16 Lastly, to the potential beneficiaries of this SME programme, we implore that all
funds borrowed be put to good productive use, so as to allow other aspiring borrowers
equal opportunity to transform their entrepreneurial dreams into tangible wealth for
our Great Country Zimbabwe.
Thank you
DR G GONO,
GOVERNOR,
RESERVE BANK OF ZIMBABWE
31 JULY 2006
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ANNEX 1: Sectoral Breakdown of EXAMPLES OF SME Projects that
QUALIFY FOR SUPPORT
13
14
15
16
ANNEX 2: PROVINCIAL NATURAL ENDOWNMENT-BASED SME POJECTS
17
18
NOTES
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NOTES
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