Agents of Change
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Studies on the Policy Environment for Small Enterprise in Africa
Published in Canada
by the International Development Research Centre
PO Box 8500, Ottawa, ON, Canada K1G 3H9
and
Published in the United Kingdom
by Intermediate Technology Publications
Ltd 103-105 Southampton Row, London WC1B 4HH, UK
© International Development Research Centre 1995
English, P
Hénault, G.
Agents of change : studies on the policy environment for small enterprise in Africa. Ottawa, ON, IDRC, 1995. xx + 353 p. : ill.
/Small enterprises/, /national policy/, /Africa/ — /policy making/, /private sector/, /fiscal policy/, /regulations/, /financial administration/, /financial institutions/, /innovations/, /competitiveness/, /case studies/, /conference reports/, references.
A CIP record for this book is available from the British Library.
UDC: 334.746.4(6)
A microfiche edition is available.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise, without the prior permission of the International Development Research Centre.
The paper used in this book is recycled as well as recyclable. All inks and coatings are vegetable-based products.
ISBN: 0-88936-726-4 (IDRC)
ISBN: 1 85339 272 3 (IT Publications)
Donor collaboration, cynics sometimes say, is an oxymoron. There is, however, one example of donor collaboration that is still going strong after about 15 years — the Committee of Donor Agencies for Small Enterprise Development. Initiated by the World Bank in 1979, this committee now includes 17 bilateral agencies, 15 multilateral institutions, and 2 other international development organizations.
As befits a group focused on small enterprise, it is informal, with no legal status. But the committee seems to serve a need, as donor representatives keep coming back. The committee's objective is to promote small enterprise in developing countries by
• exchanging information on the programs of participating agencies;
• sharing experiences and lessons learned in project implementation; and
• coordinating efforts in this field.
The committee has been particularly active in the first two areas. There have been regular annual meetings, nine conferences have been organized, and the Journal of Small Enterprise Development was launched in 1990. Attempts at better coordination at the country level are somewhat more problematic because they depend a lot on the initiative of individual field officers. But, as one of our members said at the close of the most recent conference, one of the principal ways in which donors can serve as a catalyst in small-enterprise promotion is through the transmission of ideas. In this respect, the committee has undoubtedly been a success.
Our second conference was held in Abidjan, Côte d'Ivoire, in 1983, and had a regional focus on Africa. After various, more thematic conferences, we again turned our attention to this troubled continent when we met in The Hague in 1991. This meeting was seen as an exploratory step on the way to a larger conference to be held, once again, in Africa in 1993. In each case, the emphasis was on the policy environment because of its crucial importance and past neglect. The best papers from the conference in The Hague were published in Small Enterprise and Changing Policies: Structural Adjustment, Financial Policy and Assistance Programmes in Africa, edited by Helm-sing and Kolstee (1993).
That conference was especially notable for involving a large number of African speakers. As Helmsing and Kolstee (1993, p. 6) emphasize, "it has become painfully clear that there can be no major progress in tackling Africa's development dilemmas without strong and clear participation by African policymakers, practitioners and researchers." Encouraged by its success in The Hague in 1991, the Committee chose to extend this approach in Abidjan in 1993 by moving the conference back to Africa and by further limiting the role and number of non-Africans.
At least two other modifications were adopted for 1993. First, it was agreed that there should be a greater diversity of participants. Whereas the conference in The Hague in 1991 was dominated by researchers, this one would have a greater share of speakers and listeners from governments, banks, nongovernmental organizations, and private enterprise itself. In this way, it would be firmly anchored in the reality of current experience and, hopefully, would also include some genuine agents of change.
Another significant modification adopted for 1993 was a change in focus — away from the definition of appropriate policy and toward the process of designing and implementing such policy. It was felt that at least the basic principles were fairly well understood, but somehow they were not finding their way into policy reform. The conference proposed to explore the ways in which some countries manage to galvanize the necessary political will and what obstacles continue to block the path for others.
The conference was a truly collaborative effort. Its agenda and objectives were initially discussed in the commit-tee's annual meeting in 1992. A subcommittee was formed, and it met again in March 1993. From then, the Canadian International Development Agency (CIDA) and the International Development Research Centre (IDRC) took the lead, with the assistance of Georges Hénault and other members of the subcommittee. Eighteen donors contributed to the financing and helped in almost as many different ways. The list of invited delegates was put together through a collaborative process. Even the title was chosen by committee (and it probably shows it).
Yet, somehow it all came together in Abidjan in late November 1993. Some late arrivals were moved to other hotels because another conference got some of our rooms. And there was a danger that the whole country would be closed down with the imminent death of its long-standing president, Félix Houphouet-Boigny. But at the close of the conference, everyone seemed to agree that it had met its objectives.
Perhaps policy and program design dominated the discussion, more so than process, but it became clear that many of the basic principles of policy and program design are still being debated by practitioners. Problems tended to figure more prominently than success stories, but this is part of the challenge facing Africa.
The discussion was led by Africans, the debate was lively, information was shared, and new contacts were made. And there were certainly some agents of change in the room. We hope that as a result of the publication of these proceedings, those who were unable to attend will agree with us that sometimes donor collaboration does work.
Philip English, IDRC
Gilles Lessard, CIDA
Before discussing the objectives, structure, approach, and content of these proceedings, I would like to place this work in the context of the issues surrounding African development.
Social and economic development on the continent of Africa occurs through the private sector (anything that is not public), whether this involves cooperatives in the areas of production, marketing, and credit, traditional associations, or even micro-enterprises, small and medium-size enterprises (SMEs), large-scale enterprises, and multinationals.
For more than 25 years, African countries, as well as large international agencies, have emphasized the vitality of economic agents and their spirit of initiative and entrepreneurship. The decade 1980–1990 was declared the Industrial Development Decade for Africa. In 1980, the heads of African states adopted the Monrovia Declaration, which was the basis for the Lagos Action Plan (OAU 1980). The 1981 World Bank report, Accelerated Development in Sub-Saharan Africa: Indicative Action Plan (Berg 1981), emphasized human resources and productive sectors in a regional and macroeconomic context. The report defined industry as the motor of development and had only a brief, half-page discussion of entrepreneurial spirit. The contribution of SMEs to the economic vitality of Africa was not accorded any special significance. This is puzzling, because it seems that the economic growth of Western countries, especially after the Second World War, has been due to the work of the SME sector. Another 8 years passed before the World Bank (1989a) said, in one of its long-term prospective studies, that there was a need to foster entrepreneurship to ensure sustainable growth in sub-Saharan Africa. The significance of small enterprises was finally recognized in the examples in Chapter 6 of the study, particularly the cases of Kenya and Côte d'Ivoire.
This reluctance to explicitly encourage the SME sector could undoubtedly be explained by a certain ideological unwillingness to support the private sector with public funds. For reasons of efficiency, management training has been aimed at officials of cooperatives, nongovernmental organizations (NGOs), and even state-owned corporations. From funding large projects managed by large-scale enterprises we have moved on to micro-projects driven by the momentum of the informal sector.
International cooperation policies started to promote small enterprises during a time of profound change in the role of the state in African economies. The calls for "more government" in the 1970s and "less government" the 1980s were replaced by calls for "better government" in the 1990s. Structural adjustments and the trend toward privatization pushed the bloated public service in African countries (which acted in a somewhat reactionary and defensive manner) to downsize and to create enterprises to give their departing members employment. There now appears to be a consensus on the validity of actively fostering business as a source of economic growth. Has business not gained its credentials by stimulating African economies?
With these changes in the role of the state in the economy, people became more acutely aware of the disparities between African countries. Although most African nations had clearly defined developmental objectives by the end of the decade, a number of differences still remained in the way policies affecting entrepreneurship were implemented (Commonwealth Secretariat 1991). To this we might add that African countries are very heterogeneous to begin with.
Without dwelling on the linguistic differences between English- and French-speaking countries in Africa, one may recall that, in the view of Helmsing and Kolstee (1993), some countries, such as Angola, Malawi, and Mozambique, have a small industrial base, whereas others, such as Côte d'Ivoire, Mauritius, and Zimbabwe, have a substantial industrial base to draw on.
A more integrated and holistic approach to small-business development has been adopted as a result of the growing awareness of the importance of the private sector in Africa and in recognition of the diversity of the continent. As evidence of this, I need only mention the creation in the past few years of a number of networks linking African organizations devoted to small-business development; between August 1993 and January 1994 there were also some seminars and conferences on the problems of the small-enterprise sector.
States and international organizations now agree on giving priority to the needs of the private sector.
Also, enterprises are organizing into networks, taking control of their own destiny. The number of meetings, conferences, symposiums, and other seminars is increasing, allowing for a dialogue among the continent's economic partners to identify common solutions.
Two examples of networks created to exchange information on increasing the efficiency of African enterprises eloquently illustrate the dynamism of the private sector on the African continent:
• The West Africa Business Network is an association of business people in the subregion; it publishes a bulletin under the aegis of the African Development Bank (ADB 1993).
• The entrepreneurship network of the Université des réseaux d'expression française (UREF) brings together researchers and representatives of the private sector to improve their knowledge of the problems facing African enterprise, particularly in the French-speaking countries. The proceedings of two of UREF's conferences have been published (Hénault and M'Rabet 1990; Ponson and Schaan 1992). The proceedings of another of its conferences are in press.
I can mention a few recent conferences and workshops to illustrate the spirit of the times. These conferences and workshops helped us define the objectives of our meeting in Abidjan in December 1993.
