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

APPROVAL FORM
The undersigned certify that they have supervised the student SHARON MANYARAs 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

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 authors 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.

TABLE OF CONTENTS
BY.............................................................................................................................................1 Supervisor: Mrs Chikoko.............................................................................................................1 1.1 Introduction............................................................................................................................1 1.2 Background to the Study........................................................................................................1 1.3 Problem Statement.................................................................................................................3 1.4 Objectives of the Study..........................................................................................................4 1.5 Research Questions................................................................................................................4 1.6 Significance of the Study ......................................................................................................5 1.7 Assumptions of the Study......................................................................................................5 1.8 Scope of the Study.................................................................................................................6 1.9 Limitations to the Study.........................................................................................................6 1.10 Definition of Terms..............................................................................................................7 1.11 Organisation of the Study....................................................................................................7 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 2.5 Empirical Literature on the Financing Gap.........................................................................18 2.6 Financing Small and Medium Scale Enterprises.................................................................19 2.7 Survival Strategies to be adopted by SMEs.........................................................................22 2.8 Stock Market........................................................................................................................27 2.9 Summary..............................................................................................................................29 3. 1 Introduction ........................................................................................................................30 3.2 Research Design...................................................................................................................30 3.3 Research Population.............................................................................................................31 3.4 Research Sample..................................................................................................................31 3.5 Data Collection Methods and Instruments .........................................................................33 3.6 Data Presentation and Analysis Plan .................................................................................36 3.7 Summary..............................................................................................................................36 4.1 Introduction..........................................................................................................................37 4.2 Analysis of Data Response Rates........................................................................................37 4.3 Analysis of Research Findings.............................................................................................39 4.2 Sources of Finance Available To SMEs..............................................................................40 4.3 Nature and Severity of the Financing Gap...........................................................................43 4.4 Significant Changes in the Borrowing Constraints Faced By SMEs in Multiple Currency. ....................................................................................................................................................45 4.5 The Factors That Inhibit Further Growth and Development in SMEs................................49 4.6 Sustainable Survival Strategies Adopted.............................................................................50 4.7 New Initiatives That Can Be Adopted For The Expansion and Development of SMEs.....51 4.8 Summary..............................................................................................................................53 5.1 Introduction..........................................................................................................................53 5.2 Summary of the Study.........................................................................................................54 5.3 Conclusions..........................................................................................................................55 5.4 Recommendations................................................................................................................56 5.5 Suggestions for Future Research.........................................................................................58
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Appendix A-Cover Letter..........................................................................................................61 ....................................................................................................................................................61 LIST OF TABLES Table 3.1 Distribution of SMEs per Industry category............................................................ 32 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

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LIST OF FIGURES
Fig 2.1 Risk and Return Faced by SMEs...............................................................................13 Fig 4.1 Distribution of SMEs according to the number of employees...................................39 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

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LIST OF ACRONYMS
JSE OCED IPO PPPs RBZ SEDCO SMEs TNCs UNCTAD UNDP Johannesburg Stock Exchange Organization for Economic Cooperation and Development Initial Public Offering Public Private Partnerships Reserve Bank of Zimbabwe Small to Medium Enterprises Development Corporation Small to Medium Enterprises Transnational Companies United Nations Congress on Trade and Development United Nations Development Programme

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LIST OF APPENDICES

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 1990s 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 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
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researcher reveals the challenging problem of SME financing in Zimbabwe with a view of 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 its 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?

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 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.

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 its 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.

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 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
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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 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
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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 (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
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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).

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

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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 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

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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 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.

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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.

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.

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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 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

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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 firms asset structure. For very small and micro-enterprises this asset substitution may well take place between the enterprise and the owners household.

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.
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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, 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.

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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

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
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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 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
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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 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.

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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)

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.

22

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. (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.
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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 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.
24

(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 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)

25

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. PPPfor 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. 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
26

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

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. Its

27

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 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 1990s 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.

28

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 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

30

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. 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 stratas. 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.
31

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.

