Give SME/informal sector its due space

Victoria Ruzvidzo Business Focus
Revelations last year that at least $7,6 billion was circulating in the informal sector, buttressed by the recent statistics that operations in this field raked in as much as $24 000 per month means that this sector cannot be ignored anymore. Contrast it with reports of company closures and perennial operational challenges in the formal sector. You realise more and more which of the two is contributing more to the economy.

The lead story in The Sunday Mail’s business section this week was quite revealing. It gave an in-depth account of the goings on is the SME/informal business segment of the economy.

This was premised on a report conducted by the Bankers Association of Zimbabwe and the Zimbabwe Economic Policy Analysis and Research Unit.

Zimbabwe has generally been alert to the importance of small businesses in the economy but there is not much that has been done to harness this sector so that it can make a meaningful contribution.

Emphasis has remained on formal and usually big businesses many of whom have failed to adopt to a highly challenged operational environment.

There is very little smoke coming out of industry while the noise of machines humming has died down, except a few here and there .

Much of the space in industrial sites is almost abandoned or has been taken up by smaller companies.

We have often argued that even bodies such as the Confederation of Zimbabwe Industries are no longer representative of companies.

At the peak of the economy, CZI represented large firms but its membership has dwindled. The SME sector has taken over.

When the formal sector only has half the money circulating in the informal sector then nothing can be more telling than this.

By the way this does imply a skewed economy but this is the global trend. Many economies particularly in India, are in the hands of SMEs, long considered as the engine for economic growth.

Therefore, Zimbabwe needs to give the SME/informal sector its due space to ensure a more sustainable economic growth trajectory.

The fact that these firms can rake in as much as $24 000 per month with potential to increase the top-line should signal their growing importance in sustaining lives and their contribution to the Gross Domestic Product.

The BAZ/ZEPARU report notes that this sector faces challenges such as access to finance, factory space etcetera.

These are challenges that need to be looked into and solutions sought, to nurture operations and ensure there is very little disturbance in their growth.

A more holistic approach that sees banks coming up with products that encourage funds from this sector into the formal channels would help fight the liquidity constraints while increasing the depositor base.

Granted, banks have always had fears that SMEs are high risk, may not have permanent locations and have potential to default, but this may no longer be the case while financial products can still be modelled to suit this SMES status and modus operandi.

In this regard the BAZ/ZEPARU, study highlights that the banking sector policy framework needs to be revisited to accommodate SMEs .

“The policies should also make it easy for banks to craft tailor-made products and services for the informal sector. However, most policies governing the financial sector are not friendly to the informal sector players.

“Although banks could be willing to develop tailor-made products for the informal sector, prudential regulation policies by the central bank might only allow some limited flexibility for the banks.

“Access to banking services for the informal sector thus would require changes in bank regulations and standards governing loan collateral, approval and documentation especially when the central bank might not allow too much flexibility,” read part of the report.

Therefore, it would be prudent for the RBZ to expeditiously look at ways of inducing more flexibility, without necessarily exposing the banks to high risk, to ensure the policy framework is accommodative of the informal sector.

The banking sector, and the economy at large, can ignore the informal sectors at its peril. This economy cannot talk of any growth without considering the increasingly important informal sector.

The truth is that the economy has largely been kept afloat by this sector. Even in the 2007 /2008 period when Zimbabwe experienced shortages of goods, it was this sector that largely brought in or manufactured the products that sustained lives.

For long, families have been sustained by informal sector activities in terms of school fees, health care, building of houses and other basic family needs.

The thousands that have been retrenched over the past few years have also found solace in informal sector activities.

They may not be in formal employment today but they are engaged in small activities that are generating income for families.

Some of those ventures have grown beyond the family but have assumed importance as they supply goods and services that have an impact on the national economic landscape.

Therefore, as noted by the research under discussion, most economic activities in this country now lie in the hands of the SMEs.

Government needs to tap into such growth and ensure that what was previously a “high risk” sector is now that which is sustaining the economy.

The ensuing benefits of widening the tax base, increasing a culture of saving as the SMEs open more individual and corporate accounts, and other such benefits, can only augur well for the economy.

Both fiscal and monetary policies need to increasingly factor the presence of SMEs as major contributors to GDP.

The sector has ensured a soft landing when company closures and consequent loss of jobs could have been disastrous.

Reports are that even big corporates, wholesalers and retails shops now source products and services from the SME/informal sector.

This symbiotic relationship should be allowed to grow and produce results for this economy. Small businesses have become such a big issue they cannot be ignored anymore.

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