• In August 1993, a technical conference was held in Nairobi, Kenya, on the importance of capital markets in Africa (Mensah 1994). In fact, the channeling of the local economy and investment funding constitutes a major challenge that the 10 stock markets in Africa must face.
• In October 1993, the Sahel Club of the Organisation for Economic Co-operation and Development (OECD) organized workshops in Accra, Ghana, and these were attended by representatives of the private sector. The workshops focused on four major themes concerning business development in West Africa: (1) financial restructuring, (2) the development of an entrepreneurial class, (3) competitiveness among businesses, and (4) improved dialogue with the state (OECD 1994).
• In January 1994, the International Labour Office (ILO) and its section for the development of businesses and cooperatives organized the eighth regional African conference in Mauritius. The theme of the conference was Entrepreneurship and Small Business Development in African Urban and Rural Sectors (ILO 1993).
In recent decades, regulatory policies and frameworks unfavourable to business development impeded efforts to assist SMEs. More recently, researchers and entrepreneurs have stressed the importance of suitable policies for assisting small enterprises. The elements of this type of policy are well known. What is lacking is the know-how to develop and implement strategies in cooperation with all concerned.
Many African decision-makers would like to know how the private sector, particularly SMEs, could play a greater role in the economic development of their countries. In many cases, liberalization has created a free-market environment, more favourable to the private sector. There are fears, however, that without support and access to ample resources during the adjustment period, the SMEs will be unable to succeed. The choice of Africa as a location and focus of this conference is justified by the extent of the changes occurring on this continent and by the need to strengthen institutions supporting small enterprises in Africa.
As the headquarters of the ADB is in Abidjan, this was the most logical choice for our conference, for the same reason as it was 10 years earlier, in 1983, for the ADB-hosted symposium on small-enterprise development (organized by our committee). During the opening session, A.O. Sangowawa, Vice-President of ADB, was pleased to mention "the historical importance" and contemporary relevance of this theme. Ten years later, he presented a very interesting diagnosis of the difficulties facing SMEs in Africa:
...small enterprises have to be fostered because of their great potential and value in creating employment, achieving equitable income distribution, alleviating poverty, building up local technological base, promoting participation of vulnerable groups, particularly women, in the development process, providing training ground for entrepreneurial and managerial skills, providing opportunities for use of own capital resources, and acting as ancillaries to large-scale enterprises. Although many African governments have realized the importance of small enterprises and the need to develop them few have launched comprehensive and effective policies to promote them. The lack of an appropriate institutional framework and of adequate infrastructures, inadequate financing schemes and inefficient information systems are some of the important obstacles which still hamper the organized development of small enterprises in Africa.
Members of the Committee of Donor Agencies for Small Enterprise Development believe that the governments, entrepreneurs, chambers of industry and commerce, NGOs, financial intermediaries, and other key participants (the donors) could do more to promote SMEs. To find the criteria for success and avoid any problems, an effort must be made to exchange knowledge and to learn from experience.
The conference organizing committee identified the following four categories of objectives:
1. Share know-how on developing and carrying out policies and programs for financing SMEs.
2. Stress the role of the public and private sectors in creating an environment to foster the emergence and blossoming of small business.
3. Help coordinate the implementation of action programs for small-enterprise development in several countries.
4. Create a forum for sharing the experiences of English-speaking and French-speaking African countries.
The objectives of the conference proceedings are obviously those of the conference. However, it would have been difficult to fit the great variety of texts presented by some 200 participants from 24 African countries into a single book. Constraints on the size of the published proceedings made it necessary to limit the number of presentations included. This required a difficult and stringent selection process, obviously based on quality but also on the need for a thematic, regional, and linguistic balance. This was the reason why, for example, the selection committee had to decide, with regret, not to include papers on experiences in other major regions of the world.
The selection committee attempted to identify not only the most revealing experiences, but also those that would be useful to any country or region of Africa.
The proceedings follow the same plan as the conference. Its main theme — expressing the contribution to many debates on the problems facing SMEs — is the role of agents of change in developing and implementing policies.
Part I is the introduction, bringing together viewpoints from the private sector, the public service, and international organizations.
Part II discusses the process of designing and implementing national policies that make SMEs one of the priorities of African development.
Part III stresses regulatory reforms in this context, notably the way in which the legal, regulatory, and fiscal framework affects the dynamics of business growth.
Part IV deals with the agents of change in financial services. Whether from formal or informal financial systems, working and investment funds for African small enterprises are essential to ensuring balanced growth.
Part V discusses innovations to improve the competitive potential of small enterprises. These innovations are in the areas of technology, the grouping of small enterprises into export consortia or corporate associations, and, finally, the training of entrepreneurs.
Part VI is the conclusion. It presents a summary of the presentations that could not be included (because of the constraints previously mentioned) and the debates and discussions following the various presentations.
Although I am aware of the limitations of this type of work and the fact that much remains to be done, I hope that these proceedings accurately reflect the richness and variety of the ideas discussed during three intensive days in 1993. I am convinced that this conference will raise many questions and offer some answers to the problems of SMEs on the African continent.
George Hénault, University of Ottawa
One cannot acknowledge those who have contributed to this publication without expressing gratitude to those who helped make the conference a success. The list is long.
It begins with the co-chair of the conference-organizing subcommittee, Gilles Lessard of the Canadian International Development Agency (CIDA), who took the lead in coordinating this conference and maintained his remarkable cool throughout the many ups and downs. Next is the co-chair of the Committee of Donor Agencies for Small Enterprise Development, Biff Steel (World Bank), who framed the initial conference proposal and delivered the keynote address. The list continues with the members of the subcommittee who helped us plan the conference: Marilyn Carr (UNIFEM), Michael Farbman (United States Agency for International Development), Bert Helmsing (Institute of Social Studies, The Hague), Franz van Rijn (Dutch Ministry of Foreign Affairs), Leila Webster (World Bank), and David Wright (Overseas Development Administration, United Kingdom).
In Ottawa–Hull, Daniel Lussier and Jean-Baptiste Sawadogo provided critical organizational support at CIDA; Marleny Tanaka and Margaret Langill, at the International Development Research Centre (IDRC), were very helpful, particularly in making travel arrangements for participants. In Abidjan, the Canadian embassy was a great help. Its greatest contribution was in identifying Victor Luboyeski, who, with a team of assistants, may just have saved the day by supervising all the logistical arrangements for the conference.
We thank all those who prepared and presented papers at the conference. In addition, we appreciated the willingness of some of these same people and others to act as chairpersons and rapporteurs at the various sessions. Their names are listed, along with those of the participants, in Appendix 1. Jake Levitsky, the former chair of our donor committee, contributed in many ways: providing an oral summary of the conference at its close and a written version soon after, as well as advice in the editing of this volume.
We wish to acknowledge the assistance of Bill Carman and his colleagues at IDRC in preparing these proceedings for publication.
Finally, the list would be incomplete without the donor agencies that financed the conference (see Appendix 2).
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Ministers, ambassadors, representatives of international development institutions, Mr Chairman of the Committee of Donor Agencies for the Development of Small Enterprises, representatives of the donor agencies, conference participants, honoured guests, ladies and gentlemen, I want to take this opportunity, on behalf of my government, to extend the warmest welcome of Côte d'Ivoire to all the distinguished participants in this high-level conference on the development of small and medium-size enterprises (SMEs) and to thank the donor agencies who organized the event in cooperation with the African Development Bank (ADB).
Let me say to the Chairman of the Committee of Donor Agencies for the Development of Small Enterprises what a pleasure it is that the committee chose Côte d'Ivoire to host the work of this conference and what an honour it is to have such high-calibre participants gathered here from all corners of the world to discuss this complex and timely topic.
Mr Chairman, I want to thank the committee on behalf of my government for this significant show of confidence and friendship at a time when Africa's political and economic systems are under such strain.
Our meeting, our discussions, and our thoughts are going to revolve around the theme "Agents of Change in the Design and Implementation of Policies for SMEs in Africa." For Côte d'Ivoire and for most African countries south of the Sahara, one could not choose a better topic to mobilize business leaders to assist in developing Africa. This choice of topic is an eloquent testimony to the importance we all attach to the role of SMEs in the development of our economies.
How can one speak of growth of any kind without enterprise? How can one imagine development without enterprise? Ladies and gentlemen, dear guests, we all recognize that enterprise is the very solution to the problems of economic and social development.
Yet we must remember that the development of our economies is a task beyond meeting the requirements for growth: it is also necessary to meet basic human needs for food, health, and education and to overcome the inequalities, unemployment, and poverty that have caused our countries such concern during this decade.
When we think about adapting our economic policies to the realities of today's world, in this era of political and economic liberalism, we must recognize that the only way to grapple effectively with the problems of development is by harnessing private initiative as the engine of growth. If we look at the development process as a straight line into the future, we can see that the small enterprise of today, whether in the formal or the informal economy, can become the medium-scale firm or the big business of tomorrow.
This linear idea of progress may seem simplistic to some, but small business is the seed from which economic progress can grow and spread out to all sectors of society. No one doubts any more the role that small business can play in developing economies like ours — creating an industrial fabric, providing employment and engaging our people in productive activity, slowing the exodus from the countryside, and promoting rural development.
To be more specific, experience has shown us that small business has the following characteristics:
• Small business is more open to imagination, which is the key to inventiveness.
• Small business helps integrate research policies into an overall business strategy by promoting the spread of knowledge to the various pillars of enterprise.
• Small business fosters creative intuition to make up for its lack of resources.
