The small-to-medium (SME) sector is a fast-growing area and now forms a significant part of the economy of Zimbabwe. With this in mind, it is critical for stakeholders to participate in efforts to make the SME sector a more sustainable contributor to job creation and gross domestic product growth. A lot of work is already going into efforts to formalise many informal sector players and develop them into SMEs. Such efforts also require a clear understanding of how formal to informal sector business linkages can facilitate that process.
BY CLIVE MPHAMBELA
What are business linkages?
Business linkages are those ongoing, profit-oriented relationships that exist between buyers and suppliers. They provide important opportunities for micro and small and medium enterprises to grow by participating in the dynamic segments of the economy.
Business linkage arrangements are a widespread characteristic of successful market-based economies where there is an extensive array of such relationships among businesses of all types and sizes. Business linkages are win-win situations for the enterprises involved as well as for the economy and society as a whole.
They can help micro and small enterprises thrive and grow in ways that lead to specialisation, diversification, economic efficiency, and widespread dispersion of economic benefits. Because the government is a major buyer of goods and services in Zimbabwe, linkages with government can also play an important developmental role.
Increasingly, most business people in Zimbabwe are finding such linkages to be an efficient way of doing business as the economy moves away from its historic, vertically integrated, dualistic, and inward-looking structure. Business linkages are becoming more prevalent as restrictions and protection are removed and as increasing numbers of SMEs develop the competence to perform as reliable partners in linkage relationships.
Linkage programmes should, therefore, focus on reinforcing rather than substituting natural market forces. Linkage programmes can help make market information more widely available; they can also help strengthen the capacity of SME suppliers to perform as reliable partners. In healthy, market-based linkages, the buyers, who are developed large corporations, often perform an important role in mentoring the suppliers. Linkage programmes should encourage such mentoring relationships because these linkage relationships can facilitate the efficient use of capital.
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Why are banks keen on fostering strong business Linkages with the SMEs and informal sector?
Zimbabwe’s banks no longer view the pursuit of broad financial inclusion as a tool for combating poverty in the wider economy, but also a means for driving the sustainable growth of the marketplace for financial services.
In the past traditional banking models have seen banks being persuaded either through regulations and other coercive measures, to adopt financial inclusion for other reasons, rather than their own self-interest. This has in the recent past changed as the drive for sustainable financial inclusion is now seen by banks as a business imperative.
Banks have now adopted an approach to financial inclusion that seeks to counter various problems that used to be associated when dealing with customers in the lower rungs of the economy.
Revamping the traditional banking model
The traditional banking model involves delivering services using brick and mortar-based banking channels or physical branches. This model in the modern world, suffers from significant service delivery costs.
Further to this major challenge, the problem of information asymmetry, particularly with respect to credit, as well as regulatory constraints such as stringent Know Your Customer regulations imposed by regulators, have added to the complexities faced by banks in trying to deliver services to marginalised sections of the economy.
How are banks supporting financial inclusion in the economy?
The Bankers Association of Zimbabwe (BAZ) is actively seized with the following:
- Engaging in financial literacy and other training programmes for micro, small and medium enterprises, women’s groups and youth structures in critical areas such as basic business planning and management skills, cash flow management, taxation and corporate governance etc in order to play a role in the formalisation of informal enterprises.
- Rolling out outreach programmes in schools and universities aimed at engaging in a discussion on teaching the young people about managing finances with a particular emphasis on teaching them to save.
- Engaging in public financial education and financial consumer protection programmes. This is being done mainly through a media programme of weekly newspaper articles in two of the country’s most widely circulating daily papers. This programme has been supported by live radio programmes.
- Ensuring the availability, proximity and effective use of a broad range of appropriately priced financial services and products. Quite a number of banks already have low cost transactional accounts and special accounts targeted at SMEs, college students, youths and children and women.
- Raising consumers’ awareness of various financial products and financial services through consumer education and financial literacy programmes.
- Conducting and or supporting ongoing market research aimed at creating an information base that facilitates informed policy interventions.
- Collectively the BAZ member banks are ensuring that they adhere to and comply with the provisions of the agreed Code of Banking Practice in line with the principles of fairness and transparency.
- The Business Association of Zimbabwe also aims actively supporting government efforts targeted at ensuring that financial literacy/financial education is incorporated into the mainstream school curricula to inculcate financial principles from an early age.
- Banks are also support various efforts by the government and the Reserve Bank of Zimbabwe aimed at rebuilding consumer confidence in the banking industry through the promotion of professionalism, integrity and accountability, and adoption of good corporate governance practices and standards.
How are banks helping create sustainable business linkages for the MSME sector?
The promotion of business linkages between formal and informal sectors thus becomes one of the key challenges that must be addressed in driving SME sector growth and development.
Such partnerships help to promote the growth and survival of micro, small and medium enterprise businesses (MSMEs) through capacity and capability enhancement on the one hand, while improving the policy environment for larger formal businesses to flourish on the other.
In spite of such limitations, however, the larger formal businesses particularly banks are quite ready to upgrade business relationships with MSMEs into long-term relationships, provided the MSMEs commit themselves to remedy identified shortcomings.
Such dynamic linkages with formal business are being facilitated in a number of ways.
- Structuring of innovative financing tools for SME financing such as issuing bonds to institutional investors on behalf of groups of SMEs (SME bonds).
- Institutionalising value chain financing models such as order financing and invoice discounting products.
- Setting up SME banking units within banks.
Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers Association of Zimbabwe. BAZ expressly invites players in the MSME sector and all other stakeholders to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686, 0772206913
