Available empirical literature has highlighted financing challenges as the major concern for SMMEs which are considered the backbone of the majority of the world’s economies though adequate financing has been a major factor hindering SMMEs success and sustainability.
A 2017 research study titled “Factors Influencing Small, Medium and Micro-sized Enterprises’ Borrowing from Banks: The Case of The Botswana Manufacturing Sector” found that “the major hindrance for SMMEs’ growth is lack of finance and related factors”.
The study recommended that manufacturing SMMEs should focus more on marketing, networking and the ability to manage their resources efficiently. Since SMMEs are struggling with accounting records, shortage of skills and scarce resources, they should engage in regular formal and informal training to keep abreast with the changing business environment so that they can remain relevant.
According to the research study, the formal training can include sending management and staff on refresher courses, workshops, seminars and short courses. Informal training can include personal development encouraged by having a company library, which helps staff and management to study and remain open-minded and stay abreast of changes in the industry.
One form of training should be acquisition of money management skills such as finance for non-finance managers, which is offered by local institutions such as Botswana Accountancy College and BAISAGO University.
It is reckoned by the research study that historically, the formal credit market in Botswana has been dominated by commercial banks, which are the major suppliers of credit to households and private businesses.
According to the paper, “while there are a number of ways to finance individuals and organizations, commercial have always been expected to play major role in financing individuals and SMMEs alike”.
In terms of the SMMEs contribution to the national economies, it has been argued that small firms dominate world economies and also that they are a source of livelihood and employment for many. Their growth and sustainability is crucial, and especially for SMMEs in the manufacturing sector.
It is further argued that although manufacturing SMMEs have the potential to create long-term employment, “there are some challenges that threaten their survival and growth. The challenges include access to markets, financial challenges, lack of business acumen, poor or no record-keeping on business performance, poor quality products and lack of competitiveness”.
In addition, lack of funding, lack of expertise, lack of innovation, no or poor planning and poor management are some of the challenges manufacturing SMMEs face. Of all the challenges that SMMEs face, “lack of finance has been identified by this article and many others as the major challenge that hinders SMMEs from tapping into the available business opportunities”… and in Botswana “lack of finance is most cited and is the main factor that hinders SMME growth”.
Globally, commercial banks are the main suppliers of credit for manufacturing SMMEs and the same applies in Botswana because government has a limit in terms of financial support to manufacturing SMMEs.
Furthermore, in Botswana, “there is a scarcity of literature on manufacturing SMMEs and especially on their financial challenges. It is not easy to get literature on SMMEs, let alone on the challenges of manufacturing SMMEs. This means that policymakers and academics cannot find adequate studies to draw knowledge from”.
Against the background of information asymmetry and for the sake of addressing the research gap, the research paper examined the factors that affect manufacturing SMMEs’ ability to obtain bank loans and reviews the literature, methodology, findings and discussions, as well as conclusions and implications.
The paper acknowledges that SMMEs struggle to get financing and tend to get start-up finance and working capital from informal sources such as founders’ relatives and friends. Large enterprises on the other hand qualify for financing from formal institutions such as commercial banks and development banks.
This lack of financing, coupled with poor management of finances and other resources, has negatively affected growth and survival of SMMEs in Botswana. The factors influencing SMME borrowing are mainly divided into firm characteristics and entrepreneurial characteristics. Various scholars have characterized firm characteristics into age, size, level of income, collateral, location, insurance, business information, industry type and registration.
The research study found out that “the majority of manufacturing SMMEs use their own money (79 percent) to start and run their business. This supports the theory of internal financing where business owners do not borrow money when they start operating and they plough back profits for the business to progress”.
Manufacturing SMMEs have no choice, as they are small and usually do not have collateral security and premises, hence they do not qualify for loans (external financing). Four percent get their capital from family and friends, three percent of them from CEDA, 11 percent from government support, two percent from banks and one percent of them from micro lenders.
With 11 percent getting grants and loans from government and three percent getting loans from CEDA (government funded agency), in total 14 percent receive financial support from government.
The government and financial institutions therefore need to “finance more manufacturing SMMEs to increase chances of survival. The result demonstrates that manufacturing SMMEs mostly engage the internal funds theory, which suggest that firms use their own funds, and retained profits to finance the business rather than borrow”.
The study also found that “female SMME owners are more likely to get loans compared to their male counterparts in Botswana. Women in Botswana are regarded as responsible. That is why generally in schools girls perform better than boys. In positions of power in the corporate world, there are many women at the top. Most homes have women as breadwinners”.
