Financing technology, entrepreneurs and SMEs

The Zimbabwes ICT sector has been growing over recent years, and although its contribution to national economy is not yet very high, it has been recently included among the priority sectors in the recent budget and also in a number of Government initiatives.

The sub-sector that seemingly holds the highest potential is the telecommunications, call centre and BPO services. The telecommunications sector has attracted significant investment from national and private companies over the past few years: Econet, Africom, PowerTel being some examples. However, other sectors are thinly developed, for example, hardware assembling, software development, and internet services/applications.

Most of Zimbabwean ICT firms are in fact simple retailers of equipment or providers of basic IT services. There is potential for growth in areas such as mobile application development, content developers, BPO and call centre business in Zimbabwe once reliable telecommunication networks are in place.

Challenging times

The financial institutions in Zimbabwe have been going through challenging times due to liquidity concerns and the financial crisis. Lending operations of Zimbabwean banks are focused on a few large firms and on short-term loans. Schemes dedicated to SME-financing are rare and seemingly there is no credit line specifically for the ICT sector. The private equity industry in Zimbabwe is also facing a lot of challenges.

Foreign investment has not been forth coming for a number of years. Zimbabwe also hosts some business angels, but they appear to be very few and information on their operations is not readily available. The financial system is complemented by a wide network of micro-finance institutions (MFI) and financing schemes made available to SMEs by Government agencies and the donor community.

There have been studies across the developing world looking at financing challenges faced by ICT firms. The results have shown the presence of a financing gap for ICT SMEs. The gap is particularly severe for firms at development and first expansion stage. The factors that concur to determine this gap are as follows:

Financing Policies – Banks are wary of lending to SMEs, especially from the ICT sector. Loans need to be secured with immovable assets and personal properties for at least 100% of the amount borrowed. Limited Diffusion of Alternatives – There is a lack of equity financing instruments available. In particular, business angels are few and scarcely visible. The existing credit guarantee fund is also marginal.

Constraints on the Demand Side – The degree of informality of ICT SMEs is high. Promoters are often unwilling to disclose information about their business, or to spend time negotiating with bankers. In most cases the capacity of preparing sound business plans is very limited. Understanding of ICT – Bank officers often have scarce knowledge of the various ICT business models, and therefore are more inclined to reject loan requests to develop this area.

Business Environment Constraints – The telecom market still presents some restrictions and inefficiencies that affect the Internet sector. There is a lack of concrete public interventions in support of IT entrepreneurs.

Bridging the gap

Against this background a series of measures has been identified that could prove useful in bridging this financing gap in Zimbabwe. Some of these measures concern specific interventions aimed at facilitating access to equity and debt financing while others are aimed at improving the interaction between the entrepreneurs and the institutional investors and lenders.

Regarding private equity financing, the possible measures identified are listed below:

– Supporting the establishment of SME financing schemes with mixed participation of public and private investorsideally providing incentives to the participation of private sector operators.

– Promoting the business angel financing model and establishing a network of investors.

At the same time, some initiatives in the field of access to bank financing should be envisaged. In this sense a two-pronged approach could be followed. One which promotes and assists the scaling up of the existing Credit Guarantee Schemes with a dedicated window for ICT firms; and also provides direct assistance to ICT entrepreneurs to improve their ability in dealing with commercial banks.

Finally, ways should be devised to remove obstacles generated by the information gap on ICT business models and improve the familiarity of bankers and investors with this type of enterprises. This could take the form of initiatives of various natures, such as studies, publications, trainings, seminars, ideally organized with the support of a vast network of stakeholders from the private and public sectors.

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