Bridging the Gap in Access to Finance by Small and Medium Enterprices in sudan

Bridging the Gap in Access to Finance by SMEs in Sudan

Graduate School of International Relations

Ritsumeikan University

Abeer Salih Mohamed

Professor Hideaki OhtaSupervisor

Student

TABLE OF CONTENTS

1. RESEARCH OBJECTIVE AND METHODOLOGY

2. OVERVIEW OF SUDAN ECONOMY

3. PRESENTATION OF FINDINGS

4. DISCUSSION OF FINDINGS

5. CONCLUSION AND RECOMMENDATION

• To assess the problems that hinder SMEs access to finance and suggest an affective ways to bridge the gap.

Research questions:I. What are the major problems that hinder

Sudanese SMEs growth?II. What is the current state of SMEs finance?III. What lessons Sudan can draw from

international best experiences in SMEs access to finance?

• Questionnaires, face-to-face interviews, observations, and reports were used in this study.

1.RESEARCH OBJECTIVE & METHODOLOGY

Sudan Economy

Population: 37.9 million. population growth rate :1.78%. 20 % under the age of 24.

GDP per capita: $ 1,875. Inflation : 36.9%.

Life expectancy: 63years. Unemployment :14.8.

2.Overview of Sudan

Land mass: 1,861,484 sq Km.

Sudan Economy

1.The agriculture products include cotton, groundnuts, wheat, and gum arabic2.The industries include the textiles, cement, sugar, petroleum, refining, pharmaceuticals, and automobile assembly.3.The services includes telecommunications services, financial services, transportations, training and educations, and other services

1985 1990 1995 2000 2005 2010 2015 2020

-10

-5

0

5

10

15GDP growth (annual%)

GDP growth rate

Ann

ual p

erce

ntag

e(%

)

Industerial value added

20%

Service value added

50%

Agriculture value added

29%

Sectors' contribution as percent of GDP, 2014.

Industery7%

Service13%

Agriculture80%

Employment by sectors

1.Account for 80% to 90% of all enterprises.2.Contributes from 30% to 50% of GNP. 3.Provide jobs for 60% to 80%. 4.Stimulates industrial development.5.Create entrepreneurship and innovation.

Global importance of SMEs

These companies started as SMEs and now they have significant economic contribution.

Share of SMEs contribution to GDP

The three major global SMEs challenges

• The access to finance remains the major challenge for SMEs growth (World Bank).

• The problem is acute in DC.

● SMEs segment is perceived as a high risk● SMEs are unable to provide collateral ● Some banks operate in limited geographical area● Lack of tailor made product for SMEs● Poor recording and lack of transparency in SMEs financial records● Inability to prepare and present business plan that meet bank requirement● Lack of adequate guarantee scheme● Poor knowledge on business and operating law

Challenges for SMEs Financing

SMEs contribution in Sudan

make up 93% of manufacturing sector

Account 90% of private sector

Provide 2/3 of the daily household needs

Defined as having less than 50 workers

3.PRESENTATION OF FINDINGS

General description of the respondents profile

Primary Secondary Bacholer Master Other0%

10%

20%

30%

40%

5%

42% 41%

10%

3%

Level of Education

Perc

enta

ge

0%10%20%30%40%50%60%70%

60%

18%8%

2%

13%

Ownership

Perc

enta

ge

1_5 years 6_10 years 11_15 years

16_20 years

more than 20 years

0%

10%

20%

30%

40%

50%

60% 53%

20%15%

3%10%

Years in Business

Perc

enta

ge

0%10%20%30%40%50%60%70%80%90% 79%

11%4% 2% 3% 2%

Number of EmployeesPe

rcen

tage

Manufacturing Trade Service Hotel and restaurant

0%5%

10%15%20%25%30%35%40% 38%

27%23%

12%

Business Sector

Perc

enta

ge

1.What are the major problems that hinder SMEs growth in Sudan?

Specific research questions

• IFC, 2011 report classified access to finance as major obstacle for SMEs in developing countries.

• From this study access to finance ranks as second major problem for SMEs.

2.What is the current state of SMEs finance in Sudan?

Access to finance as a constraint for growth

59%

24%

10%7%

Legal barrier Social barrier Other barrier

51%

27%22%

Barriers to financial access


• SMEs in Sudan source their startup capital from the savings followed by family and friends.• The operating finance is the retained earnings, money lender and family & friends.• Banks and microfinance play a very small role in SMEs financing.

