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CHAPTER ONE

1.0 BACKGROUND TO THE STUDY

1.1 Introduction

The importance of Small to Medium Scale Enterprises (SMEs) in economic

development and growth continues to be one of the top agenda items on economic

policy planning and growth deliberations in both developed and developing

economies. SMEs have been acknowledged as the hub of economic growth and a

building block for globalization. The advantages put forward for the

establishment of SMEs are quite numerous. “More generally the development of

SME is seen as accelerating achievement of wider economic and socio-economic

objectives, including poverty alleviation.”1 Undoubtedly, for any nation to attain

sustained economic growth and higher GDP per capita more focus should be

placed on enhancing growth and development SMEs. “However, the ability of

SME to grow depends highly on their potential to invest in restructuring,

innovation and qualification. All these investments need capital and therefore

access to finance”2 is the major factor for SMEs development and growth.

International finance and economics literature is replete with evidence to prove

and support that SMEs, especially in developing or emerging economies3, are

more constrained than their larger counterparts, in terms of access to finance for

various reasons; chief among them being macroeconomic imbalances, weak

financial systems and the capital market structures that have not been adapted to

deal with the unique requirements of SMEs, thus leaving them to orphanage; i.e.

1 Bataa Ganbold, October 2008 “ Improving access to Finance for SME: International Good Experienceand lessons for Mongolia, IDE-JETRO2 Ibid3 Ibid; SME Lending In Africa: Challenges, Current Trends, and USAID Initiatives, USAID September,2008; Beck, Thorsten, Aslı Demirgüç-Kunt, and Maria Soledad Martinez Peria. 2007. “Barriers to SMELending around the World.” World Bank mimeo; Albaladejo, Manuel. “Promoting SMEs in Africa: KeyAreas for Policy Intervention”. United Nations Industrial Development Organization (UNIDO), Privatesector development branch. May 2002

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with very limited or no ways in which to finance their growth initiatives. Access

to and cost of finance is often ranked as one of most constraining feature for an

enabling business environment by SMEs4.

Small firms do not only report higher financing obstacles, they are also more

adversely affected by these obstacles (Beck, Thorsten. Aslı Demirgüç-Kunt and

Augusto de la Torre, 2007), small firms’ financing obstacles have almost twice

the effect on their growth that large firms’ financing obstacles do (Beck,

Demirgüç-Kunt and Maksimovic, 2005). Furthermore, the global

financial/economic crisis is most likely to shrink access to finance for SMEs more

than for bigger companies for the next foreseeable future or at least for as long as

it lasts.

The SME sector in Zimbabwe is no isolation, despite being credited for having

created most of unprecedented new jobs, export markets and vast of other

economic benefits over the last decade; with prospects for 2009 and beyond.

However if their unique financial requirements are not fully addressed, as the case

is with other developed and developing nations, this may all be history. A

dynamic small business sector is, therefore an essential and core component of a

more flexible, growth oriented and innovative economy, which is one of the key

agendas being pursued by the government, under the indigenization strategy.

SMEs development may prove to be an effective antipoverty programme and the

foundation for innovation and sustainable growth. Consequently, the

improvement of access to finance allow for SMEs to undertake productive

investments in order to expand their operations, thus ensuring their

competitiveness and that of the nation as a whole. It is therefore crucial that SMEs

be strongly supported with more flexible and inexpensive channels of finance;

which match international best practice.

4Beck, Thorsten. Aslı Demirgüç-Kunt and Augusto de la Torre , 2007 “Financing Constraints of SMEs in

Developing Countries: Evidence, Determinants and Solutions” World Bank, Development Research Group

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Like the world over, the traditional method of SMEs funding in Zimbabwe has

largely been debt-based finance as a rescue for SMEs with little benefits for the

SMEs, due to its inherent disadvantages; despite wide criticism for it being

misdirected5, leading to a shift in many developing and developed economies

away from debt-based and other related modes of financing SMEs towards

establishment of frameworks to support equity-based financing such as external

commercial borrowings, private equity, venture capital, business angels, etc. Little

or no attention has been paid to improving access to equity-based capital market

for SMEs in Zimbabwe; the only closer step was the talk about a second tier

bourse6, which is yet to be instituted. Other SMEs lenders(including government

schemes), in a bid to run away from debt financing, have come up with direct

financial assistance; focusing more on working capital with very little or no

changes on the SMEs’ fixed capital, leaving them with little scope for growth,

thus practically not assisting them at all.

Certainly, there is a challenge in accessing equity capital by the small business

sector the world over. However, the issue in Zimbabwe is more aggravated;

largely due to none existence of deliberate schemes to assist SMEs access equity

finance, the economic meltdown that the country has gone through, and the recent

dollarization which has grossly affected most small businesses and even forced

some to closure; mainly due to lack of finance to resuscitate their operations. Thus

the key constraint, for SMEs growth and competitiveness remains: availability

and accessibility to finance. Equity investment, especially at the early stages of a

business’ growth, is an alternative and complementary source of funds for SMEs,

which can enhance their access to additional sources of medium-to-long-term

financing and thus highly attractive to SMEs.

5 Don Cruickshank’s report “Competition in UK banking: A Report to the Chancellor of the Exchequer”www.bankreview.org.uk

6The Herald, October 10, 2007- The Ministry of Small to Medium Scale Enterprises in Zimbabwe of was

quoted in The Herald saying, “Enough ground had been covered for the establishment of the secondarybourse”, and this was further confirmed by the ZSE Chief Executive in the same paper.

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Several researchers, in Zimbabwe, have undertaken study on SMEs, with

astounding benefits for financial institutions willing to extend debt to SMEs, or on

competitiveness of SMEs (Mpofu, 2004). However, the ability of SMEs to

develop and grow depends on their potential to invest, and investment requires

capital, therefore access to finance/capital (non-expensive forms – i.e. equity) is

the drive for SMEs growth and development. Most research has focused on more

general problems faced by SMEs, and key characteristics of SMEs that ensure

determine success, without any focus on improving access to funding as a rescue

for Zimbabwean SMEs. Important, though, the other factors may seem to be, but

access to finance is the engine that drives all the other factors. It is against this

background that this study is being conducted. It seeks; above all, to identify

specific challenges faced by SMEs in accessing equity-based finance and, based

on international experience and the needs of SMEs, recommend the way forward

for the Zimbabwean situation.

1.2 Problem statement

Sustainable economic growth and development calls for careful and articulate

attention towards the development and improvement of mechanisms to ensure

ease of access to finance by SMEs, in order to improve their potential for

investment. Key among the constraints to SMEs’ growth and competitiveness is

access to adequate and timely financing, at competitive terms. With the

challenges of globalization; world economies are now forced to come-up with

astute and robust ways of improving SMEs’ access to finance, in line with

international best practice. Access to finance therefore equips SMEs with

productive investments which are essential for individual company expansion and

growth, with positive ramifications to overall economic development, growth and

competitiveness.

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1.3 Research Objectives

The main objective of this research was to identify the major constraints faced by

SMEs in Zimbabwe in accessing equity-based sources of finance. In addition, the

following objectives were pursued:

Access the appreciation of SMEs on the various methods of equity-based

sources of finance that they can employ.

Provide recommendations to SMEs on how best they can access equity-based

finance based on international best practice.

Present relevant findings and recommendations to authorities and policy

makers on how equity-based sources of finance can be competitively availed

to SMEs in Zimbabwe.

Make any other recommendation as may be found necessary.

1.4 Research Questions/sub-problems

Do SMEs understand the various kinds of non-debt based sources of finance

they can use?

What constraints, if any, do SMEs confront in accessing equity-based sources

of finance in Zimbabwe?

What developments or improvements need to be made in the Zimbabwean

economic environment to improve SMEs access to equity-based finance?

What lessons can be drawn form international best practice on the provision of

equity-based finance for SMEs in Zimbabwe?

1.5 Statement of Hypothesis

This study was based on the hypothesis that: SMEs in Zimbabwe do not have

access to equity based sources of finance;

Sub- hypothesis: The current operating environment has no provision for equity

sources of finance.

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1.6 Significance of study

The research sought to access the general appreciation of SMEs on equity-based

sources finance, including their advantages over debt-based funding. The research

highlights the major constraints that SMEs face in accessing equity-based finance

and best practice in structuring equity-based sources of finance for SME, for the

benefit of economic players. Research findings and recommendations are general

in nature; covering the main requirements of broadly all SMEs for economic wide

applicability .The guidelines are, therefore, general in nature and have broad

applicability to all stakeholders.

1.7 Assumptions

SMEs are at the hub of economic growth and development.

The major impediment for SMEs growth and development is lack of access

to capital; more specifically equity-based sources.

Equity financing helps to reduce business risk and strengthens a company’s

financial position, giving it preference ahead of debt-based funding.

With proper orientation and education SMEs would prefer equity to debt

financing.

1.8 Scope/delimitation of study

The study focused on SMEs’ access to equity-based finance in Zimbabwe,

however the research was focused particularly on SMEs based in Bulawayo; with

the view that findings and/or recommendations can be extended to all SMEs

countrywide. Details were gathered on various aspects but chiefly among them

were; SMEs views of current methods of funding, factors that they consider in

selecting the best method of financing, and the impediments they currently face in

accessing or better accessing equity finance.

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1.9 Limitations

The response rate on questionnaires was not quite excellent as some

respondents probably considered the information to be sensitive, and a greater

portion were had low literacy, thus it long to get the responses.

Some respondent were too busy to attend to the research questions and thus

delegated to junior employees who may not have a full understanding of the

study or the position they are likely to take as an organization.

The time given to conduct the study may not be fully adequate, also

considering that the researcher is a full time employee. The university should

at least factor this into account and give students enough time to carry out

their research

.

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1.10 Chapter Summary

SMEs are the backbone of economic development and growth and a building

block for globalization, and for this to be realized fully economies need to change

their mindset towards SMEs, and improve SMEs access to finance; especially

equity finance.

This research seeks to identify challenges/constraints faced by Zimbabwean

SMEs in accessing equity based finance and how this can be improved.

The study is organized into five chapters as follows:-

Chapter one, deals with study introductions, purpose of the study, significance of

the study objectives, research questions, hypotheses including limitations of the

study. Chapter two looks at review of literature relevant to the study inline with

the research objectives. Chapter three focuses on research methodology; i.e.

research design, population, sampling techniques, sample sizes, data collection

methods. The fourth chapter is on data analysis and presentation. Finally, chapter

five has the conclusions observations and recommendations based on the research

findings on which way forward were made.

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CHAPTER 2

2.0 LITERATURE REVIEW

2.1 Introduction

The importance of Small to Medium Scale Enterprises (SMEs) in economic development

and growth continues to be one of the top agenda items on economic policy planning and

growth deliberations in advanced, as well as in emerging economies. SMEs are generally

considered as the backbone of all economies and a hub of socio-economic development,

growth, dynamism and flexibility. Due to their private ownership, high entrepreneurial

spirit, flexibility and adaptability, SMEs contribute to sustainable growth and socio-

economic development in a significant manner.

“The main argument for favouring SMEs in developing countries is that they are

increasingly playing a strategic role in economic growth and development through their

contribution to the creation of wealth, employment, and income generation”7.

According to the Organization for Economic Co-operation and Development (OECD)

Policy Brief (2006), SMEs constitute between 95% and 99% of enterprises in both OECD

and non-OECD member states and they contribute between 60-70% net job creation in

OECD countries. In Zimbabwe, SMEs contribute a significant portion of economic

activity wand with their relative contribution cutting across all sectors, they are

strategically positioned as major economic drivers and key to improved economic

activity.

7 Louis Kasekende, 2001. “Financing SMEs: Uganda’s Experience”, United Nations Conference On TradeAnd Development

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2.2 Definition of Small to Medium Scale Enterprises (SME),

There is no universally agreed definition for Small to Medium Scale Enterprises (SME),

there is wide range of definitions and measures, which vary from country to country and

between the sources reporting SME statistics. Criterion used for defining SMEs normally

hinges on number of employees, value of assets, value of sales and size of capital;

however the most common definitional basis used is employees, mainly due to relatively

ease access to this information. Research on definitions for SMEs have revealed that

generally developing countries, use lower number of employees and size of asset or

turnover for SME in defining SMEs as compared to developed countries.

Empirical evidence show that even among OCED member countries a variety of

definitions are applied and employee numbers are not the sole defining criterion8; though

one of the major.

“SMEs are generally considered to be non-subsidiary, independent firms which

employ fewer than a given number of employees. This number varies across

counties…. Small firms are mostly considered to be firms with fewer than 50

employees while micro-enterprises have at most ten, or in some cases, five

employees”9.

In view of this the OECD, in an attempt to achieve international comparability, compiled

data on national, regional and European Community definitions in defining SMEs.

However, the various classifications could not be matched, as definitions for SMEs

varied between countries and regions, but similar factors characteristics were used for the

definition. Annexure 1, presents a list of definitions of SMEs used by the OECD the

Working Party on SMEs and Entrepreneurship.

In Zimbabwe10 SMEs are classified under three categories; namely micro, small and

medium enterprises.

8 OECD-APEC Global Conference- Removing Barriers to SME Access to International markets, 20069 Ibid10 This definition was extracted from the Ministry of Small to Medium Scale Enterprises

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Micro-enterprises are the smallest unit of business, with less than five

employees, they are usually family owned and home based.

Small enterprises employ between five and 50 people, they use advanced to

sophisticated production techniques with several clear steps in each stage of

operation, and they have basic accounting, internal auditing and payroll systems

are in place.

