Commercial Farmers' Union of Zimbabwe

Commercial Farmers' Union of Zimbabwe

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Alternative financing explored

Alternative financing explored

Thursday, 04 August 2011 16:15

Julius Chikomwe

FINANCE minister Tendai Biti, last week indicated in his mid term fiscal 
review that the country had limited fiscal space within which to manoeuvre. 
This resulted in him allocating a paltry US$70 million towards the Zimbabwe 
Economic Trade Revival Facility (ZETRAF). The minister lamented the absence 
of alternative sources of finance for business.This article gives insight on 
some of the alternative finance avenues Zimbabwean business might consider 

ALTERNATIVE financing, as the name suggests, is business finance from other 
sources other than commercial lending institutions. Alternative financing is 
normally used by smaller businesses. The reason is that, unlike the bigger 
and more established businesses smaller businesses, in most of the cases, do 
not meet the two major requirements under which banks are willing to advance 
credit-collateral security and business records.

In the context of Zimbabwe, one can say that there are about seven 
alternative sources of funding. We will examine five of them; factoring, 
community banks, venture capital, credit unions and yes-friends and family.

Factoring receivables basically involves a business selling its yet to be 
collected invoices to an institution established for this purpose at a 
discount. Why would a factoring company be interested in this sort of 
arrangement? Well, mainly because it realises a margin in each case, which 
is basically the difference between the discounted value of the invoice and 
full value of the invoice when the invoice is eventually settled. Pretty 
easy isn’t it? No.

Firstly, because factoring companies, like commercial lending institutions, 
exercise usual credit judgment and are unlikely to want to take risks unless 
the invoice that is the basis of the proposition is from a  reputable 
company. Secondly given the high interest  rates commercial banks are 
charging, it would seem that  factoring companies would charge more than 
what banks are charging. As a result, this would render this particular 
financing method less attractive to small businesses.

Community banks
Community banks, unlike commercial banks, are driven by developmental rather 
than commercial considerations. Their primary objective  is to overcome the 
barriers that prevent many small businesses from accessing business 
financing from the conventional sources. They seek to achieve this through 
less stringent lending requirements and offering their target market cheaper 
money. This sort of funding is usually specific in terms of both the target 
sectors  and beneficiaries that may access it.

The POSB serviced the market for a very long time. But, as we know, the POSB 
left this market when it converted into a commercial bank. It is hardly 
surprising therefore that there is no  reputable institution that  is 
filling the gap that was created by the POSB’s exit. Some could argue that 
Sedco is playing a  role in this area. But even if this were the case, at 
the rate at which Sedco is going we might need life times to notice their 
impact. In short, a lot more needs to be done. Perhaps the honourable 
minister needs to come up with policies that will demonstrate the government’s 
appreciation of  the special needs of this sector. In addition, there is the 
need to incentivize private companies and developmental organisations to 
invest in this sector.

Venture capital
Under this option, the owner of the business sells part of the business in 
exchange for capital injection by the venture capitalist. The arrangement is 
usually for a fixed time period, at the end of which, the venture capitalist 
is expected to exit. The exit, of course, would be in terms of previously 
agreed options.

This option is the least burdensome on small businesses. They just need to 
get professional advice when entering into such arrangements so that they 
can avoid entering into one sided arrangements that are detrimental to 
themselves and the country. In the preceding sentence, I have implied that 
venture capital would have to come from without. The reason is that venture 
capital is supposed to be patient capital, with arrangements taking on 
average between 5 and 10 years. It does not seem that Zimbabwe has, at this 
stage, capital that can be that patient.

Significant changes have taken place in Zimbabwe during the last decade 
regarding ownership of the means of production, particularly in the 
agriculture and mining industries. However, many of the new owners lack the 
necessary skill and capital to make a positive contribution towards 
improving their own lives and the country’s economy.  With the right policy 
framework, this would be a viable option for bridging the capital and skills 
gap that so many farmers and owners of mining claims face today.

This option dovetails with the government’s economic aspirations in the 
sense that investors do not become perpetual owners but exit at the end of 
an agreed term. Finance minister  Tendai Biti may want to consider this as a 
viable policy option for translating indigenisation policies into something 
meaningful for Zimbabwe’s mining claim holders and landowners who can’t 
afford to pay US$300 schools per term while they are sitting on a farm or 
mine that could potentially bring them a better life.

Credit unions
Another alternative funding source is credit unions. Most of these were 
buried during the hyperinflation years. There is need to revive this 
particular sector as it is cheap and very effective way of mobilising 
finance amongst members of a credit group. Credit unions are an attractive 
source of funding for group members because the administrative routines for 
accessing the money are usually very simple. In addition, it provides  a 
useful learning ground for members to understand the basics of business and 
managing credit on a very small scale. Both sets of skills become 
increasingly useful as the business grows.

The trade union movement  should lead the way in setting up and propagating 
credit unions. Employees and family members of employees would benefit from 
raising money for informal businesses so as to diversify their sources of 
income and to reduce dependence on wages as the only source of income.

Friends and family
Friends and family are an alternative source of financing. This particularly 
so when one is embarking on a new business, when it is not clear if the 
business is going to survive. Friends and relatives are a useful source of 
money for the promoter of a small business to establish  its basic 
infrastructure and facilities. More importantly, it creates a window through 
which the promoter of the business can begin to develop the reputation of 
the business and setting up basic business infrastructure such as record 
keeping, a necessary requirement of the business needs formal borrowing 
facilities even with non-conventional sources of capital.
In this article, I have confined myself to the alternative sources of 
financing that are relevant to Zimbabwe. This is not  an exhaustive list of 
all the possible sources of alternative financing.

A lot has happened since 1997 when Zimbabwe’s financial health began to 
decline. This was followed by decade-long hyperinflation. Hyperinflation has 
since been superseded by low inflation. But the market is still very 
Zimbabweans now have the resources. The number of small business has 
increased as a result of the policy of indigenisation. But, they do not have 
the capital and or skills that would enable them to derive a meaningful 
livelihood and generate wealth from the resources that they now own. The 
policy framework, on the funding side, has largely remained the same as what 
it was a decade ago.

The needs and priorities of Zimbabwe’s  small businesses  have changed; they 
are now completely different from those that existed a decade ago. There is 
therefore the need for the Ministry of Finance to come up with a policy 
framework will attract investments through alternative sources of capital to 
meet the needs and priorities of a nation that is now empowered but still 
needs capital to take the final step towards translating empowerment into 
meaningful economic participation.

Julius Chikomwe is an LLM (Finance and Law) Student at Duisenberg School in 
Amsterdam,  Netherlands.


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