By Mpendulo Dlamini
Mpendulo Dlamini, Founder and Managing Director of Umbuso Advisory, a corporate finance advisory firm for Small and Medium Enterprises, analyses the difficulty of access to funding for SMMEs and the role of the BRICS bank.
[SMMEs] are playing an increasingly important role in developing market economies. That they have great difficulty accessing funding is a travesty…
As more and more details emerge about the BRICS New Development Bank (NDB), it is clear that it will function as a typical development finance institution (DFI), albeit multilateral. It will also function as a critical policy instrument providing an alternative to the current Western-dominated multilateral funding institutions, whose development goals remain increasingly alienating.
I say typical not in the cynical sense, which implies bloated and staffed with incompetence, but rather typical in that its aim has historically been focused on development banking – large-scale commercial developments and, more importantly, infrastructure projects.
While there is nothing wrong with this aim, these larger development projects are becoming easier to fund with market-related instruments. These instruments make the diligence process more stringent and, as a result, can remove historical problems that multilateral development bank (MDB) and development bank (DB) financed infrastructure projects face. These problems include cost overruns; disruptions caused by labour delays and disputes; environmental issues; construction delays; engineering problems; designs disagreements; and supplier collusion, among other things.
The Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) has taken an interesting view on the role of MDBs, and it’s worth considering. In loose developmental speak, it outlines the role of MDBs as funding institutions that:
- Take a leading role in creating new financial packages with the involvement of commercial banks and other financial institutions, such as loan syndication of large projects, guarantee schemes for start-up industry sectors;
- Operate as advocates of development, promoting the “business of development” such as job-generation, domestic resource mobilisation, countryside development and urban renewal, among many other development aid projects; and
- Operate as a bank of last resort, providing finance to projects which no other financial institution will fund.
It can be seen from the above that development banks can become funders of projects that no other financial institution will fund. However, there are few areas where this description is more apt than in the area of SMMEs.
SMMEs account for that vast majority of private sector employment in the Americas, Europe and Asia. One can arguably say the same with African private sector employment if one considers the “informal” sector.
Whether or not we consider this African context, we cannot doubt that SMMEs contribute considerably to employment and domestic GDPs across the world. They are playing an increasingly important role in developing market economies. That they have great difficulty accessing funding is a travesty, but it is also the great opportunity in financing, especially DB financing.
The standard reasons for commercial banks’ current decline in providing funding to SMMEs is that they are too risky. This means understanding, and therefore mitigating, their risk is too expensive for the banks to make it worthwhile.