Medium enterprises employ between 51 and 75 worker. They standardized

accounting documentation, governance, products and marketing strategies and

they export and/or compete in foreign markets. Medium enterprises are further

divided into lower and upper medium categories. Lower medium sized firm

employ between 51 and 64 employees and upper medium employ 65 to 75

employees.

For the purpose of this study, the Zimbabwean definition will be used for Zimbabwean

SMEs and the OECD for international comparison.

2.3 Economic Significance of SMEs

The contribution of SMEs and their catalystic effect on economic growth and

development can not be overemphasized; SMEs constitute the dominant form of business

organizations. According to Hallberg (2001) SMEs form the base for private sector-led

growth. Small businesses are an engine for innovation and growth, and they help to

alleviate poverty as the majority of them are inherently labor intensive. However, most (if

not all) SMEs are constrained by institutional and market failures mostly in relation to

access to finance for expansion (Biggs -2002).

In the supplement to the January 2007 Monetary Policy Review Statement, the Reserve

Bank of Zimbabwe(RBZ) stated that; “ Small to Medium Enterprises (SMEs) are

recognized world wide as engines for economic growth and are potentially the future

giants for both local and international markets”11.

Indeed SMEs are considered to be a major economic contributor and driver world wide.

11 Page 22, Reserve Bank of Zimbabwe, “Rural banking, Financial Inclusion and Empowerment of Small tomedium Enterprises”, Supplement to the January 2007 Monetary Policy Review Statement, 312 January2007

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The table below shows World Bank’s view of the contribution of SMEs to GDP and

employment, from across the world.

Table 2.1: SMEs contribution to Employment and GDP across countries

Source: The World Bank, policy research paper, 2003, adapted from Bataa Ganbold (2008),

The above figure shows that, as the nation’s income increases so does the contribution of

SMEs to employment and growth, alternatively the nation’s income is a positive function

of SMEs growth. The implication of this evidence is clear; to improve the economy of a

nation emphasis should be directed at enhancing SMEs growth; they are a key economic

driver.

SMEs contribute a significant proportion of export trade as well. A study, conducted by

the OECD Working Party on SMEs and Entrepreneurship in co-operation with UNCTAD

& Swiss Academic Partners12, revealed that in today’s world where globalization has

reached unprecedented levels; SMEs have a strategic role in the global value chain. Due

to their size, SMEs are highly versatile, they can easily penetrate global markets and

adapt to any changes.

SMEs have generally been viewed as seedbeds of economic activity and provide a fall

back position from economic depression. “During economic crises, micro enterprises and

12 OECD Global Conference, Enhancing the role of SMEs in global value chains, Tokyo 2007.

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small businesses are often the most resilient, serving as a crucial backbone of the

domestic economy.” (Renate Kloeppinger-Todd, 2001). However for SMEs to play their

role in the economy they need capital, and thus access to finance is an essential element if

SMEs are to achieve their potential.

It is important to mention that there are a number of researchers with skeptical views

concerning the provision of equity to SMEs, those against the idea emphasize the

advantages of larger firms, mainly economies of scale and the perceived stability and

higher quality of jobs they provide. Some researchers argue further on that SMEs are less

labor intensive than their larger counterparts and thus their individual contribution to

employment is negligible. While they might be a number of pro and opposing arguments

for SMEs, it is quite evident though that they play an important role in the economy.

In Zimbabwe SMEs in the manufacturing sector contribute to about 20% of non-formal

employment and 10-20% of the Gross Domestic Product (GDP)13. According to the

Reserve Bank of Zimbabwe, SMEs in Zimbabwe contribute more than 50% of the GDP

and are responsible for the livelihood of 80% of the population. Undoubtedly they have

become important key players in the economy.

2.4 Access to finance

The development of SMEs has been identified as one of the strategies for

industrialization, employment generation and poverty reduction; however they continue

to be sidelined in access to financial services and they face a number of constraints that

limit their development. For SMEs to play their part in the economy they need to have

access to funds at an economic and competitive cost. Lack of access to financial services

is one of the major constraints that have been identified by a number of researchers with

undisputable consensus cutting across all economies. If at all it is true that SMEs are

constrained due to lack of access to finance, we need to investigate why this is the case so

that we can develop strategies on how to overcome this.

13 http://indeginisation.gov.zw/sectorial analysis/sectorial_analysis5.htm

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According the Ministry of Economic Development (2006), “SMEs represent an

important component in the economy. They have a potential to grow and evolve into

global players. Government will with immediate effect support the development of SMEs

through facilitating access to adequate and cost effective financing initiatives and

advisory services such as marketing”.

Sadly though most of the schemes aimed at assisting SMEs have been debt-based and

thus not accessible to most SMEs, especially start-up, as most of them fail to meet the

minimum requirements. High risk businesses like SMEs, can not easily access debt as

they are charged higher interest rates compared to larger firms, thus increasing their

operating costs and reducing their competitiveness and often, due to their operation they

fail to produce some required records. Access to financing remains a significant

impediment to the creation, survival and growth of SMEs. (Reserve Bank of Zimbabwe,

2007)14

It is against this background of the importance of SMEs in economic development and

growth and the consistently reiterated concern of SMEs15 about the obstacles they

encounter in accessing finance that the researcher has considered access to finance as a

significant constraint that imperils the economic recovery strategy of Zimbabwe.

“Access is about the ability of an individual to get and use financial services that are

affordable, usable and meet their financial needs.” (Genesis Analytics, 2004)

Finance is essential to enable SMEs initiate and expand their operations, come-up with

new products, and/or advance in new technology/facilities, thus access to finance

determines the success or failure of SMEs; it is undoubtedly one of the key hindrances

for the growth and development of SMEs.

14 It is interesting to note that even after coming-up with a very informative and wide research on bestpractices in other countries and having identified that the major impediment faced by SMEs was access tofinance, the Reserve Bank of Zimbabwe still recommended a debt based scheme as a rescue package forSMEs. This did not yield any results.15 Access to finance of small and medium-sized enterprises Commission communication COM(2003) 713;

(http://europa.eu.int/comm/enterprise/entrepreneurship/financing/index.htm)

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“Access to finance has been identified as a key element for SMEs to succeed in

their drive to build productive capacity, to compete, to create jobs and to

contribute to poverty alleviation in developing countries”16.

Access to finance is rated as the major constraints by around 30% of small and medium

enterprises worldwide. (Thorsten Beck, etal- 2007b).According to Ayyagari, Demirgüç-

Kunt and Maksimovic, (2006), evidence from across countries indicates that SMEs are

more constrained in their operation and growth than large enterprises and access to and

cost of finance is often ranked as one of most constraining feature by SMEs.

Bataa Ganbold (2008) asserts that access to finance has attracted significant research

interest and increasing importance for policy makers in both developed and developing

economies mainly due to the following factors17:

i. There is empirical evidence that, that expansion of access may reduce poverty

in developing economies.

ii. Financial developments, which may lead to growth, often include improved

financial access.

iii. The widespread lack of access to financial services in emerging economies

particularly when compared to developed countries, leading to a strong

correlation between access and economic development.

iv. The Investment Climate Survey (ICS) by the World Bank indicated that one

major impediment to SMEs growth is lack of access to financial services.

In order to improve access to finance one should be in a position to measure this access.

However, there are various dimensions that can be used, the easiest way would be to

measure accessibility to financial services in general, and then identify which financial

services are accessed, from whom and by who.

16 United Nations, “Improving the Competitiveness of SMEs in Developing Countries -The Role of Financeto Enhance Enterprise Development” United Nations Conference on Trade and Development, 2001

17 Bataa Ganbold ( October 2008), “ Improving Access to Finance for SME: International good experiencesand lessons for Mongolia”, IDE-JETRO

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In a general sense access to finance or financial resources, refers to the degree of both

cost and non-cost barriers in use of finance/financial resources; the ease with which the

resources are available to all economic players at a fair prices. However, as Bataa

Ganbold (Ibid), indicate though it is easy to measure use of financial services, use is not

synonymous to access. Access deals with supply of quality financial services at a

reasonable cost, measurement or determination of access would obviously depend on

one’s definition of quality and reasonable costs. It therefore follows that, quality and

reasonable cost have to be defined in an objective standard and the cost should be

inclusive of both financial and non-financial costs. In this sense access refers to the

presence of financial services, with little or no concern about the rate of consumption,

and usage, on the other hand usage refers to actual consumption. Access to finance

fundamentally refers to supply of finance, while use depends on demand and supply of

finance or financial services.

Measuring access is inherently difficulty, and different researchers are likely to come-up

with divergent findings on the degree of access to finance.

“Access is not easy to measure. It is important to distinguish between access – the

possibility to use – and actual use of financial services.” (Asli Demirguc- Kunt, etal

2007).

Usage deals with both demand and supply factors, which are generally difficult to

separate, access, on the other hand has many dimensions18.

Another reason why it is problematic to measure or evaluate companies’ access to

finance is the lack of a unified data collection framework. “Somewhat surprisingly,

18 According to Beck, Thorsten and A. de la Torre (2006) the following dimensions can be used to measure household access tofinancial services

Geographic branch penetration: branches per 1,000 km2 Demographic branch penetration: branches per 100,000 people Geographic ATM penetration: ATMs per 1,000 km2 Demographic ATM penetration: ATMs per 100,000 people Actual use of financial services Loan accounts per capita: loan accounts per 1,000 people Loan-income ratio: average loan size/GDP per capita Deposit accounts per capita: deposit accounts per 1,000 people Deposit-income ratio: average deposit size

However Genesis (2004) describes the following as “four key dimensions” in determining access to financial services: Physical access Affordability Appropriate features (meeting the users’ particular needs) and

Appropriate terms (no terms that effectively exclude any category of potential user

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theoretical models and empirical evidence on the topic of access to finance has not yet

resulted in a commonly accepted framework for data collection”. (Stijn Claessens &

Konstantinos Tzioumis, 2006).

It is behind this background that the researcher, has switched-off from direct measures of

access to finance to identification of constraints and challenges that Zimbabwean SMEs

face in raising equity-based finance, with the assumption that once these are addressed

then access will automatically be improved. For the purposes of this study access shall be

restricted to physical availability, appropriateness, and affordability of equity based

finance for SMEs. These are considered from a demand-side perspective based on the

notion that investors and regulators would work on understating and eliminating these

barriers, thus leading to the development of a favorable environmental framework

creating a platform for improved access to finance for SMEs.

Figure 2.1: Access to Finance and use of financial services

Source: Bataa Ganbold (2008), “Improving Access to Finance for SME: International good experiences and lessons for Mongolia”, p.6

The above diagram summaries several reasons why a firm (SME) may be excluded from

accessing financial services including; high transaction costs; unavailability (mostly in

developing countries) and perceived risks that investors have associated with small firms,

unreliability of financial information from SMEs and this is divided into voluntary and

involuntary exclusion. Access to finance focuses on those who are involuntary excluded;

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due to this, involuntary exclusion, SMEs are forced to resort to informal channels which

are inflexible and highly expensive. Research findings have shown that this financing

problem is more pervasive in non-OECD (or developing economies) but not so with

OECD countries due to well-established systems of rising finance, as shown the graph

below:

Table 2.2: Comparison of SME financing in OECD and non-OECD countries

Source: OECD Policy Brief: Financing SMEs and Entrepreneurs, November 2006

Developing economies need to learn a lot from developed economies as far as financing

SMEs is concerned. “Access to finance has become the most critical challenge faced by

African countries.”-African Development Bank Group (2009). Empirical evidence has

shown that in most developing economies access to finance is often restricted either

physically or institutionally, i.e. lack of legislative and supportive economic framework

and the non-existence of actively involved institutions (public and private) to promote

access to finance.

The current global financial crisis calls for increased efforts to improve SMEs access to

finance through long-term investments and provision of adequate incentives, for efficient

allocation of the little financial resources that are available. Only economies with robust

structures/schemes to access to firm for high growth firms would be able to peak from

this crisis. Above all, the crisis calls for a shift against the traditional methods of credit

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financing to innovative mechanisms aimed at reducing the inherent risks of financing for

both parties.

According to Hans Falkena, etal (2001) the issue of access to financial services has come

to the forefront recently as a public policy problem because a positive correlation appears

to exist between increased access to financial services and social inclusion. If an

entrepreneur fails to access finance through the regular system, they may not start-up

their operation or operate at very low scale; a potential loss for the economy.

Generally in Zimbabwe, data on access to finance has been not been, actively compiled

(especially in relation to SMEs access to equity-based finance). In this regard, access to

finance has been lacking and/or very expensive for SMEs. Consequently most of them

have resorted to informal, inflexible and costly sources of finance, a move that has been

counter economic growth and development.

2.4.1 Fundamentals issues to be considered in equity finance

2.4.1.1 Why Equity Finance

SMEs generally do not fulfill the criteria for obtaining debt finance for long-term and

sustainable growth, due to the stringent conditions imposed by banks and other finance

lenders, thus most SMEs rely on the owner at the early stages of development, as they

grow the need for external capital intensifies, and this is the point where most of them

struggle. Average business growth can be financed by debt instruments, as growth

prospect increase, or the risks increases, debt financiers draw back or become expensive

and an SME are forced to look for alternative sources. At this point equity financing,

(provision finance in return for portion of ownership in the company) comes to the

rescue, as it strengthens the balance sheet, making it easier to approach lenders for the

supply of the remainder thus helping a firm to even get more capital than the case would

be without equity finance.

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However, equity finance is an uncommon feature in the SME sector, not only in

Zimbabwe, but across most developing or emerging economies, mainly because most

SMEs generally have an exclusivity tendency against external equity financers and are

not keen on disclosure and transparency about their business operations. In addition; most

investors are unwilling to invest in smaller companies; as they believe it is more difficult

to set an investment in a smaller business than in a larger one.

