Trade financing, an enabler of growing exports by SMEs

Trade is a key driver of economic development in Zimbabwe.

The importance of the country’s exports in the national economic recovery and growth drive cannot be overemphasized.

Foreign currency inflows play a critical role in ensuring the sustenance of the intended national development, given the current high dependence on imported raw materials as well as the supply of some key commodities and economic drivers which Zimbabwe does not produce such as fuel.

As such, for trade to be more effective, there is need for it to be directly supported through adequate financing, which is a crucial cog in the development of the country.

Access to affordable finance is critical for the growth of exports across the world and especially for Zimbabwe as the country seeks to boost its exports and spread its footprint across the globe.

Trade financing refers to financial products offered by any bank or financial institution that are specifically related to trade transactions, which include exports and imports.

In most cases, trade financing is recognized as an important lubricant of trade and the availability of such facilities is vital for a healthy and robust trading system.

According to the World Trade Organisation, up to 80 percent of world trade is backed by some sort of financing or credit insurance and it is estimated around US$10 trillion a year.

Trade financing supports the flow of credit in various supply chains and typically assists companies manage their cashflows for international payments, associated risks as well as provide needed trade related working capital.

Thus, meaningful contribution to national exports by local businesses can be easily realised if financial institutions provide necessary support by making available typical trade financing, this includes instruments such as lending facilities, Letters of Credit, export factoring/invoice financing, export credit, insurance.

Having the right instruments which are accessible to exporters and would be exporters will provide the requisite insurance, credit and payment guarantees to simplify the payment processes for the goods and services.

This will play a significant role in growing the national exports.

There are various financial institutions in Zimbabwe which offer different instruments related to trade.

The primary aims of the provisions of such instruments by some of the institutions is to promote and facilitate Zimbabwe’s international trade, assist new exporters and Small and Medium-sized Enterprises (SMEs) to access export finance, boost production and provide support that increases competitiveness of Zimbabwean exports, among others.

Although financing to small businesses has continued to grow over the past decades, according to the Reserve Bank of Zimbabwe (RBZ), advancing export financing in Zimbabwe is often faced with various challenges, some of which include information asymmetry.

Access to finance becomes even more challenging for SMEs as generally smaller companies generally find it more difficult to access finance from banks, regardless of their contribution to the economy and that they constitute most companies in Zimbabwe.

Recent research by the WTO suggests that low or no access to finance by SMEs can significantly impede formal SME development and unfortunately Zimbabwean SMEs are affected by this.

According to RBZ, only about 3.78 percent of the total loans and advances by Zimbabwean banks go towards the SME sector.

This also translates to poor export and trade financing to a key economic and potential exporting sector.

According to the CZI Manufacturing Sector Survey in 2018, the number of firms which find it difficult and/or impossible to access funding at local banking institutions is concentrated in small firms.

This is probably because smaller firms are viewed as having higher risks by financial institutions as they may not be credit worthy.

Most financial institutions view SMEs as having higher chances of defaulting on loan repayments.

This is despite the decline in the non-performing loans to total loans, from 3.95 percent in June 2019 to 1.75 percent in December of the same year, according to RBZ.

Consequently, banks demand collateral, guarantees, credit history, prefer dealing with ‘tried and tested’ products/services and in some instances charge higher interest to account for the higher risk making it difficult for small firms to obtain the requisite financing.

According to the same survey by CZI, 38 percent of the respondents highlighted ‘collateral’ as the biggest challenge of accessing funding from the banking sector, supporting the need for reforms in the financial sector in order to allow companies and SMEs alike to gain access to finance.

According to CZI, since inception of the import substitution and export promotion initiatives, access to finance is still regarded and expressed as one of the key impediments to industrial development and to companies’ ability to operate at full capacity.

Respondents to the same survey were asked on what the government can do to stimulate exports and the majority of respondents highlighted the need for access to cheap finance for exporters.

Generally, all firms in Zimbabwe find it difficult to access funding at local financial institutions and if this does not change, the country’s exports will remain subdued.

Access to trade finance in Zimbabwe is regarded as one of the most problematic factors that are faced by exporting companies together with other factors such as access to imported inputs.

Given the contribution of small businesses to the economy, it is crucial that financial institutions create tailor-made financing that can be easily accessed by small-scale manufacturers and exporters.

According to the Monitory Policy Statement delivered by the RBZ Governor in February this year, financial “support to the micro, small and medium enterprises (MSME) sector has the potential to promote value addition to the key sectors of the economy through diversification, export earnings and import substitution, which are all critical for increased economic output.”

Given technological advancements that have made it easy to analyse data, RBZ suggest that “lending institutions can leverage on the vast amounts of digitized alternative data including transactional (payments) data, behavioural data and social media data to determine capacity and willingness to repay loans.”

Such data analysis will ensure that financing partners do not stereotype all small businesses as having “bad” financial discipline, which in turn will open more credit lines for performing businesses.

With WTO reporting that multilateral trade financing programs generated over US$30 billion in trade in 2014, it is imperative that more is done in availing trade finance to grow exports.

Publish Date: Sunday 07 June 2020



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