Microfin firms crucial to SMEs

Others are Bayport Financial Services Zambia, Madison Microfinance Zambia Limited, Madison Finance Company Limited and Meanwood Finance Corporation Limited.

The Bank of Zambia (BoZ) indicates that MFIs remain well-capitalised, with capital adequacy at 42.2 per cent of risk-weighted assets, supported mainly by retained earnings and shareholder capital. This means that they are financially strong in terms of capital and have enough money set aside to absorb potential losses.

An SME, Edna Kalaka, founder of Lyeni Investment Limited says MFIs are easily accessible and readily available, particularly for small businesses that may struggle to obtain financing from traditional banks.

She explains that SMEs, access to finance can make the difference between taking advantage of a business opportunity and missing it altogether.

Traditional banks loans can sometimes involve lengthy application processes, extensive documentation, and waiting periods before funds are approved and disbursed.

MFIs on the other hand can provide an alternative by giving SMEs faster and more efficient access to funding, she states.

Another SME, Chama Bwalya Founder of Tullage Village Farms highlights that the primary advantage is speed as microfinance often have simpler application and approval processes than traditional banks.

This means that an SME may be able to obtain the funds it needs within a shorter period, allowing the business owner to respond quickly to immediate financial needs, she says.

For example, an SME may receive a large customer order but lack sufficient working capital to buy the raw materials or stock required to fulfil it. If the business has to wait weeks or months for financing, the opportunity could be lost, she explains.

Ms Bwalya says additionally, faster microfinance can provide the working capital needed to purchase inventory, pay suppliers or cover operational costs while the opportunity is still available.

TILLAGE Village Farms Founder Chama Bwalya

“Fast access to funding can also help SMEs manage cash-flow challenges,” she adds.

Many small businesses experience periods when expenses must be paid before customers settle their invoices.

A short-term loan can help bridge this gap, enabling the business to continue paying employees, suppliers, rent, and other operating expenses without significant disruption.

Another benefit is the ability to make time-sensitive investments. An SME may identify an opportunity to purchase equipment at a favourable price, expand into a new market, or increase inventory ahead of a busy trading period.

Quick financing allows the business owner to act when the opportunity arises rather than wait until the opportunity has passed.

Frazer Handondo, an SME who is Managing Director and Co-founder of Forest Africa Zambia Limited says MFIs provide SMEs with financing options and this plays an important role in improving access to finance, particularly for businesses that may struggle to obtain traditional bank loans.

“Overall, while microfinance and trade financing can provide important sources of capital for SMEs,” he says.

Mr Handondo explains that however, the suitability of financing depends not only on the availability of funds but also on the cost, repayment period, grace period, and timing of business cash flows.

He cautions SMEs to match the type and duration of financing to the nature of the investment or transaction to avoid turning short-term funding needs into long-term financial difficulties.

Mr Handondo says however, one of the major challenges is the high cost of borrowing as interest rates on microfinance loans can be significantly higher than those offered by commercial banks, with rates often ranging from 30 per cent to over 40 per cent.

FRAZER Handondo. Managing Director and Co- founder of Forest Africa Zambia Limited

He explains that such high financing costs can place considerable pressure on SMEs, especially businesses operating with low profit margins.

“The high cost of borrowing can create several financial and operational risks. Businesses may need to increase product prices to cover loan repayments, which can make their products less competitive in the market,” he states.

He explains that alternatively, if businesses cannot pass these costs on to customers, their profit margins may decline, leaving them with insufficient funds to sustain operations or repay their loans.

Mr Handondo further says another major concern is the mismatch between the duration of financing and the purpose for which the funds are used.

He explains that short-term loans are often used to finance long-term assets, such as machinery, equipment, or infrastructure and because these assets generate returns over a longer period, the business may not have enough cash available to meet short-term repayment obligations.

“This problem becomes more serious when a business has limited grace periods or moratoriums, or repayments may begin before the investment has generated sufficient cash flow,” he says.

Mr Handondo says additionally, mismatches can also create significant difficulties. For example, an SME may be required to repay a loan shortly after receiving financing, while it may take several months to produce and deliver goods and receive payment from its customers.

He explains that even though the business may have a profitable order, the timing of cash inflows and loan repayments may not align.

“This he says can force the business to take on additional debt, delay payments to suppliers, or operate at a loss.

Association of Micro Finance Institutions in Zambia (AMIZ) Executive Director Webby Mate says MFIs remain an important source of finance for businesses that struggle to meet the collateral requirements of commercial banks.

According to Mr Mate, MFIs provide working capital for activities including small-scale trading, agriculture, services and other income-generating activities.

He says the growth of MFIs has contributed to a more diversified of financial system in which consumers can choose among banks, MFIs, savings groups, mobile-money providers and other financial-service providers.

“This diversification is important because different customers have different financial needs,” he says.

For SMEs, he says MFIs needs can range from purchasing stock and meeting payroll to financing equipment, managing seasonal cash-flow shortages or responding to new business opportunities.

Small businesses are particularly important to the broader economy because their ability to expand can influence production, household incomes and employment.

However, access to credit alone does not guarantee business growth. The ability of an enterprise to generate sufficient income to service its debt remains critical.

The distinction between microfinance institutions and money lenders is also important when examining Zambia’s lending landscape.

Emmanuel Mubanga, founder and chief executive officer of Wasis Money Lender, says traditional moneylenders, such as FINCA and EFC generally focus on the collateral requirements of commercial banks.

Money lenders, by contrast, may focus more heavily on consumer lending and short-term financing.

Mr Mubanga says some money lenders assess borrowers using factors such as salary, affordability or collateral rather than requiring the borrower to own or operate a business.

WASIS Money Lender Founder and Chief Executive Officer Emmanuel Mubanga

Despite these challenges, the expansion of financial-service providers has contributed to a broader increase in access to financial services in Zambia.

The broader economic value of SME finance however, lies beyond the loan itself.

For businesses, productive borrowing should ideally translate into increased sales, improved productivity, expansion and, where possible, employment.

For policymakers and financial institutions, the challenge is therefore not simply to increase lending but to expand access to finance that businesses can use productively and repay sustainably.

For Zambia’s SMEs, the question is ultimately not just whether finance is available, but whether the cost, terms and speed of that finance enable a business to grow rather than simply survive.

“Microfinance institutions are easily accessible and readily available, particularly for small businesses that may struggle to obtain financing from traditional banks…”