Given the dynamic economic environment in which we operate and success stories from

developed economies, it is high time SMEs in developing economies consider positively

and strongly the introduction of equity financing, as a key instrument for innovative start-

ups and economic growth & development. SMEs in most developing countries depend

highly on external finance, however the trend has been to rely more on credits and loans

than those in the developed world do. In developed economies this sector has been more

dynamic and initiative; key attributes that are still lacking in developing economies like

Zimbabwe; to the detriment of economic development and competitiveness. The

provision of equity finance is still at its infancy in most developing economies. Equity

investment should be considered as an alternative and complementary source of funding

for SMEs which can help them access additional sources of long-term finance.

Most SMEs, since they one-man/family owned, tend to be undercapitalized, as the

owner(s) usually do not have enough resources to plough back, thus equity finance is the

only suitable method of financing. The importance of having access to equity becomes

even greater as a firm grows in size.

The capital adequacy requirements, from the Basel Committee (Basel II) if implemented,

as it has been muted by the regulatory authorities in Zimbabwe, which gives financial

market authorities and institutions a lot of flexibility and may have negative effects on

costs and accessibility to credit finance for SMEs, mainly because these were largely

developed with larger corporations in mind; creating the risk of worsening the position of

SME borrowers as compared to other borrowers. SMEs will be subjected to more intense

internal rating procedures or credit rating scoring systems by their banks, causing higher

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uncertainty for SMEs; unless they are further refined. Instead of lamenting their

impending demise because of such regulatory frameworks, SMEs should seek innovative

sources of funding and slowly move away from debt-based finance to equity-based

sources finance.

Just like any other form of external funding, equity finance, have its unique advantages

and disadvantages, as outlined below:

2.4.1.2 Disadvantages of Equity Finance

Dividends are not tax deductible

Issuing equity will dilute the ownership; leading to a reduced share of profits and

percentage of voting rights and shareholders may interfere with the day-to-day

business operations

Equity contributors often demand greater disclosure on business operations

(though for competitive reasons)

When a business becomes successful it is often difficult to make a share-buyback,

as some equity investors may want to hold on to their share in the business

Equity finance is not appropriate for all SMEs, especially smaller companies that

lack the production or service quality and scalability, it is ideal for high growth

companies, usually within the early years of development.

Equity investments require considerable participation of fund managers in

guidance and support, some fund mangers may not be willing to embark into this.

The outside equity holder can not easily monitor the activities of the firm, this

problem is pervasive to equity finance worldwide

Due to the illiquidity nature of venture capital market funds, exit is difficult for

SMEs venture capitalists

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2.4.1.3 Advantages of Equity Finance

It is a form of long-term finance that may not need to be paid back (except in the

form of share-buyback and dividends, but these would be agreed in advance)

Dividends are only paid when a profit is made and are agreed upon; this allows

for the company to survive the hard challenges of initial take-off and economic

challenges

Equity providers do not provide finance only, but assist in other non-financial

ways19

Equity can be leveraged

Typically SMEs are not obliged to file detailed reports on their operations, and

thus are not willing to use equity in order to remain private, however, research has

shown that there is close correlation between GDP per capita and firms’

disclosure (Thorsten Beck, etal, 2007b).

Generally, equity is beneficial mainly when a business fails or does not perform as

expected; if the business succeeds equity may appear to an expensive method of

financing. Since with debt, whether or not a business succeeds, it eventually has to be

repaid. Given the risky nature of most business ventures of a business proves to be

success, equity may appear to be a non-prudent method of financing.

2.4.1.4 Constraints in accessing equity finance

According to the Organization for Economic Co-operation and Development (OECD),

Policy Brief (2006) SMEs encounter a number of difficulties in access financing which

include, inter-alia, incomplete range of financial products and services, regulatory

rigidities or gaps in the legal framework, lack of information on both the providers of

finance and the SME’s side.

19 Often shareholders assist in corporate governance and other expertise on management issues, which maybe more beneficial to the firm

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In addition, most SMEs are closely knit with the owners such that it is difficult for

potential investors to distinguish between the financial situation of the company and that

of its owners.

However the greatest danger is that they may operate on the informal sector to the

detriment of the economy.

Research has shown that the business environment is important for firms’ financing

constraints and patterns. According to Beck, Demirgüç-Kunt, Laeven and Maksimovic

(2006) institutional development, is the most strongest characteristic predicting cross-

country variation in firms’ financing obstacles, even after factoring in for differences in

GDP per capita. The higher the level of institutional development, the lower the financing

obstacles firms face and vice-versa. Financial and institutional development helps to

ensure all firms compete on the same level. Beck,Demirgüç-Kunt and Maksimovic

(2005) explain that effect of financial and legal development on the constraints-growth

relationship is significantly stronger for small firms than for large firms.

The Cruickshank Commission20 found that there was market failure in the provision of

small-scale equity finance to SMEs with high potential; especially in developing

economies. The result of this market failure was manifested in:

i. Insufficient small-scale risk capital being available to SMEs (in particular to

high-growth potential SMEs); and

ii. Illiquid equity markets for small firms.

Cruickshank saw these shortcomings in the equity market as being more significant than

access to debt and other financial services.

Regulatory reform has also featured strongly in improving access to finance for SMEs.

The World Bank Investment Climate Study21, discovered that economic and regulatory

policy uncertainty discourages investors .The government should come-up with SMEs

20 Don Cruickshank’s report “Competition in UK banking: A Report to the Chancellor of the Exchequer”www.bankreview.org.uk21 Maricar Paz M. Garde, “New insights from the World Bank Investment Climate Survey”, De La SalleUniversity

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friendly regulations to promote different types of support institutions. Evidence from

international best practice has shown that the government should be actively involved

in22:

Provision of information on regulations, standards, taxation, customs duties,

marketing issues;

Giving advise on business planning, marketing and accountancy, quality control

and assurance;

Creating incubator units providing the space and infrastructure for business

beginners and innovative companies, and helping them to solve technological

problems, and to search for know-how and promote innovation; and

Assisting in looking for partners.

Arguments for government intervention or strong regulatory framework are based on the

premise that financial markets rely heavily on information. Where information

asymmetry exists the market will not provide adequate funding. However the government

should also avoid too much intervention, as this may be detrimental.

According to the World Bank Conference Paper (2004) the provision of equity finance

has been insignificant in most economies due to three main factors23:

Informational asymmetries between SMEs and investors

Intrinsically higher risk associated with the activities of SMEs

High transaction costs in handling SME financing

To stimulate entrepreneurship and improve the business environment for small

enterprises, the Heads of State or Government and the European Commission developed

22 http://www.unece.org/indust/sme/ece-sme.htm23

World Bank, Conference on Small and Medium Enterprises, October 2004World Bank Conference of Access to Finance, March 2007,Berger Allen & Greg Udell, 2004, A More Complete Conceptual Framework for SME Financing, WorldBank Papers

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a Charter24 and agreed collectively work on the following ten items for the development

of a supportive environment for SMEs’ growth and development;

Education and training for entrepreneurship

Cheaper and faster start-up

Better legislation and regulation

Availability of skills

Improving online access

Getting more out of the single market

Taxation and financial matters

Strengthening the technological capacity of small enterprises

Successful e-business models and top-class small business support

Develop stronger, more effective representation of SMEs' interests at Union and

national level

2.5 Equity financing for SMEs

SMEs usually do not meet the standards set by lenders of finance to access debt, mainly

due to lack of appropriate collateral, excessively outstanding debts, and lack of business

skills, thus they are forced to rely on the owner’s personal finance. During the first stages

of growth the SME is entirely dependent on the owner, and they graduate to other

external sources as they grow in size. Hans Falkena ,etal (2001) suggest that the general

trend for financing SMEs is to initially use self-financing, and move on to debt finance

and/or venture capital and they outlined this into four major stages:25

a. Initial infrastructure investments,

b. Lumpy operations costs,

24For full details on these lines of action see:- Aziz Šunje, The Role Of Government In Supporting Entrepreneurship

And SMEs , DEP Policy Brief No 4, Sarajevo Graduate School of Business (SGSB)(http://ec.europa.eu/enterprise/enterprise_policy/charter/index_en.htm)

25 Hans Falkena ,etal (2001) SMEs’ Access to Finance In South Africa, – A Supply- Side Regulatory Review–Task Group of The Policy Board For Financial Services and Regulation, South Africa

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c. ‘Next-step’ expansions,

d. Unexpected opportunities requiring quick access to funds.

Access to external sources of funding depends largely on the level of development in

financial markets; the policy /regulatory environment, and the ease with which financial

institutions operate and their ability to assess, manage and value SMEs financing based

on the risk assessment.

Equity investment is an alternative and complementary source of funds for SMEs; to

assist SMEs (especially in developing economies) access long-term financing.

Early research in SMEs access to finance identified a situation referred to as the

“financing gap”- where a firm, due to growth in size, reaches a point where it has

exhausted its short-term finance, but its size inhibits it from access to the capital market.

However research has indicated that for firms in developing countries, this “financing

gap;” arises very earlier than their counterparts in developed economies26 due to a

combination of factors

To counter this financing gap, and develop an appropriate financing structure for SMEs,

Hans Falkena, etal (Ibid)27 came up with three major hypotheses for explaining SMEs

financial structuring inline with growth, namely;

Lifecycle approach

Pecking-order approach

Agency and informationalist theory

Lifecycle approach: suggests that small firms start out by using contributions from the

owner, if they succeed, they would then suffer from undercapitalization forcing them to

look for other sources, such as trade credit and short-term bank loans. If a form

experiences rapid growth at this stage, it may lead to illiquidity problems. The firm would

then have to choose between reducing its growth or look for venture capital. Based on

26 Ismail, S., “SMME vision needs money upfront for risk taking”, Business Report, 7 March, 200127 The Theories are adapted from the following: Weston, J.F. and E.F. Brigham, Managerial Finance,Hindgale: Dryden Press, 1981., Myers, S., “The Capital Structure Puzzle”, Journal of Finance, (34) 3,1984,pp. 575-592, Coase, R.H., “The Nature of the Firm”, Economica, 9, 1937, pp. 386-405, Jensen, M. and W.Meckling, “Theory of the Firm; Managerial Behaviour, Agency Costs

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this hypothesis, SMEs on early growth stage experience increasing short-term debt with

little or no long-term debt.

Pecking-order: postulates that firms finance their needs in a hierarchical fashion, using

internal funds, debt and external equity; in that sequence. It implies a negative

relationship between profitability and external borrowing; i.e. if a firm is profitable it

would generate enough profits, thus reducing the need to borrow; will rely more on

internal funds and less on external funds.

Agency and infornmationalist: it focuses on transaction costs, contracting analysis and

agency theory. It seeks to underpin that the presence of these problems explain the

greater use of collateral lending to SMEs as a way of dealing with these agency problems.

The lenders’ strategies for dealing with these problems also add significantly to the cost

of dealing with this sector. SMEs are also exposed to the risk of asset substitution which,

in practice, means a change in the firm’s asset structure

Entrepreneurs, who subscribe to the lifecycle hypothesis, would rely more on equity

capital and switch between various types of equity as the enterprise grows, as tabulated

below:

Table 2.3: SME growth phases and funding cycle

Type of SME Start-up phase Growth phase Stable Exit for externalinvestor

Traditional,providing incomefor an individual,family or smallgroup ofemployees

Family, friendsSavingsEquity in residential

propertyTrade credit

Asset-backed finance Factoring Bank debt

Often none, butdebt if required

N/A

High potentialwith growthaspirations

"Angel" finance Team equity, some

venture capital

Venture capital Private placement of

equity, Asset-backed finance Some bank debt

Venture capital High-yield debt

market Bank debt

Either exit viacapital markets

Direct accesscompetitivecapital markets

Attractive withhigh techinformation andlife sciences IPR

"Angel" finance Venture capital Corporates

Venture capital Corporates Asset-backed finance

Corporates Bank debt

Exit typicallyvia trade sale

Source: Hans Falkena , etal (2001) adapted from Banking Review (cited in Cruickshank)

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The Commission for European Communities, came-up with a graphical illustration of the

same ideology indicating how a firm’s financing needs should be adapted as it grows in

size.

Figure 2.2: Company equity funding requirement versus growth

Risk Capital Debt Financing Guarantees

Early Stages High growth innovative Micro-financeSMEGuarantees

Intellectual property SME Schemes Loan

Technology transfer VC Funds Micro credit

Seed finance Seed & Start-upEquity andMezzanine

Enterprise Investment readiness Early expansion stage Round table of bankers Securitization

Risk Business angels and SMEs

Business Angels

Better Gorvenance

Capacity Building

Public stockmarkets

Formal Venture Capital Funds

Bank Loan and Guarantees

Seed/early stage VC Funds

Business Angels

Entrepreneur, friends & family

Pre-seed phaseSeedphase

Start-upphase Emerging growth Development

Enterprise development stage

Valley of death

EU Policy development LOWER RISK

HIGHER RISK EU Financial Instruments

Source: Bunmi Lawson (MD, CEO, Accion Microfinance Bank Limited- Nigeria, (With minor variations)“Financial System Strategy 2020 International Conference- Access to Finance for SMEs, adapted from Commission of the EuropeanCommunities.

Generally, a high growth company is not able to fund its activities during the early stages

of its lifecycle, and thus it seeks for investors who will bring in two simultaneous services

during the crossing of the “the valley of death”, i.e. Long-term equity, and Support

service and management advice, (business angels or fund managers).

