Batanai Matsika 
According to Small Enterprise Impact Investing, Exploring the “Missing Middle” beyond Microfinance by Symbiotics (Roland Dominicé and Julia Minici), more than 95 percent of registered businesses in the world are small.
Together, they constitute the largest employer in any given private-sector economy, whether of high, middle or low-income levels. Generally, lower income countries tend to have a much higher concentration of micro-enterprises than SMEs, contrary to higher income countries which have many more SMEs than micro-enterprises — a gap referred to as the “missing middle” in the low-income SME markets.
The current growth they face will gradually bridge this gap. But ultimately, the pace at which they will grow will depend on the sources of financing they can access and the quality of their growth will depend on regulation and behavioural standards that guide their expansion.
Despite the recognised importance of the SME sector, evidence indicates that SMEs continue to be undersupplied with the financial products and services that are critical to their growth. The more obvious structural impediments that explain banks’ subdued interest in financing the SME sub-sector include problems of information asymmetry, high NPLs, a lack of collateral, high administrative costs and high risk perception. That said, some of the key triggers that could catapult SME financing activity include the following;
Government support of SME finance
Recognising the importance of the SME sector, governments have undertaken a variety of measures to support SME access to finance.
These measures range from reforming existing legal/regulatory barriers, taking actions to develop the SME finance market broadly, and intervening in the market directly to jumpstart or incentivise lending to SMEs. The impact of these policies on the operating environment for SME banking varies by country context; and
Development of information infrastructure reduces risk
The basic principle supporting commercial aspect of banks’ lending to SMEs is the availability and accessibility of sufficient information about SME activity. Without adequate information, banks face a hurdle, which is the problem of information asymmetry — where SMEs know more about their own activities than what the banks know about SMEs.
This leads to the critical challenge of banks adversely selecting risky SME customers who are willing to borrow at high interest rates. On the other hand, these risky customers may engage in moral hazard, which is essentially assuming high risk on borrowed money in search of returns that far exceed bank expectations, and very likely unrelated to the original conditions of the loan.
Optically, the common result is a rapid rise in loan defaults. This is the crux of the SME financing dilemma in developing nations. What is required, therefore is to improve availability of information.
Overall, mounting evidence suggests that some banks are finding effective solutions to constraints such as determining credit risk and lowering operating costs and are profitably serving the SME sector. The potential profitability of serving SMEs has been enhanced by the development of new business models to engage small enterprises. In Zimbabwe, NMBZ Holdings has been gradually shifting its focus and strategy towards SME banking.
The group is also well positioned given a loan book that is largely invested in the agriculture sector, as well its focus on SMEs through technologies such as POS machines and its Tap Card. NMBZH’s business model is solid and receives support from its foreign shareholder (Arise). We have a BUY rating on NMBZ Holdings.
Matsika is the head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