I am afraid that in some political and academic circles, there are those who still believe in the discredited Schumpeter theory, that only big business can produce innovation.
Of course, it is true that big firms still do the bulk of spending on research and development (R&D), but no one can point to any direct correlation between the size of a firm and its research activity. Indeed, studies in Great Britain, Sweden, and France show that the small firms are the innovators. After all, in regions of dynamic growth like Silicon Valley and Southeast Asia, the SMEs do the best research.
Private initiative, innovation, and imagination are the keys to development, and the encouragement of SMEs is one way to get those keys. It is high time we admitted that in most of our countries, our efforts to encourage SMEs have fallen far short of their mark.
In this connection, ladies and gentlemen, allow me to say a few words about the efforts that Côte d'Ivoire has made to encourage small business during the last few decades. The two decades after independence saw a series of efforts to create a technical-support infrastructure for the development of SMEs. In 1968, the Office for the Promotion of Côte d'Ivoire Enterprise (l'Office de promotion de l'enterprise ivoirienne [OPEI]) was created, which operated like an industrial and commercial Crown corporation. In 1982, this became to the National Enterprise Promotion Assistance Centre (Centre d'assistance à la promotion de l'enterprise nationale [CAPEN]), an administrative agency.
The year 1968 also saw the creation of the Credit Guarantee Fund for Côte d'Ivoire Enterprises (Fonds de garantie des crédits aux enterprises ivoiriennes [FGCEI]), which was intended to help SMEs obtain short-, medium-, and long-term bank credit. Two years later, in 1970, a special fund for SMEs was created to supplement the proprietor's initial investment by 15%. The FGCEI and the special fund were subsequently dissolved — the FGCEI, in 1981; the special fund, in 1982. From 1968 to 1982, though, about 300 SMEs were created, with an investment of about 7 billion XOF (in 1994, 570 CFA francs [XOF] = 1 United States dollar [USD]).
I should also mention the major role played by the development banks created by the government. The banks, which have since been dissolved, were crucial to the creation of SMEs in Côte d'Ivoire.
CAPEN was the last agency created by the government to promote SMEs, and it was dissolved in 1992. With its mandate to carry out assistance policies for SMEs, it promoted the creation of 46 small businesses in Abidjan alone between 1982 and 1989, for a total investment of 1.7 billion XOF.
To create a sound business climate, the government has set up industrial and handicraft zones for SMEs and has given them tax and customs privileges under the investment code. The government has also taken special steps to help the marketing efforts of small enterprises.
The government is now paying particular attention to the artisan and handicrafts sector and recently set up six regional technical training centres for artisans and for entrepreneurs in the informal sector.
The government also conducts many programs and pilot projects jointly with various bilateral and multilateral aid agencies. One example is the National Marketing Assistance Program (le Programme national d'assistance aux commerç ants ivoriens [PNCI]) set up with the help of the Aid and Cooperation Fund (Fonds d'aide et de coopération). Another is the Trades Enterprise Promotion project carried out with the help of the United Nations Development Programme (UNDP) and the International Labour Office (ILO). This project has led to the creation of more than 30 regional firms in the forestry, construction, and agro-industrial sectors. Yet another example is the PDU3 project, supported by the World Bank and supervised by the French Association of Volunteers for Progress (Association française des volontaires du progrès [AFVP], an NGO). The purpose of this project was to measure the effects of credit on development in the nonstructured sector.
So, ladies and gentlemen, there you have a brief overview of the efforts the government of Côte d'Ivoire has made to encourage small business. Côte d'Ivoire has been tirelessly pursuing these efforts. Yet now, we are determined to replace the models we used during the first two decades to assist small business. Now we favour a participatory approach, where the government, instead of acting alone, will be a partner to the private sector while continuing to meet its responsibilities for designing sectoral policies and creating the proper fiscal, legal, and institutional framework for private initiative to flourish.
The participatory approach is well under way in Côte d'Ivoire. A good example is the public-sector–private-sector liaison committee that Côte d'Ivoire created as an instrument for real dialogue and cooperation on all questions affecting business.
One of the concrete things this committee has already done is to present proposals to the government for dealing with the problem of fraud.
The entrepreneurial spirit is more or less developed in all human societies. In Africa, the significant role played by our artisans bears witness to the fact that this spirit exists among us too. However, consumption patterns, the absence of a money-based economy, and colonization have fostered the development of a race of consumer agents, to the detriment of the entrepreneurial spirit. It was, therefore, natural that all entrepreneurial initiatives were taken exclusively by expatriates, whether these expatriates were from Europe, the Middle East, or even the Sahel. The needs are so tremendous, however, that there is and always will be room for initiative.
I started in a heavily dominated sector in my own society and was forced to strengthen my national base with the aim of conquering the regional and, in part, the international market. In fact, we must now acknowledge that the economy is being globalized and that development is likewise being globalized.
From the dawn of independence, the leaders of Côte d'Ivoire decided to promote private enterprise by establishing offices for this purpose. Today, we are forced to conclude that all these structures failed, and we have a right to ask how this happened. Some people have questioned our culture, that is, African culture. They believe that a purported absence of individual and collective personal standards could provide the beginning of an explanation. Others, who are more pessimistic, think that living and climatic conditions make it difficult to produce lasting results. We can list all the national, regional, and continental structures that have now disappeared, such as the Industrial Development Bank of Côte d'Ivoire, the Credit Bank of Côte d'Ivoire, the Côte d'Ivoire Enterprise Credit Guarantee Fund, the Fund for Loan Rebates to Small and MediumSized Enterprises, the National Agricultural Development Bank, BICT, UAM and its special structures, CAMO and its special structures, and so on.
Do the funding structures blame their demise on SMEs that do not honour their commitments? The list of donors is very long. In view of all the global structures created to foster development of the private sector in Africa, why is there a discrepancy between the means available and the slim results obtained?
Putting Africans to work is a considerable investment. Because these funds are not available on easy terms, African states have chosen to become economic operators themselves. African states are turning to the private sector and transferring this heavy responsibility to it, and this is going on at a time when the private sector, in its national make-up, is nonexistent and when the return on foreign investment is no longer as high as it was at the dawn of independence. All this presents a sizeable challenge.
To learn the criteria for success, that is, for profit and enrichment, and to create an environment that promotes the emergence and expansion of the private sector are noble endeav-ours. It is a problem of culture. In fact, according to Babacar N'diaye, the President of the African Development Bank, the problem of culture arises as soon as people are asked to follow strategies and policies for the economic and social development of their country. In our enterprises, we are experiencing some difficulties in communicating the need for preventive maintenance to safeguard the means of production, and occasionally it seems that the concept of amortization is a difficult one to understand.
The World Bank claims that Africa, more than any other continent, has placed its fortunes in foreign investments. In Africa, unlike in Mauritius, everybody believes in the principle that a project started by an individual will fail. All the pitfalls and difficulties are presented to the individual as insurmountable. Individuals are told that the sector they wish to start their business in is dominated by expatriates and that they do not have a chance. They are advised to go and look for more profitable sectors, as if such sectors existed and had been overlooked by the expatriates.
Many of our administrative officials lack the mentality to encourage others to venture into entrepreneurship. The officials even start to smother enterprise by the way in which they exercise their authority. Such behaviour quickly discourages less assertive spirits. Other people better placed to describe this than I am will talk about financial and regulatory harassment.
I can only say that such harassment is part of the enterprise environment in Africa and that the entrepreneur must cope with it and find a way out. For some time, of course, our governments, in their attempts to disengage themselves from the productive sector, have been taking measures to improve competitiveness and to make the institutional and regulatory framework less restrictive. If such measures can be improved, the conditions for starting up and expanding SMEs will also be improved.
Insufficient capital and security are often mentioned as a problem for SMEs. It is a fact. I remember once applying for credit at the National Agricultural Development Bank for my pineapple plantation. At that time, this bank asked me to put up my house in town as equity for my plantation. Often, the real estate of the promoter does not constitute adequate security.
Furthermore, I have just applied to the International Finance Corporation of the World Bank for credit and received it. The investment agreement is an 82-page document with 36 pages of conditions to be met to obtain the loan. You can easily imagine the difficulties that an SME would experience if it found itself in my position.
It is generally agreed that investment in Africa is more costly than elsewhere. Soap-making equipment ordered from an Italian supplier by a small French enterprise is 30% cheaper than the freight-on-board factory price for the same equipment ordered on the same day from the same supplier by Cosmivoire for Africa. Consequently, the cost of creating employment in African countries is exorbitant.
Family pressure and cultural values in Africa have been described by great thinkers, such as Henri Bourgoin and Daniel Etounga Manguele, as having negative and restrictive effects on entrepreneurship.
I believe that others are better qualified to speak on this subject than I. I will only stress that the all-powerful state's practice of placing orders with SMEs that are in debt and cash-starved and then failing to pay them is working toward the disappearance of a sector that the state itself wishes to promote.
Finally, some people have emphasized the lack of entrepreneurship; I take this to mean formal and organized entrepreneurship because the informal sector is growing rapidly and many Africans seem to find satisfaction in it. I believe that the informal sector results from the development of the formal urban sector. I also believe that the informal sector is the reservoir for future promoters of the formal sector. I notice that women as heads of enterprises are predominant in the informal sector. Women represent more than half the population, and this should permit them to contribute more to economic and social development than they have in the past. I, therefore, hope that the informal sector will no longer be regarded as the way all the evils of the formal sector reach us.