The illustrations emphasize the importance of equity financing at each stage of the firm

growth phase. Generally equity is an essential funding at all stages of growth, though in

deferent forms. Thus entrepreneurs need to understand the various methods of equity

funding so that they can acquire them wise.

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2.5.1 Venture Capital

Venture capital is the provision of investment finance to an SME in the form of equity

or quasi-equity instruments not listed in the stock exchange. It is a long term form of

investment, whose returns are from capital gains rather than dividends. Venture

capitalists taken an active role in the management of the company; they bring both funds

and expertise. Venture capital is usually provided without collateral in the private equity

market. Venture capital investing can be further subdivided into:

- Seed capital:- to finance the initial business idea

- Start-up capital:-to finance product development and initial marketing

- Expansion capital:- to finance business growth and expansion

- Mezzanine capital:- to finance the firm for an initial public offering (IPO)

- Buy-out or buy-in capital:- to assist purchase of firm from its owners (given to

employees of the company)

Leading international corporations like – Federal Express, Microsoft and Intel are

products of venture capital assistance28, a clear demonstration of the role that venture

capital funds play not only in firm growth but the economy at large. The key elements of

the lending position of the United States as an economic hub lies in its pro-

entrepreneurial legislation and business culture in support structures for venture

capitalists. In Europe, Australia and Asia, South Africa, Tanzania venture capitalists are

actively involved in SMEs financing. This calls for a speedy move in Zimbabwe as well

if our SMEs are to be players in the global economy, a practice that has been lacking.

Studies have revealed that most developing economies (Ibid), there is a general lack

potential investment opportunity for venture capitalists and, in case were they exist, exit

possibilities are restricted.

2.5.1.1 Advantages of Venture Capital

No collateral required

Venture capitalist are often willing to accept higher risk than traditional banks

28Best Practice, Programmes To Support SMEs In Accessing Financing

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It provides a long-term (or at least medium-term_) source of finance.

Venture capitalist provide managerial support, which is considered as one of the

key elements for the success of most SMEs

It reduces operating costs- no interest payments

However, there are also a number of drawbacks.

Operating costs associated with small scale lending may be discouraging to

investors

There should be an attractive exit mechanism for venture capitalist to be attracted

2.5.2 ‘Business-angel’ risk capital

Business angel refers to financial investments made by private persons (individually or

in small groups, but not an institution) directly in private unlisted companies, in return for

an equity stake29; business angels may sit on the company's board.

Business angel capital closes the gap between internal finance and access to formal

venture capital and is often cheaper and easily available compared to venture capital. It

obviously excludes business partners, existing investors and employees. Business angels

prefer industries that they understand fairly.

In a bid to promote the business angel concept, in the United Kingdom there are tax and

other incentives that were created for business angel investors from the Government

through the ‘Enterprise Investment Scheme (EIS)’. According to this scheme there is a

box in each individual’s tax to indicate whether the taxpayer is investing in an EIS and

they do they are exempted from tax on dividends received, and capital gains tax on sale

of the holding.

In addition in Australia and the USA, there are online databases for business angels, to

match various business criteria – such as skills, capital requirements, or growth potential

per sector – between the SMEs and the business angels. These enables business angels to

advertise anonymously, access a large database become involved with managers and

consultants and receive regular updates on new company developments. The business

angel concept has been a success in the Middle East, India, Nigeria and South Africa; just

29www.nationalbusangels.org , www.matchco

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to mention a few and given its importance as a driver of SMEs growth in other

economies, the “business angel” concept is worth emulating in the Zimbabwean market

as well.

However “business angel” has the following disadvantages:

Business angels usually have less time and, in most cases, very little

experience/systematic procedures for providing management support and

capacity building

Because they invest in fields well known to them, there is often less

diversification of risk by the business angel investor

2.5.3 Securitization

“Asset securitization is the structured process whereby interests in loans and other

receivables are packaged, underwritten, and sold in the form of “asset backed”

securities.30” This enables the transfer of risk to parties who can or are willing to

effectively manage it, this allows the originator to access funding at more favorable credit

rating scores, than previously would be.

Asset securitization helps the originator to improve their return on capital by converting

an on-balance-sheet item into a non-balance sheet, usually with reduced lending costs,

and additional reinvestment capital and improved asset/liability and credit risk

management.

Investors can also benefit from this concept in that an attractive combination of yields

would be availed to them, with further improvement on market liquidity. Above all, it

eliminates the need for a detailed understanding of the underlying loan.

To borrowers; this concept increase credit availability at even better term.

Most developed economies accept securitization as a method of financing both medium

and larger scale enterprises; however it has been unheard of in Zimbabwe, partly due to

stringent regulatory reform. There is need for a review in the regulatory framework, if

30Comptroller’s Handbook, November 1997, Asset Securitization, Comptroller of the Currency

Administrator of National Banks

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Zimbabwean enterprises are to compete on the same footing with other international

players.

2.5.4 Stock Markets for SMEs

Worldwide stock markets and investment listings are increasingly shifting focus towards

development of SMEs exchanges and/or listing program thus creating greater

opportunities for SMEs, in capital market access and diversification of investment

options for corporate investors with resounding economic and social benefits. Success

stories from regional and international markets call for a closer look at this astute idea

and focus on what can be done to ensure its realization.

Most nations admitted that the listing requirements of their main bourses are too stringent

for SMEs, and thus segregate them from being listed despite their track record, and they

have moved to develop second-tier bourses for SMEs with astounding results. Economic

and financial literature is replete with success stories from established SMEs capital

markets such as the Alternative Investment Market (AIM) in London, Secondary Tier

Securities Market (SSM) in Nigeria, the Growth Enterprises Market (GEM), Hong Kong

and MOTHERS, JAPAN the AltX in South Africa, Malawian experience, Egypt, India

the United States and Europe.

During the past two years31 a lot of talk was being on the imminent establishment/setting

up of a second tier bourse for SMEs in Zimbabwe, in order to improve capital market

access for SMEs in Zimbabwe up to now there has not been any move in that direction,

obviously partly because of the economic meltdown that the economy was going under.

Easing of capital market access for SMEs may cause panic amongst the SMEs

themselves on its possible impact, mainly because this would expose them to take-overs

or they may fear being easily dominated by few investors, since they are likely to few

31 For in example in October 2007, the Ministry of Small to Medium Scale Enterprises was quoted in TheHerald newspaper saying “…enough ground had been covered for the establishment of the secondarybourse” and this was confirmed by the ZSE Chief Executive but up to now no positive or at least publicmoves have been made in that direction

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shares and lower paid in capital. It other major challenge is that, unless the government

provides incentives brokers may panic over reduced low commission due to lower trading

volumes and values. However if handled professionally, this can bring long lasting

solution to most SMEs and their financing challenges may soon be history.

2.5.4.1 Advantages of SMEs Capital Market

It increases integration of the informal sector into the economy

Provides support to an economic sector which has bee affected by a number of

financial challenges

It attracts foreign investment in SMEs, thus improving their access to both local

and international finance

Brings in best practice in business management

Assist in determining fair value of the company, and gives investors (and owners)

a bargaining position.

International practices on improving SMEs access to equity finance has focused mainly

on the following:

Reducing the cost of financing for the SMEs

Lowering the risk for both the investors and the SMEs

Improving the quality of information required by investors, without exerting too

much pressure on the SMEs

Educating SMEs on the advantages and disadvantages of each method of

financing

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2.6 Role of Government in Facilitating Access

Based on the empirical evidence that SMEs access to finance vary widely around the

globe and its importance towards assist SMEs and the economy in general, it is quite

clear that the government have a greater role to play. Governments are generally expected

to support or put legislation to control/ ensure the operating environment is conducive for

both SMEs and providers of equity-based finance. However, the government should, at

the same time, guard against counterproductive policies or legislation. The success of a

particular regulation in a certain environment is no guarantee that it will work in any

environment with similar results.

To enhance access to equity finance and promote financial depth, the government should

develop policies aimed at stabilizing macroeconomic imbalances and improving

information asymmetry. According to Beck and de la Torre (2007), the government

should distinguish between financial systems where the service providers deliver as

widely as is possible given existing infrastructures, against systems where service

providers are hampered by inappropriate regulatory or other policies or coordination

failures. Thus the extent of government action can be categorized into four measures as

follows:

i. Market development interventions: development of measures that improve the

contractual and information frameworks within the economy.

ii. Market activity facilitating or enabling activities: focusing on streamlining

regulations, or improving startup of key activities.

iii. Regulations that harness or restrain market participants in order to prevent

institutions from engaging in speculative activities

iv. Policies designed to substitute for market decisions by direct ownership or

subsidy of financial intermediaries.

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2.7 Dealing with hurdles for SME equity financing32

The success of financial markets relies mainly on the ability of economic players to

effectively deal with risk, information asymmetry and transaction costs. SMEs are

generally inhibited by their high credit risk exposure and the fact that they are more

vulnerable to economic changes than their large counterparts. In-addition, information

asymmetry is very high within SME sector; on average, it is very difficult to source

information relating this is further worsened by lack of published data about their

operations. Moreover, SMEs financing has higher transaction costs, and the need for

close monitoring. All these and other factors make equity financing for SMEs a

mammoth task.

In order to improve on the above highlighted hurdles the role of the government can not

be undermined; the government should take active role in SME data collection and

publication to ensure availability of credible data on SMEs; such an exercise can not be

effectively done by the private sector as it is not profitable. Such data, augmented by

information gathered by financial institutions who lend to SMEs can eliminate

information asymmetry. There is need to review the nature of statistical data gathered on

SMEs, the need for different data, and development of institutional arrangements for

collection and dissemination of most appropriate data.

The concept of insurance can also be implemented to reduce SMEs risk; SMEs can group

together to reduce their credit exposure through pooling of risk.

In handling the challenge of high transaction costs can be resolved through securitization

process, which involves issuing of securities backed by a specific pool of homogenous

assets; it converts a pool of illiquid assets into tradeable securities. This has become an

attraction to investors in most developed economies, but uncommon in developing

32For more datails please refer to: Jae-Ha Park, Byung-Chul Lim, Jung-Han Koo, (Feb2008) “Developing

the Capital Market to Widen and Diversify SME Financing: The Korean Experience”, Korea Institute ofFinance

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economies. Hans Falkena ,etal (2001) developed a proposal for securitization for SMEs33.

Figure 2.3 below shows the proposed securitization process for SMEs.

Figure 2.3: Possible Securitization of SMEs

Borrower Protection Depositor Protection

Share-loanaccount

dividends &interest

loans interestfees/

dividends services, subordinated debtand preference

assets cash

cashprincipal

interest

interest credit commitment feeinterest enhancement and interest

creditloans enhancement

Trustee/MFRC Trustee/Rating Agencies

Source: Hans Falkena ,etal (2001), p161

33 Though this was proposed for the South African environment the proposal can be adopted in

any economic environment with minor or no alterations.

INDIVIDUALBORROWERS(Micro-small)

SMEs

RLEs

(Medium-sized)SMEs

SPONSORSProvide the initiativeand initial risks, etc

SERVICERManages portfolio, collectspayments makes a market

in own bonds andunderlying debt

COLLATERALISEDLOAN OBLIGATION

FUND

INVESTORSBuy securities, receiveprincipal and interest

payments

CREDIT ENHANCERMezzanine debt

Subordinated debt

LIQUIDITYPROVIDER

Credit liquidity facility

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The problem of higher transaction costs can be resolved by issuing a sufficient size of the

deal, structuring the deal with a number of trenches the base of potential investors with

different risk levels.

To improve on venture capital and business angel concept, there should incentives for

potential investors through-out the investment cycle; a strong property rights protection

legislation would also help to build investor assurance. Venture capitalist generally, look

for viable exit strategies; thus the success of venture capital revolves around the existence

of a diversity of exit strategies, and as the ‘good news’ spreads the more investors would

come-in; increasing available funds; thus breading a constructive environment for

investment.

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2.8 Chapter Summary

The term Small to medium scale enterprises (SMEs) includes a wide range of enterprises

and its definition defers from region-to-region and from country-to-country, and there is

no universally agreed definition of SMEs.

SMEs are generally considered as the backbone of all economies and a hub of socio-

economic development, growth, dynamism and flexibility. Due to their private

ownership, high entrepreneurial spirit, flexibility and adaptability, SMEs contribute to

sustainable growth and socio-economic development in a significant manner.

The importance of SMEs in economic development growth is mainly attributed to their

contribution to GDP, employment creation, and socio-economic development. However,

despite the wide international acceptance and acknowledgement of the key role of SMEs

in economic growth, development and sustainability, they are generally isolated in a

number of ways compared to their larger counter parts, especially in terms of rising

finance for growth and development. The only providers who almost come closer to the

rescue of SMEs are debt-based, and because of their stringent requirements, most SMEs

fail to acquire enough funding and if they manage to break the jinxt, it is usually at higher

costs (compared to their larger counter parts) an because such terms of funding are not

long term, SMEs fail to make long-term development plans, and thus are forced to

leaving for the short-to-medium term.

There is need for SMEs to move away from debt-based funding to equity-based funding,

and size of an SMEs and its stage of growth, has an impact on its financing needs, and it

is very important for entrepreneur to understand the implication of the each growth phase

in financing the SMEs

While contemporary types of funding like venture capital, business angel, asset

securitization and capital markets capital markets, have a significant impact in reducing

cost of capital and improving access, empirical evidence shows that they are still

underdeveloped in most developing countries.

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CHAPTER 3

3.0 METHODOLOGY

3.1: Introduction

The preceding chapter focused on literature review on SMEs, and generally challenges

they face in accessing finance. The review considered various literature from books,

journals, conference papers, periodicals, research papers, magazines newspapers and

government circulars on SMEs financing.