Historically, women have been known to be more loyal than men. Based on these observations, it can be understood “why women in Botswana would be more likely to get loans than men. The other reason that influences married people obtaining loans more than unmarried SMME owners is to do with the cost involved in defaulting.
“When couples default, they will be blacklisted in all the financial institutions in Botswana as bad borrowers. This also affects any activities in the future that involve trust”.
Like most developing countries , Botswana underscores the importance of private sector investment in its economic diversification process, economic growth and employment creation. the country has over the years implemented various policy instruments to stimulate private sector investment. On the policy front, Botswana should enhance efforts to create a market friendly regulatory environment as a requisite for conducive investment environment.
It has been argued that countries with private sector dominance have shown the most impressive and sustained high rate of economic performance. Faced with this new private sector-led realism,Sub-Saharan Africa (SSA) region has fast been adopting longer term structural adjustment and sectoral reforms to create more appropriate incentives and a private sector-led development as the basis for achieving sustained economic growth. To date, to many SSA countries,increasing private sector remains a policy objective.
A march 2019 Botswana Institute for Policy Analysis (BIDPA) research study titled “The Impact of Business Regulatory Quality on Private Sector Investment in Botswana” concluded that “increasing private investment remains a policy priority in Botswana due to its fundamental role in the economic development process and in reducing unemployment and poverty”.
The study, undertaken and authored by Kedibonye Sekakela found from its research facts that “less has been achieved so far with regard to increasing private sector investment. Thus, private sector investment remains low”.
the study however acknowledged that the regulatory environment plays a significant role in boosting private sector investment when the capacity and efficiency of the administrative personnel improves. the results are bin accordance with the conventional knowledge that the quality of regulation regulation is profoundly affected by the institutional context in which it is imposed.
In Botswana, the private sector investment and development is recognized as the main vehicle for inclusive growth. From its early stages of development, the country implemented various policy instruments to stimulate private sector investment and one remarkable achievement so far, has been its prudent macroeconomic management.
Although macro policies are unquestionably important, there is a growing consensus that the regulatory environment also play a major determining factor of private sector investment and economic growth the country. It is however lamentable that there has been research that analyzed their impact on economic outcomes such as growth, productivity and investment.
The World bani in 1995 agreed to the redefining and narrowing sown of the government regulation to ensure an undistorted policy environment in which efficient markets could operate.
Deregulation is widely adopted , often as part of structural adjustment programmes, with the aim of reducing the “regulatory burden” on the market economy. Nonetheless, the objectives in regulation in the context of developing countries are likely not to be simply concerned with the pursuit of economic efficiency but with wider goals to promote sustainable development and poverty reduction.
Regulation is not without transaction costs, the study observes. The costs can be classified into two: the costs of directly administering the regulatory system, which are internalized within government and reflected in the budget to the regulatory agency and fall on consumers and producers in terms of the economic costs of conforming with the regulations and avoiding and evading them.
Studies have shown that regulations, if applied effectively, reduce transaction costs and uncertainty by establishing a stable (but not necessarily efficient) environment, thereby promoting efficiency. This in turn, facilitates investment in human and physical capital, techno, logical innovations and advancement, private sector development, all of which contributes to economic growth.
In other words, effective regulatory framework is associated with increasing levels of real income per capita since they shape overall condition for investment and growth. Executed poorly, “regulation can stifle creativity in learning and limit opportunities for all citizens. Countries with good regulatory reforms enables markets to function effectively by providing a stable environment for investment and thereby sustaining the process of a market-led economic development”.
The study further observes that another structural factor, particularly in developing countries, include public investment and financial development. Public investment could be either complementary or a substitute to private sector investment.
For instance, public spending on infrastructure or goods that raises productivity of private investment could be complementary. On the other hand, “stronger public investment while possible beneficial to some ancillary sectors is on a balance more likely to crowd out private sector investment”.
The crowding it may occur when the public investment is competing for scarce physical and financial resources and for the provision of goods and services. It may also occur when the private sector finance public investments through the accumulation of debt that is not sustainable.
A key determinant of private sector investment is trade openness as it is also a crucial enabler of investment and economic growth as it provides new market opportunities for domestic firms, stronger productivity, and innovation through competition.
It is also observed that “there is no country especially smaller countries that have developed successfully in modern times without harnessing economic openness particularly to international trade and investment”. Studies have shown that “trade openness stimulate private sector investment”.
The Sekakela research study found in conclusion that “private sector investment responds positively to increases in corporate credit in the short term but not responsive in the long term. Economic activities support private sector investment positively but to a lesser degree”.
On the policy front, the study advises government to deepen its efforts towards creating a market friendly environment and also capacitate bureaucrats as they play a catalytic role in the process.