MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF BANKING AND FINANCE

BACHELOR OF COMMERCE BANKING AND FINANCE HONOURS DEGREE

Survival strategies adopted by Small to Medium Enterprises in bridging the financing gap in the multiple currency.

BY

Sharon Manyara (R0722253c)

Supervisor: Mrs Chikoko

This dissertation is submitted in partial fulfillment of the requirements of the Bachelor of Commerce Banking and Finance Honors Degree in the Department of Banking and Finance at Midlands State University.

May 2011 Gweru, Zimbabwe

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APPROVAL FORM

The undersigned certify that they have supervised the student SHARON MANYARA’s

dissertation entitled “Survival strategies adopted by Small to Medium Enterprises in Harare

Zimbabwe in bridging the financing gap”, submitted in Partial fulfilment of the requirements of

the Bachelor of Commerce Banking and Finance Honours Degree at the Midlands State

University.

………………………………… …………………………..

SUPERVISOR DATE

…….……………………………… ……………………………..

CHAIRPERSON DATE

….………………………………… ……………………………..

EXTERNAL EXAMINER DATE

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RELEASE FORM

NAME Sharon Manyara

DISSERTATION TITLE Survival strategies adopted by Small to Medium Enterprises

in bridging the financing gap in the multiple currency

regime.

DEGREE TITLE Bachelor of Commerce Banking and Finance Honours Degree

YEAR THIS DEGREE GRANTED: 2011

Permission is hereby granted to the Midlands State University Library to produce copies of the

dissertation and lend or sell such copies for private, scholarly or scientific research purposes

only. The author reserves all other publication rights and neither dissertation nor extensive

extracts from it be printed or otherwise reproduced without author’s written permission.

Signed ..........................................................................

DATE: May 2011

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DEDICATION

I dedicate this research to my parents, who have gone out of their way to take me this far and to

support me and be my pillar of strength. To the Manyara family, I have set the pace for you and I

have got faith you will make it.

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ACKNOWLEDGEMENTS

I would like to thank the Almighty God for taking me this far. He has always been there for me

unconditionally. Glory be to God. A special heartfelt thanks goes to my supervisor Mrs Chikoko

for her guidance, assistance, constructive criticisms and enormous encouragements that

contributed immensely to the outcome of this research project. I am grateful for the help and

support I got from the corporate world and anonymous individuals for granting interviews and

responding to my questionnaires.

A special thanks goes to Enerst Nyambo who provided support and motivation throughout the

entire duration of my studies. Last but not least, to my family and relatives, the source of my

inspiration, thanks for being so loving, patient and supportive in all my life endeavours, God be

with you always

To God Be the Glory Forever and Ever.

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ABSTRACT

The research sought to investigate the prevalence of the financing gap in SMEs .The research

also aimed at looking at the various survival strategies that are to be adopted by SMEs in order to

minimize the negative effects of the financing gap in this multiple currency environment. Due to

the qualitative nature of the study, an exploratory research design was used, with questionnaires

and interviews being the major research instruments. The researcher however, found out that the

major sources of credit available for the establishment and expansion of SMEs in Harare are

personal savings, funds from family and friends and banks. However, the problem associated

with bank credit is the demand for collateral and the high cost involved in loan administration.

The importance of Small and Medium Scale Enterprises as being crucial to the economic

development cannot be over emphasized. It is therefore, important to consider conditions that

would ensure sustained growth in this sector. The SMEs should be seen as an important sector of

the economy requiring specific incentives to assist its development. The researcher recommends

that Governments accelerate the development of markets for financial services suited to the

special characteristics of SMEs by promoting product innovation and building institutional

capacity. Improving SMEs access to credit requires an increase in the number of financial

institutions that find lending to SMEs to be profitable and therefore sustainable especially the

microfinance institutions (MFIs). Easy accessibility to credit through specialized or development

oriented financing institutions and at a preferential interest can go a long way to boost the sector.

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TABLE OF CONTENTSAPPROVAL FORM.......................................................................................................................iRELEASE FORM.........................................................................................................................iiDEDICATION..............................................................................................................................iiiACKNOWLEDGEMENTS.........................................................................................................ivABSTRACT....................................................................................................................................vTABLE OF CONTENTS.............................................................................................................viLIST OF TABLES......................................................................................................................viiiLIST OF FIGURES......................................................................................................................ixLIST OF ACRONYMS.................................................................................................................xLIST OF APPENDICES.......................................................... PAGEREF _Toc301377168 \h xi.CHAPTER ONE: INTRODUCTION..........................................................................................1

1.1 Introduction…………………………………………………………………………………1

1.2 Background to the Study……………………………………………………………………1

1.3 Problem Statement………………………………………………………………………….3

1.4 Objectives of the Study……………………………………………………………………..41.5 Research Questions

…………………………………………………………………………41.6 Significance of the Study

……………………………………………………………….......51.7 Assumptions of the Study

……………………………………………………………..........51.8 Scope of the Study

………………………………………………………………………….61.9 Limitations to the Study

…………………………………………………………………….61.10 Definition of Terms

………………………………………………………………………..71.11 Organisation of the Study

…………………………………………………………………7CHAPTER TWO: LITERATURE REVIEW…………………………………...............................9 2.1 Introduction……..……………………………………………………………………………………9 2.2 Overview of the Financing gap…………………………….……………………………….9

2.3 Nature of the financing gap………………………………………………………………..11

2.4 Theories on the financing gap……………………………………………………………..15

2.4.1 The Lifecycle Approach,………………………………………………………........... 15 2.4.2 The Pecking-Order Framework

……………………………………………………….16 2.4.3 The Agency and Information list Theory ………………………………16

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2.5 Empirical Literature on the Financing Gap……………………………………………….17

2.6 Financing Small and Medium Scale Enterprises………………………………………….19

2.6.1 Owners Savings Equity………………………………………………………………….19 2.6.2 Venture Capital………………………………………………………………………….19 2.6.3 Trade Credit 20 2.6.4 Grants20 2.6.5 Commercial Bank Financing 20

2.7 Survival Strategies to be adopted by SMEs…..………………...........................................21 2.7.1 Franchising 22 2.7.2 Subcontracting 23 2.7.3 Public-Private Partnership (PPPs) 25

2.8 Stock Market ………………………………………………………………………………27

2.8.1 Initial Public Offering (IPO) 272.9 Summary

……………………………………………………………………………..........28CHAPTER THREE: RESEARCH METHODOLOGY. .……………………………………30

3. 1 Introduction…………………………………………………………………………….....30

3.2 Research Design…………………………………………………………………………...30

3.3 Research Population……………………………………………………………………….30

3.4 Research Sample…………………………………………………………………………..31

3.4.1 Sample Size 313.5 Data Collection Methods and Instruments

………………………………………………...32 3.5.1 Primary Data 33 3.5.2 Secondary Data 35

3.6 Data Presentation and Analysis Plan……………………………………………………...36

3.7 Summary…………………………………………………………………………………..36

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS..........................................374.1 Introduction

………………………………………………………………………………..374.2 Analysis of Data Response Rates

………………………………........................................37 4.2.1Questionnaire Response Rate 37 4.2.2 Personal Interview Response Rate ……………………………………………………39

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4.3 Analysis of Research Findings…………………………………………………………….39

4.3.1 Distribution of respondents 394.2 Sources of Finance Available To SMEs

…………………………………………………..40 4.2.1External Finance Currently Being Used 41 4.2.3 Assistance received from Government 42

4.3 Nature and Severity of the Financing Gap………………………………………………...43

4.3.2 Number of Years in Operation 444.4 Significant Changes in the Borrowing Constraints Faced By SMEs in Multiple Currency……………………………………………………………………………………….45

4.4.1 The Reasons behind the Difficult in Accessing Credit from Financial Institutions …46 4.4.2 Reasons For The Low Credit Extention to SMEs 47 4.5 The Factors That Inhibit Further Growth and Development in SMEs…………………...

..484.6 Sustainable Survival Strategies Adopted

………………………………………………….494.7 New Initiatives That Can Be Adopted For The Expansion and Development of SMEs.

…50 4.7.1 Alternative Stock Market 50 4.7.2 Franchising 51

4.8 Summary…………………………………………………………………………………..52

CHAPTER5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS.....................535.1 Introduction

………………………………………………………………………………..535.2 Summary of the Study

…………………………………………………………………….535.3 Conclusions …………………………………………………………………………...…..545.4 Recommendations.

………………………………………………………………………..565.5 Suggestions for Future Research

………………………………………………………… 57REFERENCES............................................................................................................................58APPENDICES..............................................................................................................................61Appendix A-Cover Letter

………………………………………………………………………..61

LIST OF TABLESTable 3.1 Distribution of SMEs per Industry category............................................................ 32

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Table 4.1 Response rate on questionnaires sent to Financial Institutions.................................37

Table 4.2 Response rate on questionnaires sent to SMEs ........................................................38

Table 4.3 Number of years in operation....................................................................................44

Table 4.4 Factors that inhibit growth of SMEs.........................................................................48

LIST OF FIGURESFig 2.1 Risk and Return Faced by SMEs...............................................................................13

Fig 4.1 Distribution of SMEs according to the number of employees...................................39

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Fig 4.2 Sources of finance available to SMEs........................................................................41

Fig 4.3 SME bank Account Holding and Loan Gap...............................................................43

Fig 4.4 Changes in Borrowing Constraints Faced SMEs in the Multiple Currency...............45

Fig 4.5 Factors Affecting SMEs Access to Finance................................................................47

Fig 4.7 Small Capital Initial Public Offering in Various Industrialised Countries..................51

LIST OF ACRONYMS

JSE Johannesburg Stock Exchange

OCED Organization for Economic Cooperation and Development

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IPO Initial Public Offering

PPPs Public Private Partnerships

RBZ Reserve Bank of Zimbabwe

SEDCO Small to Medium Enterprises Development Corporation

SMEs Small to Medium Enterprises

TNCs Transnational Companies

UNCTAD United Nations Congress on Trade and Development

UNDP United Nations Development Programme

LIST OF APPENDICES

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CHAPTER ONE: INTRODUCTION

1.1 Introduction

This study seeks to reveal the challenging problem of SME financing in Zimbabwe with a view

of indentifying sustainable survival strategies besides alternative financing options available

within the multiple currency period. In this chapter, the researcher looks at the background

information, the problem statement and the objectives of the study. The chapter also highlights

on the significance, assumptions, delimitations and limitations of the study as well as the

definition of key terms used.