The objective of this chapter is to discuss the approach to the research project. Methods

of data collection of the study are outlined and highlighted. It describes the research

design and data collection procedures. It also includes the methods the researcher used to

identify the major constraints faced by SMEs in Zimbabwe in accessing equity-based

sources of finance.

This chapter details the various methods and procedures applied in conducting the

research study, i.e. research design, population, sample size, sampling techniques,

research techniques and data gathering tools.

3.2: Research Design

The research was conducted in the form of a non-descriptive research; a survey of SMEs

in Bulawayo will be conducted. A cross-sectional survey was used; as it deals with non-

observable data, which includes opinions, and perceptions about several issues relating

the field of study. This method was chosen because of its cost effectiveness in collection

of large quantities of data. Further; it enables gathering of data at a particular point in

time and allows for comparison and generalization of findings across the entire

population.

The researcher employed more than one method of research, so as to avoid the “method

effect”. According to Saunders (2003) using different methods of data collection

eradicates the method effect and lead to greater confidence and reliability of conclusions.

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3.3: Population and Sampling

For convenience the researcher considered SMEs situated in Bulawayo only, either

operationally (i.e. operate wholly from Bulawayo) or locationally (have offices/head-

offices in Bulawayo though operations are outside Bulawayo) to minimize costs and

reduce time. The SMEs were further divided into sub-groups based on the industry sector

and random sample was taken from each industry category. The selected SMEs are

expected to be a true representative all SMEs in Bulawayo, which can then extrapolated

to the entire country.

The researcher evaluated the sample frame in order to reduce the possibility of sampling

faults namely; incomplete frames, clusters of frames, and blank foreign element.

3.3.1 Incomplete frames.

This refers to a situation where some population units are not included; or not

represented in the sampling list.

3.3.2 Clusters of elements.

Clustering of elements occurs where units are taken or included in groups rather

than as individuals; leading to heterogeneous or semi-heterogeneous members

being lumped together.

3.3.3 Blank foreign elements.

This occurs when some elements are omitted from the original population; as such

these are not represented in the sampling framework.

To avoid the above, the SMEs were categorized into various industries. An initial

database of SMEs was collected from the Ministry of Small to Medium Scale Enterprises

which included 97 companies across all industries; however the officials indicated that

the database had been outdated; though they did not have an updated one, data base had

not been updated. The researcher had to then contact organizations, such as Zimbabwe

Miners Federations (ZMF); an association of medium-to-small scale miners (29 affiliated

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mines), Zimbabwe Youth in Mining Association (ZIYOMA); an instituted established to

assist youth miners raise capital by seeking for investors on their behalf (about 65

affiliated mines), Zimbabwe Investment Centre (ZIC); Zimbabwe’s prime investment

promotion agency, which was established, by an act of Parliament in 1993 by the

Government of Zimbabwe to promote and facilitate investment for economic growth in

Zimbabwe, Zimtrade ; the national centre for trade information committed to satisfying

its clients’ needs by providing trade information and promotion services. The main

objective of Zimtrade is to provide effective and timely trade information to all its

customers and stakeholders; both large-scale companies and SMEs.

The companies were then subdivided according to industries/activities, based

categorization obtained and modified from the various organizations indicated above

including Reserve Bank of Zimbabwe classifications. This was done so that samples can

be collected from each category (strata) to allow for greater precision and administrative

convenience; because the companies are now stratified smaller samples can then be taken

from each category. However the researcher is aware that with such a data collection

method, it may be more complex to organize and analyze data, compared to simple

random sampling and there are some companies which cannot be directly put into a

particular category; for such companies the research would use their main product

Respondents will be selected on a referral basis; i.e. those referred to by company

representatives will be given the questionnaires, though focus will be owners of the

SMEs.

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3.4 Sample size.

For any sample to be a true representative of the population it must bear some

proportional relationship to population from which it would have been drawn34.

The researcher developed an adequate size of sample and efforts were made to balance

between the dangers of having an under or over-sized sample, without over straining the

limited resources available.

According to the information received from the institutions mentioned above, the

following number of SMEs was said to be available (or registered), and the samples size

of a maximum 20% was selected as indicated below.

Table 3.1: Distribution of SMEs per Industry Category

Industry Sector No. of SMEs Sample size

Mining 65 13

Tourism and related services 3 1

Manufacturing 11 2

Wholesaling/Retailing 8 2

Clothing (manufacturing & retail) 18 3

Pharmaceuticals (manufacturing & retail) 3 1

Finance & Financial Services 3 1

Construction ( or hardware retailing) 2 1

Agriculture or Agro-related 3 1

Information Technology 5 2

Engineering 10 2

Food /Restaurants 4 2

Other 20 4

Total 155 35

34 The American Association for Public Opinion Research (2007) recognizes a minimum sample of 3.3% asbeing representative.

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3.5: Data Collection Procedures

3.5.1 Sources of data

The researcher used primary, secondary and literary data to arrive at the conclusions, a

process referred to as triangulation.

This term triangulation is used to describe a combination several methods in the same

study. Methodological triangulation involves using more than one method and may

consist of within-method or between-method strategies, it is considered as a method-

appropriate strategy of founding the credibility of qualitative analyses.

Figure 3.1 shows an example of triangulation used.

Figure 3.1 Illustration of triangulation.

Primary data: Questionnaire, Interviews

Secondary data: Literary data:Research data from institutions Journals & other reports

By combining multiple sources, and empirical materials, collected by different methods,

by different groups and in different populations; triangulation helps to overcome the

weakness or intrinsic biases and the problems that come from a single method, or single-

theory studies. Triangulation methodology is a useful tool where a rapid response is

needed, or when good data do not exist to answer a specific research question. However

its major drawback of triangulation is that; its effectiveness depends on the relevance and

Data gathered forcomparison& cross-

checking

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accuracy of the various methods on which it is based. It is behind this background that

the researcher chose this method to improve the reliability and validity of the results.

a) Primary Data

The researcher used primary data; produced and tailored precisely for the research needs.

This enabled the researcher to have direct or hands-on access to the research topic. The

following methods of primary research were used:

i. Questionnaires

A questionnaire was used to gather written responses from the targeted population

which were reviewed, tabulated and analyzed (see attached questionnaire). However,

the researcher is aware that, with a questionnaire some respondents may not submit

the forms or may return them too late and /or some questionnaires may be wrongly

completed; particularly if they feel the research will not benefit them. In addition a

questionnaire relies more on the respondents’ literacy levels; depending on their

literacy levels and their command of the language used; respondents may interpret

and answer some questions from varied angles.

However, because of its intrinsic advantages; which include, among others, lower

cost, reduction in bias, greater anonymity and accessibility in primary data gathering,

the questionnaire method was used. The questionnaire was distributed to the sample

population of all the SMEs according to industry sectors as indicated above.

However due to low literacy levels amongst most entrepreneurs, the researcher had

to administer the questionnaire personally in certain instances.

Questionnaire Pre-testing or Pilot testing

Pilot testing is done to identify and eliminate weaknesses and/or ambiguities in

the research instrument. It is an essential way of testing for validity, reliability and

practicability of the instrument.

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A draft questionnaire as prepared and distributed to ten (10) SMEs at random

using computer generated random numbers. After this pilot study, some questions

were rephrased, whilst some were omitted altogether to ensure they communicate

and gather the intended data, are correctly decoded by the respondents.

Questionnaire Administration

The corrected copy of the questionnaire administered to selected SMEs as

indicated above to randomly selected SMEs from each industry category.

Emphasis was on issuing it to business owners or top management as they were

considered to be in a better position to provide the required data.

To improve on response rate the researcher personally delivered and collected the

questionnaires.

ii. Interviews

Given the limited period of time in which the research was conducted it was difficult

or rather impossible to conduct structured face to face interviews, instead semi-

structured interviews with representatives from organizations, such as ZMF,

ZIYOMA, ZimTrade, ZIC and other relevant authorities will be conducted including

SMEs were conducted. This was done in order to allow for interviewees to express

themselves freely, expand answers and change the theme of the interview by

including factors that they thought were important. The researcher however kept a

guard against having the interviewee digression from the main study to topics of

interest to them.

These interviews were designed to compliment the questionnaires.

b) Secondary and Literary Data

The researcher used reports published by research institutions and organizations that deal

with SME financing such as ZIYOMA, ZIC and others. Though historical in nature, such

data are valuable as they reflect the past situation and help to identify gaps that have been

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covered from the time they were done to date, and assist in identifying perennial

problems faced by SMEs.

The researcher also used his general knowledge of Zimbabwean economic and regulatory

environment.

3.5.2: Data Analysis

Qualitative data analysis deals with detection, defining, categorizing, theorizing,

explaining, exploring and mapping of data to explore its meaning and interpret it into an

easily understandable way. The researcher used descriptive statistical analytic methods,

tables and graphs to infer the meaning of data and come-up with conclusions; more

specifically Statistical Package for Social Sciences (SPSS) was used in analyzing the

data.

3.5.3: Data Interpretation

The respondent’s views were categorized on a question by question basis, for ease of

interpretation and clarity on analysis of responses.

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3.6 Chapter Summary

The study was conducted through a survey of thirty-three SMEs in Bulawayo; across all

industries. The research used stratified random sampling technique to ensure a fair

representation of all sectors, using a questionnaire composed of both closed-ended and

open-ended questions. For adequate data gathering triangulation will used; to gather data

through primary, secondary and literary sources.

The next chapter will deal with the analysis of data gathered; in line with objectives and

hypothesis indicated in chapter two, to allow for meaningful conclusions and

observations.

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CHAPTER 4

4.0 DATA ANALYSIS AND PRESENTATION

4.1 Introduction

This chapter focuses on data analysis and presentation based on information gathered

during the research, mainly from the questionnaire that was distributed to a sample

representative of SMEs. The questionnaire was analyzed using SPSS, and accordingly it

was coded to ensure ease of classification of responses, analysis and presentation of data.

Since the data was collected from a sample of SMEs; and not the entire population, it is

therefore subject to sampling errors and tolerances, i.e. some differences may not be

statistically significant.

The study sought to provide answers to the following main questions;

Do SMEs understand/appreciate the various kinds of non-debt based sources of

finance that they can use?

What constraints, if any, do SMEs confront in accessing equity-based sources of

finance in Zimbabwe?

What developments or improvements need to be made in the Zimbabwean

economic environment to improve SMEs access to equity-based financing?

4.2 Hypothesis

The research study was based on the hypothesis that: SMEs in Zimbabwe do not have

access to equity based sources of finance; the current operating environment has no

provision for equity sources of finance.

The null hypothesis is that: Zimababwean SMEs have easy access to equity based sources

of capital and the operating environment supports or promotes equity based financing.

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4.3 Secondary and Literary data analysis

Research data on SME financing has been mainly on non-equity based sources of

finance; accessing bank loans, and/or government grants, there are no documented

research data on equity financing for SME; this shows that this area is still

underdeveloped in Zimbabwe. Organizations such as SME Development Centre assert to

have conducted research on venture capital but could not avail the information to

“outsiders”.

Despite the low development of the field of equity-financing in the country, the mining

industry is however different; the two quasi-government institutions (ZMF& ZIYOMA

are dedicated mainly at assisting small-scale miners to access all forms of finance (debt &

equity finance). The two organizations are currently making arrangements with investors

from around the SADC region; mainly the Republic of South Africa, for possible

investment in small scale mines. However, they face one major challenge, that is, lack of

appreciation by small scale miners of the benefits of equity-based sources of finance.

Most miners prefer to ‘go solo’ so that they will not be forced to share their profit(s) with

anyone, without realizing that by so doing they are derailing their development. Most

miners prefer short-term financing; this is partly attributed to their operational structure;

in that most small-scale miners do not operate registered companies, the mines are

registered in individuals’ names thus making it very difficult for them to access long-term

finance. The most common phenomenon amongst small-scale miners are joint ventures

and partnerships between/among the miners themselves; to take advantage of economies

of scale.

There is a need to come up with credible research data on SMEs and such data research

should be publicized; in order to reduce information asymmetry. Database on SMEs is

not updated frequently, most SMEs in the databases are no longer existent and some

vibrant SMEs are excluded from the database.

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4.4 Questionnaire analysis

The main objectives of the questionnaire were as follows:

Identify methods of financing currently used by respondents.

Identify factors considered by SMEs in selecting a method of additional financing

Identify challenges faced by SMEs accessing and/or better accessing equity

finance, and what they think should be done to enable them access capital

Finally the questionnaire assesses the respondents’ attitude towards equity

financing.

4.5 Data Management and Analysis.

As indicated above, the questionnaires were administered personally by the researcher

mainly due to low literacy levels amongst some entrepreneurs (however some were left to

fill on their own; as they were considered to be literate)

The questionnaires were distributed as indicated below; and a total response rate of 80%

was attained.

Table 4.1 Questionnaire Response Rate

Industry Sector Population Samplesize

Response Response rate

Mining 65 13 11 84.61%

Tourism and related services 3 1 1 100.00%

Manufacturing 11 2 1 50.00%

Wholesaling/Retailing 8 2 2 100.00%

Clothing (manufacturing & retail) 18 3 3 100.00%

Pharmaceuticals (manufacturing & retail) 3 1 0 0.00%

Finance & Financial Services 3 1 1 100.00%

Construction (or hardware retailing) 2 1 1 100.00%

Agriculture or Agro-related 3 1 1 100.00%

Information Technology 5 2 2 100.00%

Engineering 10 2 1 50.00%

Food /Restaurants 4 2 1 50.00%

Other 20 4 3 50.00%

Total 155 35 28 80.00%

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A high response rate was achieved in industries with fewer registered SMEs as the

researcher had more time with the respondents; however the response rate for the

Pharmaceutical industry was zero; the questionnaire was not returned and efforts to make

a follow-up were fruitless.