Private enterprise in many Asian countries has contributed to growth rates in the order of 6% per annum, giving rise to the "Asian miracle." The conditions facing private entrepreneurs in many African countries, however, make simply surviving a miracle. The challenge before us is to turn the miracle of survival into the miracle of growth by investigating how government policymakers and regulators, financial systems, and other agencies can themselves become the agents of change to support small entrepreneurs in transforming the economies of Africa.
Hence, the underlying rationale for this conference is that Africa's entrepreneurs can be agents of change and growth, but they cannot do it alone. We need to learn lessons from successful cases of change — from Asia and Latin America, as well as from Africa — not just what has been accomplished, but who did it, how, and why. The focus should be on the process: what conditions stimulate and empower people to make changes that help small enterprises fulfill their potential contribution to employment and income generation? This overview discusses the rationale for the specific subtopics of the conference and how they fit into the framework of enterprise development.
The conference title is "Agents of Change in Policy Development and Implementation for Small Enterprises." So there is a policy axis, and there is an implementation axis. Within these axes, the forces of change can be found in six areas, what I will call the "six INs" of small enterprise development: INvestors, ENterprises, INcentives, INputs, ENvironment, and INstitutions. As shown in Fig. 1, the INs may be grouped into a matrix with three dimensions:
• The central dimension is the enterprise itself, and it depends first and foremost on the investor.
• The second dimension is the markets in which a firm operates. Factors of this dimension are the incentives that determine costs and benefits (profits); and the inputs needed for the production process.
• The third dimension is the support system that is available to help an enterprise solve problems and to facilitate the working of markets. Factors of this dimension are the business environment and a wide range of institutions.
Figure 1. Agents of change in small-scale enterprise development.
The third dimension — support systems — is the principal focus of this conference. The policy axis cuts across the lower half of Fig. 1, affecting investment in the creation of enterprises through incentives and the business environment. The implementation axis cuts across the centre, affecting firms' ability to produce competitively through access to needed inputs, finance, technology, information, skills, and other business services.
The result of these forces determines the outcome for the enterprise. Outcomes can range from stagnation or exit to stability, growth, or even "graduation" to a new level of size or technology (top of Fig. 1). The conference focuses on the process of change in the institutional and policy environment — in particular, who can make such changes and how — that leads to increase in the rates of enterprise creation, survival, growth, and graduation.
What follows are some "stylized facts" for each of the six INs in terms of the changes that have already occurred and the present status of small enterprises in Africa. These characterizations refer broadly to countries that have already embarked on an economic reform or structural adjustment program; however, the specifics vary greatly from country to country.
Incentives refer to the determinants of the profitability of investment, including demand for output, prices of outputs and inputs, and taxes. In general, the economic policy environment in the post-independence period was not favourable to small enterprises. Incentives favoured large state and foreign investments over small private ones. Large import-substitution industries received protection, and pricing policies were unfavourable to agriculture. Because most small enterprises and microenterprises are located in rural areas, policies that restrained agricultural incomes limited the demand base for small, off-farm employment activities.
Imported inputs have historically been licenced or directly allocated by governments, and finance has been heavily controlled. Small-scale enterprises (SSEs) typically lack access, whereas large enterprises have often received preferential access. Besides finance and foreign exchange, input controls have often covered commodities such as sugar, flour, and wood.
There have already been substantial changes that allow market forces to more freely determine prices and access to inputs. Structural adjustment programs, however, have had both positive and negative effects on the small private sector (Helmsing and Kolstee 1993). On the positive side, they have opened up new opportunities, particularly for exports, and removed the dominance of the state — both as a direct competitor and in determining the allocation of resources. In particular, liberalization of input markets gives SSEs greater access to resources. And greater attention to agriculture is helping to restore the rural demand base for goods and services supplied by small enterprises. Many small enterprises have been able to adapt and even flourish, especially in countries with growing economies, which have made it easy for smaller firms to export.
On the other hand, growing competition has made it harder for other small enterprises to survive and grow. This is largely a function of the rapid growth in the number of new labour-force entrants, accelerated by downsizing of the public sector. Competition is especially a problem for microenterprises, where barriers to entry are low. There is also competition from imports as restrictions are lifted and a country's foreign-exchange earnings or aid receipts grow to allow low-cost imports of competing finished products, not only inputs. (This has been less of a problem in countries that have used their exchange rates to provide extra protection for domestic value added.)
In sum, the playing field has been leveled considerably. Yet many observers feel that small private enterprises are not adequately equipped to play and are still at a disadvantage in the game of producing competitively. Small enterprises exist in an environment of economic change — whether there are structural adjustment reforms or not — and our goal is to enable small enterprises to adapt to and benefit from these changes as much as possible. Let us look more closely at the agents of those changes.
The central agents of change are the investors or entrepreneurs themselves — risk-takers who are able to identify and manage profitable investments and who provide employment, both to themselves and, if successful, to growing numbers of other workers.
At one time it was often said that Africa lacked entrepreneurs. That myth has been laid to rest: for example, studies under the Growth and Equity Through Microenterprise Investments and Institutions (GEMINI) program, sponsored by the United States Agency for International Development (USAID), and studies under the Regional Program on Enterprise Development (RPED), sponsored by the World Bank and a number of the donor agencies that are also responsible for this conference, show that many people are willing to invest their own savings to go into business. Whether these entrepreneurs can mobilize sufficient capital and skills to establish large industries is another story, but the entrepreneurial spirit is certainly there and documented. Now, how can we best bring it out and nurture it? Before completing the discussion of the enterprise dimension, let us first examine the support systems that can either nurture or constrain entrepreneurs.
Political and social attitudes toward profit-seeking in private businesses can determine whether those with entrepreneurial potential will come forward. If profit-making endeavours are not rewarded and respected, assistance in entrepreneurship development will not get very far. Broader policy measures to change attitudes will be needed. Hence, the second agents of change, besides the investors themselves, are the national leaders and politicians, who set the tone. That is why this conference begins by examining ways in which national leaders have incorporated or can incorporate small business into the policy agenda.
Negative attitudes are often manifested in a restrictive regulatory environment — the second specific issue examined at the conference. Indeed, the high cost of complying with regulatory policies may constitute a powerful barrier to the growth and graduation of formal SMEs, encouraging firms to stay very small and informal to avoid the regulations.
Note that administrative officials in the agencies charged with implementing policies can be agents who resist change, especially liberalization measures that take them out of the picture. Creating a "one-stop shop" doesn't do much good if the people who mind the shop lack the power or incentive to make final decisions. Thus, it is important to go beyond broad issues of national policy formulation and regulatory reform and propose practical implementation methods that actually change the behaviour of the administrators.
The term "institutions" covers a broad range of implementing agencies. It is useful to distinguish facilitating institutions, which influence how well markets work to provide inputs, from assistance institutions, which support entrepreneurs usually on a one-to-one basis or through interest groups.
In designing institutional development programs, it is important that we take a systems approach — that is, recognize that it is insufficient to develop one aspect, such as credit, in isolation without considering the functioning of the system within which it operates. The issues are complex, and actions in one area may have unintended consequences in another. For this reason, policy changes that address fundamental problems are often preferable to direct interventions that introduce new distortions.
The financial system is one of the most important facilitating institutions. A responsive financial system is widely regarded as critical for expansion of the small-enterprise sector. However, because banks in developing countries generally have little interest in or experience providing term loans to small enterprises, a key question is whether it is more effective to encourage greater interest by banks in SSE clients or to facilitate the emergence of alternative institutions and instruments that would be more responsive to the needs of SSEs.
Liberalizing financially repressive financial policies — controlled interest rates and directed credit — has not in practice proven sufficient to substantially improve the access of SSEs to formal financial institutions. (Where financial policies such as fixed or subsidized interest rates reduce the incentive to lend to small firms, policy reforms are the first priority.) The failure of banking systems to act as agents of change with respect to small enterprises in Africa can be attributed to several factors:
• their historical orientation toward the import trade, large clients, and the government;
• the restructuring that they are going through to clean up their portfolios;
• tight money policies that limit the volume of credit;
• government borrowing that crowds out the private sector; and
• the failure to introduce technologies that would reduce high transaction costs and risks in small loans and substitute for the absence of collateral.
Fortunately, as well as innovative, specialized banks, many other institutions are experimenting with SSE finance. Such institutions include NGOs; informal savings collectors and lenders; self-help organizations; nonbanking financial institutions; donor agencies; and suppliers and others who provide trade credit.
One important conclusion of those who have taken a systems approach to financial development is that there has been too much emphasis on credit — saving is an equally important part of the system. Especially for would-be micro-entrepreneurs, the availability of appropriate savings mechanisms may have a wider impact than credit programs and should at least go hand-in-hand with credit.
Besides finance, other facilitating institutions contribute directly to the normal process of production and sales. In particular, small businesses find it difficult to obtain critical information on markets, inputs, and technology. Key agents of change are often those who enable firms to fill a profitable market niche or to introduce a cost-saving innovation.
Who can provide such information? In more developed countries, it is often the private-sector suppliers and buyers themselves: equipment suppliers come to sell the latest technology; buyers specify what they need to satisfy current demand. These agents have certainly been important in the newly industrializing countries of Asia.
These international buyers have recently begun coming to Africa. For example, major US department stores and importers are competing vigorously for African products — first of all for "Afrocentric" products (handicrafts and specialty clothing) but, more important, for standardized garments, especially those for which quotas make Asian suppliers relatively expensive (World Bank 1993). Supplying just 1% of the US market alone would yield 275 million USD of garment exports a year — more than 10 times what the major sub-Saharan countries are now exporting. Thus, there is a gap between this demand and what Africa is currently able to supply. Besides financing, SMEs will need both market information and innovation to meet quality and quantity requirements. Hence the need to examine what catalytic agents can help them to fill that gap.