1.2 Background to the Study

The development of SMEs in Zimbabwe is a step towards building a vibrant and diversified

economy (Mahmoud, 2005). SMEs are seen as vital to the promotion of an enterprise culture and

to the creation of jobs in the Zimbabwean economy. Small to medium enterprises provide an

impetus to the economic progress of developing countries. These enterprises are having

financing constraints which is greatly affecting their growth.

In the controlled regime of the 1980s, the monetary policy in Zimbabwe was rather passive and

reactive to direct controls on both deposit and lending rates (RBZ 1995) this was against the

background of controls on wages, the exchange rate and the general price level aimed at keeping

inflation in check. There were laws and regulations which restricted entry into the financial

sectors hence the financial sector was heavily segmented with limited competition. Together

with the continuously foreign resource gap this resulted in low domestic saving rates, low credit

availability, low investment and low economic growth. Thus the absence of reasonable

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competition as a result of an oligopolistic financial sector resulted in the natural discrimination of

SMEs and the poor.

In 1991 the Gemini study funded by USAID found that In Zimbabwe during the early 1990’s

there was a marked scandal and massive failure of small to medium enterprises. This was due to

the prohibiting high lending rates, use of conventional lending methodologies by banks as well

as restrictions of credit policies on credit allocation in favour of large corporations at the expense

of small businesses. During the controlled regime big corporations could finance their

investments through profit reserves whilst small to medium enterprises were hard hit by credit

shortages.

With the introduction of Economic Structural Adjustment Programme (ESAP) which spanned

the period 1991-1995 there was a significant increase in demand for finance by businesses in

which formal financial units failed to satisfy. CEEDR (2007) noted a number of interesting and

important observations with regarding to the financing constrains of such enterprises. A major

observation was that while internal sources of finance continued to dominate the finance of fixed

investment, external finance was quite significant. In spite of that trend only a quarter of SMEs

application for bank loans had a chance of being favourably considered. Banks attributed high

rejection rates to the absence of viable projects and collateral.

The apparent death of medium term financing ,the rudimentary nature of capital markets and

weakening in financial intermediation in general have made it difficulty for small businesses to

access the means of financing. According to UNDP (2001), foreign direct investment has fallen

drastically, inflation was on the increase without clear signs of coming down and economic

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growth has been lower than anticipated. The situation grew even worse for the SMEs in the

agricultural sector because of the sectors relatively high risk. In the pre-financial reform era the

major window for finance of SMEs were Small Enterprise Development Corporation (SEDCO),

Agricultural Finance Corporation (ADF), the Zimbabwe Development Bank (ZDB) and the

Venture Capital Company of Zimbabwe (VCCZ). These institutions could not provide adequate

finance to SMEs because of their unsustainable reliance on the government and donors for

funding.

During the hyperinflationary period 2000-2008, inflation had a negative impact on credit

allocation to SMEs. Economic performance in Zimbabwe was on the decline and in particular

unemployment levels have reached 80% and the poor were estimated to be 75% of the whole

population (Central Statistics Office of Zimbabwe 2009). A great deal scaled down operations

as a result they faced a great challenge to rejuvenate and those that survived are currently facing

problems of accessing finance. The SMEs in the country cannot continue to stay small and use

the traditional business models that have sustained them to date if they want to survive in the

competitive world. Given this genuine need for financing and equity for SMEs which is

hampering its growth. There is a definite and critical role for investigating the strategies that are

to be adopted by SMEs to ease the financing constraints.

1.3 Problem Statement

The main problem faced by SMEs in Zimbabwe is failure to access credit from financial

Institutions. Despite SMEs strong interest in credit, banks profit orientation may deter them from

supplying credit because of the high transaction costs and risk involved. In this endeavour the

researcher reveals the challenging problem of SME financing in Zimbabwe with a view of

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indentifying sustainable survival strategies besides alternative financing options within the

multiple currency period.

1.4 Objectives of the Study

The main objective of this study is to investigate the survival strategies that are to be adopted by

SMEs to minimise their financing constraints. In pursuit of this objective the other supporting

objectives are:

To evaluate alternative sources of finance available to SMEs.

To analyse the concept of the financing gap and determine it’s prevalence in SMEs.

To examine whether there has been a significant change in the borrowing constraints

faced by SMEs in the period of the multi currency.

To indentify the factors that inhibits further growth and development of SMEs.

To examine sustainable survival strategies to be adopted, as well as new initiatives for

their expansion and development. The advantage SMEs will have in adopting each

method

1.5 Research Questions

The research was undertaken to answer the following questions:

How prevalent is the financing gap in SMEs?

If the financing gap exists, how can it be bridged?

How can the constraints encountered by SMEs in the process of accessing funds be

addressed?

What are the sources of funds available to SMEs both (internal and external) in

Zimbabwe?

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How has the multiple currency affected the operating capacity of SMEs?

1.6 Significance of the Study

This research will be of major benefit to the small and medium enterprises, entrepreneurs and

financial institutions. It also provides them with the various investment opportunities that exist

from SMEs as they are essential for growth and development of the Zimbabwean economy

especially in economical conditions of the multicurrency.

The study is also useful to those entrepreneurs who are looking for finance as it provides a

detailed analysis of the various sources of finance available for SMEs in Zimbabwe. It also

provides alternative survival strategies that can be adopted by SMEs to minimise their financing

constraints. To the researcher, it will provide her with in-depth knowledge in these areas as well

as introduce her to the real world of SME management.

1.7 Assumptions of the Study

Below are the assumptions to the study:

The researcher will have enough time and resources to carry out and complete the study.

All information collected from respondents is regarded as accurate, complete, and

relevant and therefore can be relied upon.

The researcher will access recent and correct information from the respondents (banks,

entrepreneurs, SMEs and government institutions)

The sample taken is an ideal of the whole population.

The information provided by individuals interviewed can be related to the institutions that

they work for.

1.8 Scope of the Study

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The research is confined to investigating the prevalence of the financing gap among SMEs with a

view to explore more sustainable ways of minimising these financing constraints. Most of the

research material used in the study is related to SMEs in Harare, Zimbabwe though there is

supporting information from other countries. The study was confined to institutions which

included banks, entrepreneurs, and SMEs and government agencies; this was done so as to align

the research with the programme the researcher is pursuing. The research was carried in Harare,

Zimbabwe as the researcher had access to SMEs, government agencies and financial institutions

in this area.

1.9 Limitations to the Study

The research was successful but the following limitations hindered the researcher in performing

an up to standard study:

Time – The researcher had to strike a balance between social issues, school issues,

lectures and examinations preparation. Due to this the researcher had to limit the size of

the sample population, the textbooks used and also the time spent on the internet.

Monetary resources- This was a major constraint especially due to the use of hard

currency things have been relatively expensive like using the internet, photocopying,

typing, communication and transport issues.

Nature of information- Some information which the researcher deemed critical to the

research was rendered strictly private and confidential by the people who had it. This was

due to ethical policies and codes of conduct of different financial service firms.

Most of the SMEs are not registered had to rely on literature reviews from available

resources like books and the internet.

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Geographical limit- transport and logistical challenges constrain the researcher to travel

from one area to another.

1.10 Definition of Terms

Financing gap-. Refers to a sizeable share of economically significant SMEs that can not

obtain financing from banks, capital markets or other suppliers of finance.

Financial institution- Refers to an institution which collects funds from the public and

places them in financial assets such as deposits, loans and bonds rather than tangible

property.

SMEs- Small businesses which have limited liability it’s defined by the number of

employees, it often refers to those fewer than 50 employees as ‘small’ and those fewer

than 250 employees as medium. They are also defined in terms of turnover and assets.

Survival strategies- Refers to long term plans and methods that can be adopted by SMEs

to minimise their financing constraints.

1.11 Organisation of the Study

This chapter generally looked at the background to the research topic, the problem statement, and

the objectives of the study as well as the research questions to be answered. It also highlighted on

the significance, assumptions, scope and limitations of the study. It ends with a list giving the

definitions of key terms used in the chapter.

The next chapter will look into the theoretical and empirical literature review on the topic under

study. Chapter 3 will cover the research methodology. Chapter 4 covers the presentation and

analysis of data and the concluding Chapter 5 covers the summary of the study, conclusions,

recommendations and suggestions for future research.

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CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter explores the vast literature on the financing gap and its prevalence among Small to

Medium Enterprises (SMEs). Various forms of financing will be discussed next and their

limitations. The researcher will look at the various strategies that are to be adopted by SMEs to

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minimize this gap. The researcher will look at the limitations of each strategy adopted and

investigates how successful are these strategies are in other countries.

2.2 Overview of the Financing gap

According to Kirzner I (1979) in modern financial systems surplus funds may pass from

“savers” to borrowers through intermediated channels (e.g. banking, securitisation) or may be

allocated directly to borrowers. At its core the process of financial intermediation is about

processing information from one form to another. According to (Levin etal 1987) thus this

process concedes that banks and other intermediaries could add value via diversification it entails

expanding the investment choices available to savers and the sources of credit for borrowers.

According Hall (1996) in examining the financial intermediation process, it is important to note

that, because the supply of credit is inexhaustible, there will always be some borrowers whose

demand for credit is not satisfied in full or terms they consider inappropriate. Deakins (1993)

agree with Hall stating that in the competition for credit. Borrowers whose credit risk is

relatively easy to assess have the advantage while entities such as SMEs are more likely to have

their requests denied. In fact even in banking markets that are fully competitive and have no

major structural distortations. SMEs may well be at a considerable disadvantage in obtaining

finance compared with more established companies. Obviously the possibility that large number

of small firms will be excluded from the credit market becomes even higher as market

imperfections gain in significance.

Argument to this effect are frequently made concerning SMEs, in particular, that there are

systematic gaps in the debt market for SMEs. OECD (2005) define the financing gap as a term

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that is typically meant to imply that a sizeable share of otherwise economically relevant SMEs

that can not obtain financing from banks, capital markets or otherwise suppliers of finance for

their “viable projects” because the flow of credit would be affected by changes in either the

demand or the supply of credit. Thus in defining a financing gap it is necessary to distinguish

between the two.

Haynes, Ou and Berney (1999) argue that in countries with the private credit market, with

moderate amount of financial assistance; have apparently succeeded in providing sufficient

financial resources to SME sector broadly defined, such that no generalised financing gap can be

indentified. Competition has spurred financial institutions to devise innovative solutions,

combined with a measured amount of public support have enabled the financial system to

surmount the information and agency problems that characterise SME lending.

