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SMEs to be accommodated on LuSE

Provided by ELIF Business Solutions Content Partner for the SME Toolkit

By GILBERT KAIMANA

THE small and medium enterprises (SMEs) in Zambia have been riding on a difficult path despite the immense potential that they possess as the engine of growth and the effective means through which the benefits of the country’s economic gains could be distributed.

The SME sector is arguably the lifeline of the economy, because it is the largest domain for employment creation and service provision especially in areas which the larger-scale sector shuns.

It is not surprising therefore that the country’s economic development agenda which has been anchored on the development and expansion of the private sector, places a lot of emphasis on the development of the SME sector.

Through the Fifth National Development Plan (FNDP), the Vision 2030, the Private Sector Development (PSD) Reform Action Plan of 2004, and the Financial Sector Development Programme (FSDP), among other guiding instruments, the country is set to become a middle income country by 2030, but with the key message that the SMEs sector plays its full role.

Yet, the SMEs face a myriad of challenges in their quest to grow, chiefly being financial. These challenges have become a chorus in many a discussion fora, with different prescriptions being recommended.

But one route that has been identified as being more likely to provide an avenue through which the SMEs could access capital for their growth and become viably run business institutions is the stock market.

It is for this reason that the Lusaka Stock Exchange (LuSE) is in the process of introducing a second tier on the stock market which will accommodate the SMEs, an initiative that is seen as an alternative market place from which the SMEs would be able to attract equity investment and capital fundraising.

But the stock exchange is a cagey avenue for the majority of the SMEs in Zambia, who are not accustomed to the requirements of the stock exchange, among which is the strict adherence to good corporate governance practices, not least because by its nature, the market has to assure potential investors that they would be investing their money in well managed, directed and controlled firms.

The stock exchange has already a code of corporate governance for companies that are currently listed, and the successful entry of the SMEs through the second tier would demand similar standards in corporate governance.

It is with the objective of equipping SMEs in this area that the Institute of Directors (IoD) has developed a code of corporate governance for the SMEs that would be admitted to the stock exchange.

The code which was launched last week, would guide entrepreneurs in managing their operations.

Since corporate governance is concerned with the relationship among the board members, the management team and the shareholders of a company, and is the process by which company objectives are established, achieved and monitored, the SMEs should attract a lot of investor goodwill and interest when they buy in the initiative.

The practice of corporate governance will help the SMEs cultivate the culture of complying with the law, help managements and directors of the SMEs to earn the respect of their shareholders, identify and manage risks, adopt and develop systems that enhance the quality of decisions they make, and lower the cost of capital for their operations.

The SMEs would be expected to recognise their majority and minority shareholders, hold annual general meetings, appoint boards of directors, and put in place a management structure.

They are expected to adhere to the Companies Act, embed accounting, transparency and disclosure mechanisms, internal and external audits, risk management, internal controls, maintain a cordial relationship with the Government and the community, and care for the environment.

The best corporate governance practices also serve to promote fair competition and efficiency among firms, reduces both the supply and demand side of corruption through increased transparency and accountability, reduces risks and increases efficiency at firm and country level.

Eugene Chandi, who engineered the introduction of the code of corporate governance for the SMEs, says the initiative is more than handy in the implementation of the various national programmes in place, such as the PSD that lays foundation for faster and sustained private sector-led economy, the FNDP, the Citizens Economic Empowerment (CEE) programme, and the FSDP.

Mr Chandi said the initiative would help the SMEs develop into reliable entrepreneurs expected to grow into large-scale firms.

The code of corporate governance requires them to establish directorate and management structures that are credible, establishing a distinction between the shareholding of the businesses on the one hand and their management and directorate on the other hand.

To the extent that corporate governance includes organising the management structure and processes of decision-making within an enterprise by making them more efficient, transparent and objective, the SMEs could benefit in ways that give the enterprises a professional image, help achieve their continuity, increase their profitability and expansion of their businesses.

According to Mr Chandi, the code was meant to be that specific because there is no ‘one-size-fits-all’ when it comes to corporate governance, varying because of the distinguished complexity of operations between large enterprises and SMEs in this case.

He said the idea to introduce the corporate governance code for SMEs was timely, not only because the LuSE was incorporating the SMEs on the stock exchange, but also more importantly because the country had expectations for the entrepreneurs to wake up from slumber and discard their woes.