4.6 Reliability Analysis - Scale (Alpha)

Before the data was analyzed it was subjected to reliability analysis scale using SPSS,

and the following indicators were recorded:

Number of cases: 20

Number of items: 31

Alpha: 0.6568.

Thus, the data can be considered to be statistical reliable, the lower Alpha value can also

be attributed to the fact that the researcher had to personally explain questions to

respondents, thus indirectly introducing researcher bias, as generally all questions were

answered from almost the same perspective, however the researcher made sure that

respondents were free to answer as they wished and further explanation was provided

only when solicited for.

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4.7 Analysis of Research Findings

4.7.1 Distribution of respondents

Generally most SMEs in the sample were Small Enterprises; that is, employ 5 to 50

employees as shown in the categorization below;

Figure 4.1 Distribution of respondent SMEs according to number of employees

1 to 4 5 to 50 51 and above

The above distribution may suggest that research findings may be more applicable to

small enterprises, than micro-and medium-enterprises, though they can be extrapolated

across all SME categorizes, however this may also suggest that small enterprises

comprise the bulk of SMEs, in the population under study.

4.7.2 External/additional funding currently being used

None of the surveyed SME are currently using equity finance, there is an equal

distribution (7.41%) of SMEs who use leasing/hire purchase, government grants and

other methods of financing, as illustrated below;

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Figure 4.2 External Funding currently being use by respondents.

Leasing/Hire purchase Loan from owners/directors Loan from family/friends

Government grant Other

The pie chart above indicates that most of the SMEs surveyed are currently using loans

from family/friends and/or loans from owners/directors to finance their businesses,

40.37% use loans for from owners/directors, whilst 37.04% use loans from

family/friends. Further analysis reveals that 63.7% of SMEs who use loans from

owners/directors also use loans from family/friends. This implies that most SMEs rely

heavily on the liquidity of their owners/directors and/or their acquaintances for financing

their activities. According to Hans Falkena (2001), this would suggest that most

respondents are traditional type of SMEs and are still in start-up phase.

4.7.3 Financing history

4.7.3.1 Have you ever applied for additional funding in the past five years

In response to the above question, 70% of the SMEs indicated that they applied for

additional funding in the past five years; of these 90% applied for bank

loan/overdraft/mortgage as indicated below;

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Figure 4.3 Bar graph on type of financing applied for

0

2

4

6

8

10

12

14

16

18

Bank loan Lesaing/hire purchase Government grant

4.7.3.2 Was the application approved (reason for disapproval)

About 36% of the SMEs that applied for bank loan/overdraft/mortgage were successful,

and the rest were not, the most common reasons for none-approval was lack of traceable

credit history and not being in business for too long. Further probing, outside the

questionnaire, revealed that most of the SMEs who received the loan/overdraft/mortgage

had applied during Zimbabwean dollar era.

Twenty-three percent of the SMEs who indicated that their application was not approved

because of lack of traceable credit history also indicated that their application was

disapproved because the economic climate was not conducive. On a similar note, 32% of

SMEs who indicated that their application was disapproved due to lack of credit history

also included the economic climate was not conducive.

Generally SMEs expressed dissatisfaction on the requirements for accessing bank credit;

especially information on trade/credit history.

From the above it can be concluded that most SMEs have been relying on short-term

financing and they do not keep proper records of their trade transactions.

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4.7.4 Factors considered when selecting method of financing

4.7.4.1 Cost of application or processing (transaction costs)

Generally, the cost of application or processing of loan is not considered as a major factor

when selecting a method of funding, 37.9% of respondents indicated that they do not

consider the cost at all; whilst 24.1% indicated that the cost is of least importance when

selecting a method of funding.

4.7.4.2 Security/collateral required

Amount of security/collateral required to obtain the funding is generally valued by most

SMEs; 51.7% of the surveyed SMEs consider this as a most important factor, whilst

33.2% consider it as important. This can also be attributed to the fact that since most

SMEs have very little or few assets; it becomes difficult for them to obtain funding linked

their resource base; therefore they consider this as an important factor when selecting a

method finance.

4.7.4.3 Impact on company capital structure

Fifty-nine percent of the SMEs surveyed consider impact on company’s capital structure

as one of the least important factors; however 34% of the SMEs consider this as an

important factor in selecting a method of funding.

4.7.4.4 Amount of disclosure required

The majority of SMEs consider amount of disclosures required as an important factor

when selecting a method of financing, this is indicated by 82.7% of the respondents who

indicated that this is an important factor. It would appear; most SMEs still want to keep

their business very secretive and would not want to disclose certain information about

their business or operations to outsiders; including prospective investors.

4.7.4.5 Tax benefits to your company

SMEs do not value tax benefits that may accrue to them because of using a certain

method of financing, 65.5% indicate that they consider tax benefits as a least important

factor, whilst 15% indicated that they do not consider tax benefits at all.

4.7.4.6 Accessibility

Most SMEs consider accessibility as a most important factor when selecting a method of

financing; 65.5% indicated that they consider this as a most important factor, this is also

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substantiated by the fact that none of the surveyed indicated that they do not consider

accessibility at all.

4.7.4.7 Time taken to receive capital

Sixty-nine percent of the respondents consider time taken to receive capital as a most

important factor when selecting a method of funding, and 31% percent consider this as an

important factor.

4.7.4.8 Extent of funding/capital to be received

SMEs value the extent of funding/capital to be received; three quarters of the SMEs

surveyed consider this as a most important factor.

4.7.4.9 Repayment terms

Eighty-six of the sample population indicated that repayment terms is an important factor

they consider when choosing a method of financing.

4.7.4.10 Interest rate(or cost)

Generally, SMEs appear not to be willing to pay high interest rates; 75.9% indicate that

they consider interest or cost as an important factor when selecting a method to use for

financing.

4.7.4.11 Amount of control over business operations

In line with the general notion that most SMEs do not want to give-up ownership-off

their businesses; 51.7% indicated that, they consider amount of control over business

operations as an important factor, this refers to both amount control that the SMEs is

entitled too, and that which the investor may want to take over. Generally, though SMEs

want additional funding they do not want to give too much control to an investor.

4.7.4.12 Risk involved

Fifty-five percent of the respondent rated this is an important factor when selecting a

method of financing.

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4.7.5 Interrelationship of factors considered when selecting method of financing

4.7.5.1 Cost of application or processing (transaction costs) vs. Extent of

funding/capital to be received

Table 4.2 Correlation Summary A1Cost of application orprocessing (transaction costs)

Extent of funding/capitalto be received

Cost of applicationor processing(transaction costs)

Pearson Correlation 1.000 0.827**Sig. (2-tailed) . 0.000N 28 28

Extent offunding/capital tobe received

Pearson Correlation 0.827** 1.000Sig. (2-tailed) 0.000 .N 28 28

** Correlation is significant at the 0.01 level (2-tailed).

From the tabulation above we can be conclude, at 99% level of confidence, that as the

amount of funding to be received increases SMEs are willing to pay for the additional

cost of funding. That is, all factors constant, SMEs prefer to pay more for higher capital

disbursement than lower. This is in line with the general understanding as it does not

make economic sense to pay high transaction costs for lower funding.

The strength of the relationship between the two factors is further by the magnitude of the

R-square, as shown in the summary below:

Table 4.3 Regression Model Summary A1

Model R R Square Adjusted R Square Std. Error of the Estimate1 0.827 0.684 0.672 0.3834

a Predictors: (Constant), Extent of funding/capital to be received

The R-square of 0.684 indicates a strong positive relationship between the two factors; a

change in any of the factor would lead to a variation on the actions of the respondents.

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4.7.5.2 . Cost of application or processing (transaction costs) vs. Risk involved

Table 4.4 Correlation Summary A2Cost of application orprocessing (transaction costs)

Risk involved

Cost ofapplication orprocessing(transaction costs)

Pearson Correlation 1.000 -0.387Sig. (2-tailed) . 0.042

N 28 28

Risk involved Pearson Correlation -0.387 1.000Sig. (2-tailed) 0.042 .

N 28 28* Correlation is significant at the 0.05 level (2-tailed).

There is a negative correlation between cost of application or processing (transaction

costs) and risk involved, this implies that as the risk involved increases, the importance of

cost of application is over-shadowed. Based on the findings, we can conclude with 95%

confidence that as risk involved in any method of financing increases SMEs would prefer

the cost of financing to decrease or relative lower, compared to low risk methods of

financing.

4.7.5.3 Impact on company's capital structure vs. Time taken to receive capital

Table 4.5 Correlation Summary A3Impact on company's capitalstructure

Time taken to receivecapital

Impact on company'scapital structure

Pearson Correlation 1.000 0.500**Sig. (2-tailed) . 0.007N 28 28

Time taken to receivecapital

Pearson Correlation 0.500** 1.000Sig. (2-tailed) 0.007 .N 28 28** Correlation is significant at the 0.01 level (2-tailed).

From the table above it can be seen that there is a positive correlation between, the

method of financing’s impact on company capital structure and time taken to receive

capital. SMEs are willing to sacrifice their financial structure if they are guaranteed of a

quick disbursement of funds. Based on the data gathered during the survey, we are 99%

confident that as time taken to receive capital becomes favorable, SMEs are willing to

compromise on their capital structure, i.e. they value quick disbursement of finance, than

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impact on capital structure. Thus for equity investors to appeal to SMEs; they should be

able to provide funds at the shortest possible time.

4.7.6 Methods of financing used in company’s history

Equity-based financing is unknown to most SMEs in Zimbabwe; none of the respondents

have ever used any equity-based method of financing, in line with findings on 4.7.2

above, most SMEs rely on funds from owners/directors and family/friends. This can also

be linked to the fact that they do not want to disclose much about their operations thus,

they prefer methods that do not require detailed disclosure.

4.7.7 Shares/ownership/investment in other companies

All respondents indicated their companies do not have shares/ownership/investment in

other companies.

4.7.8 Reason for not using equity finance

Twenty percent of the respondents left this question blank (these are respondents who

answered on their own without assistance from the researcher). Of those who responded,

there was a divided opinion on this point, 34% of the respondents indicated that there are

no equity investors in the country, 24% responded that their business does not require

equity, 17% assert that equity is only used when other methods of financing have failed,

and 10% had various reason, including, among others, that it is only suitable for big

multinational companies, and it is very complicated for SMEs.

4.7.9 Significance of factors in preventing/assisting to better access equity finance.

4.7.9.1 Limited information to locate/identify equity investors

Respondents were not in total agreement on the significance of limited information to

locate/identify equity investors in hindering access to equity finance, 21.4% indicated

that this was very significant, 35.7% indicated it was significant and 39.2% indicated it

was some-what significant. However, despite the seemingly non-agreement amongst

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respondents, one element comes out clearly, i.e. the significance of this factor can not be

ignored if we are to improve SMEs’ access to equity finance.

4.7.9.2 Unreliable data about equity-investors

Sixty-four percent of the respondent SMEs consider this as a very significant factor in

preventing them access or better access equity finance.

4.7.9.3 Difficulties in identifying the right investors

Generally SMEs, believe challenges of identifying the right investors have an impact on

preventing them access equity finance; 35.7% consider this is a significant element and

46.4% believe it is very significant.

4.7.9.4 Inability to contact investors

Respondents indicated that this was a somewhat significant element; about 60% rated this

as some-what significant.

4.7.9.5 Unavailability of equity investors

In line with the four factors above, SMEs indicated that this is a very significant factor in

preventing them access or better access equity finance. It can be deduced that the reason

why SMEs generally suggest that the above factors are significant can be attributed to the

assertion that there are very few or no equity investors (at least from the SMEs’ view

point) in the country.

4.7.9.6 Lack of managerial expertise to deal with equity financing

There was a divided opinion amongst SMEs on the importance of this factor; 39.0%

indicate that lack of managerial expertise in handling equity financing is some-what

significant, 35.7%, consider this as significant and 21.4% indicated that it is very

significant. However, the results have a positive inclination towards the significance of

this element in hindering access to equity finance.

4.7.9.7 Lack of knowledge on how to raise equity finance

About 17.9% think this is some-what significant, 21.4% believe it is very significant, and

57.4% believe it is significant. It would appear SMEs’ views vary widely on factors that

point directly to them. This is indicated by the evidence that in this factor as well as the

one preceding it, SMEs’ opinions vary widely than in other responses.

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4.7.9.8 Lack of government support to companies who what to raise equity finance

SMEs almost unanimously agreed that lack of government support to companies who

want raise equity finance is a significant factor in preventing SMEs better access equity

finance.

4.7.9.9 Too much procedures when raising equity finance

About 40% of respondents indicated that they can not answer this question as they are not

aware of any procedures currently in place. Of the 60% who answered, 71% indicated

that this is not a significant element in preventing SMEs’ access to equity finance.

4.7.9.10 Inadequate property rights protection for equity investors

Respondents generally unanimously agreed that this a significant factor in preventing

them to better access equity finance, 46.4% rated this as a significant factor and 25.3%

indicated that it is very significant.

4.7.9.11 High risk level of SMEs

Again, there was a divided opinion on the significance of this element, 21.4% indicated

that this is a very significant element, whilst 46.3% indicated it is significant and 17.8%

suggest it is some-what significant. Similarly; this wide spread of SMEs’ views confirms

the idea that they generally have difficulties in rating factors that are under their control.

4.7.9.12 Unfavorable rules and regulations:

Fifty percent rated this as a significant factor, the other 50% was divided equally between

very significant and some-what significant.