This same positive assessment does not necessarily apply in the case of emerging economies and

developing countries. In most countries the majority of SMEs appear to be facing a persistent

challenge in obtaining credit. There are macro economic policies that lead to excess for domestic

savings, regulatory and structural policies that favour larger enterprises. These have got a

tendency or provide incentive for SMEs to remain in the informal economy and patterns of

ownership, governance and supervision that discourage banks from lending to SMEs are

contributing factors.

2.3 Nature of the financing gap

The extant literature is clear on the fact that small businesses mostly have problems accessing

funds from finance providers to finance fixed assets and working capital for their operations

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(Tucker and Lean, 2003). The presence and nature of a “finance gap” has been debated for

decades. Blanton and Dorman (1994) argue that even when SMEs are given credit, they are

often granted informal credits in financing their long term needs and working capital. This

section focuses on the reasons why financial institutions are reluctant to give credit to SMEs.

They include the following;

Existence of Information Asymmetries between Finance Providers and Borrowers

Information asymmetries refer to disparities between information available to businesses seeking

capital and suppliers of capital who are typically assumed to be at an informational disadvantage

with respect to insiders of the business (Stiglitz and Weiss, 1981; Bester, 1987). SMEs do not

publish the same quantity or quality of financial information than publicly held firms. As a

result, information on their financial condition earnings and earnings prospects may be

incomplete or inaccurate. Faced with this type of uncertainty, a lender may deny credit,

sometimes to firms that are credit worthy but unable to document it (Coleman, 2000). These, for

example, include new and technology-based propositions for which market intelligence will be

limited and asymmetric information is more acute. At an early stage, information is limited and

not always transparent (Hall et al, 2000; Schmid, 2001) and assets are often knowledge based

exclusively associated with the founding entrepreneur (Hsu, 2004). Especially with

manufacturing or technology based firms, entrepreneurs may be reluctant to provide full

information about the opportunity because of concerns that disclosure may make it easier for

others to exploit (Shane and Cable, 2002). In addition, there may be asymmetries arising from

location as well as sector. For example, owners of SMEs in rural environments may face

difficulties with access to bank finance (OECD, 2008).

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Reputational Effects

They apply theoretically where SME owners are prevented by their own or others experiences

from applying for debt finance. This provides a discouraged borrower effect (Kon and Fraser,

2005). That is, some small business owners may not access finance because at some stage they

are discouraged from applying. For example, women owners, who are discouraged by perceived

bureaucracy or financial requirements and are discouraged by a first refusal. Entrepreneurs may

not seek finance if there are perceived issues. This could be either that they think they will be

unsuccessful so there is little point in applying or a perception that they will not have the

information and good credit history that it is perceived that banks require. It may occur where

entrepreneurs from certain groups distrust bankers, as for example can occur with ethnic

minority entrepreneurs since they may perceive institutional bias in banking institutions (Roper

and Scott, 2007). The extent of any discouraged borrower effect is unknown. It has been

suggested that banks with extensive and close relationships with some small firm communities

may be able to overcome these adverse effects.

Despite these developments by the banks of more sophisticated decision-making and financial

modeling approaches. These have been supported by increased market intelligence and

developments in relationship banking that may help to over come these informational and

reputational effects. However theoretical arguments suggest that there are, nevertheless, a

number of categories of SME owners that could be affected by informational issues or

reputational effects.

Perceived High Risks

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Commercial banks are usually wary of small businesses because of their perception that SMEs

are high risk borrowers. This systematic bias against SMEs can be explained by Akelofs (1970)

theory “market for lemons” This theory is illustrated below

Figure 2.1: Risk and Return Faced by SMEs

Source: Quarterly Journal of Economics

Because small businesses are regarded as high risk, the level of risk associated with the riskiest

small business tends to be applied to all businesses. Consequently bad business tend to drive

good business out of financial markets as the latter have to raise equity or debt terms than to

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exaggerate their risk. The gap between true risk and the perceived risk can be termed as the

lemon gap.

Lack of Collateral

Lack of collateral limits access to credit and is usually related to poorly defined property, land

use rights, weak land and property markets (WDR, 2001). Stringent collateral requirements of

formal institutions often rule out a large segment of SMEs. Since there is considerable

uncertainty surrounding the survival and growth of SMEs and their asset-backed collateral is

usually valued at “carcass value” to ensure that the loan is realistically covered in case of default

and immediate realization. According to Fafchamps (1996) even when borrowers have assets

that can be used as collateral, they are often not acceptable to banks because of high cost and

long delays in using judicial enforcement mechanisms. This implies that the already

disadvantaged small firms may even need proportionately more collateral than do large firms.

High Cost of Lending

The perception of a finance gap may reduce the willingness of SMEs to approach the banking

network to secure appropriate financing. According to Allison, (2005) people do have a tendency

not to present themselves to a financial institution in the first place, because of self-selection.

Then it may appear that the institutions rates of granting loans are quite high – that they are

meeting demand. This therefore leads businesses seeking to ‘bootstrap’ rather than securing

appropriate financial packages. Typically these businesses become dependent on financial

support from their own resources and family and friends. Therefore this leaves a problem for

anyone with a viable proposition but without family and friends without any resources to help.

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There is some evidence that accessing finance may be affected by differences in supply side

practices and policies i.e. in commercial banking policy (BBA, 2002), insofar as they affect the

perceptions and attitudes of small business owners seeking to raise finance. For example

commercial banks differ in the extent to which relationship banking is applied to the small firms

sector.

2.4 Theories on the financing gap

SMEs’ access to external sources of funding depends largely on the development of financial

markets, the regulatory environment within which financial institutions operate and their ability

to assess, manage and price the risks associated with loan products for SMEs.

Theoretically, a number of analytical paradigms have attempted to explain the complexities and

practicalities involved in small-firm financing.

Three major hypotheses have emerged that attempt to explain small-firm financial structuring

these are:

Lifecycle approach

Pecking-order framework

Agency theory

2.4.1 The Lifecycle Approach,

As described by Weston and Brigham (1981), was conceived on the premise of rapid growth and

lack of access to the capital market. Small firms were seen as starting out by using only the

owners’ resources. If these firms survived, the dangers of undercapitalisation would soon appear,

and they would then be likely to make use of other sources of funds, such as trade credit and

short-term loans from banks. Rapid growth could lead to the problem of illiquidity. The dynamic

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small firm would therefore have to choose between reducing its growth to keep pace with its

internally generated funds, acquire a costly stock market quotation, or seek that most elusive

form of finance – venture capital. The implication of this hypothesis for SMEs is that expanding

small firms are likely to experience rising short-term debt and use little or no long-term debt.

2.4.2 The Pecking-Order Framework

The pecking order theory was propagated by Myers (1984),it states that firms finance their

needs in a hierarchical order, first by using internally available funds, followed by debt and

finally, external equity. This practice is more common in small firms and indicates the negative

relationship between profitability and external borrowing by small firms. In other words,

assuming a zero growth, firms with high profitability would generate higher levels of internal

liquidity, reducing the need for borrowing. Older firms, it may then be hypothesised, would

make less use of external finance and, instead, would rely on retained funds.

2.4.3 The Agency and Information list Theory

It focuses on transaction costs, contracting analysis and agency theory following the work of

Coase (1937) and Weiss (1981). This body of literature gives vital insights into the problems of

ownership, management interrelationships and credit rationing. Issues around information

asymmetry, moral hazard and adverse selection are likely to arise in contractual arrangements

between firms and external providers of finance. These problems may well be more severe, and

the associated costs are much higher, for small firms than for large ones, given the complexities

of monitoring and bonding. Small firms are also subject to the risk of asset substitution which, in

practice, means a change in the firm’s asset structure. For very small and micro-enterprises this

asset substitution may well take place between the enterprise and the owner’s household.

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Thus, the proximity to the household, lack of legal formalisation, weak financial disclosure and

the owner-managed nature of small firms make it hard for lenders to track ongoing changes to

the asset base of the small firm. The presence of these problems in small firms may explain the

greater use of collateral lending to small firms as a way of dealing with these agency problems.

Lenders strategies for dealing with these problems also add significantly to the cost of dealing

with this sector. For a large enterprise the evaluation of an application for finance may be limited

to the assessment of an (audited) set of financial statements and supporting documentation

provided by the applicant. For SMEs the assessment frequently has to go far beyond this,

implying a substantially higher transaction cost.

Regardless of all the theories explaining the financial needs of SMEs, its clear that the financial

needs of SMEs in both developing and industrial countries are largely diverse, they differ from

region to regions or country to country. The degree of competition between banks and the stage

of development of the capital markets constitute an important underlying force that may explain

these differences between industrial and developing countries.

2.5 Empirical Literature on the Financing Gap

The problems faced by SMEs in Nigeria have been enduring but most of the reforms have

exacerbated some of them. As far back as 1977, the Federal Government in its publication 'Small

Scale Industries, Credit Scheme' identified the basic problems that affected SMEs to be lack of

adequate capital and credit facilities for sustaining their growth and development (Ekpenyong,

17

1997; Utomi, 1997). Institutional credit was not available to SMEs because they are generally,

considered as high credit risks by financial institutions.

SMEs in China are facing greater credit constraints and have limited access to bank loans. Lin

(2007) described that over 98% of SMEs have no access to formal financing. Shen et al. (2009)

identified that SMEs in China obtain only 12% of their capital from bank loans, while their peers

obtain 21% in Malaysia and 24% in Indonesia. Lacking appropriate financing channels has

become the main hurdle for the development of SMEs. Lin (2007) argues that as SMEs are often

labor-intensive enterprises, their ability to absorb labor costs are reduced when they face credit

constraints.

The investigation of SMEs’ access to finance was undertaken for the Scottish Government

during the summer of 2007 (Scottish Government, 2008). The research was commissioned to

investigate further the difficulties that a significant minority of Scottish SMEs that took part in

the Annual Small Business Survey (ASBS) (Scotland) reported in accessing finance from banks.

The research was prompted by results from the 2005 ASBS survey which showed that, out of the

1002 SMEs that took part in the survey, 11 per cent of them sought finance in the 12 months

prior to the survey and just under a quarter of these reported experiencing problems accessing

finance.

2.6 Financing Small and Medium Scale Enterprises

18

Financing constraints limit the investment capacity of SMEs and thus hamper their growth.

Formal Financial SME support mainly refers to subsidies, credits and soft loan guarantee

schemes provided by banks and other financial institutions. Lin (2007) described that over 98%

of SMEs have no access to formal financing. The various forms of formal financing are

discussed below:

2.6.1 Owners Savings Equity

This can be classified as equity finance. This kind of funding usually provides only capital to

start the business and for growth purposes it can not sustain. Okraku and Croffie (1997) argue

that SMEs rely primarily on personal savings of owners, business profits, family members or

friends for their financial needs. They have little or no access to formal external credit. The effect

of this is inadequate fixed capital as well as working capital. The consequences of these are a

very slow growth rate and frequent failures among small businesses.

