By Yona Menon Banda
The increasing speed and scale of change affecting the world has underlined the adage that change is the only true constant. Everyday, emerging technologies and evolving consumer preferences are driving seismic changes across global commerce. In recent times Zimbabwe has maintained a fairly large banking sector, populated by a mix of large and small, foreign and indigenous institutions. While the sector has valiantly navigated the complexities of Zimbabwe’s dynamic economic environment, its architecture has remained relatively static. However, recent transactions could be the catalyst for some significant changes in the landscape of the sector.
Analysis shows increasing concentration of public deposits in a group of 4 Tier 1 banks (CBZ, Ecobank, FBC and Stanbic). As seen in the graph, from 2012 to 2022, the group’s collective share of total public deposits held by commercial banks has increased from 40% to 73%, at a compound annual growth rate of 6.2%. With FBC Holdings’ acquisition of Standard Chartered Bank Zimbabwe, and CBZ Holdings’ pending acquisition of the ZB Financial group, the Tier 1 banks could collectively control more than 80% of total public deposits by the end of 2023. All this casts a large spotlight on the future of the non-Tier 1 banks who face a narrowing space for growth in the traditional spaces such as retail and corporate banking. So, it follows that the route to growth for the non-Tier 1 banks might lie in nontraditional banking business. Arguably, right now, the long-term future of these banks depends heavily on establishing an alternative growth anchor.
One area that appears to hold much untapped potential is the Small to Medium Enterprise (SME) banking segment. Zimbabwe has a rapidly growing and vibrant Micro, Small to Medium Enterprise (MSME) sector, with a national count of 1.64 million active MSME owners and an estimated contribution of US$8.6 billion to Gross Domestic Product (GDP) in 2022. The sector is expected to be a key driver of innovation, employment and economic growth as the country pursues its Vision 2023 development agenda. However, MSMEs generally face significant challenges accessing sustainable financing from the formal financial markets. Several studies have highlighted restricted access to financing as a major obstacle to the growth and development of Zimbabwe’s MSME sector. Analysis shows that despite the sector’s growing economic significance, its share of the banking industry loan book has remained relatively flat. Further, the total value of loans to the sector has declined significantly in real terms since the country de-dollarized, falling from US$170 million in 2017 to the equivalent of US$73 million at the end of 2022. This is despite most of the commercial banks establishing specialized SME desks as extensions to their retail and corporate banking operations.
In studies, the low levels of formal MSME financing have been attributed to factors such as insufficient or unreliable financial information, and inadequate managerial capacity. The World Bank posited that in addition to financing, SMEs in developing countries also require Technical Assistance Facilities such as: financial literacy training; business plan development; marketing support and market studies; legal support; operational and process improvement; facilitating access to international supply chains; and Information technologies. Alternative financing sources for MSMEs such as Venture Capital (VC) and Private Equity (PE) have scope to close the MSME financing gap and meet some of the expanded technical support needs. However, Zimbabwe’s VC/PE industry is still emerging and has limited capacity to make a significant impact in the short to medium term. So, the onus remains on the banking sector to develop solutions for the MSME financing problem. Considering the growing dominance of the Tier 1 banks in the retail and corporate banking spaces, developing a specialized capacity as a MSME financier represents a possible long-term survival strategy for the other banks.
SME focused banks are a notable feature in developed and developing economies. They make it a core part of their business model to provide financial services and solutions tailor fitted to the needs of SMEs. The banks often strategically position themselves at the centre of their clients financial network by offering value-added business support services to complement the more conventional banking services. These value-added services typically include invoice management, payroll support, tax preparation, and inventory management. The services can also be non-financial, such as providing clients with online toolkits, training, workshops, networking, mentoring, useful publications and informative media programs. SME banks also typically embed themselves in the SME ecosystem by investing in, developing or partnering in innovations that are aimed at supporting SMEs such as payment or trading platforms.
In the Zimbabwean context, Ecobank’s single market trade hub stands out as a major strategic attempt to tap into the SME ecosystem. NMB Holdings’ move into FinTech through its recently formed X-Plug Solutions subsidiary has potential. The big question is if any of the non-Tier 1 banks are willing to take a more aggressive approach towards SME banking – making it a fully integrated core function rather than an extension to the traditional banking business model. Risks abound but it could be the foundation of a modern, tightly integrated financial services provider. It could start with a unique MSME facing service offering that attracts the primary target customer base. Over time, growing or maturing MSME banking clients could provide a market for expanded financial services such as advisory, insurance and wealth/asset management. Reduced information asymmetries and business networks formed through long-term client relationships could complement the operations of a PE/VC business. Maturing investments in the PE/VC operation could then feed into an investment banking operation. Arguably, given the shrinking space for growth in the traditional banking segments, it is a proposition worth exploring – Harare
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