Providing effective financial support to SMEs in post inflationary Zimbabwe: A case study of microfinance institutions

Abstract

The SME sector have for a long time failed to access financial services from the formal banking sector due to their lack of collateral. As a result, they have relied on Microfinance institutions (MFIs). In Zimbabwe, regardless of a continual increase in the number of people joining the SME sector, the MFIs have not been increasing after the dollarization period. MFIs have failed to secure donor funds, are unregularised and in some cases based only in urban areas. This has limited their ability to offer services to SMEs. The purpose of this study was to evaluate whether MFIs are providing effective financial services to SMEs after the dollarization period in view of all the challenges and dynamics related with the period. A qualitative multi-case study survey was carried out among five MFIs and 8 SME organisations located in Harare. It was established that the financial services provided by MFIs to SMEs after dollarization is not effective. Since March 2009, most MFIs have faced difficulties in getting donor funds and more SMEs have defaulted paying back loans borrowed from MFIs. It is concluded that the unregularised nature of the MFI business in Zimbabwe limits the number of private funders who might want to deal with the MFIs. It is concluded that the challenges faced by MFIs which are affecting their effectiveness in providing financial services to SMEs can be overcome and the effectiveness of MFIs in providing SMEs with financial services can be improved. The study recommends a coalition between the SMEs and MFIs to create a platform where the two groups discuss their problems to ensure MFIs will offer effective financial services to SMEs. The planned RBZ MFI bill is also anticipated to regularize the MFI sector, add confidence among the donor community and protect both the SMEs and MFIs in the way they deal with each other.