Intermediaries that may facilitate the process include government agencies, NGOs, donors, and private foreign investors. In most African countries, intermediary agencies have a relatively important role to play in initiating change, opening up markets, and spreading information. They may have to begin as assistance agencies, with the ultimate objective of developing permanent, self-sustaining facilitating institutions that provide marketable business services.
Assistance institutions can fill gaps, help firms cope with policy changes in transitional periods, provide services that are costly for individual firms, and build capabilities for sustained development. Perhaps the most important assistance institutions are those that build up the human resource base, especially by providing education and training. A policy-level issue is whether education and training are designed to enhance not only the capability of the workforce but also the supply of entrepreneurs and managers. The influence of culture can come in here, for example, as it influences the ability of women to enter and succeed in business.
Survey evidence shows a consistent correlation between entrepreneurs' general level of education and their success. The education system itself, therefore, is an important potential agent of change. But the evidence is not so clear on training programs, especially those driven by the perceptions of the agencies that supply them. Assistance programs in this area usually try to instill in people the particular attitudes or skills that are presumed to be lacking. A critical question is how to ensure that such programs actually respond to entrepreneurs' demands and overcome constraints.
Business associations are an important form of mutual assistance through which the entrepreneurs themselves can lobby more effectively for changes in policies, regulations, and the business environment. In the past, some governments have tended to see independent associations in an adversarial light; some countries control the dialogue through state-sponsored chambers of commerce and industry. With increasing democratization and a decreasing role for the state in the economy, associations may be better able to build a partnership with government to create a more suitable climate for private-led growth.
The enterprise is the visible form through which we observe the effects of all the other forces and agents of change. Many types of enterprises can be broadly considered small: self-employment, family firms, cottage industries, artisans, microenterprises, and SMEs. Although the precise definition may vary by study, program and country, when we are designing programs we must make sure the definition is suitable for the particular operational objectives and for the likely outcome for the type of enterprise (see the range of outcomes at the top of Fig. 1).
For example, survey data show that the vast majority of microenterprises will remain micro and that many people have a business primarily for supplementary household income than for a full-time occupation. For many women who are fitting business activities around household and child-rearing responsibilities, graduation to a larger business outside the home may not suit their business plan. In such cases, the primary objective for the enterprise is to help ensure survival and security of income. Interventions geared entirely to the growth of the enterprise may fail. Nevertheless, some improvements in management techniques might improve profits without necessarily changing the scale and location of the enterprise.
On the other end of the scale, graduation to new levels of production and technology is an important part of the development process, whether for individual firms or for the overall production structure. In some Asian countries, graduation of SMEs has generated as much employment growth as the entry of very large enterprises. The questions are whether support systems are conducive to this type of dynamic growth and what types of interventions might help overcome obstacles.
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Kenya's small-enterprise sector is defined as being all of those businesses that employ 1–50 people. It is estimated that 2.1 million of Kenya's workforce are employed in the sector's 912 000 enterprises. The sector is growing at an impressive rate. In 1993, for example, it grew 20%; the large-enterprise sector, on the other hand, recorded a rather sluggish 2.3% growth in the same year. The implication of these growth rates, if they continue at their present levels, is that in the foreseeable future small enterprises will employ three out of every four people looking for a job in the nonagricultural sector of the economy. In addition to its importance in job creation, the small-enterprise sector contributes 33% of the value added in manufacturing and the retail trade in Kenya. These are compelling reasons for the Government of Kenya to take an active interest in the continued growth and expansion of small businesses.
Immediately after independence the Government of Kenya, like the governments of many other newly emerging nations at that time, directed a great deal of support toward the industrial and commercial sectors of the economy. Government policies and strategies were centrally planned and clearly oriented toward import substitution and the development of large-scale industrial and commercial enterprises. Punitive regulations discouraged foreign ownership. This type of policy environment led to protectionism, the increased use of subsidies to foster locally manufactured content, massive public ownership of enterprise, the establishment of a regulatory framework to control the private sector, and enterprise development policies favouring the few and large. Because larger enterprises always perform better than small ones in a highly regulated environment, most small-enterprise support programs were designed to compensate for this imbalance.
The central actor in the promotion of small industries was the government, which in fashioning its policies and measures drew heavily on the Indian model sometimes called the "integrated approach." The model was based on the premise that for small businesses to start and expand, a whole range of subsidized services is needed:
• preconstructed commercial sheds;
• extension services that prepare feasibility studies and give advice on technology choices;
• management and technical training;
• supplies of raw materials; and
• subsidized credit.
It was not until the late 1970s and early 1980s that this approach was largely discredited as being too expensive and inappropriate for developing entrepreneurship. By the middle of the 1980s the government was searching for a new model that was more in keeping with an open-market economy and a more liberalized business environment. Kenyan entrepreneurs were more plentiful and capable, and they were beginning to articulate how the regulations introduced in the 1970s were hampering their expansion.
By 1986 the ever-increasing employment problem was also beginning to manifest itself, and with it came a heightened awareness of the growing contribution that small businesses make to employment. All of this was stressed in a government publication entitled Economic Management for Renewed Growth (Kenya 1986). The document, which went before Parliament as Sessional Paper No. 1, clearly pointed out that modern wage and rural farm employment were growing much too slowly to absorb a labour force that was projected to expand by 6 million entrants between 1986 and the end of the century. The only area of the economy that appeared to be growing at an accelerated rate of 11–12% at that time was the informal, or small-enterprise, sector. The government, therefore, began to examine the impact of its interventionist strategies. It became clear, for example, that
• the industrial estates in both urban and rural areas had not stimulated the kind of growth that had been expected from them;
• the extension services, for all of their costs, had not proved popular with the entrepreneurs; and
• the disbursement of subsidized credit to the sector had been minimal, and recovery rates were poor.
By 1986, however, the country's institutional infrastructure had developed considerably. Aside from parastatals such as Kenya Industrial Estates (KIE) and the Industrial and Commercial Development Corporation (ICDC), which had spear-headed the government's programs in the 1970s, many NGOs had entered the field of small-enterprise development. The Kenya Rural Enterprise Program (K-REP), the Partnership for Productivity, the Undugu Society of Kenya, and the National Council of Churches of Kenya (NCCK) were only some of the NGOs that were experimenting with grass-roots methods for reaching smaller enterprises.
Because of this dramatic increase in small-enterprise promotion, projects were starting to move in different directions and inconsistencies were beginning to emerge. Whereas some foreign donors and NGOs were supporting banks that gave repayable loans to entrepreneurs to start and run maize mills, others, with the sole objective of promoting employment, gave away maize mills to women's groups. Church organizations entered the lending business, providing subsidized loans, but other NGOs, trying to achieve sustainable incomes, charged market interest rates. Mistakes were being repeated in the areas of infrastructure and supplies of raw material. There was a clear need for some consistency in the approach to the sector.
To spearhead a new initiative, the Government of Kenya took two important steps: it created a special unit in the Ministry of Planning and National Development to coordinate inputs for the 1989–1993 national development plan (Kenya 1989a); and it established a task force in the Ministry of Industry to prepare a set of recommendations for government action. The task force, for all its good intentions, lacked the human and material resources needed to collect even the most primary information. The results of its deliberations were, therefore, unimpressive. At this point, the government asked the United Nations Development Programme (UNDP) to help it begin to formulate a strategy. After agreeing on a broad budget and time frame, the government and UNDP began to consider the preparation of a national strategy and an investment program for small-enterprise development. The joint project was known as the Creation of Enterprise and Promotion of Entrepreneurship (CENTRE) Project (Malkamaki et al. 1991).
In choosing an approach to formulating a national strategy, the government considered three distinct methods:
• the "external experts" approach, in which several foreign consultants are brought in to analyze the situation and prepare a report;
• the "task force" method, in which a select group of local experts, usually civil servants, is appointed for a short time to prepare a report; and
• the "participative planning" method, in which predominantly local experts interact over an extended period with selected external experts to generate recommendations on which there is a wide local consensus.
The first method had already been used in Kenya by the ILO when it prepared a world employment report on the informal sector (ILO 1972). The method resulted in a document of high quality. Where it fell short, however, according to the team leader of the mission, Hans Singer of the Institute of Development Studies of the University of Sussex, was that there was very little Kenyan ownership of the recommendations. Consequently, implementation of the proposals was very difficult. Although the proposals of this report had indeed been relevant and many of them were reflected in a subsequent sessional paper, the execution of the plans never took root within the government or the private sector.
The second method had also been tried. The previously mentioned task force, which had been appointed after Sessional Paper No. 1 of 1986, had met several times but had failed to come up with a meaningful action program that was well researched and capable of standing up to the standards demanded for the next 5-year plan. The members of the task force had been primarily institutional representatives rather than interested and competent individuals. In addition to the poor composition of its membership, the task force lacked a budget to sustain its operations.
The third method, backed up by adequate human and material resources, seemed to offer the best prospects for building both a strong local consensus and a capability for follow-up in the next stages of implementation. The team consisted of local experts from the public and private sectors who were assigned by their employers to the task of strategy formulation on a part-time basis for an initial period of 3–4 months. Such experts included investment bankers from public and private banks, extension or promotional officers from the government, senior civil servants from the relevant ministries, heads of relevant NGOs, private consultants familiar with the sector, and representatives from the sector itself. These people were supported by an experienced coordinator, a secretariat, and consultants, most of whom were local. There was an agreed-upon objective, time frame, and budget, and most of the work would be done in small groups of about five people.