Banks Microfinance institutions

Familly and friends

Saving Moneylenders

7%2%

24%

62%

6%

Startup Finance

Banks

Microfi

nanc

e ins

titutio

ns

Familly

and f

riend

s

Retaine

d earn

ings

Money

lende

rs

Missing

7%1%

12%

67%

13%

1%

Operating finance

Description Male Female

Number of loan application 36 4

Percentage of loan applicants for each gender 23% 11%

Number of loan acceptance 28 3

Percentage of loan acceptance from each gender 78% 75%

Manufacturing Trade Service Hotels & Restaurants

Loan application 22 8 9 1

% of loan applicants for each sector 30% 15% 20% 4%

Loan acceptance 20 6 5 0

% of loan acceptance for each sector 91% 75% 56% 0%


• The challenges exist from both sides SMEs and Bank.

• Sudan business culture and religion has impact on business.


No nee

d for

exter

nal fi

nanc

e

Strict c

ollate

ral re

quire

ments

Comple

x app

licati

on pr

oced

ures

High in

teres

t rate

High re

jectio

n pos

siblilit

y

45%

17% 14% 12% 12%

Reason for not applying 33% 33%

22%

11%

Reasons for rejection

• The average loan given to SMEs were SDG 20,000 ( $3,278).• The interest rates were varies between 4% to 18%.


Working

capit

al

Fixed i

nves

tmen

t

New pr

oduc

t/Exis

ting p

roduc

t

New eq

uipmen

ts

Missing

3%

18%

48%

10%

23%

Loan purposes

6 month to 2 year 2 years to 4 years More than 4 years Missing

23%

30%

10%

38%

Loan terms

• SMEs which uses ATM for their cash need is less than half of those which uses other means.• The SMEs business forecasting to be growing and expanding has a culture and belief backup.


Withdraw from ATM Safekeeping at your premise

Visit Bank

37% 37%

26%

Cash needs

Growing and expanding

Not improving Declining Missing

68%

16% 14%

2%

Business forecasting

Key Findings

•A large number of SMEs have never used formal finance due to strict collaterals and complex procedures.

•Most of the SMEs depend on borrowing from family & friends or money lenders.

•Some SMEs owners still hesitate to benefit from banks loans due to cultural and social barriers.

•A minority of those surveyed did use bank loans but suffered great difficulty in dealing with the system, repaying the loan, and dealing with high interest rates and minimum loan size.

· No specific policy that addresses the SMEs in Sudan.

1. No responsible body that can create a strategic program to support SMEs in order to

strengthen their capacities and productiveness, consequently:-

• No national definition for SMEs.

• No measurement of the size of SMEs sector and it is contribution to the economy.

• No evaluation of the problems that hinder the development of SMEs sector.

• Lack of implementation of efficient policies and programs that support SMEs.

• Lack of encouragement to banks to expand lending for SMEs sector.

Institutional level

4.DISCUSSION OF FINDINGS

·

1.Most of SMEs do not have sound firm financial systems and accurate financial reports

which affect their ability to secure fund for their investments.

2. Majority of SMEs are sole proprietorship that lack qualified personnel who able to

present a sound feasibility study for investment’s projects.

3. Culture & religion has great effect on SMEs finance choices.

SMEs level

·

1. Most of financial institutional lack the vision and strategy to expand finance for SMEs.

2. Low fund ceiling and short repayment periods.

3. Limited information & distance from Khartoum are major obstacles.

Banks level

3.What can Sudan learn from successful experience for SMEs financing?

1. Japan SMEs Act was enacted in 1963 and revised in 1999.

2. Government affiliated financial institutions have been established to support SME financial needs.

● Japan Finance Cooperation for SMEs

● National Life Finance Corporation

● Shoko Chukin Bank ● System of credit guarantee has

also been introduced.

1. Malaysia National SME Development Council (NSDC) in 2004 responsible for comprehensive coordination and formulation of the policy.

2. DFIs responsible to put in place the institutional arrangement and financial policies to address the needs for SMEs financial requirements.○ Tailor products for

SMEs

1. Office of SME Promotion (OSMEP) in 2000 as a government agency responsible for promoting SMEs policies and plans

2. Establishment of SME bank among a Specialized Financial Institutions (SFIs)

○ Fast Track Loan ○ Exporters’ Credit ○ Assets Capitalization Scheme

The countries that reform the best are those countries which take into account access to finance in their policies and mandate their financial institutions to implement that strategy (World Bank,2010).

1. Improve the enabling environment.2. Forming a national body responsible for SMEs development.

a. Encourage banks to expand lending for SMEs and promote alternative financing

techniques for SMEs.

b. provide capacity-building and technical assistance for SMEs.

c. Establish credit guarantee system.

Sudan should do the following to bridge the gap in SMEs financing

5.CONCLUSION AND RECOMMENDATION

More studies are required in other states of Sudan for SMEs financing

Economy & Finance

Bridging the Gap in Access to Finance by Small and Medium Enterprices in sudan