Survey reveals financial inclusion gap

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Minister of Small Business Development, Cooperatives and Marketing Thabiso Litšiba
Minister of Small Business Development, Cooperatives and Marketing Thabiso Litšiba

Bereng Mpaki

LACK of financial inclusion, capital and literacy are among the main constraints to the development of micro, small and medium enterprises (MSMEs) in Lesotho.

This is according to the FinScope MSME Survey Lesotho 2015 that was conducted by the FinMark Trust (FMT) in conjunction with the Ministry of Small Business Development, Cooperatives and Marketing and the Ministry of Finance.

Developed by FMT, the FinScope MSME Survey is a research tool to assess financial access in a country and to identify the constraints that prevent financial service providers from reaching the financially under- and un-served MSME owners.

The survey was meant to assess the nature and scope of MSMEs in Lesotho and to identify the most binding constraints to their development and growth with a focus on access to finance, infrastructure, business development services and technology.

It was also meant to find frameworks for the provision of financial assistance and policies to support small scale enterprises.

Data collection for the survey was conducted from September 2015 to February this year, with 2 182 adult business owners interviewed from 336 enumeration areas around the country.

The survey defined micro enterprises as businesses with less than six staff members; small enterprises as businesses with six to 20 staff members, while medium enterprises were businesses with 21 to 50 staff members.

At the time the survey was conducted, there were about 76 000 business owners in Lesotho, employing 118 000 people including the owners.

The survey revealed the MSME sector was largely (52 percent) driven by wholesale, retail and agriculture.

It noted an overall lack of business sophistication in the MSME sector with 45 percent of businesses – around 35 000 of businesses – classified as least sophisticated followed by 31 000 (41 percent) emerging businesses. Only 11 000 (14 percent) businesses were found to have characteristics of a most sophisticated business.

The survey indicated that about two-thirds of business owners were financially included while 35 percent of business owners (28 000) were financially excluded; meaning they didn’t use any financial products or services (neither formal nor informal) to manage their business finances. Only 41 percent (31 0000) of business owners were banked and 12 percent (9 000) have/use other formal non-bank products and services.

Three in five business owners did not have a bank account. Of those using bank accounts for business purposes, 71 percent used their personal bank account to manage their businesses’ financial needs. Only 15 percent made use of a business account in the name of the business.

The main barriers related to banking were affordability with 65 percent of business owners indicating they were not banked due to monetary reasons. About 41 percent reported low income and 24 percent reported not making enough money from the businesses while  four percent did not know anything about banking.

According to the survey results, 36 percent of business owners saved mainly with informal groups and only 29 percent saved with commercial banks. Around 40 percent of business owners did not save.

It indicated that 91 percent of business owners did not borrow or did not borrow money for business purposes in the past 12 months prior to the survey.

“This is at the back of the findings that show that there are three broad categories of business constraints; obstacles inhibiting starting a business, obstacles inhibiting smooth operations, and obstacles inhibiting growing the business,” the survey noted.

“The common thread across the board is access to finance. About 49 percent of business owners reported access to finance as the leading obstacle in starting a business, 35 percent of owners reported access to finance limiting operations while 20 percent attributed it to inhibiting growth. Further analysis showed that only 2 percent of businesses access credit from the commercial banking sector.”

The survey participants also indicated the main constraints to starting up a business was access to finance (49 percent).

In presenting the findings of the survey this past week, FMT Chief Executive Prega Ramsamy indicated access to finance was an essential component to the MSME sector’s development.

“Access to finance is essential for tapping the full potential of an economy, thus boosting economic growth, improving opportunities and income distribution as well as reducing poverty,” he said.

“In the absence of the available services, the benefit of financial development is likely to elude many individuals and enterprises, leaving much of the population in absolute poverty.”

Mr Ramsamy added: “In many countries, access to financial products and services, amongst other constraints, impinge on the growth of MSMEs. This survey, attempts to understand these factors and provide appropriate information to policy makers and financial service providers so that they can address the situation.

“Furthermore, many business entrepreneurs lack basic business management skills, and most importantly capital to support their businesses. Other constraints are limited access to resources and competencies necessary to meet challenges of the business environment which altogether pose serious challenges to the sustainability and growth of the sector.”

He also expressed hope the survey’s findings would be used to increase the MSME sector’s access to finance.

For his part, former Small Business Development minister Thabiso Litšiba said the findings called for increased intervention by the government in the MSME sector’s development.

“The underlying message from these findings is that government needs to scale up its interventions. The number of businesses in the sector is estimated at tens of thousands. But we seem to be only reaching out to a small fraction of them. This is the biggest challenge,” said Mr Litšiba who has since been fired from cabinet.

He said while Lesotho’s financial inclusion levels were comparatively high in the region, there was need for improvement on access to credit and insurance products.

“Inclusion levels for credit and insurance products are very low, recorded at nine percent and two percent respectively. This picture indicates very little hope for this sector to enhance creativity and improve productivity,” Mr Litšiba said.

“It further limits the potential of the sector to have the desired impact on employment as well as to encourage transition from the informal sector to the formal sector.”

He added: “Disturbing as these figures may be, they are nevertheless instructive in that they provide feedback to the government, and our development partners, on the impact of the reforms that have been embarked upon to date. Therefore, the findings of this study should contribute to a deeper assessment of the impact of all interventions. They also should point areas for improvement.”

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