In a process-oriented or participative planning exercise it is not possible to predict the outcome because the contributions of the participants are needed to reach a conclusion by consensus. Therefore, in the first stage it was essential to clearly highlight to those involved the characteristics of this method:
• The method is process oriented, so more time than usual would be required to reach a conclusion.
• The method involves several participants, so the results would be more transparent than is normal in a policy-formulation exercise.
• The method would likely generate consensus.
• The method incorporates all the important issues and links them in their causal relationships, rather than simply prioritizing them, so the sequencing of interventions would be more pragmatic.
In addition, because participants would be from decision-making and implementing institutions, subsequent steps in implementing the strategy would be easier.
A preliminary workplan with the relevant milestones was prepared, and all other official issues were settled.
In a participative process, the most important ingredient is people. Great care had to be taken at this stage to avoid the mistake of the first task force, which had overlooked individuals from the sector for its membership. The initial temptation this time was to include almost everyone who came to mind, on the assumption that no one should be offended by being left out. An objective "search" for local expertise began. The people who were contacted were those who had produced a significant paper on the subject, managed a past program in the sector, occupied a key position relevant to the sector, etc. The emphasis was more on finding articulate individuals with experience than on finding representatives of institutions.
To find out who was interested and available to participate in the process, the project managers phoned these individuals and asked them if they wished to take part in small, informal brainstorming sessions of about five or six people on topics related to small enterprises in which they had some experience. The topics included the sector's contribution to employment, entrepreneurship, rural industrialization, export, technology adaptation, subcontracting, and urban land-use planning.
In addition to giving project managers an opportunity to identify those individuals who had the firmest grasp of the issues and therefore would make good participants, these sessions helped the managers isolate key and recurring themes and identify publications that would be useful later. At the end of this stage, 25 people were selected to join the process.
At some stage when dealing with the subject of small enterprise, one is confronted with the issue of defining the sector. Most people perceive only a segment of the whole sector, and this limited perception becomes a source of confusion. Some governments already have definitions related to employment or capital or even technology. These definitions are helpful, but even they require further disaggregation so that participants can conceptualize different target groups when formulating interventions. After coming to terms with the question of definition and target groups, the next critical activity was the collection of relevant documents. These books, papers, and studies were mostly local, but international materials were also gathered to provide participants with information on the latest trends in the field. The major objectives of our collecting this information were to learn as many lessons as possible from the past and thus to avoid irrelevant themes in the future stages of the project.
A strategy formulation workshop was held. It took place sufficiently far from the capital (Nairobi) that the selected participants were fully absorbed in the task. The workshop lasted for 5 days and was moderated by someone trained in the ZOPP method (the ZOPP — aim-oriented project planning — method was developed by the German Agency for Technical Cooperation [GTZ] as a means of planning complex bilateral projects [GTZ 1992]). The 25 participants were not asked to write any papers but to come prepared for free, open, and frank discussions on the problems of small enterprises and how to address them in a practical manner. Selected background materials that had been collected in the previous step were copied and distributed to participants.
The ZOPP sessions began by generating consensus on a "core" or starting problem that was central to the subject. From that point the group derived the causes of that central problem and, going further down, the causes of the causes. In this way almost all problems related to small-enterprise development could be incorporated and their causal relations established. The main group reached a consensus on the first level of causes as well. The group then broke up into smaller working groups of five or six people to go into further detail. These problem clusters, which were essentially statements of negative conditions and their causes, were then reversed and stated positively as objectives. For example, if the core problem was "poor access to credit," then the objective could be formulated as "increased access to credit." Generally, the causes of problems when reversed and stated positively as objectives became the means to achieving the next higher objective. For example, if one of the causes of poor access to credit was "no long-term capital available," then "increased availability of long-term capital" became part of the solution to the problem of poor access to credit.
In the case of the CENTRE Project, the core problem was located at the very high level of "unemployment." Four causes were identified:
• high population growth,
• the inability of agriculture to absorb more jobs,
• a slowdown in the modern wage sector, and
• insufficient growth in small enterprises.
The insufficient growth in small enterprises was attributable to the high mortality rate and insufficient expansion of existing enterprises and to the lack of adequate startups. The working groups then discussed each of these last problems to elaborate on their causes and eventually the solutions. Discussions were animated and lively, and the working groups frequently met until the late hours of the night.
One of the successes of the workshop was the consensus the public- and private-sector participants reached on the critical problems and their causes. It became clear, however, that there was considerable overlap in some areas. For example, poor entrepreneurship could be the cause for high mortality rates as well as inadequate startups; similarly, a hostile business environment or limited access to credit could be the cause of both insufficient expansion and high mortality rates. A core group of about 12 participants, committed to seeing the process through to the end, was selected to examine the results from the workshop. This core group identified three main factors as common obstacles to growth in the sector:
• an unfavourable environment,
• limited access to credit, and
• a low quality of entrepreneurship.
These factors affected all levels of small business, but they were problems for which specific remedial measures could be designed.
At this point it became clear to those involved that even with the synthesized ZOPP results, a further and deeper level of analysis was required. Of particular concern were the successes and failures of the more interesting programs in Asia. Furthermore, a thorough analysis of the existing institutional capacity in Kenya was needed before the team could recommend meaningful and pragmatic steps to be taken. The core group, therefore, broke up into working groups again. The three tasks at this stage were the following:
• to send one member of each group to one or two countries outside east Africa and to feed the knowledge acquired back into the process;
• to hire local consultants to examine the country's institutional players; and, when this was complete,
• to draft the chapter on this area for the strategy document.
Five main strategic themes emerged from this stage:
1. The Government of Kenya should abandon its position as an implementer and become a facilitator, and all future projects should be planned against this background.
This theme reinforced the fundamental change in policy called for in the government's Sessional Paper No. 1 of 1986 (Kenya 1986). Approaches that exemplified this role change were identified. Hence, the emphasis was on additional projects to disseminate information rather than on additional extension services and credit.
2. The private sector must take a more active part in formulating and carrying out projects.
Of necessity, this would mean shifting to the private sector much of the institutional support that had until then gone to the government. Hence, there was a scramble for new private-sector partner organizations.
3. Small enterprises are part and parcel of the private sector, and if there are serious constraints on the private sector, such as irrational interest rates or distortional foreign-exchange rates, the small business is just as likely to suffer as the larger business.
In response to this theme, attention was directed to improving the enabling environment for investment and expansion. The proposed strategies included improving the sector's access to urban infrastructure; disseminating information on technology; simplifying licencing procedures; removing price controls; and switching from import quotas on raw materials to tariffs.
4. For significant vertical growth of existing businesses to occur (as opposed to simply adding new entrants of the same type, thereby achieving only horizontal growth), existing businesses should have access to formal credit.
This would entail liberalizing the interest rates so that banks could make a profit on loans to small enterprises; developing alternative forms of security and collateral; initiating more credit schemes to increase the supply of finance; and improving the institutional base of the country to disburse thousands instead of hundreds of loans and to collect the repayments.
5. Even if all these improvements were made, the number of adequately qualified entrepreneurs had to increase, both in the long term and in the short term.
This was to be accomplished by celebrating the role of the entrepreneur as a creator of wealth (before this, the entrepreneur had been portrayed as an exploiter); introducing entrepreneurship into the education system; improving the quality of small-business management training through better needs assessment; and upgrading the indigenous apprenticeship system as a credible alternative to the formal technical training institutions, which in any case did not have the capacity to absorb the growing number of unemployed youths.
Because none of those involved in the process was a professional writer, an editor was hired for the last 3 weeks of the project to work with the three groups and the project managers to produce a strategy paper with well-reasoned arguments and a strong internal logic. Each recommendation was tested for relevance and consistency with the overall direction of the strategy paper. In addition to the strategy itself, a separate set of recommendations was prepared for donors. The document also contained project profiles to illustrate the types of interventions considered appropriate for implementing the strategy.
Following the presentation of the findings to the Government of Kenya 9 months after the project began, the project team made several other presentations to various ministries and donor agencies. These presentations further polished the strategy and sensitized the ministries and agencies to the direction in which the government, in partnership with the private sector, wished to go.
More focused workshops were then held on specific aspects of the strategy with a view to initiating projects to address the major problem areas.
Donor agencies continued to support the core group of local experts through a second project called the Small Enterprise Development Policy Project. In May 1989 the core group presented their findings to government in a report entitled A Strategy for Small Scale Enterprise Development in Kenya: Towards the Year 2000 (Kenya 1989b). Because of the involvement of all the key and relevant actors throughout the policy formulation process, the document was immediately adopted by the government. Furthermore, the document was widely acknowledged by many others outside government for providing valuable information and suggestions that they could use to improve their own enterprise-promotion programs in Kenya.
Two other important events taking place in Nairobi coincided with the publication of the strategy paper. The first of these was the formulation of the country's Sixth National Development Plan (1989–1993). Most of the key actors from government who were working in the core group were also involved in drafting the chapter on small enterprise for the development plan. As a result, the recommendations in the strategy paper were mirrored in the development plan (Kenya 1989a). The timing of the strategy paper had been optimal, and many of its recommendations were translated automatically into policy because of their inclusion in the development plan.
