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How to improve lending recipe for SMEs
2006-06-21 10:24:59
By Mireny John
Some general assumptions about Tanzania’s lending-borrowing relationships are absolutely misleading. Because of the unfortunate past mismanagement of state-run banks, we still find reports today referring to Tanzania as amongst places where the rate of default on loans is very high.
This attitude has been swaying around for about 16 years since the country liberalized its financial sector. All private commercial banks and financial institutions inherited the ill-fated legacy, hiking lending rates to unreachable levels on the same basis.
More worrisome, it is doubtful whether someone, including the Bank of Tanzania (BoT), has undertaken a comprehensive research seeking to re-position the country’s borrowing culture.
It seems even when technocrats who were designing Small and Medium Enterprises Credit Guarantee Scheme (SME-CGS), the un-toward notion of defaulting SMEs was their primary, though faulty, starting assumption.
The National Microfinance Bank (NMB), with long experience in lending to SMEs, attests that the rate of defaulting in micro-financing sub-sector is just 1 per cent.
Every loan package has its own costs-benefit characteristics which ultimately determine its inherent interest rate, terms and conditions.
The second wrong assumption was that the 1.7m or so SMEs have the organizational strength badly needed to absorb the Tsh.2bn set aside by the government as a guarantee fund.
As a testimony that something went wrong, since its inception six months ago, only 18 SMEs have managed to secure loans under the SME-CGS arrangement.
The process of accessing the guarantor is technically more complicated than earlier thought of, so because most of the SMEs are sole proprietors or individual/family based businesses without limited liability.
Technocrats laboured too much to define capital and management thresholds as eligibility criteria for prospective SME-CGS applicants, with the unfortunate oversight on the organizational culture and stability.
Being the first scheme of the sort to be implemented in Tanzania, an aggressive public education programme should have preceded actual lending activities.
For instance, potential SMEs should have known that going alone is not the best practice of business management and success.
That way, the 50 per cent guarantee benchmark provided under the SME-CGS by BoT and agency banks could not necessarily have become an unaffordable factor to most SMEs, if they were organized in Savings and Credit Co-operative Societies (Saccos) and producer co-operative societies.
By their own right, Saccos are optionally acceptable as collateral for the 50 per cent security against borrowed funds by some of its members.
So far, this country has about 1,870 Saccos, most of them located in rural areas. These are potential ’intangible’ assets, but only 18 SMEs have accessed the credit scheme!
One of the active partners in SME development in Tanzania is the Small Industries Development Organisation (SIDO), with a countrywide network and experience in SMEs’ entrepreneurial skills’ training and development.
SIDO should be engaged in a countrywide implementation of a strategic communication programme to enlighten SMEs of the existence of the credit facility and the prerequisites for qualification, including organizational arrangements.
Some SMEs would wish the 50 per cent collateral guarantee change to 100 per cent. Technically this approach is untenable because by its own nature it encourages defaulting and slackness in running business scientifically.
This is all about suggesting a refined formula so that SMEs get smooth going into a well intended plan. SMEs development is the locus where poverty can be effectively attacked.
It is therefore undeserving to note that of the country’s 3 trillion worth of lending; only 10 per cent is actually lent to SMEs.
In the budget announce last week, the government has acknowledged complaints raised by some people that the operations and management of SME-SGS is cumbersome.
The hope is, it will honour its promise; that it will evaluate the scheme and take appropriate measures as soon as possible.
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