4.7.9.13 Macro economic instability

SMEs suggest that economic stability has an impact on enabling them access equity

finance, 71.4% indicated that this was very significant whilst 25% think this is a

significant element.

4.7.9.14 Uncertainty of economic policy

SMEs almost agreed unanimously that uncertainty about the economic policy has an

impact on opening equity markets for them, 83.7% rated this as a very significant factor.

4.7.9.15 Political instability

Fifty-eight percent of the respondents indicated that this is a significant element in

preventing them access or better access equity finance.

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4.7.10 Analysis of the significance of factors in preventing/assisting to better access

equity finance.

4.7.10.1 Difficulties in identifying right investors vs. Inability to contact investors

Table 4.6 Correlation Summary B1

Difficulties inidentifying rightinvestors

Inability to contactinvestors

Difficulties inidentifying rightinvestors

Pearson Correlation 1.000 0.611**Sig. (2-tailed) . 0.001N 28 28

Inability to contactinvestors

Pearson Correlation 0.611** 1.000Sig. (2-tailed) 0.001 .N 28 28

** Correlation is significant at the 0.01 level (2-tailed).

From the above table of statistical summary we can conclude, at 99% confidence level,

that difficulties in identifying right investors, lead to inability to contact investors.

4.7.10.2 Difficulties in identifying right investors vs. Unavailability of equity

investors

Table 4.7 Correlation Summary B2Difficulties inidentifying rightinvestors

Unavailability ofequity investors

Difficulties inidentifying rightinvestors

Pearson Correlation 1.000 0.777**Sig. (2-tailed) . 0.000

N 28 28Unavailability ofequity investors

Pearson Correlation 0.777** 1.000Sig. (2-tailed) 0.000 .

N 28 28

** Correlation is significant at the 0.01 level (2-tailed).

In line with intuitional evidence; there is a strong positive correlation between difficulties

in identifying right investors and unavailability of equity investors; if there are no or few

investors it automatically becomes very difficulty to identify them. Therefore it implies,

that, for SME equity finance to be a success efforts should also be directed at increasing

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the availability of investors; there should be a strong promotion and positive incentive for

equity investors.

4.7.10.3 Difficulties in identifying right investors vs. Lack of managerial expertise

to deal with equity financing

Table 4.8 Correlation Summary B3Difficulties inidentifying rightinvestors

Lack of managerialexpertise to deal withequity financing

Difficulties inidentifying rightinvestors

Pearson Correlation 1.000 0.610Sig. (2-tailed) . 0.001N 28 28

Lack of managerialexpertise to deal withequity financing

Pearson Correlation 0.610 1.000Sig. (2-tailed) 0.001 .N 28 28

** Correlation is significant at the 0.01 level (2-tailed).

It is interesting to note that the results of the study confirm the idea that lack of

managerial expertise in dealing with equity financing is positively correlated to

difficulties in identifying the right investors. If managers (or owners) are not aware of

handling equity finance or its importance they will generally shun it away, or find it very

difficult to attract the right investors. Based on the findings from this study, we conclude

with 99% confidence that improving managerial expertise on equity finance will reduce

challenges of identifying the right investors. Thus; SMEs need to be trained on effective

handling of or dealing with equity financing; this will not only increase their awareness

and expertise, but will effectively reduce the difficulties of identifying the right investors.

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4.7.10.4 Unavailability of equity investors vs. Lack of knowledge on how to raise

equity finance

Table 4.9 Correlation Summary B4Unavailability ofequity investors

Lack of knowledgeon how to raise equityfinance

Unavailability ofequity investors

Pearson Correlation 1.000 0.648**Sig. (2-tailed) . 0.000N 28 28

Lack of knowledgeon how to raise equityfinance

Pearson Correlation 0.648** 1.000Sig. (2-tailed) 0.000 .N 28 28

** Correlation is significant at the 0.01 level (2-tailed).

The study reveals that there is a strong correlation between unavailability of equity

investors and lack of knowledge on how to raise equity finance. This can be interpreted to

imply that, what can be interpreted as unavailability of investors can not be or should

never be concluded to mean that there are no investors in the country. One should probe

further on SMEs’ knowledge and ability on how to raise equity finance; i.e. if SMEs are

unknowledgeable they fail to locate equity investors and conclude that there are no

investors in the country. Based on the data gathered during the study we can conclude, at

99% confidence level, that there is a positive correlation between lack of knowledge on

how to raise equity finance and availability of investors.

In the same view, this suggests that training of SMEs on equity financing should never be

underestimated.

Table 4.10 Regression Model Summary B1Model R R Square Adjusted R

SquareStd. Error of theEstimate

1 0.744 0.554 0.518 0.5863a Predictors: (Constant), Lack of knowledge on how to raise equity finance, High risk level of SMEs

As highlighted above, there is strong correlation, the way SMEs view factors that appoint

directly to them, as indicated by correlation co-efficient (R) of 0.744, and an R-square of

0.554.

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4.7.11 Need for additional funding

The majority of SMEs require additional funding to meet their working capital & cash

flow constraints, and to update technology and equipment as shown in the pie chart

below:

Figure 4.4 Need for additional financing

Finance Research & development Update technology and equipment

Working capital & Cash contraints

4.7.12 Assistance received from Government

About 52% of the SMEs surveyed indicated that they have never received any form of

government support; however of those that indicated that they received government

support, the following forms of support were prominent:

Rental controls

Licenses and other levy/fees reduction

Training programs on SMEs start-up.

Generally SMEs think the government assistance was useful.

4.7.13 View of current government policies towards SMEs

Generally SMEs do not see current government interventions as supportive to SMEs,

most of them think they are biased towards large corporations and providers of finance,

as indicated in the chart below;

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Figure 4.5 View of government policies towards SMEs

Supportive to SMEs Favor large Companies

Favor banks & other suppliers of finance Other

The result above would imply that though the above forms of assistance were received

and welcome; these are not the real needs of assistance the SMEs were anticipating from

the government. It would appear that, government initiatives are not driven by the needs

of the SMEs.

4.7.14 Action to adopted to assist SMEs

Forty-five percent of the SMEs under survey believe all the factors listed should be

adopted in order to assist SMEs access equity finance, whereas 56.3% advocate for

provision of guarantees to SMEs when borrowing and 54.3% prefer special financial

institutions dedicated to SMEs.

4.7.15 Attitude towards equity finance

4.7.15.1 Do you think equity can assist your firm

Generally, SMEs do not believe equity finance can assist them, this is indicated by the

51.8% who indicated that equity can not assist them.

4.7.15.2 Company’s equity objective

Of the 48.2% who indicated that equity can be of assistance to their entities only 78%

indicated that they are aspiring to use equity, implying that about 62.4% expressed no

need for equity financing.

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4.7.16 Growth objective

The majority of SMEs are aiming for moderate growth; about 48% indicated that they are

focusing at moderate growth, 18% are aiming at substantial growth, whilst the other 34%

indicated that they want to remain the same. About 77% of SMEs who are focusing at

substantial growth also indicated they desire to be raise equity capital. The correlation

table below indicates that we can conclude with 95% confidence that, an SME’s growth

objective is related to its attitude towards equity finance; i.e. a high growth aspiring

SMEs will be eager to raise equity finance.

Table 4.11 Correlation Summary C1Consideration of equityfinance

Growth objective

Consideration ofequity finance

Pearson Correlation 1.000 0.421*Sig. (1-tailed) . 0.013N 0.28 28

Growth objective Pearson Correlation 0.421* 1.000Sig. (1-tailed) 0.013 .N 28 28

* Correlation is significant at the 0.05 level (1-tailed).

The above conclusion would imply that the fact that most SMEs indicated no immediate

need to use equity finance should not scare away investors. The fact that the majority are

aiming at moderate and substantial growth, is a solid evidence to suggest future need of

equity financing by SMEs; based on the results of this study.

4.7.17 Opinion of action to taken to improve access to equity finance

The following ideas were highlighted.

Educate SMEs on equity finance

Do not rush the process

Relax requirements for past financial statements

Improve access to guarantees

Transparency on government grants

Relaxation of some regulations or requirements

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4.8 Testing for hypothesis

The hypothesis for the study can be re-stated as follows:

Hypothesis: SMEs in Zimbabwe do not have access to equity based sources of finance.

Sub-hypothesis: the current operating environment has no provision for equity sources of

finance.

Alternative Hypothesis: SMEs in Zimababwean have easy access to equity based sources

of finace

Sub-alternative Hypothesis: the current operating environment supports or promotes

equity based financing.

Based on above data and analysis we reject the null hypothesis, and conclude that

SMEs in Zimbabwe do not have access to equity based sources of finance and the

current operating environment has no provision for equity sources of finance; there

are a number of significant constraints (from the SMEs view point) that prevent

access to equity finance.

It therefore follows that a lot still needs to be done to improve SMEs access to equity

finance. The following chapter will focus on conclusions and recommendations on what

needs to be done to improve SMEs access to equity finance.

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4.9 Chapter Summary

The study revealed that, SMEs face a number of challenges in raising equity finance, and

most of them rely mainly on loans from owners/directors and/or from family/friends.

SMEs are generally, not aware of the various sources of equity that they can use. However,

it is quite evident that SMEs in Zimbabwe do not have access to equity based sources of

finance due to various reasons, which include, inter alia; under development of this form of

financing in the country, limited knowledge on and recognition of equity financing and

poor perceptions about equity investment amongst SMEs.

SMEs are in consensus on the significance of prominent factors that prevent them better

access equity finance. A lot needs to be done to open-up equity finance access for SMEs

and most of them indicated that current government schemes and policies are not

supportive to SMEs.

The next chapter develops conclusions and recommendations based on details gathered

from this and previous sections and identify future areas of study on access to finance for

SMEs.

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CHAPTER 5

5.0 CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter uses the key issues and findings of the study, to derive conclusions and

recommendations on improving SMEs’ access to equity-based sources of finance.

The research gathered perceptions, attitudes and views of SMEs’ on various issues

relating to equity finance. Conclusions and recommendations are based on key

findings as discussed in the preceding chapter and are expected to be applicable to

all SMEs in the population; with the possibility of being extrapolated to SMEs

nation wide and even other countries where SMEs may be operating under the same

or similar conditions.

The main objective of this research was to identify the major constraints/challenges

faced by Zimbabwean SMEs (Bulawayo based) in accessing equity-based sources

of finance; however the following sub-objectives were also pursued:

To access the appreciation of SMEs on the various methods of equity-based

sources of finance that they can employ.

To provide recommendations to SMEs on how best they can access equity-

based finance based on international best practice.

To present relevant findings and recommendations to authorities and policy

makers on how equity-based sources of finance can be competitively availed to

SMEs in Zimbabwe.

To make any other recommendation as may be found necessary

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5.2 Conclusions

The research was expected to provide answers to the following questions:

Do SMEs understand the various kinds of non-debt based sources of finance

they can use?

What constraints, if any, do SMEs confront in accessing equity-based sources of

finance?

What developments or improvements need to be made in the Zimbabwean

economic environment to improve SMEs access to equity-based finance?

What lessons can be drawn form international best practice on the provision of

equity-based finance for SMEs in Zimbabwe?

Based on the evidence gathered through the research study, the following

conclusions can be made:

1. SMEs do not have (or at least have limited) access to non-debt sources of

finance.

2. SMEs face a number of challenges in accessing equity finance, chief among

them being informational problems relating to equity financing namely;

a. Limited knowledge on and recognition of equity financing, leading to

poor perceptions of equity financing amongst SMEs.

b. Limited information on location/identification of equity investors

c. Under development of this form of financing in the country

d. Unfavorable rules and regulations to open way for equity investors

e. In adequate property rights protection for equity investors

f. Macro-economic and political instability; thus preventing potential

investors.

3. Current efforts by government/state sponsored agencies in development

and/or provision of finance to SMEs are in adequate, in terms of scope,

applicability, policy and regulation.

4. High growth-minded SMEs aspire to use equity financing

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5.3 Recommendations

SMEs generally have a strong inclination towards debt finance; due to several

reasons. However, for equity financing to succeed, efforts should be targeted at de-

orienting SMEs from debt-based sources of finance to develop a liking for equity

based financing. In order to develop this among SMEs and stimulate an economic

wide entrepreneurial spirit; and ultimately improve the business environment for

SMEs, it is vital to support the creation of a local equity finance culture in all its

forms (i.e. venture capitalists, business angel, private placement etc) and from all

angles (i.e. from the investors, government and SMEs themselves). It therefore

follows that; both the private and public sector have an important role to play. The

outline below summaries the role of each party based on the findings of this study.

5.3.1 The role of government and other policy makers

The major challenge faced by the government is on development and

implementation of non-discriminatory yet support policies to enable SMEs

access equity finance.

To implement this, the government should first focus on stabilizing the

macroeconomic environment and improving information asymmetry; these

two are the key pre-requisites for financial markets success. A stable

macroeconomic environment; supported by a comprehensive regulatory

system, is a strong foundation for a highly credible financial system and

conducive for SMEs growth and development. The current macroeconomic

imbalances increase the cost of doing business, not only for SMEs but for all

economic participants. Once macroeconomic stability is attained, the

government can then focus on reducing distortions within the market. An

ideal economic environment is one that encourages and rewards innovation,

growth and development; which is currently lacking. The researcher

however acknowledges current government efforts on creating

macroeconomic stability, such as the Short Term Economic Recovery

Program (STERP), however a lot still needs to done on improving liquidity

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levels and development of a long-term economic strategic direction . As

things are now, economic players are highly uncertain on the direction of the

economy, this affects a lot of long-term investment decisions and it has to be

addressed in order to encourage investment inflow.

