Investigation into factors that constrain banks to bank the unbanked SMEs in Zimbabwe: The case of Harare CBD

Abstract

This dissertation investigated factors that influence SMEs to banking their revenue due to the informal environment in which they are operating in. There have been significant debates that only about 18 percent of SMEs in Zimbabwe have access to formal financial services institutions while the majority put their savings “under the pillow”. SMEs, according to official figures constitute 70% of the economy and that means that the bulk of economically-active Zimbabweans are employed by the sector. Due to constrained cash-flow and lack of financial support most SMEs do not bank their revenues. In pursuit of economies of scale they often prefer dealing in cash which often pushes down the cost of production and ultimately low prices to enable them compete with large corporates. The study focused on the main objective to investigate the factors that influence banking the unbanked SMEs, to identify strategies that banks can use to bank to attract them. Recommendations on the strategies and factors that can influence banking the unbanked SMEs will be suggested to reduce the current liquidity gap given the missing revenue in circulation attributed to unbanked SMEs. There is a growing body of literature that suggests SMEs have an influence to current liquidity challenges in the Zimbabwe economy. Studies suggest that banks should reduce charges and create innovative products that match SMEs’ needs in order to attract the unbanked. Banks in other developing countries has successfully introduced mobile banking to tap in the informal sector, and it is yielding results. A case study was conducted with the sample representing SME owners and management. The study adopted a qualitative approach in the form of a survey research to ascertain knowledge, opinions, and attitudes of respondents in banking their revenue. A qualitative approach was chosen as data is rich and subjective and fit well with the study approach. The research considered a sample size of 100 SMEs in the Central Business District of Harare. In this study, primary data was obtained through the use of questionnaires. With primary data it was easy to formulate structured or unstructured questions that focused on the study topic. Primary data offered greater control over data accuracy. A response rate of 74% was attained, this allowed the researcher to effectively evaluate the responses Findings suggest that the greater majority of SMEs have bank accounts, but only dormant. Using appropriate statistical analyses, and content analysis techniques, the major concerns that cropped out were that banks have high pricing models and do not offer suitable products and have no access to borrowings. Recommendations made include innovative pricing that have matching products. SME engagement through re-pricing of tailored bank products, education that has information and tools to prepare bankable project proposals as well as basic financial literacy has also been recommended. The proposition has also been proven as the informal operation caused by unbanked revenues by SMEs limit liquidity in the financial sector.