SMEs: A panacea for Zim’s economic challenges?

By The NewsDay | May. 19, 2014 | 5 Min read

Many people who lost their jobs through company retrenchments operate as SMEs but are not formally registered as businesses, and in the form of taxes.

FOURTY-three-year-old Itai Guzha is self-employed and operates from a backyard industry in Glen View 7 where he manufactures different items of furniture such as sofas, wardrobes and kitchen units.

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Although he was formally employed at a furniture manufacturing concern 15 years ago, he was given a retrenchment package and had no choice, but to operate an illegal workshop at his home premises.

“When I was retrenched in 1999 I had no option except to operate as a small enterprise from my home to try and make a living as I could not find employment since more industries were closing.I decided to use my acquired carpentry skills to manufacture furniture and even employed two other people as assistants at my small workshop,” he said.

Guzha said his customers included people from Glen View and other surrounding areas and also claimed big furniture shops bought some complete products from his backyard factory.

Many people in Zimbabwe who lost their jobs through company retrenchments operate as SMEs like Guzha, but are not formally registered as businesses, and therefore are not contributing to the fiscus in the form of taxes.

But, small and medium enterprises have been said to be one of the answers to Zimbabwe’s economic quagmire, yet they lack capital and bank loans in order to grow and become bigger businesses.

Tobacco farmers buying furniture at Glen-view home industries

According to the Finscope survey of 2012, the SMEs sector in Zimbabwe has an estimated turnover standing at $7,4 billion circulating within the sector, with 2,8 million Micro, Small and Medium Enterprises (MSME) owners, owning 3,5 million MSMEs and employing 2,9 million people.

SITHEMBISO-NYONI-(2) SMEs minister Sithembiso Nyoni (pictured right) told Parliament last month that due to its potential, it was now imperative to look at ways of formalising the informal sector to ensure it contributed to the national economy.

According to Nyoni, SMEs, including those operated by vendors and those in rural areas should be legalised and helped to market their products locally and internationally to ensure they became fully-fledged businesses.

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But banker Clive Mphambela in his paper Burden of Compliance in SME Growth said although formalisation might contribute to the national economy, the problem was that even with the most formal businesses, very few of them followed all rules governing formal enterprise behaviour, adding on the extreme scale of informality some businesses will also follow none of the rules set for formal businesses.

“The degree of formalisation varies immensely from a business that may be registered, but not pay any taxes nor declare their employees’ earnings for the purpose of social security insurance.“On the other hand, a business may not be registered as a formal company with the registrar of companies or government, but nonetheless complying with many local authority regulations,” he said.

Mphambela said there were barriers to formalisation which included regulatory barriers, administrative, fees and financial requirements, corruption in public administration, socio-cultural attitudes, lack of key business services and criminality.

Founder and executive officer of the Small and Medium Enterprises Association Clement Mutambanengwe appeared before the Parliamentary Portfolio Committee on Small and Medium Enterprises chaired by Gokwe Zanu PF MP Dorothy Mhangami this week and explained some of the barriers that SMEs were facing in their operations.

Mutambanengwe said since independence the government had talked about formalisation of SMEs, but failed to teach people operating in the sector like Guzha on how to comply with statutory obligations to become fully-fledged businesses.

“Most non-formalisation within the sector is because of ignorance. There is no curriculum that teaches anyone how to comply with statutory regulations, and the approach of most authorities is intimidatory, rather than helpful. If one cannot afford to hire a tax consultant, they cannot navigate the complexity that is Zimra (Zimbabwe Revenue Authority) and thus they choose to evade,” said Mutambanengwe.

He said as a result his organisation had engaged in some initiatives with the National Manpower Development Corporation (Namaco) where they did road shows to educate SMEs about their functions and the importance of things like the Manpower levy and the Zimbabwe Manpower Development Fund.

Mutambanengwe said banks were not receptive of SMEs, adding the local financial sector had been promoting external competition by funding people going to import goods like motor vehicles, rather than fund the local productive sector.

“The issue of lack of funding in the SMEs sector can only be addressed by the formation of micro finance banks,” he said.

He said government seemed to be punishing SMEs for trying to create employment resulting in most of them shutting down or operating as one-man-shows to avoid problems with government agencies, labour laws and an apathetic work force.

SMEs Expo managing director Delight Makotose said in order for SMEs to grow into bigger businesses, there was need for an intensive marketing strategy of their products or services.

“SMEs should participate and show their goods at the national and world stage by taking part in exhibitions. They also need to understand the country’s legislative framework pertaining to SMEs. Currently, the ministry is on a drive to ensure the unbanked SMEs become banked — but how many SMEs even know about the SMEs Act? Vital information should be availed to SMEs to enhance their growth into fully-fledged businesses,” said Makotose.

He said in order for the SMEs sector to drive the economy, big corporates should be prepared to work with them — even through supplying seed capital.

“For instance, there are some SMEs that are commodity brokers (runners) and they supply big corporations with machine spares. Those SMEs might not be well financed, but the big companies can provide finances for procurement of raw materials by SMEs,” he said.

Makotose said examples of how SMEs can grow economies of a country were the Germany Mittelstand export-oriented companies that are often family-owned businesses and have a focus on high value manufactured products, as well as adoption of modern business management practices.

“The Mozlink of Mozambique also has a lot of success stories in terms of creation of SMEs that can be integrated into the supply chains of large companies,” he said.

While contributing to debate on SMEs in the National Assembly recently, Mount Darwin MP Christopher Kuruneri (Zanu PF) also emphasised the need for marketing strategies to be instilled on SMEs.

Referring to cases of people like Guzha who were supplying big companies with furniture manufactured from illegal backyard workshops, Kuruneri said there was need to protect SMEs from exploitation by big companies.

“I did a study where I found that big furniture shops in Harare bought furniture clandestinely from home industries in Highfield and Glen View at night. They put fake stamps pretending it was ordered from South Africa and even sell it with a 100% mark up at the expense of SMEs. We need to ensure they are protected,” said Kuruneri.

Other issues hampering the SMEs growth were said to be high fees, especially in the mining sector which demanded huge amounts for registration purposes, as well as high costs encountered in clearing goods for import and export.