One of the main challenges that an SME (Small and medium enterprise) will typically reveal to you is lack of access to finance.
The enterprises that employ 30 to 50 people are central to the realisation of Rwanda’s vision 2020. These businesses are the backbone of the vision. But, to play this role effectively, they must grow. And to grow they need finances. Why?
Three main areas need to be looked at in order to unlock financing for SMEs. One; character and practices of SME’s. Two, weaknesses in the banking system and three the business environment.
SMEs are mostly characterised by underdeveloped business culture. Few have adopted business principles. Many operate within traditional values which favour social relations, pride, conspicuous expenditure, informality, etc.
We start businesses and are likely to employ unqualified relatives than professionals. There is thus, no clear demarcation of business and family, taking customers for granted, personal decision-making and lack of focus.
SMEs also suffer from inadequate record keeping. This lack of appreciation of keeping business and financial records leads to lack of proper records that makes it impossible to prove the business track record which is necessary to borrow from any bank.
Limited managerial capacity characterised by lack of formal planning, appraisal and reporting systems and structures. Few businesses engage professionals to write their plans.
Vision, mission, objectives, if they exist tend to be, slogans and are not internalized and owned by stakeholders.
Further, this limited governance capacity where structures do not develop with growth and depend on the family structure and capacity.
This negatively affects the quality of decision-making, results in issues such as lack of credit history or verifiable business premises and collateral.
SMEs also need to perceive banks as business entities that need to make profits and not charitable organisations that are supposed to ‘help’ them.
This will reduce loan diversion that often result default in repayment and build better relation with the banks.
But banks too need to improve. Most banks have focused on the corporate sector which is easier and where they are experienced.
The problem is that our corporate sector is pretty small and thus there is need to grow the SME’s. To be fair, some banks have shifted focus to SMEs but still have capacity problems such as slow loan processing, where the rapid expansion in the banking system has not been matched by staffing, in terms of numbers and competencies.
Decision making on loans is highly centralised. Bank officers also give incomplete information with regard to requirements resulting into wasteful repeat trips to the bank.
There is over insistence on collateral rather than business potential. Banks are more concerned with the collateral than the potential of the business resulting into non-funding of good business ideas.
When they lend, the loan is limited and there is slow graduation to higher amounts. This is because SMEs are perceived as risky and the loans they get are often small relative to their needs after a certain threshold they find it difficult to increase.
The business environment needs to be more conducive to lending. Consideration is needed in land laws, dispute settlement system, establishment of adequate credit information and reference system and formalization of land and property ownership.
We should stop living in denial. The problem of lack of access to finance is attributable to weaknesses in the SMEs, financial institutions as well as the policy and regulatory environment, all of which need to be addressed. Everyone needs to put their house in order.
SMEs should in addition be ready to start small and build capital base through development of a ‘saving’ culture e.g. have a savings bank account, join savings and credit cooperative societies, etc.
They must develop and refine innovative business ideas which are appealing to financial institutions and seek information and contacts of government and other development agencies that promote and finance SMEs initiatives in the country.
This can and should be done.
Sam Kebongo teaches entrepreneurship at Rwanda Tourism University College. He also is a Director at Serian Ltd that provides skills and business advisory services consultancy.