By Kelvin Chungu
TWO and half years ago, on 13 September 2017, the Zambia Credit Guarantee Scheme Limited (ZCGS) with the aim of providing a platform for financial institutions to offer affordable financial products and services at reduced risk to SMEs, thereby promoting growth and competitiveness of SMEs.
This followed a statement by then Minister of Finance that the government was in the process of setting up an Entrepreneurial Fund for the private sector to enable the establishment of a system that facilitated the issuance of long-term credit guarantees to Small and Medium Enterprises (SME’s) in Zambia at low-interest rates.
The Entrepreneurial Fund was aimed at augmenting the ability of small-scale private sector participants, particularly those in agriculture, aquaculture, value addition, energy projects in contribute to the growth of the economy.
In August 2018, to ZCGS introduced the ‘business coach model’ to train and supervise small and medium-scale entrepreneurs (SMEs) in risk management, record keeping and financial management. The goal was to assist SMEs to operate efficiently and to improve monitoring, compliance and evaluation and therefore avoid the incidences of funds from loans being diverted to other things. This coaching model was expected to increase the security of the bank’s investments in loans to small-scale entrepreneurs with or without collateral depending on the business plans by restricting the borrower from making unplanned expenditure without the approval of the business coach. The coaching model came on the back of failure by Government efforts in the past to offer these credit guarantees through established institutions such as the Bank of Zambia and/or the Development Bank of Zambia, occasioned by high levels of default.
At the back of announcement of the coaching model, there was also indicative reports that US$5Million had been provided as seed money by government for the scheme and in September 2018, the then Minister of Finance officially launched the ZCGS, while challenging the board and management of the organisation to transform the institution into an effective world class credit guarantee scheme. One year, five months later, the ZCGS has been busy at work, however a review of the relevant news landscape shows that there has been little discernible information that can point to how the organisation is contributing and navigating the landscapes that they sought to cure.
It remains to be noted that the credit guarantee scheme is a worthwhile undertaking particularly in this market that literally starves the SMEs of capital. Added to that the World Bank has previously noted that lack of access to appropriate levels of funding is one of the significant constraints that SMEs worldwide are encountered with in terms of their levels of contribution to the national economy, with a financing gap estimates for SMEs in emerging markets of over 50% to the high of 75%. And so there is no question that the credit guarantee scheme must be supported, particularly in the face of high levels of aggregate NPL in Zambia of over 13%.
The SMEs world over are responsible for delivering so many economic benefits and they therefore need to be supported and thus information from the ZCGS must be widely available to ensure that the intended benefits are achieved. It is also worth considering Miasamari (2012) ‘Challenges of Credit Guarantee Scheme for Sustainable
Entrepreneurship in Nigeria’ article which listed some of the Challenges of Credit Guarantee Scheme as follows:
- “Bank risk-averse behavior in lending when bank considers the expected value of returns on investment as being less than expected utility of investment outlay, and when transaction cost risk inherent in servicing small loans to a large number of borrowers is perceived risk cost.” How is the Scheme responding to this?
- “High collateral, interest rate and stringent eligibility criteria for registration at bank level particularly banks located in some rural areas and resource-poor areas, this inappropriate attitudinal orientation has been reported and has hindered access to credit finance.” Clearly, the credit guarantee scheme is a response to the interest rate criteria and perhaps that of collateral, however, is this scheme appropriately designed to cater to the eligibility criteria? This is an area of interest to a large swath of people.
- “Limited managerial capability due to inexperience, illiteracy, and absence of the mentoring and entrepreneurial network, and the challenge on the ability to provide sound business plans.” How is the Scheme responding to this?
- “The increasing competition among microfinance and other institutions:- Some microfinance have sought strategic alliances with NGOs and other financial intermediaries in other to build the new market and expand a client base, which is stimulating competition leading to the client running to commercial banks that offer credit finance.” Is this a potential in Zambia and could this scheme result in adverse lending behaviors that increase the NPL? Is the coaching model mitigatory? There are many questions to be answered around the operations of the credit guarantee scheme. Some of them include:
· Whether it is possible that the credit guarantee scheme could enable a higher risk tolerance level in advancing loans?
· What is the level of guarantee provided? For example, the European Foundation for the Improvement of Living and Working Condition’s Euro Fund SME Credit Guarantee Scheme which was established to address specific market inefficiencies in the Euro Zone that prevent bank lending to some commercially viable businesses provides a 75% guarantee to banks against losses on qualifying facilities. Is our scheme modelled on this and what is the qualifying conditions?
· Has the credit guarantee scheme come with a full deployment of a formal credit assessment infrastructure? These and others questions raised above need answers if we can enable a successful regime that positively impacts a productive SME sector. As the Government continue with the implementation of this worthy idea and bringing forth a mechanism to increase the allocation of financing to the SMEs, it is important not to understate the challenges in managing a successful scheme that can deliver the desired results.
About the Authors
Kelvin Chungu is a Partner at Nolands Zambia and can be reached on firstname.lastname@example.org