2.6.2 Venture Capital

This is also a way of acquiring equity finance and is cheaper than debt finance. Venture

Capitalist are investors who want to acquire shares in a company. When investing in SMEs

venture capitalist consider whether they are likely to expand. The institution that puts in the

money recognises the gamble that is inherent in the funding. There is a serious risk of losing the

entire investment, and it might take a long time before any profits and returns materialize.

Venture capital funds participate in the financing chain by providing capital to growing SMEs in

their early expansion and developing years.

2.6.3 Trade Credit

19

Trade credit is a major source of financing for small firms and has been discussed and

investigated as short term financial source in various theoretical and empirical studies. With the

use of trade credit, borrowers might encounter capital market imperfections in form of

asymmetric information and transaction cost. According to Wolken (1993) this consequently

lead yield high interest rate and credit rationing, thus prompt them to use trade credit. In this

market setting, trade credit might cause less transaction costs associated with the liquidation of

each individual commercial exchange, compared to credit from other financial institutions, like

banks therefore trade credit is a more efficient way to deal with market imperfections.

2.6.4 Grants

Grants are also another important source of funding for small businesses. Grants are usually

from the government or non profit organisations, are contributions of capital that do not take

equity interest in the company ,but also do not need to be repaid .While this “free money” may

seem great at first ,there are two things to consider . First the process of receiving is time

consuming and filled with bureaucratic hurdles. Second, grants are given to promote the interests

of the grant (e.g. lowering unemployment). Also companies seeking the grant will have to meet

strict requirements often tied to location, industry, job creation, and show that the money will be

used to that end.

2.6.5 Commercial Bank Financing

The Financial systems in every country play a key role in the development and growth of the

economy, although the ability to play this role effectively and efficiently largely depends on the

degree of development of the financial system. The traditional commercial banks which are key

players in the financial systems of nearly every economy have the potential to pull financial

20

resources together to meet the credit needs of SMEs. There is still a huge gap between supply

capabilities of the banks and the demanding needs of SMEs

Despite the numerous factors that challenge the survival and growth of SMEs in both developing

and developed countries, finance has been identified as one of the most important factor

(SBA, 2000). There is a huge challenge for SMEs globally when it comes to sourcing for initial

and expansion capital funds from traditional commercial banks. Abereijo and Fayomi (2005)

note that the majority of commercial bank loans offered to SMEs are often also limited to a

period far too short to pay off any sizeable investment. In addition, banks in many developing

countries prefer to lend to the government rather than private sector borrowers because the risk

involved is lesser and higher returns are offered. According Levitsky (1997), such apathy for the

SMEs have crowded out most private sector borrowers and increased the cost of capital for them.

These preferences and tendencies of the commercial banks, instead of addressing the capital

needs, it has actually worsened the lack of financing for SMEs.

2.7 Survival Strategies to be adopted by SMEs

Firms should develop innovative capabilities for their survival in the era of global competition. Firms

rely either on their internal capabilities and or their external linkages as the sources of innovation.

Several factors contribute to the growth for SMEs, these include, the development of horizontal

relationships aimed at improving the market environment for small enterprises or the

development of vertical linkages with larger domestic enterprises. All which are vital for the

development and survival of SMEs (Cook, P. 2000)

21

2.7.1 Franchising

A significant portion of SMEs fail due to a lack of familiarity with the requirements of the line of

business. Moreover, while SMEs face financial and investment constraints; this is a critical issue,

mainly due to their inexperience and weak business management capabilities. A business culture

has been identified that prefers to replicate with incremental innovations and is reluctant to

pursue growth by opening up to investors for fear of losing control of the business.

According to Scott A (1998), Franchising offers small to medium enterprises with limited capital

the opportunity to succeed at national or regional levels where when operation and positioned

effectively, franchising fast tracks business growth from start-up through to globalization. This is

a successful strategy for business expansion that has both an economic and social impact.

Between 2001 and 2009, the franchise sector in the United States grew more rapidly (economic

output growth 41%) than businesses in general (26%), with the number of franchise jobs and

establishments on the rise. In Latin America, in 2007, Brazil and Mexico had 1,197 and 500

domestic franchise networks, and 65,553 and 60,000 points of sale (franchise and owned),

respectively, with significant growth in the number of enterprises, jobs, and share of GDP.

It is important to note that in both countries most of the franchises were small or medium-sized

local businesses, which have now surpassed in number all foreign franchises. Although this is a

viable option for SMEs to use to bridge the financing gap, it has got many constraints which

limit its viability in Developing countries these are:

(i) There is unfamiliarity with the areas of industrial property, and trademark and patents

registry for protecting business concepts and processes.

22

(ii) There is high cost of transforming an SME into a franchise due to the lack of a

competitive market of consulting services with experience in closing management

gaps and facilitating the legal, financial, and commercial structuring of a franchise.

(iii) There is the absence of a franchise registry and mechanisms to facilitate the purchase

and sale of domestic franchises and promote their entry into the international

marketplace.

(iv) There are few financing alternatives, both for structuring businesses and for

supporting potential SME franchisees.

However the overall benefits outweigh the constraints and these include: improved survivability

for micro, small and medium-sized enterprises; establishment of marketing networks; generation

of value added; improvements in the quality of the proposed products and services and greater

value of trademarks.

2.7.2 Subcontracting

In the globalization era, there has been an increasing trend of Trans National Corporations

(TNCs) shifting their production bases to developing countries, which offer growing markets as

well as manufacturing facilities to have advantages of both productivity and distribution. This

international expansion of TNCs provides increasing opportunity of subcontracting relationships

for local Small and Medium Enterprises (SMEs). This is one of the main determinants for the

success of SME development; it involves the establishment of useful linkages between LEs and

SMEs through subcontracting arrangements (Berry, 1997).

Subcontracting is one type of inter-firm linkages involving back end relationship between a large

buyer firm and an SME supplier. Hayashi (2002) defines subcontracting as a type of business

23

transaction in which one party (subcontractors or supplier firms) is commissioned by another party

(parent firms, assembler firms or higher tier supplier firms) to provide intermediate products or

processing services necessary for the products manufactured by the latter.

According to Hondai (as quoted in Hayashi, 2002), the main benefits SMEs can obtain from

subcontracting transactions with large scale parent firms are,

(i) The reduction of information and transaction costs through subcontracting ties, which

includes easy and cheap acquisition from large scale parent firms of new technologies,

product designs, production processes, management methods, marketing and input

materials.

(ii) The reduction of risks and uncertainty and an increase in expected rate of profit as a

consequence of stable orders and better payment conditions.

(iii) The improvement of credit worthiness.

(iv)Subcontracting firms receive assistance from the contractor and the degree of inter-firm

linkages between the participating firms has to be assessed in terms of the assistance

provided by the contractor to subcontractor. The type of assistance can be related to

product, production process, organizational knowhow, marketing, financial and human

resources.

Deardorff and Djankov (2000) exploring the importance of subcontracting as a source of

knowledge transfer and increased efficiency for the Czech firms found out that there was a

positive correlation between subcontracting and knowledge transfer and knowledge transfer

resulted in increased firm efficiency

Rothwell (1991) explains, based on the data on SMEs of UK, that subcontract manufacturing can

be an important means of gaining access to new production technologies for many small firms

24

and can enable firms to innovate products requiring new production techniques, without having

to invest initially heavily in expensive, sophisticated production equipment. Most of the SMEs,

which are basically subcontractors for other companies, do not perform R&D in any formal

sense and much of their technology derives from their customers. Engaging in external technical

and other linkage activities can increase the technical, market and managerial know how of the

small firm and can form an important part of its overall innovatory activities leading to

competitiveness and little dependence on financial institutions for credit thus minimizing the

extent of the financing gap.

2.7.3 Public-Private Partnership (PPPs)

Governments due to the current internationalization of economics and politics are indulged in

more interaction with business world (Yanez, Magnier and Ramirez 2008). PPPs are a popular

source of developing SME sector in developing countries.

PPPs bring public and private sectors together in long term partnership for mutual benefit. PPPs

enable the government to tap into the disciplines, incentives, skills and expertise which private

sector SMEs have developed in the course of their normal everyday business.

Though there is no perfect definition of PPP, but in the light of the discussion following

definition for SME sector. PPP—for SMEs is an approach to addressing SMEs financing and

growth problems through the combined efforts of public, private, and development

organizations.

PPPs are initiated for the formation of business research centers and industrial parks, or other

institutes to provide human, financial and technical help for small enterprises. Such institutions

are usually financed and operated by both public and private sector.

25

The use of PPPs is the most efficient and effective mechanism in minimizing the financing gap

number of ways, PPP create a sense of co-responsibility and co-ownership for the promotion of

small enterprises. For PPPs to work they must follow some policy recommendations and

implications which are given as follows:

(1) Both public and private sector should try to develop an overall conducive environment to

entrepreneurship, innovation and SMEs growth. Promoting access to finance through developing

cooperation between public-private sectors financial institutions and introducing innovative

financial instruments to reduce the risks and transaction costs of lending to SMEs.

(2) Government measures to promote SMEs should be carefully focused, aimed at making

markets work efficiently and at providing incentives for the private sector to assume an active

role in SME finance. Where necessary, banking systems should be reformed in line with market-

based principles.

(3) Governments should also act to improve awareness among entrepreneurs of the range of

financing options available to them from officials, private investors and banks.

(4) Micro-credit and micro-finance schemes play an important role in developing countries and

efforts should be made to boost their effectiveness and diffusion.

(5) Developing PPPs in education sector to increase the availability of skillful human capital,

which is essential for SMEs growth and prosperity. Further enhancing cooperation between

public and private sector educational and research institutions will also help improving

technological capabilities of SMEs.

(6) Develop an environment that supports the growth and dissemination of innovative

technologies for and by SMEs to take advantage of the knowledge-based economy.

26

If public- and private-sector actors are willing and able to take these steps, both may realize the

potentially significant benefits of PPPs, including improved access to technological, human and

financial resources. This will further improve the capacity of SMEs to solve problems that

cannot be addressed by a single actor. Most important, greater public private partnership may

contribute to the improvement of livelihoods for a major portion of small entrepreneurs, and

other vulnerable individuals and households in developing countries.