In line with above, the government should therefore establish institutionary

and regulatory support to:

i. Gather and disseminate information on regulations, taxation,

standards and general views of SMEs and incorporate these in policy

and regulatory framework development.

ii. Foster and develop stronger, more effective representation of SMEs'

interests at national level. Current efforts by Small Enterprise

Development Corporation (SEDCO) and the Ministry of SMEs have

not yielded expected results; these institutions need to change their

approach towards SMEs; their roles, focus and objectives, to ensure

they serve the real needs of SMEs, in services they provide to both

SMEs and potential investors. Undoubtedly, this can only be through

thorough and purposeful research on SMEs, and wide publication of

such research studies.

iii. Assist SMEs in identifying equity investors and provide incentives

for such investors. Such institutions or regulations should; facilitate

communication and provide links with equity investors both within

and outside the country to promote development and growth of SME

equity investment.

iv. Enact legislation to provide or encourage attractive exit packages for

equity investors.

v. Assist SMEs in solving technological problems, impart ideas and to

search for know-how and promote innovation, by improving online

access for SMEs for successful e-business models and top-class

small business support. This will also reduce information

asymmetries that currently exist.

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vi. Advise SMEs on business planning, marketing, accountancy, and

other business issues. The researcher acknowledges the existence of

institutions such as Zimtrade, Zimbabwe Investment Centre (ZIC),

and various ministries and organizations; however their efforts have

fallen short in terms of tapping the unique needs of SMEs, and

matching good practice the world over.

In addition, the government should continue and intensify current support to

SMEs, such as grant scheme, special funds (though proper management

should be developed and implemented to avoid moral hazard, adverse

selection, and other abuses).

There is need to improve or intensify current research on SMEs, such

research should be publicized; it is quite surprising that research information

from organizations such as SEDCO and the Ministry of SMEs could not be

availed; this leaves one to wonder whether such research is undertaken in

the first place. SMEs database should be timely updated and availed for

public consumption. If these are widely publicized most SMEs will benefit

and they will all seek to be included in the databases, the reason why most

of them are not even interested in being registered is most likely because

they do not see any incentive of being registered in these databases.

Improved public relations exercise would enhance SMEs’ appreciation of

equity finance. The main role of the government is to develop an

encouraging environment for SMEs growth in all aspects.

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5.3.2 Role of SMEs

SMEs should invest in staff development to ensure their staff are

acquainted to and are abreast with latest developments in the

economic environment.

Also, efforts should be directed at increasing literacy levels of

owners as this has negative effects on their operations

SMEs should seek to learn how to access various sources of equity

finance and understand their pros and cons

Investment in technology should not be undermined as a tool for

effective communication.

SMEs should lobby for development of stronger and more effective

representation of their interests at sectorial, regional and national

level

5.3.3 Role of Private sector

SMEs do not exist in isolation; they are integrated into an economic supply

chain, through various linkages and thus have diverse roles; in this regard

the role of other private sector market players cannot be overlooked.

The private sector should support the development and growth of equity

finance by facilitating e-based communication, so that investors and SMEs

can meet online thus, greatly reducing traveling cost and time.

Banks and other financial institutions are by de-facto the major

intermediaries in any financial matters, thus they should play an active role

in educating both SMEs and investors and facilitate, contact between both

parties.

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5.4 Drawbacks of the study

Due to limited time and resource constraints the researcher could not conduct a

survey of SMEs in the country, which could have provided more insight into the

extent, impact and significance of the constraints faced by SMEs in accessing

equity finance and the conclusions and recommendations thereof. In addition, the

view of possible suppliers of finance could not be obtained; the study focused on

SMEs only. Overall the issue of equity finance is still underdeveloped in the

country (if not the SADC region), and thus restricting inference on constraints faced

by SMEs, the role of and access to equity finance for SMEs, as they may not even

be aware of what they really require or the extent of challenges perceived.

5.5 Suggestions for further study

Further study on this topic should focus at surveying SMEs nation wide, and also

gather data from economic players, such as banks, stock brokers, potential

investors, etc, to establish an economic-wide point of view; which could not be

done within the research specification limits. For SMEs equity financing to be of

value, it should not only be viewed from the SMEs point of view, but from an

economic wide perspective as SMEs do not exist in isolation; they are integrated

into the economic supply chain with other economic participants.

However, the findings and recommendations are still significant to regulators,

policy makers and all economic participants as they present a fair view of SMEs.

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5.6 Chapter Summary

Generally, in Zimbabwe equity financing is still an unknown fiscal concept,

however, SMEs are willing to adopt equity financing; though some still require

enlightenment on this concept and assistance in location of equity investors and

improved communication on assessing equity finance.

SMEs’ perceptions of equity investment are still very poor and thus proper public

relations exercise is needed to enhance the profile of this sector.

The government has a major challenge of development and implementation of non-

discriminatory regulations and policies, to enable SMEs access equity finance

without negatively affecting economic development and growth.

However more research needs to be done to establish the view of other economic

players as SMEs do not exist in isolation; they are integrated into the economic

supply chain with other economic players, the widening of SMEs research base

would be of equal value.

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ANNEXURE 1

DEFINITIONS OF SMEs 35

MemberEconomies

Definition Criteria usedEmployment Turnover Other financial By sector

AboriginalPeoples ofCanada

SMEs include businesses with fewer than500 full-time-equivalent employees and lessthan $50 million in annual revenue.

Australia An ‘SME’ as a business employing up to 200employees

A ‘medium’ business as a business employing 20or more employees but

employing less than 200 employees A ‘small’ business as a business that employs up

to 20 employees

BruneiDarussalam

Definition of SMEs in Brunei Darussalam is basedon number of employees, i.e. those businessestablishments with 100 or less employees.

Subdivisions of SMEs are:o Micro – up to 5 employeeso Small – 6 – 50 employeeso Medium – 51 – 100 employees

Canada Generally, the definition of an SME is based onemployment size with a few exceptions.

Small (goods producing) - 1-99 employees Small (services) – 1-49 employees Medium – 100-499 employees A micro-enterprise is defined as having 1-4

employees

Chile The standard definition is based on annual sales ofenterprises:

o Micro enterprises: annual saleso Small enterprises: US$ 81,000 < annual

saleso Medium enterprises: US$ 844.000 <

annual saleso Large enterprises: annual sales > US$ 3.

380.000 Few programmes use a definition based on

numbers of employees:o Micro enterprises: 01 -09 employeeso Small enterprises: 10 - 49 employeeso Medium enterprises: 50 - 199 employeeso Large enterprises: 200 and more

employees

ChineseTaipei

Paid-in capital not exceeds NT$ 80m; or regularemployees not exceed 200 persons.

Commerce, transportation services and otherservices: Total operating revenue in the precedingyear not exceeds NT$ 100m; or its regularemployees not exceed 50 persons (extendingindustry terms to agriculture).

CzechRepublic

As per EC Recommendation 2003/361/EC

35 For detailed definitions see: OECD-APEC Global Conference- Removing Barriers to SME Access to Internationalmarkets, 2006, p63-67

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Denmark A company with less than 50 people employedand annual revenues of less than DKK 50 million(6.70 million euros).

Finland As per EC Recommendation 2003/361/EC

France According to Recommendation 2003/361/EC

Germany SME are companies with less than 50m Euroturnover and less than 500m employees:

Small sized companies: Less than 1m Euroturnover and less than 10 employees

Medium sized companies 1- 50m Euro turnoverand 10 to 499 employees

Greece According to Recommendation 2003/361/EC

Hong Kong Manufacturing enterprises employing less than100 persons

Non-manufacturing enterprises employing lessthan 50 persons.

Switzerland Micro enterprise: 1 – 9 employees Small enterprise: 10 – 39 employees Medium-sized enterprise: 50 – 249 employees Large enterprises: > 250 employees

UK According to Recommendation 2003/361/EC

USA 1-100 employees (small) 101-499 employees (medium)

Source: OECD-APEC Global Conference- Removing Barriers to SME Access to International markets, 2006, p63-67

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ANNEXURE 1- RESEARCH QUESTIONNAIRE

My name is Godfrey Ndlovu; I am a final year student at the National University of

Science and Technology (NUST) in Bulawayo, studying for a Master of Science

Degree in Finance and Investment. As part of the program, each student is required

to conduct a dissertation on a topic of their choice. I would like to investigate on the

challenges faced by Zimbabwean Small-to- Medium Scale Enterprises (SMEs) in

raising equity finance (that is; finance provided in exchange for a portion of

shares/ownership in the company for certain period of time).

Kindly assist by completing this questionnaire. All information provided shall be treat

with strict confidentiality and will be used solely for academic purposes.

1. Which industry sector is your business in?

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Mining

Tourism and related services

Manufacturing (or Processing)

Wholesaling/Retailing

Clothing (manufacturing and retail)

Pharmaceuticals (manufacturing& retail)

Finance & Financial Services

Construction (or Hardware Retail)

Agro-related

Information Technology

Engineering

Food/Restaurants

Other (specify)…………………………………………………………….

2. How many employees are in your company

Less than 5 Between 5 and 50 Above 50

3. What kind of external/additional financing are you currently using?

Bank loan/Overdraft/Mortgage

Leasing/Hire Purchase

Loan from Owners or Directors

Loan from Family and Friends

Government grant

Equity Financing

Other (specify)…………………………………………………………….

4. Have you ever applied for additional financing in the past five years? (if no go

to Question 8)

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Yes No

5. What type of financing had you applied for?

Bank loan/Overdraft/Mortgage

Leasing/Hire Purchase

Loan from Owners or Directors

Loan from Family and Friends

Government grant

Equity Finance

Other (specify)…………………………………………………………….

6. Was the application successful? (if yes go to Question 8)

Yes No

7. Why was the application unsuccessful?

Lack of security/collateral

Insufficient security

Too much existing debt

Industry considered too risky

Firm/company considered too risky

Lack of traceable credit history

Not been in business for too long

Amount applied for too small

Amount applied for too much

Economic climate not conducive

Unfair competition from large organization(s)

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Other (specify)…………………………………………………………….

8. Of each of the following factors indicate the level of importance you attach tothem when selecting a most appropriate method of raising additional capital.

(Use the following to indicators: 1- most important, 2- important, 3- least important, 4- notconsidered at all)

Factor Level of importance

1 Cost of application or processing (transaction costs)

2 Security/collateral required

3 Impact on company’s capital structure

4 Amount of disclosure required

5 Tax benefits to your company

6 Accessibility

7 Time taken to receive capital

8 Extent of funding/capital to be received

9 Repayment terms

10 Interest rate (or cost)

11 Amount of control over business operations

12 Risk involved

9. Of the following equity financing methods; which one has yourcompany/organization ever used? (tick as much as possible)

Venture Capital

Business Angel

Private placement

Asset-backed finance/Secutirization

Issuing of shares

Loans from Family/friends

Loans from Owners/Directors

Other ( please specify)……………………….…………………..

10. Does your company have shares/ownership/investment in another company?(if

no go to Question 12)

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Yes No

11. If yes, what type of investment do you have

…………………………………………………………….…………………………

12. Which of the following closely explains your business position towards equityfinance?

You do not use additional equity finance because:

You are satisfied with current level

You do not want to give-up ownership

You donot know how to apply for it

Type of your business does not require equity

Equity financing is only used when other sources have failed

There are no equity investors in the country

Other (specify)…………………………………………………………….

13. Of the following factors, indicate the level significance of each in preventingyou to access or better access equity finance?

Limited information to locate/identify equity investorsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Unreliable data about equity-investorsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Difficulties in identifying the right investorsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Inability to contact investorsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Unavailability of equity investorsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Lack of managerial expertise to deal with equity financingExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

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Lack of knowledge on how to raise equity financeExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Lack of government support to companies who what to raise equity financeExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Too much procedures when raising equity financeExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Inadequate property rights protection for equity investorsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

High risk level of SMEsExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Unfavorable rules and regulations:ExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Macro economic instabilityExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Uncertainty of economic policyExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

Political instabilityExtremelySignificant

Verysignificant

Significant Some whatSignificant

NotSignificant

14. Which of the following explain your need for additional financing

To finance Research and Development

To update technology/equipment

To finance purchase of land and buildings

To invest in marketing and advertising

To hire new employees

Working capital and cash flow constraints

Other (please specify)……………………………………………………..

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15. What sort of assistance have you ever received from the government? (pleasegive a brief description and where possible, specify the name of theprogramme)……………………………………………………………………………………..

……………………………………………………………………………………..

……………………………………………………………………………………..

16. Do you consider the assistance received as useful?

Yes No

17. What is your view of current government policies towards assisting SMEs

better access equity finance

Supportive to SMEs

Favour large Companies

Favour banks and other suppliers of finance

Other (specify)……………………………………………………………….

18. Which of the following do you think should be adopted to assist SMEs access

equity finance?

Provision of guarantees to SMEs borrowing

Special Financial institutions dedicated to SMEs

Interest subsidy for SMEs

Technical support to SMEs in accessing bank loans

Promoting Venture Capitalists& other equtiy investors to invest in SMEs

Other (specify)……………………………………………………………………

19. Do you think equity financing can assist your firm?

Yes No

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20. Please indicate your company’s consideration of equity finance

Currently using equity finance

Aspiring to use equity finance in future

Not interested in using equity finance

21. What is your growth objective for the next five years?

Become smaller

Moderate growth

Substantial growth

Remain the same

22. In your opinion how do you think access to equity finance can be improved forcompanies like yours?

……………………………………………………………………………………..

……………………………………………………………………………………..

……………………………………………………………………………………..

Thank you