“You can give the SMEs all the money, but if they do not adhere to good corporate governance, they would not be able to move to a level where they can grow and become viable,” he said.

He said the formulation of the code was not something that the IoD merely wanted to dictate for the SMEs, but an ideal and practical vehicle that would necessitate the SMEs to drive through in the capital market, and is in line with the various instruments of economic growth that the country has in place.

The code of corporate governance will also help to guarantee the financial institutions that would like to support the SMEs that they were worth lending to, because the code would instill a sense of responsibility in the entrepreneurs so that they could cultivate the culture of paying back loans.

“What is important is that banks should be able to distinguish between good and bad eggs, so that those who are identified to have a good credit culture are seen as low risk, and are then allowed access to loans,” said Mr Chandi.

Related to the above, the other benefit that will accrue to the SMEs is that the cost of finance is likely to be reduced. Since the SMEs would prove to the banks to be low risk clientele, they will be able to negotiate borrowing at reduced rates.

Barclays Bank Zambia head of SME banking, Regina Mulenga agrees that the financial institutions have been finding problems dealing with the SMEs for a long time, because they have had no corporate governance practices.

Ms Mulenga says even if many SMEs had emerged on the scene following the privatisation programme, lending to the sector proved to be high risk for the financial institutions.

She said since the economic environment was generally not good for businesses, it was even more so for the newly established small businesses who struggle to meet their obligations, which, coupled with the poor credit culture, forced financial institutions to cap their lending to minimise credit losses.

“As the default rates continued increasing, lending to the SMEs was scaled down to minimal levels and access to finance for the SMEs became more and more difficult,” noted Ms Mulenga.

In recent years, however, there has been more emphasis by financial institutions to target the SMEs sector, and many have introduced different facilities for this group in response to their particular needs.

Ms Mulenga said even if the banks and micro-finance institutions have been vigorous in their pursuit of SMEs for financing, the new offerings by the financial institutions have been more cautious.

She said in most cases, the main concern for the financial institutions has been the realisation that the SMEs lacked principles of corporate governance in the running of their businesses.

“For example, an analysis of the credit problems revealed many factors and when all these are analysed further, one could successfully argue that the main problem was the lack of application of best practices of corporate governance by the SMEs in their day to day business operations,” she said.

The Barclays Bank official believes that renewed focus on financing for SMEs has been a testimony to the realisation that the sector is important to the development of the country, as well as the realisation that SMEs need to be tutored in best practices of corporate governance.

As financial institutions strive to address the problem of access to finance and cost of borrowing, they are looking to lowering the cost of borrowing for the SMEs through addressing principal factors that impact on the credit risk related to the SMEs.

Ms Mulenga said the principal credit risk considerations by financial institutions are performance and payment risk, while under corporate governance they include transparency, accountability, responsibility and fairness.

“When these principles are applied, they provide a clearer picture for any lender to make sound credit decisions at a cost truly reflective of the risk being taken,” she said.

The initiative should mark a turning point for the SME sector to ensure that it plays its full role in being one of the viable avenues for growth in the economy.

Permanent Secretary in the Ministry of Commerce, Trade and Industry, Davidson Chilipamushi recently observed that for a long time, the Government and various stakeholders had provided incentives aimed at stimulating the growth of SMEs in the country but the SMEs had remained at the same level.

Speaking in Lusaka when he launched the corporate governance code for SMES, Mr Chilipamushi challenged SMES to graduate from being small entities to big companies

“It is saddening to note that an organisation which was termed an SME a few years ago has remained small despite receiving financial schemes from Government,” he said.

Now surely this should be a thing of the past and the SMEs should come out of their cocoons, and perhaps now the permanent secretary’s concerns will be ably addressed through the inculcation of best corporate governance practices among the SMEs.

And as Mr Chandi says, corporate governance has more benefits not only for the SMEs but through a spill over effect to the economy as a whole.

In this globalisation era, there is need for the country to be attractive to all forms of investments and investors.

“Ideally, if we really follow and practice good corporate governance, we will have created a greater Zambia that will be very attractive to the outside world,” said Mr Chandi.

In all, the introduction of the code is a necessary contribution by the private sector to the vision and economic agenda that the Government has road-mapped for the country towards the objectives of vision 2030.

It is one of those milestones in the efforts to grow and enhance the sustainability of the economy.

 

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