2.8 Stock Market

A stock market is place where dealings in stocks and shares take place, a market where those

desiring to buy stocks and shares are bought into contact with those who want to sell. It’s

therefore primarily mainly a market for existing securities (J L Hansen 1977). A stock market

enhances purchase of shares and stock and it therefore boosts equity.

2.8.1 Initial Public Offering (IPO)

This can be referred to as floatation. An IPO or an initial public offering transforms a private

company into a public one, by opening the shares of a company to the general public. In an IPO

the issuer is given assistance from an underwriting firm and these are usually banks. The

underwriter determines what type of security to issue (common or preferred stock, the best

offering price and the best time to bring to the market.

The public sale of ownership interest is to generate funds for working capital, repayment of

debt, diversification, acquisition, marketing and other uses. A successful IPO can increase the

demand and value of shares for the company. The money paid by investors for newly issued

shares goes directly to the company. According to (Meyer et al 1994) Public stock offering are

ways of raising money by selling shares or stock in the company. This can be through financial

27

markets. An SME should use this strategy only if it has the required funds, the much needed

investors, surplus cash and of course, good growth story in order to make sure that it has the

strength to remain afloat even if its IPO fails.

In the USA during the dot com bubble of the 1990’s many venture capital driven firms were

started seeking cash on the bull market. The market quickly offered IPOs which resulted in the

stock price spiralling upwards as soon as the company went public. Initial founders became

overnight millionaires and due to the generous stock option. Majority of IPOs were found on the

NASDAQ stock exchange. In Nigeria the Private Placement and Emerging Markets Window

(PRIMPEM) was established recently in mid 2008, to improve SMEs access to credit.

However, while IPOs are an excellent source of expansionary of capital, they are costly and time

consuming to put together. This is so because of many legal, accounting and administration

requirements of the Securities and Exchange Commission. This is the commission that protects

the public from poorly prepared offerings. Moreover, a company has to fulfil some strict

conditions before launching an IPO. Add to the huge cost of using IPO as for an SME, the

unpredictability of an IPO and it makes an IPO a dicey option. Not all IPOs are successful.

The above strategies to be adopted are there to ensure the growth and survival of SMEs in the

multiple currency environment. These are all meant to bridge the effects of the financing gap, if

carefully implemented.

2.9 Summary

This chapter involved an analysis of the relevant theoretical and empirical literature on the

subject of Small and Medium Enterprises and the financing gap. It explains the various sources

of finance their suitability to SMEs. The theory of this study based itself on investigating the

28

various strategies that are adopted by SMEs in trying to bridge the financing gap. On the other

hand the empirical evidence shows how different countries have adopted survival strategies to

facilitate the growth of SMEs. The next chapter will focus on the research methodology, which

comprises the research design, research population, research sample, research instruments and

data collection and analysis.

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CHAPTER THREE: RESEARCH METHODOLOGY

3. 1 Introduction

This chapter outlines the methods which were used in the collection of data and information. In

this chapter it highlights the research design, the research population, research plan, data

collection methods and the instruments used in the research, focusing on the merits and demerits

of each method used. The chapter also looks at the data presentation and analysis.

3.2 Research Design

The researcher utilised an exploratory research design. This qualitative approach was used to

gather information relating to the area of study. It was chosen because of its reliability and

validity in achieving the purpose of the study. It is less expensive and time consuming than

quantitative experiments. Furthermore it collects a large amount of data for detailed study. Lastly

it has got heavy reliance on secondary data which enables reviewing of the available literature.

3.3 Research Population

The research considered SMEs in Harare. The sample size was systematically chosen from the

population of the SMEs in the SEDCO database this was however outdated. A total of 155 SMEs

was taken as the research population. In this research the population that was used included

twenty financial institutions operating in Zimbabwe. The sampling unit comprised of heads of

corporate banking departments and heads of structured finance departments in the various

financial institutions under study. These people were selected because they were considered to be

in a better position to know about the banks loan books and the risk associated in lending to

various clients in various currencies.

30

3.4 Research Sample

For a sample to be a true representation of the population it must be clear. It must bear some

proportionate relationship to the population from which it has been drawn. The research sample

chosen was based on stratified random sampling. Here the population was put into groups called

strata’s. It was chosen because it presented a better representation of the whole population.

3.4.1 Sample Size

SMEs were categorised into various industries. The SMEs were further divided into subgroups

based on the industry sector and a random sample was taken from each industry category. This

categorisation was obtained from the RBZ classifications. This was done so that samples can be

collected from each category (strata) to allow greater precision. A sample of fifteen financial

institutions was taken. The researcher developed an adequate sample of 31 SMEs from all

sectors and efforts were made to balance between the dangers of having an undersized and

oversized sample without straining the limited resources available.

31

Table 3.1 Distribution of SMEs per Industry category

INDUSTRY SECTOR NUMBER OF SMEs SAMPLE SIZE

Mining 65 3

Tourism and Services 3 1

Manufacturing 11 2

Clothing 18 3

Pharmaceuticals 3 4

Finance Services 3 1

Construction 2 2

Agro related 3 1

IT 5 2

Engineering 10 2

Food/Restaurants 4 2

Wholesale &Retailing 8 5

Other 20 3

TOTAL 155 31

Source: Sedco database

3.5 Data Collection Methods and Instruments

This research was based on both primary and secondary data sources in order to come up with a

valuable and meaningful conclusion.

32

3.5.1 Primary Data

Primary data was collected directly from different SMEs firms and financial institutions through

the use of questionnaires and interviews. It was gathered to answer the research questions

highlighted in chapter one. Primary data was used because the data was very useful and direct,

thus meeting the exact needs of this work. The data was also presumably reliable to use, as it was

coming directly from the various parties involved and also due to the nature of the data obtained,

which is first hand detail. However, the primary data method of collection was very costly. It

took quite a lot of financial input in order to fairly distribute the questionnaires, conduct

interviews as well as obtain feedback from the various respondents.

Questionnaires

The questionnaire as a research instrument was used in collecting data, this is a sheet of paper

consisting of a series questions in a format which the respondents answers, and it was used for

gathering information (Refer to Appendix B and C). The questionnaire was composed of both

structured questions which were simple and relatively easy to administer and unstructured

questions, which assessed the views of the respondents without guiding them. The use of

questionnaires, gave respondents enough time to deliver well thought answers in cases where

questions needed one to check records for answers.

Questionnaires were used to collect data because carefully chosen questions were enlisted to aid

respondents to answer only questions which were related to the topic under study. Respondents

were people who were busy, thus giving them questionnaires gave them ample time to respond to

questions hence giving accurate answers. Respondent's answers were free from researcher’s

interruption or input.

33

Questionnaires were chosen because they were relatively cheap, easy to administer and covered a

large number of respondents. Self-completion of questionnaires also guaranteed confidentiality.

Furthermore, with closed questions, answers were standardized and this helped in interpreting

responses.

However though presenting quite a number of benefits there were also drawbacks involved in

administering the questionnaires which included, ambiguity unclear answers were given by

respondents, and also some questionnaires were not returned by the respondents. Questionnaires

limited the researcher's ability to observe non-verbal communication since the questionnaires

were completed in the researcher's absence. Questionnaires were also unsuitable because

questions needed to be explained to the respondents especially in instances where they were left

for completion. Questionnaires were also very strenuous in terms of preparation, distribution and

very costly in terms of feedback through increased transport costs.

Personal Interviews

The regulatory authorities were the main targeted respondents for the interviews. The

interviewee's were asked questions and their various responses were recorded on the

questionnaire by the researcher (Refer to Appendix D). During the personal interviews, the

questions were read out in the same tone so as to eliminate any bias emanating from any changes

in tone of voice.

Interviews were used because they involved one-to-one verbal interaction between the researcher

and the key informants thus there was instant feed back. This enabled the researcher to

effectively appraise the validity of the responses that were given and also questions that were not

understood were rephrased and repeated for better apprehension. The method was efficient in

34

collecting relevant data since the interviewer could ask more questions and read additional

observations about the respondent such as body language.

However interviews proved very costly, time consuming and they permitted interviewer and

interviewee bias. Some respondents were unwilling to provide more information in addition to

their questionnaire responses they had already given. This was, however overcome through

establishment of good relationships with the respondents. Some respondents were more

concerned about maintaining confidentiality that they feared the interviews could be manipulated

by the researcher to obtain the company secrets which could either be exploited by competitors

or by the regulators. In these scenarios the researcher had to convince the concerned parties that

the information would be used solely for academic purposes. Some respondents failed to avail

enough time to the researcher for the face to face or telephone interviews as a result of busy

schedules. This was, however overcome by establishment of persistent contacts with the

respondents and making them understand the importance of carrying out the research.

3.5.2 Secondary Data

The secondary data sources included published sources like textbooks, Internet, journals,

business magazines, newspapers, RBZ Reports, Small to Medium Enterprises Journal. These

sources were useful in providing important information used during the process of designing the

questionnaires for the survey. Although secondary data in some cases would not give enough

detail and fail to meet the exact requirements of the research, it was less expensive to use than

primary data collection. Secondary data was also used because less its time consuming and effort

was expended in analysing and interpreting data that had been compiled already and due to time

constraints, the researcher required some data quickly and secondary data was the best method to

use.

35

However the information was not designed to meet the project's needs and some of the

information was obsolete given the drastic changes that taken place in the multiple currency.

There was also no control over the procedure that was used for collecting, analysing and

interpreting the data, thus accuracy of the secondary data was subjective.

3.6 Data Presentation and Analysis Plan

The researcher presented the findings using qualitative and quantitative techniques and this is

seen in Chapter four. The qualitative techniques were adopted to analyse data that could not lend

itself to statistical analysis. In this case content analysis was used. This technique was considered

appropriate particularly because the respondents either gave suggestions or expressed their

opinions. This technique explained, analysed and commented on information provided by the

various respondents and the secondary data sources.

3.7 Summary

In this chapter the methodology used to carry out the study was explained. The research design,

the sample population and plan as well as the instruments used in the research were also

highlighted. The chapter went further to look at the data collection methods and concluded by

outlining, explaining and justifying the data presentation plan for Chapter four. The next chapter

looks at a critical analysis of primary data in terms of key areas of research questions. The

chapter also looks at how statistical data is presented.

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CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introduction

In this chapter a critical analysis of data is done in line with the key areas of the research

questions, objectives and the subject matter. Data is analysed and presented based on the findings

from questionnaires, interviews and journals. Data presentation is done using tables and graphs

for statistical data whereas content analysis is done for non-statistical data.

4.2 Analysis of Data Response Rates

The following information relates to results obtained from questionnaires and interviews

respectively.

