The challenges facing Zambia’s ambitious SMEs

Lending money to small and medium-sized enterprises (SMEs) in Zambia is risky business. However, Noel Nkhoma has built a whole business with that as its raison d'etre. Launched in 2012 and headquartered in Lusaka, Betternow Finance Company specialises in providing short-term commercial financing to SMEs. For many such businesses, lack of access to the right type of capital can sometimes pose an existential threat. It’s not uncommon for budding entrepreneurs to shut up shop before their businesses get the chance to thrive. Borrowing from large commercial banks is prohibitive with lending rates reaching as high as 35 percent in some cases, reflecting the fact that the risk-return profile of many SMEs is deeply unattractive. Tech entrepreneur Mawano Kambeu told me, “I just got a quote for 28 percent from a local bank. Decided to pass. We’ve been fortunate enough over the last three years to get loans from foreign banks at six percent and eight percent.”

But if the mainstream banks view SMEs as ‘high risk,’ what is Nkhoma’s attitude to them? “Considered risk,” he tells me, is the only kind of risk BFC is interested in. “We lend against cash flows. We want to be sure about cash flows. The quality of our portfolio is quite satisfactory. It’s about 60 to 70 percent performing. It’s within the repayment schedules. In this environment, you don’t get loans paid off. There’s always bound to be a delay. But we are managing our risks very well. And so far so good.”

Two years after launching, the company sought external funding to support its rapid expansion. This resulted in a K5.8 million investment from Kukula Capital, a local venture capital and private equity firm. “By 2014, the company had established itself very well,” Nkhoma says. “We needed recapitalisation but organic growth takes time. If you’re ambitious as I am, you go for a combination of debt and equity. The partnership with Kukula has worked very well.” According to a company report published last year, BFC’s active customer base grew by 228 percent from 2015 to 2016 while its shareholder funds grew by 61.6 percent in 2017. Following a loss of K699,000 in 2016, the company bounced back with a net profit of K1.43 million in 2017. The company is planning to list on the Lusaka Stock Exchange within the next couple of years.

But while structured private equity (PE) investing holds enormous promise, it’s still a nascent industry in Zambia. Unlike larger regional markets like South Africa, the Zambian PE universe doesn’t enjoy the same joined-up structures. “PE investing is an exciting area but deal flow is still very low,” Mwiya Musokotwane, Co-Founder and CEO of Thebe Investment Management tells me. “The problem comes down to finding high quality deals of the requisite size needed to scale. No manager wants to be stuck doing 100 deals of $5 million ticket size each and then tracking them and actively participating in creating value.” Mafipe Chunga, Associate Director at KPMG Zambia agrees: “We don’t have a clear pathway that leads to small businesses becoming potential investee companies. The current funding structure we have favours multinationals. Investment banks have never really taken a long-term view on small businesses.”

A plethora of other structural and policy issues make running an SME in Zambia difficult. A common complaint amongst SME owners relates to the generous tax incentives given to large, often foreign, firms investing over $500,000. Monica Musonda, Founder and CEO of Java Foods Ltd, shares some of this frustration: “No incentives are given to Zambian SMEs. Small businesses don’t have money but they’re expected to pay full costs for everything. They say ‘no tax on profits’ but as an SME, when do you achieve profit?” There is in fact a tax exemption policy in place for SMEs but it only relates to those operating in a Multi-Facility Economic Zone (MFEZ), industrial parks or a rural area. While this helps some, it doesn’t go far enough for many others.

Musonda suggests a policy change in the area of supermarket supply chains. For years South African supermarket chains have dominated the Zambian market and are notorious for importing goods such as fresh fruit and vegetables, which can be sourced locally. Musonda would like to see the government continue improving the environment for local SMEs while coming down harder on the offending supermarket chains. But Kayula Siame, Permanent Secretary in the Ministry of Commerce, Trade and Industry, argues that while the government is doing what it can, business owners also need to take some responsibility: “Instead of spending our energy saying, ‘Why are these people coming? They shouldn’t come,’ the question should be, ‘Where are the opportunities and how can we utilise them?’ It is the private sector that will create the jobs, not the government. Getting the private sector to see that they have a prominent role to play has been a bit of a challenge because everyone expects the government to do everything.”

As part of developing an ecosystem that works to encourage and support upcoming entrepreneurs, Tembwe Mutungu, the Chief Financial Officer of Yalelo (a local fish business) believes that established Zambian businessmen and women have a vital role to play: “We need a cohort of business leaders who’ve been through journey to guide and invest in the new cohort that’s coming up. We don’t have a lot of that currently. I would hope that in 10 to 15 years, our generation would become that to younger Zambian entrepreneurs,” he says.

In Zambia, the potential to become commercially successful is real. But different issues that might seem isolated at first glance actually connect to negatively impact this potential success. Underpinning all this is attitude. “We don’t have long-term vision,” says Noel Nkhoma. “A lot of businessmen here want to make a deal, make a profit, avoid taxes, buy a luxurious car, and then look for the next deal.”

For many years the country has relied on large multinationals and commodities like copper for its growth. However, healthy, thriving SMEs led by ambitious leaders and support by visionary policymakers offer a better way: they instill a culture of entrepreneurship, create widespread employment, provide sustainable growth and limit capital flight. Failure is a risk but not trying is an even greater one.