Bereng Mpaki

ONLY nine percent of small enterprises in Lesotho source their start-up capital from financial institutions, according to a report on enterprise development and financial.

The report is the outcome of a study titled Enterprise Development and Financial Inclusion in Lesotho which sought to identify challenges and opportunities for financial inclusion and enterprise development for micro, small and medium enterprises (SMMEs) in Lesotho. The study was commissioned by the International Labour Organization (ILO) through the Association of Lesotho Employers and Business (ALEB).

It was also conducted to examine the challenges and opportunities as identified in the Enabling Environment for Sustainable Enterprise (EESE) study conducted by ILO in 2014 and the subsequent action plan which identified three priority areas in developing an enabling environment for sustainable enterprises.

The three priority areas included education, training and lifelong learning; access to financial services and entrepreneurial culture.

The EESE report had identified the need to conduct a study mapping the demand and supply of financial services as well as identifying the main bottlenecks for lending to SMEs and vulnerable groups as the first step towards the development of demand-driven financial products for SMEs.

Data collection was done through interviews where 79 SMMEs and more than 16 institutions were covered between 16 and 27 November 2015.

A validation workshop on the findings of the study was held last Tuesday where representatives from the private sector, financial institutions and business development services providers were in attendance among others.

“The majority (91 percent) of interviewed SMMEs financed their business start-up from own savings. Only nine percent financed their business start-ups through a loan from a financial institution and eight percent got assistance from a friend or relative,” said part of the study findings.

The report further indicated that the most sought after business development support (BDS) service was business management training. Other challenges included business services that were difficult to find in the country. Also, where services were available, enterprises faced the challenge of having to pay in order to obtain them.

“Sixty-eight percent of the enterprises engaged indicated that there are business services they require which are difficult to find while thirty-two percent do not face similar challenges,” the report said.

“Some challenges faced by SMMEs in their attempts to access BDS include the cost of accessing training (33 percent) and access to information (13 percent). By far the greatest challenge however is the cost of training.”

On the supply side of business services, the report highlighted such challenges as lack of clear and concrete business ideas, entrepreneurial and creativity spirit, commitment from the entrepreneurs, lack of collateral and record keeping as well as market research to understand the operating environment from small enterprises.

On the demand side for non-financial services, the report noted: “Financial literacy is generally low among the SMMEs and as a result, the ability to utilise the variety of financial services on offer to benefit their businesses is limited. SMMEs have a low perception and awareness of the role of industry and business associations in information sharing and networking.

“They are of the view that associations serve the needs of large mainly foreign-owned businesses. Only 17 percent of small enterprises interviewed belong to an association. The voice of small enterprises on issues that affect their businesses therefore remains unheard.”

The report also revealed that five main business services that SMMEs require and have difficulty in accessing included access to information on tender opportunities, mentorship/coaching/training, access to technical skills and access to appropriately packed financial products.

Other areas needing support include skills to develop bankable business plans with opportunities for growth. Challenges faced relate to the cost of training and access to information on providers of such services.

On the supply side of financial services, the report stated: “Lesotho has very few suppliers of financial services targeting micro and small enterprises in particular. Besides the four banks, there are hardly any microfinance institutions that in other countries serve the purpose of grooming micro businesses to a point where they are bankable. “Instead, Lesotho has seen a proliferation of consumer money lenders that are not into enterprise financing.

“There is limited availability of financial products tailored to suit the needs of SMEs. As a result, even the few available financing windows have limited uptake due to issues such as eligibility criteria and limited access to information on funding opportunities.”

On the other hand, it states, banks face a number of challenges in their endeavours to provide financial services to SMMEs. These include poor record keeping by SMMEs, diversion of funds and non-separation of business and personal finances.

“Financial services providers have capacity challenges for them to package and deliver appropriate services to the SMMEs sector, which they generally are not experienced in serving,” the report observes.

“As a result, their risk appetite is low and SMMEs find it challenging to meet the conditions set for accessing financial services, thereby limiting uptake of available financial services.”

It adds: “Based on information obtained through interviews with banks, hardly 100 loans have been issued under the Partial Credit Guarantee Schemes. This can point to the limitations of financial services providers to package and align products in-line with the needs of SMEs.

“The development of the microfinance sector is critical to improving access to financial services for SMEs. In addition, innovations going downstream by banking institution need to be encouraged.”

The report makes a number of recommendations to address the challenges that have been identified.

It showed that existing mechanisms for risk sharing or guaranteed enterprise lending were an important step towards facilitating access to finance for SMMEs, although there were challenges that needed to be addressed first.

It also identifies the need for capacitation of apex business bodies in order to enhance their effectiveness as member service organisations that provide a menu of member-SMME focused services.

“There is need to consider developing a technical support programme focusing on developing the capacity of BDS providers (private sector, NGOs, government) to offer a wide range of BDS services.”

Meanwhile, the Principal Secretary of the Ministry of Small Business Development, Cooperatives and Marketing Dr Motseki Mofammere hailed the study saying it complemented the government’s efforts in building a vibrant private sector in Lesotho.

In remarks made on behalf of the minister, Dr Mofammere said the findings of the study were in agreement with some of the priorities of the SMME Policy document that was recently adopted by the government. The policy seeks to chart a way forward for small enterprise development.

Among issues the policy intends to tackle are the coordination of all intervention programmes for SMME development, which were currently fragmented across a number of ministries.

“The priority areas of this initiative connect with some of the priorities of the SMME Policy of the government. This means the findings will help to operationalise the policy,” Dr Mofammere said.

ILO’s Senior Specialist in Employers Activities Maria Machailo-Ellis, urged the relevant authorities to implement the recommendations of the report for the development of the SMME sector in Lesotho.

She was, however, impressed by the establishment of the Small Business Development, Cooperatives and Marketing ministry, which she said showed the government’s commitment to creating employment and reducing poverty since the SMME sector employed more people than the large business sector.