4.2.1Questionnaire Response Rate

Questionnaires presented the easiest means of collecting data, but not all questionnaires

disbursed were returned back by the respondents as illustrated by Table 4.1.

Table 4.1 Response Rate on Questionnaires sent to Financial Institutions

Type of Financial Institution Banks Microfinance Other Total

Number of questionnaires sent 8 3 4 15

Number of questionnaires

responded to

5 3 2 10

Percentage Response Rate 62.50% 100% 50% 70.83%

Source: Raw Data

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For questionnaires sent to banking institutions which included both commercial and

merchant banks the response rate was 62.50%.

For questionnaires sent to un-categorized financial Institutions firms which included

Sedco and moneylenders firms the response rate was 50%.

The overall response rate to questionnaires sent to financial Institutions was 70.83%.

Table 4.2 Response Rate on Questionnaires sent to Owner / Managers of SMEs

INDUSTRY SECTOR SAMPLE

SIZE

NUMBER OF RESPONDENTS

RESPONSE RATE

Mining 3 0 0%

Tourism Service 1 1 100%

Manufacturing 2 2 100%

Clothing 3 3 100%

Pharmaceuticals 4 3 75%

Finance Services 1 0 0%

Construction 2 2 100%

Agro related 1 1 100%

IT 2 2 100%

Engineering 2 2 100%

Food/Restaurants 2 2 100%

Wholesale and Retailing 5 4 80%

Other 3 3 100%

TOTAL 31 25 81%

Source: Raw data

38

For questionnaires sent to the different sectors of SMEs the response rate was 81 %. This 81%

response rate was high enough to warrant a valid research. The main reasons why some

questionnaires were not responded to included; negligence on the respondent’s part who either

lost or misplaced the questionnaires, some respondents cited that they were too busy with their

workloads and some were not in when I went to collect the questionnaires.

4.2.2 Personal Interview Response Rate

Interviews were targeted at SME regulatory authorities. However due to time constraints only

four interviews out of the scheduled five were conducted giving a response rate of 80 percent.

The high response rate was attributed to the flexible nature of interviews. There were low

chances of misinterpretation since all questions which needed any clarifications could be easily

clarified. The high response rate was attributed to the researcher’s persistent efforts in trying to

obtain the information from respondents.

4.3 Analysis of Research Findings

4.3.1 Distribution of respondents

Generally most SMEs in the sample were Small Enterprises; that is, they employ 10 to 50

employees as shown in the categorization below;

39

Figure 4.1 Distribution of respondent SMEs according to number of employees

Source: Raw data

The above distribution suggests that research findings may be more applicable to small

enterprises, than micro-and medium-enterprises, though they can be extrapolated across all SME

categorizes, however this may also suggest that small enterprises comprise the bulk of SMEs, in

the population under study.

4.2 Sources of Finance Available To SMEs

Access to sources of capital is determined, to a large extent, by the firm's development phase,

which has a major impact on evaluation of its creditworthiness. During early phases of their

development firms have to rely primarily on financial resources possessed by their owners and

their families, sometimes on assistance funds or on venture capital. During further phases of its

development the firm is financed primarily from accumulation of financial surpluses and

additionally by means of external capital. Mature firms (mainly medium-sized enterprises) have

an easier access to external capital and, in particular, bank loans than other groups of firms from

the SME sector.

40

External capital becomes the main source allowing financing the firm's investment projects in the

situation when internal accumulation capabilities of SMEs are limited. Insufficient availability of

external capital can restrict the firm's growth opportunities. The main sources of external capital

for small and medium-sized enterprises are the so-called non-banking sources of financing (trade

credit, lease, factoring, franchising, loans from the non-banking sector) and bank loans (short-

and long-term).

4.2.1External Finance Currently Being Used

None of the surveyed SME are currently using equity finance, there is an equal distribution

(7.41%) of SMEs who use leasing/hire purchase, government grants and other methods of

financing, as illustrated below;

Figure 4.2: Sources of Finance Available to SMEs

Source: SME Questionnaires.

The pie chart above indicates that most of the SMEs surveyed are currently using loans from

family/friends and Personal savings. 40.37% use loans for from owners/directors, whilst 37.04%

use loans from family/friends. Further analysis reveals that 63.7% of SMEs who use loans from

owners/directors also use loans from family/friends. This implies that most SMEs rely heavily on

41

the liquidity of their owners/directors and/or their acquaintances for financing their activities.

According to Hans Falkena (2001), this would suggest that most respondents are traditional type

of SMEs and are still in start-up phase. Firms in the SME sector display clear unwillingness to

seek external sources of capital. The most important role is still played by the owners financial

resources and retained profit. Loans taken by them are usually needed to maintain their liquidity

and more seldom for investment projects. It is primarily due to a conviction prevailing among

SMEs that procedures of granting loans are very complicated, loan costs are high and small firms

are discriminated. Thus most finance their working capital from owners’ savings and from

friends and relatives. This means that they get business advice from friends and families rather

than banks.

4.2.3 Assistance received from Government

About 52% of the SMEs surveyed indicated that they have never received any form of

government support; however of those that indicated that they received government support, the

following forms of support were prominent:

Rental controls

Licenses and other levy/fees reduction

Training programs on SMEs start-up.

Generally SMEs think the government assistance was useful. Small to Medium Enterprises

Development Corporation (SEDCO) indicated that the support they had received from the

government had actually deteriorated in this multiple currency. From the 2010 budget they had

received $8.5million but from the 2011 budget they were only allocated $2.5million. There was a

major decline of 70%. Indicating that the amounts available to SMEs would generally be low

thus the financing gap is becoming more pronounced

42

4.3 Nature and Severity of the Financing Gap

The gaps in the financing of small and medium sized enterprises were observed, both in the

start-up phase and in later growth. SME financing gap is more pervasive in accessing credit from

financial Institutions. This is depicted in Figure 4.3

Figure 4.3 SME Bank Account Holding and Loan Gap

Source: Raw Data

80% of the sampled were aware of bank loan facilities more than 75% had a bank account. 55%

had applied for a bank loan and 38% had their loans approved. The lack of information by the

SMEs meant that SMEs had failed to fully utilize their capacity. Thus Banks are not lending to

SMEs. The loan approval rate was only 38% thus the loan gap is a high of 62%. 67% of the

surveyed financial institutions do not report an overall financing gap for SMEs. Most of them

reported that they do have a financing problem when it comes to innovative SMEs because they

are newcomers to the market, or seeking financing for a new type of product or service, and

43

usually have negative cash flows and untried business models, thus the failure rate among these

SMEs was quite high. Bank would bear a high risk if they were to lend to these.

One fundamental problem in dealing with the SME financing gap is lack of basic information

about just how big such a gap may be. The evidence was in the form of complaints from SMEs

themselves and this is difficult to use in analysis or for comparison.

4.3.2 Number of Years in Operation

Table 4.3 Analysis Of The Number Of Years Operating

Table 4.3 depicts the characteristic of the sampled SMEs in terms of their duration of existence.

This shows that most of the SMEs have been in operation for less than three (3) years and only a

few get past the age mark of ten (10) years. An indication that majority of them go out of

operations due to several challenges especially financial challenges that they encounter, so

survival and growth is very difficult. This indicates presence of the financing gap among SMEs

during their start up phase.

4.4 Significant Changes in the Borrowing Constraints Faced By SMEs in Multiple Currency.

44

Number in years

Less than 4 years

5 years Above6 years till 9years

10 years <

Total No. Responses

11 5 4 5

Source:Rawdata

To indentify the nature and severity of the financing gap, the researcher had to analyse primary

data that showed if there was a significant change in the borrowing constraints faced by SMEs.

The figure below depicts the extent to which access to and cost of financing are a problem for

SME firms,

Figure 4.4: Difficulty in Accessing Finance and Cost of Debt- Zimbabwe

Source: ICA Report

From the above graph, it was clear that only around 30 percent of the surveyed SMEs applied for

a loan or a line of credit and about 76 percent of them saw their application rejected. The

Zimbabwe’s lending rates are high averaging 38 pecent.This trend when compared to relevant

countries globally indicates that Zimbabwe’s results exceed those of Brazil but lag behind results

for India, China, South Africa, and Indonesia.

Figure 4:5 Difficulty of Access to Finance: International Comparison (Percentage of firms reporting access to finance and cost of debt as a problem)

45

Source: ICA Report (2008)

Therefore the situation involving borrowing constraints faced by SMEs has actually increased in

this multiple currency as most firms are failing to access credit due to the stringent conditions

imposed by Financial Institutions

4.4.1 The Reasons behind the Difficult in Accessing Credit from Financial Institutions

The problem of bank financing to SMEs has been persistent for many years in the country with

both parties actively responsible for the lack of SME financing. SMEs because of their shortfalls

in meeting the classic requirements of the banking sector and banks because they could mobilize

more resources in order to penetrate the SME segment, basically both parties share the blame as

both groups show real weaknesses in their capacity to respect the requirements and practices of

the other. In Zimbabwe, the banks have traditionally dominated the financial systems, leaving

little leeway for SMEs seeking alternative financing to bank loans; hence a close look at the

problem focuses on the banks and aims to reveal a number of reasons explaining the behaviour

from the bank.

46

4.4.2 Reasons For The Low Credit Extention to SMEs

There are many reasons why SMEs after the multiple currency continue to have limited access to

credit. Firstly the lending methodologies of the banking sector continue to emphasize on the use

of conventional collateral security which most SMEs do not have 86% of SMEs confirmed this..

About 38% of the SMEs that applied for bank loan were successful, and the rest were not, the

most common reasons for non-approval was lack of traceable credit history and not being in

business for too long. Further probing, outside the questionnaire, revealed that most of the SMEs

who received the loan had applied during Zimbabwean dollar era.

Figure 4.6 Factors Affecting SMEs Access to Finance

Source: SME and Financial Institutions Questionnaire

Generally SMEs expressed dissatisfaction on the requirements for accessing bank credit. From

the above Figure 4.6 it showed that most SMEs have been relying on short-term financing and

they do not keep proper records of their trade transactions. Other reasons why the finance gap

47

continue to exist after the multiple currency include lack of good management skills, poor

business proposals and inability to contribute own equity all of which are emphasized by the

mainstream financial history. 71.42% of financial Institutions confirmed this.