The second important event taking place at this time was a Mini-Donors Conference to discuss the future directions of government policies and strategies and major areas for further collaboration. The government took the opportunity to present to the donors the recommendations outlined in the strategy paper. Many donors (some of whom had actually participated in some of the activities surrounding the formulation of the strategy) expressed immediate interest in specific areas. Those donors who were most keen agreed to establish a forum to discuss how best to coordinate their activities. (The donors found the forum so useful that they have continued with it, meeting regularly on a quarterly basis.)
One of the major effects of the Mini-Donors Conference was growing support for the idea that the recommendations of the strategy paper should be introduced to Parliament as a sessional paper. This, in effect, provided the necessary policy framework within which implementation would take place.
The preparation of the sessional paper involved the four key ministries that had participated in the formulation of the strategy. The staff of these four ministries edited the materials previously produced by the core group and drafted it in the style of a sessional paper. The respective permanent secretaries of the ministries prepared the necessary briefs for "their ministers, who jointly sponsored the sessional paper in its presentation first to Cabinet and then later in the same year to Parliament. The paper easily passed through both stages and was published as Sessional Paper No. 2 of 1992, Small-Scale and Jua Kali [small manufacturers] Enterprise Development in Kenya (Kenya 1992). Since its approval, 4 000 copies of the strategy paper and the sessional paper have been produced and distributed.
The UNDP conducted an evaluation of the CENTRE Project and the follow-on project, the Small Enterprise Development Policy Project, and had this to say in the summary of its findings (Malkamaki et al. 1991):
The CENTRE and Small Enterprise Development Policy projects represent one of the first attempts at formulating a comprehensive national policy and programme of action for implementing a small enterprise development strategy in Africa. The projects utilized a participative approach to achieve remarkable outputs at relatively low cost by using local experts in small enterprise development (SED) as the main technical resource for the projects' activities and outputs.
The project achieved much in terms of creating awareness of SED issues and activities nationally through media coverage. Policymakers and implementors of SED programmes were sensitized through workshops and participation in committee meetings. The magnitude of the awareness created is evidenced by the creation of SED units in two ministries and SED departments in two commercial banks in the country.
The main distinguishing features of the approach were that it was highly participative, open, and transparent; fully used local expertise; generated wide consensus; and made implementation of the results easier.
On balance, although the approach has been considered successful, three criticisms of the results have been raised:
1. The recommendations failed to penetrate the highest levels of policy decision-making.
Despite the fact that almost all of the participants were senior government technocrats, heads of NGOs, private bankers and the like, the strategy was poorly understood at the political level, where recommendations such as those related to the use of market interest rates for small-enterprise lending schemes offer very little potential for winning votes. Although individual politicians have lent their support to the strategy and its proposals, this criticism still remains valid and accounts for some of the prevailing policies that continue to inhibit the sector.
2. In the initial stages of project identification that followed the development of the strategy, much of the donor assistance went to support government ministries instead of the private sector.
The justification for this was that the implementation of the recommendations required a more sophisticated government capable of understanding the long-term direction of the proposals being made. This naturally required the buildup of human resources within the government. At the same time, many of the private development institutions had not yet emerged with an adequate capacity for implementation. (In the last few years, however, the balance of assistance has shifted to the point where the private sector is implementing some of the projects recommended by the strategy paper.)
3. Some key recommendations have not been implemented. Most glaring is the continued involvement of the government in lending programs.
The cause of this is connected with criticism 1 — the recommendations are not well understood at senior political levels. The government has, however, recognized the inconsistency of continuing this activity in view of maintaining its posture of nonintervention in the sector. Such weaknesses in policy consistency underline the absolute necessity for the government to have a strong and effective monitoring capacity that is supported by the private sector.
Almost any paper that has been written on the subject of small enterprise in Kenya quotes either the strategy paper or the sessional paper. The consequence of this has been a common recognition of the main problem areas. This alignment has led to improved coordination, better project planning, and little duplication. Coordination meetings are held quarterly to ensure that planned interventions are in line with the provisions of the strategy. As a result of this consensus, the implementation of the strategy has never been in question.
The following projects and programs, which were recommended by the strategy paper, are still working in Kenya today:
• Three significant micro credit schemes cover almost the entire country and have a portfolio of approximately 6 000 borrowers (KIE, K-REP, PRIDE).
• The Credit Reference Bureau helps small borrowers build up a track record as a substitute for tangible securities.
• The College of Banking and Finance has established regular courses to orient commercial bankers to the special needs of small entrepreneurs.
• An entrepreneurship education program offered by most of the country's technical training institutes trains young technicians to start and run their own businesses.
• Small business centres attached to these technical training institutes provide assistance to entrepreneurs who want to learn how to put together business plans for investment.
• A subcontracting exchange facilitates the expansion of small-enterprise markets and introduces small producers to new standards of production and quality through interaction with larger firms.
• An urban infrastructure program is increasing the access of small producers to long-term tenure of premises and to secure electricity, thereby improving their access to more modern technologies.
• A privately sponsored permanent national exhibition of small manufacturers' products tours the country each year, exhibiting the best that the sector can offer.
• A coordinating mechanism of government, donors, and the private sector allows for examination of outstanding policy deficits and discussion of major interventions that may be planned by any of the three partners.
• The National Federation of Jua Kali Associations is the embryo of a representative body for articulating the interests of the small entrepreneur.
In the course of implementing many of the above-mentioned projects it became obvious that some form of coordination was going to be necessary. Several organizations were, for example, working in the area of credit. Would resources be shared? How would complementarity be achieved? How would duplication be avoided? These were the main concerns of all parties. The donors continued to meet regularly after the Mini-Donors Conference, primarily to inform each other about their own potential project-intervention areas. The Ministry of Planning and National Development then established the National Coordination Committee, with representatives from government and some of the NGOs, to continue the information-sharing process between the implementing agencies.
Although there was ample communication between the comitttee and the donors, it was evident that neither group, on its own, possessed adequate influence with senior government decision-makers to avoid some of the inconsistencies that have been mentioned above. Both bodies were having their own impact, but there was still no accepted channel for different interest groups wishing to articulate new policy initiatives. To meet this need, the government and donors recently agreed on a configuration of committees and advisory groups that allows adequate access by all major parties to the policy-formulation process. The structure also provides a clearinghouse for information on existing and planned interventions.
The structure is as follows. At the highest level is the National Steering Committee, comprising only permanent secretaries from the Ministry of Planning and National Development, the Ministry of Commerce and Industry, and the Ministry of Research, Training and Technology. The National Steering Committee is the main organ for policy development. Next comes the Advisory Group, made up of members predominantly from the private sector and the donor community, with some government representation. The purpose of the Advisory Group is to advise the National Steering Committee on relevant policy and operational issues of concern to any of the parties. Then comes the Small Enterprise Coordination Committee, which has working groups in the functional areas of credit and finance, entrepreneurship and training, and the enabling environment. The purpose of this Small Enterprise Coordination Committee is to identify problem areas and recommend technical solutions.
All bodies are supported by the national database, maintained by one of the NGOs. External support is still needed, however, so the Ministry of Planning and National Development is currently discussing with the Overseas Development Administration the possibility of its assistance in updating policy priorities and identifying new areas that need attention in a constantly changing policy environment. Although one of the criticisms of the process described above has been that far too much assistance went to government ministries, it should be emphasized that the policy implementation capacity in the concerned government offices is still weak.
This new and as yet untested coordination mechanism has clearly delineated three fundamental interest groups involved in the development of policies for the small-enterprise sector: the government, the private sector, and donors. How have their roles in the process changed over the last 20 years? The following critique may sound harsh, but that's only because we are evaluating the actors of 20 years ago with the performance standards of today.
The government has a strong tradition of intervention in this sector. In the early 1970s all of the industrial estates, extension services, business training, and credit were implemented through either government ministries or parastatals. During this time, KIE was set up to provide industrial space and extension services, the Kenya Institute of Business Training was established, and credit was disbursed through the Joint Loan Board Scheme and two development finance institutions (DFIs), KIE and ICDC. The emphasis during this period was on building up indigenous entrepreneurship by providing subsidized services or credit to an embryonic class of African business owners.
The ideal private-sector business owners in this same post-independence period were perceived as small Kenyan industrialists running modern factories producing substitutions for imports. They were treated very much as "beneficiaries," and it was assumed that without the support of significant subsidies indigenous entrepreneurs would not survive. The Kenyan entrepreneurs were therefore the recipients of aid, and with more aid flowing than there were recipients, the challenge for most of them became how to maximize returns from assistance programs rather than how to succeed in business. These circumstances naturally attracted opportunists, who, because of their affiliations, were able to obtain large loans and subsidized facilities. This mistargeting led to poor recovery rates for the DFIs and low impact from the extension services.
The donors played the role of policymakers in this era of plenty. Projects were designed in Europe and North America for a sector of development assistance that often required more people-oriented skills than the technical qualifications of those assigned to the task. The emphasis of the donors was on disbursement. This required the development of institutional mechanisms that could handle large volumes of aid. Little attention was paid to impact or cost efficiency. The donors supported the interventionist role of the government and the paradigm of the entrepreneur as a recipient.
Fortunately, there has been a great deal of movement and change, albeit gradual, in the attitudes, skills, and capabilities of all three actors in policy formulation and implementation.
The government, both in policy and practice, has taken up the role of a facilitator. Tighter budgets, parastatal reform, and a more competent private sector have been the main stimulants in this change. Also important has been a growing recognition that past interventions were misguided and ineffectual because of an inherent weakness of government in implementing the type of business-promotion programs that we have seen in the last 20 years. The role of facilitator was clearly spelled out in Sessional Paper No. 2 (Kenya 1992), and evidence of the shift is seen in the kinds of projects in which the government is now involved. These include strategy and policy development, monitoring and evaluation, R&D, information supply, and the coordination mechanism discussed above. One of the major practical challenges that the government now faces is what to do with the institutional infrastructure that it has built up over the last 20 years. The mission statements of these institutions are for the most part outdated, and their existence creates a counterweight to the emerging role of the government as a facilitator.