Table 3.1 Distribution of SMEs per Industry category INDUSTRY SECTOR NUMBER OF SMEs Mining Tourism and Services Manufacturing Clothing Pharmaceuticals Finance Services Construction Agro related IT Engineering 65 3 11 18 3 3 2 3 5 10
32

SAMPLE SIZE 3 1 2 3 4 1 2 1 2 2

Food/Restaurants Wholesale &Retailing Other TOTAL Source: Sedco database

4 8 20 155

2 5 3 31

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.

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

33

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 researchers interruption or input. 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

34

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 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.

35

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. 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
36

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.

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

37

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 Number of questionnaires sent Number of Banks 8 Microfinance 3 3 Other 4 2 Total 15 10

questionnaires 5

responded to

Percentage Response Rate Source: Raw Data

62.50%

100%

50%

70.83%

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 Mining Tourism Service Manufacturing Clothing Pharmaceuticals Finance Services Construction Agro related IT Engineering Food/Restaurants SAMPLE SIZE 3 1 2 3 4 1 2 1 2 2 2 NUMBER OF RESPONSE RESPONDENTS RATE 0 1 2 3 3 0 2 1 2 2 2 38 0% 100% 100% 100% 75% 0% 100% 100% 100% 100% 100%

Wholesale and Retailing Other TOTAL

5 3 31

4 3 25

80% 100% 81%

Source: Raw data 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 respondents 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 researchers 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
40

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. 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 (shortand 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.

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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 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.

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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 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

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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 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

Number years

in

Less than 4 years 11

5 years

Above6 years till 9years 4

10 years < 5

Total No. Responses Source:Rawdat a

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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. 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

45

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 Zimbabwes lending rates are high averaging 38 pecent.This trend when compared to relevant countries globally indicates that Zimbabwes 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)

46

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.
47

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

48

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
Unstable legal environment Uncompetitive products 49

Responses
2 0

High level of taxation Low purchasing power of the population Insufficient support from local authorities Negative image of the entrepreneurs Procedural difficulties in starting a company Difficulty in accessing to credit Low coordination between organizations supporting SMEs lack of qualified human resources Lack of clear government SMES program lack of market information lack of management skills too high cost of money lack of proper marketing skills

3 4 9 4 3 19 2 2 9 2 1 1 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 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.

50

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 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

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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, highreturn 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 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

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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

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
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drawn and recommendations given on how SMEs can survive in this multiple currency environment. Lastly are the researchers 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 Intels 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 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

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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 banks and SMEs 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. Banks often avoid providing financing to certain types of SMEs, 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

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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. 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:.
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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.

Its 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 its 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 ownermanagers 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.

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.
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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.

REFERENCES
Akerlof, George A. 1970. The Market for 'Lemons': Quality, Uncertainty, and the Market 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

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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 Wrttemberg 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 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.

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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. Stiglitz J and Weis A (1981; Credit Rationing in Markets with Imperfect Information, American Economic Review, vol. 71, Scott, A.J. (1998), The Geographic Foundations of Industrial Performance.United Nations Conference on Trade and Development (UNCTAD) (1997). UNDP (2001) UNDP Human Development Report (New York: Oxford University Press). Watanabe W 2005; How are SME Loans priced by the Main Bank? Bank Affects, Information and Non-price Terms of Contract? RIETI Discussion Paper Series

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Yanez, C.J.N., Magnier, A., and Ramirez, M.A. (2008) Local governance as governmentbusiness cooperation in western democracies: analyzing local and inter-governmental effects by multi-level comparison. International Journal of Urban and Regional Research .

APPENDICES
Appendix A-Cover Letter

Midlands State University Department of Banking and Finance

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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 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
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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[ ] 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 [ ]
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International donor agencies [ ] .Government agencies [ ] Others(specify) .................................... 5. Have you ever applied for a bank loan? Yes 5i. If yes did you succeed? Yes No 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 [ ]

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 [ ]
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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 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).
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 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 [ ] 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?

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 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)

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 ..

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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 [ ]

4. What sector does your bank mainly lend to?( tick were appropriate) Mining Tourism and Related Service Manufacturing
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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? 7. What is your attitude towards lending to SMEs? Willing [ ] Aggressive [ ] Reluctant [ ]

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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? . 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? APPENDIX D: INTERVIEW GUIDE FOR REGULATORY AUTHORITIES 1) What bases do you use to classify SMEs?
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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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