4.5 The Factors That Inhibit Further Growth and Development in SMEs

19 respondents out of 25 said that the major barrier to the growth and development of their

business is the challenge they face in accessing credit, also nine of them confirmed that they

suffer from insufficient support from local authorities and lack of clear government SME

programme. These are indicated in Table 4.4

Table 4.4 Factors Affecting Growth of SMEs

Factors affecting growth of SMEs Responses

Unstable legal environment 2

48

Uncompetitive products 0

High level of taxation 3

Low purchasing power of the population 4

Insufficient support from local authorities 9

Negative image of the entrepreneurs 4

Procedural difficulties in starting a company 3

Difficulty in accessing to credit 19

Low coordination between organizations supporting SMEs 2

lack of qualified human resources 2

Lack of clear government SMES program 9

lack of market information 2

lack of management skills 1

too high cost of money 1

lack of proper marketing skills 4

Source: SME Questionnaires

4.6 Sustainable Survival Strategies Adopted

89% of the surveyed SMEs indicated that they were buying most of their products and raw

materials from suppliers on credit they were usually given a week allowance to clear up their

accounts. Others were operating at very low profit margins as to get a competitive advantage

over large and well established companies. SMEs in the printing and stationery sector indicated

that they imported most of their stationery from South Africa because there were relatively

cheaper there as compared to purchasing in Zimbabwe. The imported products were of good

quality in nature. Subcontracting was also being used as a survival strategy by these SMEs. They

subcontracted to have their products processed, but they hoped in the future to obtain their own

machinery so as to print their own stationery.

Also SMEs in the retail and clothing sector bought goods on credit from South Africa they would

eventually pay after selling these goods in Zimbabwe. Those in manufacturing indicated that as a

49

way to cut costs they have reduced the supply chain in terms of raw material purchasing. They

bought straight from the suppliers. They have also adopted Japanese structure of less people in

management and more people in production to increase productivity.

All of the SMEs surveyed indicated that they had a strategic, growth, survival and outward –

oriented outlook. Their main focus was on increasing productivity and reducing costs. Focus will

be on increasing volumes and at operating at low costs. 85% of SMEs said that they planned to

open more outlets so that their geographical presence may be felt.7 of the surveyed indicated that

they planned to diversify to other sectors such as the food industry. This was seen as the most

viable in terms of income generating potential.

4.7 New Initiatives That Can Be Adopted For The Expansion and Development of SMEs.

Given the responses from different SME sectors, it can be safely concluded that the SMEs are

not operating at an efficient level as compared to their international counterparts. Asked of

possible survival strategies, several opinions were brought about by the respondents and they

include;

4.7.1 Alternative Stock Market

As shown from secondary data sources an alternative stock market can expansion and

development of SMEs thus bridging the financing gap. Statistics from countries with an

alternative stock market from small companies are performing quite well. South Africa is

examples were companies listed on the ALTX stock exchange have moved to the JSE. This

alone shows that an alternative stock market could be viable in Zimbabwe considering that the

economy is stabilizing and there are more realistically prices for shares now. Banks are not in a

50

position to lend due to the challenges they are facing financially when deposit volatility is still

high. Figure 4.7 shows the successes of IPOs in Countries were they have been adopted.

Figure 4.7 Small Capital Initial Public Offerings (IPOs) in various industrialised countries

Source :Nasdaq

The NASDAQ Review finds that the regulatory framework for equity markets can help enhance

SME access to SME capital. The ability of the US markets to raise capital for innovative, high-

return projects is related to: “favourable regulatory and trading environment has succeeded in

attracting investors to fund the continued growth of venture backed enterprises. Between 1992

and 1997 there were 1,200 venture backed IPOs in the US. 244 in the UK and only 156 in the

rest of Europe.

4.7.2 Franchising

Franchising is a successful formula for business expansion that has both an economic and social

impact. Between 2001 and 2005, the franchise sector in the United States grew more rapidly

(economic output growth 41%) than businesses in general (26%), with the number of franchise

51

jobs and establishments on the rise. In Latin America, in 2007, Brazil and Mexico had 1,197 and

500 domestic franchise networks, and 65,553 and 60,000 points of sale (franchise and owned),

respectively, with significant growth in the number of enterprises, jobs, and share of GDP. It is

important to note that in both countries most of the franchises were small or medium-sized local

businesses, which have now surpassed in number all foreign franchises. In Zimbabwe a

significant portion of SMEs fail due to a lack of familiarity with the requirements of the line of

business. Moreover, while SMEs face financial and investment constraints, for fledgling

companies this is a critical issue, mainly due to their inexperience and weak business

management capabilities. Thus by adopting this business culture SMEs are assured of survival

and growth thus leading to the bridging of the financing gap

4.8 Summary

The chapter looked at data analysis in line with the key areas of the research questions,

objectives and the subject matter. Data was analysed and presented into tables and graphs and

content analysis was also used for data that could not lead itself to statistical presentation. The

next chapter looks at research findings, conclusions and recommendations on the subject matter.

CHAPTER5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

52

5.1 Introduction

This chapter begins by giving the summary of findings. This is done by commenting on the

results of the study in relation to the research objectives and research questions. A conclusion is

drawn and recommendations given on how SMEs can survive in this multiple currency

environment. Lastly are the researcher’s suggestions for future research that is what researchers

in the future should focus on researching either to clarify what is covered in this study or to back

it up.

5.2 Summary of the Study

SME finance is one major constraint to SME growth and development. This research sought to

analyse the concept of the financing gap among SMEs. In the Zimbabwean scenario the

researcher had to look at survival strategies that are to be adopted by SMEs to minimise their

financing constraints.

The first chapter was an introductory chapter and an account of what was happening in SME

financing was explained. The statement of the problem is also mentioned in this chapter.

Highlighted in this chapter are also the objectives of the study, the research questions and

significance of the study which Intel’s why the research was undertaken. The problems

encountered by the researcher were also explained which were termed limitations of the study.

Ways on how these problems were mitigated is illustrated. Certain boundaries in the study are

highlighted. In this chapter terms relating to the research area are also defined.

Chapter 2 explains the vast literature relating to the subject matter. A synthesis of different

authors’ views and ideas was made. Both empirical and theoretical data were used to strengthen

research. The researcher looked at the research methodology in chapter 3. Data was from the

53

field and exploratory research design was used as this was compatible with the nature of the

phenomenon. A sample of 31 SMEs was taken to represent the whole sectors. These were

selected using stratified sampling technique. Questionnaires were distributed among owners of

small businesses, credit specialist in financial institutions and regulators. Interviews were also

conducted to impregnate the research findings. In chapter 4, the collected data was represented

on tables, pie charts, graphs and was analysed. This prompted the researcher to draw following

conclusions and recommendations in chapter 5.

5.3 Conclusions

The purpose of this research has been to review the challenging problem of SMEs access to

finance and secondly to investigate the survival strategies that are to be adopted to minimise

these financing constraints. The gathered data and observations from this analysis led to the

following conclusions:

The research and survey confirmed that small and medium scale firms are not favored by the

financial institutions in the provision of medium to long-term loan finance. This situation is as a

result of both external factors and internal affecting both banks and SMEs.

The difficulties that SMEs encounter when trying to access finance is due to an incomplete range

of financial products and services, regulatory rigidities or gaps in the legal framework, lack of

information on both the bank’s and SME’s side.

Furthermore, it is clear that the majority of the employed populations are engaged in SMEs in

Zimbabwe therefore, if meaningful development is to be attained in the economy of the country,

there has to be sustainable funding for the SMEs. Most of the SMEs are operating as sole traders

as compared to a small number of those who operate as medium enterprises.

54

Banks often avoid providing financing to certain types of SME’s, in particular, start ups,

innovative and very young firms that typically lack sufficient collateral, or firms whose activities

offer the possibilities of high returns but with high risk. For such company to be able to grow and

operate on a wider scale in the domestic market and next in the international market they do not

only need such factors as good ideas and owners' determination, but also a capital. Availability

of investment capital and not only short-term financing of current needs is one of key factors

determining growth opportunities of SMEs.

Policy makers the world over have indicated the significance of the small to medium sized

enterprise and the contribution they make to the well being of a country. It is the policy makers

who must also play a role in contributing to the success of the SME sector by putting policies in

place that will enable SMEs to thrive. They also need to provide the necessary support entities to

assist start-ups in getting through the first three years of their existence since these are the critical

years for future success.

In addition, it is obvious that SMEs require more than financial support, they also need

leadership and management skills development. Most importantly, the government has to

improve the conditions and infrastructural inadequacy hindering the commercial banks from

investing in the growth and development of the SMEs sector in Zimbabwe.

5.4 Recommendations.

55

Most countries are now realizing the importance of Small and Medium Scale Enterprises as

being crucial to their economic development. It is therefore, important to consider conditions that

would ensure sustained growth in this sector. From the findings of the study, the following

recommendations are made to promote and develop a vibrant SMEs sub-sector in Zimbabwe:.

The owner-managers must attend management development courses to enhance their

knowledge and skills in terms of managing their businesses.

They must take a long term view of their businesses and establish a three to five year

growth plan.

It’s vital for SMEs to keep proper financial records. Keeping of these records also shows

the seriousness of these companies in growing. In cases of acquiring a loan from a bank

it’s much easier to access finance when proper financial statements are kept.

Finally, there should be empowerment of SMEs to access not just financial support but

entrepreneurial education that gives an effective and enduring strategy for solving the

capital problems of small-scale businesses.

Access to finance is a problem. Government agencies need to address this problem

together with the financial institutions. Growth generally requires resources and owner-

managers need to have access to these resources in order to grow.

Government needs to provide support services to SMEs through qualified service

providers to allow for growth amongst SMEs. Government can accelerate the

development of markets for financial services suited to the special characteristics of

SMEs by promoting product innovation and building institutional capacity.

56

The researcher also recommends that the government should come up with banks

specifically for SMEs. These will be focusing on promoting and financing small business

only.

Policy-makers should consider additional training and focused support programmes with

SME owners on the ways to approach banks, informational requirements and work

closely with banks to provide additional advice and support to manufacturing SMEs.

Relationship banking is crucial; banks with representatives of SME owners’

organizations need to seek ways to develop these relationships. This may prove difficult

with the increasing centralization of banking services

Most banks must take ‘market share driven’ as their credit culture. This will reduce loan

concentration on one sector e.g. Stanbic bank is investing much more in the mining

sector. This causes shortages to other sectors hence resulting in poor economic growth.

5.5 Suggestions for Future Research

The research study mainly focused on investigating prevalence of the financing gap in SMEs and

the various strategies that are to be adopted to bridge this gap. Further research should analyse

the Impact of these survival strategies in enhancing SMEs growth. The research should mainly

focus on the practical aspect of each strategy i.e. its suitability and applicability to the

Zimbabwean SME.

57

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Mechanism,” Quarterly Journal of Economics.

