Africa-Press – Namibia. • SESSILIA NEKWAYA OKAFOR
DESPITE past and recent financing initiatives by various players, financing for micro, small and medium enterprises (MSMEs) and start-up firms is not yet fully available in Namibia.
Evidence rather suggests that incumbent firms have increasingly had access to organised credit, primarily through bank finance, making bank finance the most popular source of external finance for most MSMEs and start-ups in Namibia.
In spite of ongoing arguments that debt finance may not always be suitable for enterprises at various stages of development, as well as for firms that operate in certain types of industries, the reality is that bank finance serves as the only form of external finance for MSMEs and start-ups in many developing countries.
This is due to the reliance of most enterprises on loan agreements to cater to their initial financing needs and to a large extent, the availability and ease of debt financing by financial service providers.
However, in the same vein, MSMEs usually find themselves competing for this resource alongside large and well-established businesses, especially given the fact that large enterprises still rely on debt financing, due to growth constraints and equity concerns.
THE WAY OUT Now, innovation requires finance during all phases of the cycle, from the conception of ideas and companies to the commercialisation of those ideas and the subsequent growth and development of such companies.
However, in Namibia, securing funding for the initial developmental stage remains the biggest challenge. By nature, MSMEs and start-ups in sectors associated with high levels of innovation, specifically technology, often lack the assets and credit history required by traditional creditors such as banks.
It is often impossible for these new ventures to qualify for lines of credit or other traditional bank products, especially in the absence of new and innovative credit products that can be used to provide small loans to customers who do not have formal credit records, consequently, resulting in a gap in the supply of credit and barriers to entry for potentially innovative firms.
The financing of innovation is determined by the macroeconomic and institutional framework to either stimulate or curb innovative culture. In some countries, the financial legislation may appear to favour some of the financial mechanisms such as banks, and capital markets or be impartial to all, and thus hinder the full development of certain sectors.
However, in the case of Namibia, the legislative framework appears to be in favour of both banks and capital market players. This gives confidence in the fact that the legislative front may not play a limiting role or favour the development of any sector in particular.
Although there are merits, especially given that Namibia has legally instituted venture capital mechanisms, well-functioning capital markets and the development of bank credit (although heavily skewed towards mortgages, personal loans and corporate finance).
These mechanisms, to a large extent determine the success and failure as well as growth of firms in an economy. THE BIG QUESTION This begs the question: Why have these mechanisms been unable to address the eminent gaps in the provision of finance and/or address the lack of alternative finance mechanisms?
Could it be that Namibia’s highly concentrated banking sector may have resulted in reduced competition and innovation in the provision of financial services, especially to the MSME sector?
Conversely, one may argue that the net of available funding for MSMEs and start-ups has somewhat widened, attributed to the fact that most, if not all, commercial banks offer a wide range of MSME financing products through their designated SME lending divisions, the newly launched credit guarantee scheme within the SME Financing Strategy, which stands ready to partner with commercial banks and other financial providers in providing finance to bankable SMEs with viable business proposals or ideas but who lack collateral; and the Development Capital Board under the Namibia Stock Exchange, which provides an avenue for the listing of firms that do not necessarily meet the requirements of listing.
Can promising start-ups, especially those in innovative sectors, with limited resources or assets and collateral, rely on these? Is the net wide enough, and if not, then what other efforts will be required to widen this net?
Notwithstanding, considerations still have to be made in terms of whether the existing legal framework and financial institutions structure is sufficient to support the development of non-traditional forms of finance or alternative finance mechanisms such as crowdfunding, peer-to-peer lending and Initial Coins offerings, especially given that regulation generally seems to lag behind innovation in many developing countries.
Even so, is there an appetite for these types of mechanisms? Is it a financial structure issue? Do we require more players perhaps? Have we exhausted other options such as the possible role that traditional non-bank players, particularly shadow banking, could play in addressing the finance gap and needs for micro and small enterprises at-least?
Could it be a missing middle phenomenon perhaps? Is there a need for existing microlenders to graduate to levels of microfinance institutions and, if so, is the regulatory framework sufficient to support this development?
The lack of innovative firms in Namibia may be attributed to cultural patterns related to non-financial activities that stimulate or restrict innovative activity, such as cultural attitude towards risk, perceived high financial costs and technological backwardness. These factors, however, are crucial in determining the extent of demand for innovative finance.
Historically, there existed policies that prevented previously disadvantaged Namibians from owning and, or accumulating economic assets. Evidently, this has entrenched the acceptance of subsistence living standards, thus leading to absence of business mindsets and culture among the majority of the people.
As such, it is still unclear whether lack of access to finance contributes to a lack of innovation, or whether the lack of innovative ideas and firms has impeded the provision of finance in Namibia.
However, despite the cause, the availability of financial tools and mechanisms during the transitional phase of an economy is crucial and will require collaboration and commitment from various players in the economy.
THE VIS-A-VIS SITUATION There are conflicting views about who is better suited to finance innovation in an economy. Advocates of bank-concentrated financial structures often argue in favour that banks possess comparative advantages in assembling data.
Thereby implying that highly bank-concentrated financial systems are likely to achieve optimal resource allocation in the economy. Given that Namibia’s financial sector is highly bank concentrated, why is access to finance still a major challenge for MSMEs?
On the contrary, proponents of market concentrated financial structures tend to argue that bank concentrated financial systems inhibit innovation given that they are likely to be prudent and risk averse.
And that banks are more suitable for funding traditional asset-intensive industries, while capital markets are more suitable for funding innovative and risky industries.
For example, specialist venture capital firms bridge the financing gap by providing equity investment tailored to the specific nature of each of the companies in their portfolios.
They mitigate the risks inherent in investing in start-ups by diversifying their portfolios and investing in club deals alongside a number of other experienced venture capital investors. Compared with other developing countries such as South Africa, there is a distinct lack of capital market financing in Namibia.
This relative lack of investment may be related to a number of factors, one of them being the tendency of unlisted investment managers to share risk and co-invest alongside similar institutions. Thus, an unlisted investor is unlikely to enter a new market if there are no other suitable investors with which it can co-invest.
Another key factor in the lack of investment in the country, may be the absence of suitable companies to invest in, in the case of Namibia, both scenarios hold truth as evidenced by the lack of innovation and continuous emergence of traditional survivalist MSMEs.
Crucially, innovators and financiers need to gear themselves up for the transformative times we currently find ourselves in. Inasmuch as the demand for certain financing models and mechanisms is increasing, there is a corresponding demand for quality, technology-driven solutions and business models.
There is, therefore, a need to foster innovation through framework and ecosystem support machanisms. * Sesilia Nekwaya Okafor is an economist and financial inclusion expert. The views above are not that of her employer.
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