Crowdfunding could bring funding relief to SMEs

In light of poor access to credit by small businesses and start-ups, there are growing calls to expedite the introduction of regulations for crowdfunding, aimed at helping smaller enterprises to get access to alternative forms of funding.

Small to medium enterprises make up the majority of businesses in Zimbabwe, contributing about 60 percent of the country’s gross domestic product (GDP), according to a 2021 survey report by FinMark, and employs more than 80 percent of the population.

But such enterprises are having challenges in obtaining loans, making it difficult to finance their businesses. In some instances, it is taking time to have the loans approved.

Crowdfunding allows individuals and small businesses to raise money from a large pool of investors who can put money into peer-to-peer lending schemes. Globally, they have emerged as an alternative source of funding, not only for small businesses but even larger projects.

South African energy start-up Sun Exchange raised US$1,4 million in a crowd sale, so far the largest in Africa after investors purchased individual solar cells to finance a 1,9-megawatt solar plant for Nhimbe Fresh, one of Zimbabwe’s horticulture firms.

The crowd sale attracted nearly 2 000 buyers from the U.S, Europe, Australia, and South Africa.

With banks and other financial institutions viewing funding small businesses as a high-risk proposition, crowdfunding on a peer-to-peer basis can make funding easier to obtain.

“Most of the small business people, especially women have no access to collateral needed to obtain the loans and we feel that crowdfunding can be a viable alternative,” Indigenous Business Women’s Organisation founder Dr Jane Mutasa told The Sunday Mail Business in an interview. “It is importation that authorities put in place legal rules so that we can have an alternative source of funding.”

Harare-based economist Victor Bhoroma said crowdfunding could bridge the financing gap, especially for small businesses, tech firms and other novel enterprises in the economy.

“The big advantage about crowdfunding is that it has no upfront fees or uncompetitive interest rates which can overload a new business venture,” said Mr Bhoroma.

“Another issue to consider is the tight liquidity in the local market and stringent banking requirements for collateral on lending.”

The Reserve Bank of Zimbabwe governor Dr John Mangudya said the bank was ceased with the matter and the process of coming up with a legal framework was underway.

“It is a good proposal, which the bank is ceased with,” Dr Mangudya said in an interview.

He said the central bank had approved the admission of Llyod Crowd Funding into the Fintech Regulatory Sandbox (Sandbox) to provide solutions in capital raising.

Llyod Crowd Funding has commenced its sandbox operations and will test for a period of 12 months up to May 2023. Dr Mangudya said the initiation of regulatory testing was a signal of the central bank’s commitment to promoting responsible innovation and the results were expected to provide the bank with critical evidence in the formation of an appropriate regulatory framework for fintech in the country.

“The central bank expects to embark on regulatory testing with other promising sandbox applications in the near future,” said Dr Mangudya. “The applications to carry out sandbox testing are largely focused on financial inclusion products, retail payments and equity crowdfunding which account for more than half of sandbox applications.”

Last week, cross-border traders bemoaned delays by banks in approving loans, a factor they say was affecting operations and the potential to expand their businesses.

Most of the traders are women and rely on cross-border trade as their sole source of income.

The traders, who buy goods for resale in and outside the country said it was taking up to three months or more to have their loans approved. “In this hyperinflation, you can’t wait for that long because, by the time the money comes, it would have lost its value,” trader Gwendoline Sithole said in an interview.

However, Dr Mangudya advised small business businesses to take advantage of medium-term lending facilities which are meant to cater their small-scale businesses.

The global crowdfunding market size is projected to reach US$289,20 billion by 2028, according to a recent crowdfunding market research from US$ 13640 million in 2021, at an annual growth rate of 11,2 percent between 2022 and 2028.

As of 2016, the African crowdfunding market was worth $182 million, according to Cambridge Centre for Alternative Finance, with Nigeria, South Africa, and Kenya leading.

It is projected that crowdfunding in sub-Saharan Africa could reach US$2,5 billion by 2025.-ebusinessweekly