Berry, A., (1997). SME Competitiveness: The Power of Networking and Subcontracting,

Washington D.C., Inter-American Development Bank.

CEEDR, 2007; The Impact of Perceived Access to Finance Difficulties on the Demand for

External Finance: A Literature Review, Report for the Small Business Service, DTI, London

Coase, R.H., “The Nature of the Firm”, Economica, 9, 1937, pp. 386-405

Coleman S, 2000, Free and Costly Trade Credit: A Comparison of Small Firms, 14th

International Conference by Academy of Entrepreneurial Finance, Chicago, Illinois.

Cook P and F. Nixson. 2000. “Finance and Small and Medium-Sized Enterprise Development,

Finance and Development Research Programme Working Paper, University of Manchester.

Cooke, P. and Morgan, K. (1994), “Growth Regional Under Duress: Renewal Strategies in

Baden Württemberg and Emilia-Romagna”, in Amin and Thrift (1994a).

Deardorff, A., Djankov, S. (2000). Knowledge Transfer Under Subcontracting: Evidence from

Czech Firms, World Development, Vol. 28, No. 10.

Deakins, D. (2005). Entrepreneurship and Small Firms, 2nd edition. London: McGraw-Hill

Fafchamps, M. (2001) “Networks, Communities and Markets in Sub-Saharan Africa:

Implications for Firm Growth and Investment”, Journal of African Economies, Volume 10

Hall, G. (1996). Surviving and Prospering in the small firm sector.London: Routledge.

Hayashi, M., (2002). The role of subcontracting in SME development in Indonesia: Micro-level

evidence from the metal working and machinery industry, Journal of Asian Economics.

Hsu D, 2004; ‘What do entrepreneurs pay for venture capital affiliation?’ The Journal of Finance

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Irwin D and Scott J, 2007; “Barriers Faced by SMEs in Raising Finance from Banks” paper for

The Association of Business Schools (ABS), London.

Jansen Jl. (1977) ‘Conditions for Internal Entrepreneurship’, Journal of SME Development,

Kirzner I (1979) Perception, opportunity, and profit. University of Chicago Press, Chicago

Kon Y and Storey D J, 2003; “A Theory of Discouraged Borrowers”, Small Business

Economics, vol 21.

Lean J and Tucker J, 2003; Information Asymmetry and Small Firm Finance, National Small

Firms Conference, Small Firms, The Robert Gordon University, Aberdeen.

Levitsky J 1993 ; Credit Guarantee Scheme For SMEs, Small Enterprise Development

Lin, Y. F. 2007. Developing small and medium bank to improve financial structure. Working

paper, China Center for Economic Research, Peking University.

Mahoomed, M. Z., I. (2008). An analysis of ethics in small and medium enterprises (SMEs).

UNITAR e- Journal, 10(8), 45-54

Myers, S., “The Capital Structure Puzzle”, Journal of Finance, (34) 3, 1984, pp. 575-592

Okraku, F. D. and Croffie, A. (1997) "Entrepreneurship and Small Business: Policies and

Programmes in Ghana." In Fadahunsi Glu and Tunji Daodu edts., Small and Medium Enterprises

Development: Policies, Programmes and Prospects.

OECD (2005), The SME Financing Gap (Vol. I): Theory and Evidence

Organization for Economic Cooperation and Development (OECD). 2005. Policy Brief:

Financing SMEs and Entrepreneurs.

Rothwell R. (1991) External Networking And Innovation In Small And Medium-Sized

Manufacturing firms in Europe, Technovation, 11:2, 93-112.

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Stiglitz J and Weis A (1981; “Credit Rationing in Markets with Imperfect Information”,

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Watanabe W 2005; How are SME Loans priced by the Main Bank? Bank Affects, Information

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APPENDICES

Appendix A-Cover Letter

Midlands State University

Department of Banking and Finance

P. Bag 9055

Gweru

19 February 2011

To Whom It May Concern

RE: RESEARCH PROJECT ASSISTANCE

I am a 4th year final student at the above mentioned institution and am carrying out a research

on An Investigation into the Survival Strategies that are to be Adopted by Small to

Medium Enterprises in trying to bridge the Financing Gap. This is in partial fulfilment of

the requirements of the Bachelor of Commerce Honours Degree in Banking and Finance that

I am currently undertaking.

I kindly ask you to assist by completing the questionnaire attached to this letter. The

information you provide as well as your personal views will be treated with confidentiality

and used for the purpose of this study only.

Your contribution to this research will be greatly appreciated.

Yours faithfully

Sharon Manyara

61

APPENDIX B: QUESTIONNAIRE FOR SMES

Kindly indicate your answer by tick your choice /choices and please also include your comments

by typing in the spaces provided

SECTION A: Business background information

1. Which industry sector is your business in?

Mining

Tourism and Related Service

Manufacturing

Clothing (Manufacturing and retail)

Pharmaceutical (Manufacturing and retail)

Finance and Financial Services.

Construction.

Agro related

Information Technology.

Engineering

Food/Restaurants.

Wholesale and Retailing

Other (specify)…………………………………………………………………

2. Number of employees

A. <10 [ ]

B. 10-50[ ]

C. 51 and above[ ]

62

3. How long have u been operating?

…………………………

SECTION B: Sources of Finance

4. How did you raise funds to start-up your business?

Personal savings [ ]

Friends / Family [ ]

Banks [ ]

Non Governmental organization [ ]

International donor agencies [ ]

.Government agencies [ ]

Others(specify)

………………………………………………………………………………………………………

…………………………………………………………....................................

5. Have you ever applied for a bank loan?

Yes No.

5i. If yes did you succeed?

Yes No

If no kindly state the reasons behind it………………………………………………………………………………………………

……………………………………………………………………………………………....

………………………………………………………………………………………………

6. Has the situation for accessing finance changed since the inception of the multiple currency?

Improved [ ]

Stayed the same [ ]

Deteriorated [ ]

63

SECTION C: Business Support:

7. In your opinion, which of the following organizations support SMEs in Zimbabwe?

(Several answers possible)

A. national government [ ]

B. large state companies [ ]

C. local administration [ ]

D. large foreign companies [ ]

E. international donors [ ]

F. consulting companies and Agencies [ ]

G. associations of entrepreneurs [ ]

H. insurance companies [ ]

I. banks [ ]

J. service centers [ ]

K. chambers of commerce [ ]

L. Others (Please specify) ………………………………………………………………………….

8. Do you belong to any organization or institution that support or enhance business

development?

Yes [ ]

No [ ]

8i.Do you consider SME support services to be?

Very useful [ ]

Rather useful [ ]

Not very useful [ ]

Useless [ ]

8ii.What is your view of current government policies towards assisting SMEs better access equity finance

64

Supportive to SMEs

Favour large Companies

Favour banks and other suppliers of finance

Other (specify)……………………………………………………………….

9. Do you have access to any form of technical or managerial support (or training) to grow your

business?

Yes [ ]

No [ ]

9i.If yes, states the source (organization or institution).

…………………………………………………………………

10. Are you aware of any government backed funding schemes?

Yes [ ]

No [ ]

11. What do you think should be done by the government to support SMEs?

a) ……………………………………………………………………………………………..

b) ………………………………………………………………………………………………

12. In your opinion, what are the barriers to the development and survival of small businesses in

Zimbabwe in general (several answers possible?)

A. unstable legal environment [ ]

B. uncompetitive products [ ]

C. high level of taxation [ ]

D. low purchasing power of the population [ ]

E. insufficient support from local authorities [ ]

F. negative image of the entrepreneurs [ ]

G. procedural difficulties in starting a company [ ]

H. Difficulty in accessing to credit [ ]

65

I. low coordination between organizations supporting SMEs [ ]

J. lack of qualified human resources [ ]

K. Lack of clear government SME program [ ]

L. lack of market information [ ]

M. lack of management skills [ ]

N. too high cost of money [ ]

O. lack of proper marketing skills [ ]

13. What are you doing to minimize the effects of barriers to survival and development?

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

14. Does the firm have a strategic, growth- survival and outward-oriented outlook?

Yes No

14i.If yes what are they?………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

. SECTION D: General comments

15. Comments on the prospect of your business in the medium to long term growth (5-10 YRS)

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

66

APPENDIX C: QUESTIONNAIRE FOR BANKS

Kindly indicate your answer by tick your choice /choices and please also include your comments

by typing in the spaces provided

Name of bank ………………………………………………………..

Position of respondent ……………………………………………………..

1. Does your institution have a specific lending facility targeted at meeting financial needs of

SMEs?

Yes No

1i.If no please explain why?………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

……………………………………………………………………………………………………

2. If yes what are/were the criteria/conditions used in granting the credit?

a. Annual turn-over [ ]

b. Total investment outlay [ ]

c. Business plan [ ]

d. Collateral security [ ]

Others.................................................................................................................................................

......................................................................................................................................................

3. When was this specific lending facility put up?

Before the multi currency [ ]

After the multi currency [ ]

67

4. What sector does your bank mainly lend to?( tick were appropriate)

Mining

Tourism and Related Service

Manufacturing

Clothing

Pharmaceuticals

Finance and Finance Services

Construction

Agro related

Information Technology

Engineering

Food/Restaurants

Wholesale and Retailing

Other (specify)…………………………………………………………………

5. When approving loan application from SMEs what do you consider?

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

6. What is your lending rate in this multiple currency regime?

……………………………

68

7. What is your attitude towards lending to SMEs?

Willing [ ]

Aggressive [ ]

Reluctant [ ]

8. In your own opinion; what factors after the introduction of the multi currency continue to limit

the availability finance to SMEs (You may tick more than one if appropriate?)

Lack of collateral [ ]

Poor and unattractive business proposals [ ]

High lending rates [ ]

Non-availability of credit [ ]

High administration costs associated with lending to SMEs [ ]

Other(Specify)

………………………………………………………………………………………………………

………………………………………………………………………........................

9. How can credit availability and accessibity to SMEs be improved?

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10. What extent do you think if SMEs are to be given adequate credit can contribute to poverty

reduction and economic development in Zimbabwe?

Significantly

Insignificantly

11. What other comments can you give on the research topic?

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APPENDIX D: INTERVIEW GUIDE FOR REGULATORY AUTHORITIES

1) What bases do you use to classify SMEs?

2) What reasons are behind the failure of most SMEs?

3) What schemes have you put in place to support SMEs?

4) Do you face any challenges when directing these support schemes to SMEs?

5) What do you think should be done by the government to support SMEs?

6) Are SMEs performing well in this multiple currency era?

THANK YOU

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