The government is in the process of withdrawing from its interventionist role, and it is also handing over the function of implementer to the private sector. Moreover, the last 20 years have seen a phenomenal growth in the informal sector, underlining a vast reserve of entrepreneurial talent that for many years had been overlooked. Large and medium-size enterprises have recognized the benefits of working with small businesses, as shown by the following:
• the creation of the Kenya Management Assistance Programme, an organization of large and medium-size enterprises providing counselling and training to small businesses;
• the expansion by two commercial banks of their small-enterprise lending programs; and
• the sponsoring by one large multinational of its fifth annual national exhibition of small-enterprise products and technology.
Also, private voluntary organizations (PVOs), providing credit as well as training, have mushroomed in the last 10 years. The implementation capacity of PVOs is far more effective and diverse than that of the government, and the targeting of their programs is much lower than what we have seen in the past. The implications of this are that the pool of entrepreneur clients is far greater than before, giving the promotional organizations far more flexibility in selecting those clients that are most likely to have a significant impact on the economy. The challenge of the private sector in its new role as an implementer is one of sustainability. The commercial viability of the private small-enterprise-oriented institutions will depend on their ability to both mobilize donor assistance and extract an adequate income from the target group they serve.
The donors continue to be deeply involved in the area of policy development. They are, however, now dealing with a technically far stronger and experienced government that is capable of engaging them in conceptual debates on the merits of some of the proposals that are put before it. This increased capability in the government has given the donors the space to sharpen their role as risk absorbers and to spin off their better projects into sustainable programs. Major improvements with the donors have been the willingness and effort that have gone into the coordination of their activities. Joint projects are frequently the outcome of this coordination. Examples are the database of all publications on small enterprise in Kenya, an inventory of projects being implemented, and the training-needs assessment study of informal-sector entrepreneurs. This joint funding is partly due to less money being available, but it is also a result of a greater emphasis on achieving a measurable impact with the projects that are operational or "in the pipeline." The challenge for the donors is to help the government identify appropriate projects that support its facilitative role and at the same time channel bilateral and multilateral assistance to alternative private-sector development partners that are strong enough to handle the magnitude of the tasks. All of this activity is in the context of building programs with long-term sustainability.
The Kenyan experience in the field of small-enterprise policy development has been deep and constructive. A widespread consensus on priorities exists among the fraternity of individuals and organizations that are active in the promotion of this sector. By extending its hand to the private sector, the government has created a fruitful partnership in which comparative advantages are recognized. The adoption of an open and participative approach to policy development has been an adequate preparation for continued implementation. This has been the unique aspect of the process of small-enterprise policy formation in Kenya. Because of the general acceptance of the policies, donors have found it easier to fund projects that are integrated into a long-term game plan. This has resulted in higher quality projects with a greater overall impact on the growth of the sector.
Like many developing countries that have in the past 10 years embarked on economic reforms with the assistance of the World Bank, Zimbabwe has come to realize that small businesses offer a real opportunity not only to create employment but also to get indigenous people to participate in the economy. For a country that for 90 years was torn apart by racial strife and for the first 10 years after independence in 1980 practiced socialism, the adoption of policies to promote small business presents unique challenges.
This paper describes the efforts of those working to implement these new policies. The first part of the paper describes the genesis of the policies that define the economic milieu in Zimbabwe today. The second part describes the impact of government policies in the first 10 years of independence. The third part describes the efforts of those interested in a change in policy on small business, principally the efforts of the National Small Business Advisory Group (NSBAG). The last part looks at future challenges in the work to change national policies to accommodate small business.
Historians from different ideological backgrounds generally agree that the way the territory that is now Zimbabwe was colonized largely shaped the economic policies its rulers adopted in its first 100 years (see Biermann and Reinhart 1980). Cecil John Rhodes, after whom the new country was for a time named, invaded the country in 1890, hoping to reward himself with the mineral wealth he believed existed in the new territory. When it turned out that there was not as much gold as he had imagined, the 1 000 mercenaries he had used to invade the country were each rewarded with 3 000 "morgen" of land and 10 gold claims. To legitimize his actions, he gave the new territory to the British Crown as a new colony. The system of rewarding with land those who had done military service for the British Empire was pursued for most of the colonial period. Each wave of settlers resulted in the inevitable displacement of indigenous people. Effectively, this translated into the translocation of indigenous people from their own lands to the less hospitable regions of the country, where they still find themselves today. Precisely because of these displacements of indigenous people, that land became the single most important factor in the war of liberation, and even today it remains the single most important cause of conflict between the black majority and the white farmers.
A deliberate zoning and licencing system, which effectively separated whites from blacks, geographically, economically, and socially, has left an indelible mark that even 14 years of independence has been unable to erase. The system made sure that blacks did not participate in the economy except as workers or providers of very basic services like running buses or little family stores. The system was also efficiently policed, and penalties were instituted to deter any violators. When people are systematically oppressed, it is quite probable that they will end up believing that the way things are is as it should be. Many researchers observe that a whole generation of black families do not believe that blacks can operate businesses. These families, in fact, believe that to run a business is evil. Because of such beliefs, black entrepreneurs were labeled traitors or sellouts during the struggle for independence. Many of their businesses were destroyed by nationalist insurgents during the war. The absence of any meaningful economic activity in all areas allocated to blacks is, thus, not a result of choice but a product of a deliberate policy to create a market for whites and a source of cheap labour for the settler economy. Through this institutionalized monopoly, the settler economy achieved its competitiveness. Through this system, the white community gained a considerable head start over black entrepreneurs.
What strikes most people visiting Zimbabwe for the first time is the stark differences between the living standards of blacks and those of other races. Even the war of independence took on the character of a conflict between blacks and whites. When the country became independent, the new government adopted a policy of reconciliation between races in a belief that the colonial policies had been driven by pure racism.
In this paper, I contend that the driving force behind the colonial policies was what L. Tager of the Law Review Project in South Africa terms "monopoly capitalism" in its purest form. Viewed in its simplest form, such a system appeared to thrive on legalized elimination of competition. Once firms were established, they made sure that no other firm would ever be started to compete with them. At the community level, it meant that once whites were in, they made sure no one else entered who was not of their colour. They then constructed a myriad of laws to prevent any challengers. Virtually every law passed in the 90 years of colonial rule made a reference to blacks and whites. All economic laws passed in this period deliberately restrict entry by blacks. Laws like the Land Apportionment Act of 1930 and the Land Tenure Act of 1969 were designed to totally separate races. Complementary legislation determined what blacks could do.
It is, therefore, not surprising that the socialism of the first independent government in 1980 was so popular with blacks in the first few years of independence. But the collective ownership espoused by socialism also explains why it is so difficult to make people in Zimbabwe today understand the advantages of competition in a modern economy, especially when in the past there were laws to stifle competition. This in turn explains why organizations like the Indigenous Business Development Centre clamour for legislation to protect enterprises formed by indigenous people.
The socialism of the Zimbabwe African People's Union (ZANU), the party that won the elections in 1980, was based on the general belief that the suffering of black people had been the result of the capitalism practiced by white people. Admittedly, the support that socialist countries gave to the nationalists during the fight for independence also influenced the decision to adopt socialism. However, this support would have been meaningless if people had not endured economic oppression at the hands of white settlers.
The new government saw private capital, whether that of blacks or that of whites, as essentially bad. Although not adopting a policy of wholesale nationalization of private firms, the government, through licencing, prices, labour, and foreign exchange controls, would exercise stringent controls over what it viewed as the inherent excesses of private capital. The government also saw itself as a protector of indigenous people against the threat of predominantly white capitalism. The parastatals were given a bigger role in achieving the social objectives of the new government. The government also adopted policies to empower black people through cooperatives and the so-called community-based income-generating projects. Very hefty incentives and nonmaterial support were given to those who adopted the economic modes promoted by the government. Many northern NGOs, which sympathized with the government's ideology, extended their support to these programs. In addition, most diplomatic missions in Zimbabwe established units to promote cooperatives and income-generating projects. Currently, only a few NGOs are willing to assist individuals who want to establish their own businesses.
Cooperatives and income-generating groups are generally exempt from the regulations that affect private businesses. Where authorities try to apply regulations, politicians and the officials engaged to assist them always intervene on behalf of the collectives and the income-generating groups. A recent study commissioned by Environment and Development Activities (ENDA, Zimbabwe) and undertaken by Imani Development (Pvt) Ltd (1993) clearly shows how officials turn a blind eye to the mismanagement of officially sponsored cooperatives and income-generating groups, even where basic laws on hygiene are not followed. In contrast, private black-owned retail businesses in rural areas are closely monitored by regulation-enforcement agencies, despite protests that these regulations are generally discriminatory against them. In the past, if hawkers wanted to escape harassment by police, they simply became members of a cooperative. If they happened to be arrested for violating a by-law, the registrar of cooperatives intervened on their behalf. Cooperatives were synonymous with socialism, and every politician of the ruling party promoted cooperatives as a way of appearing loyal to the party.
Many associations that were formed at independence to champion the needs of the small-business sector were, over the decade, completely marginalized by either the government or established private-sector institutions. For example, in 1980 there was a very strong association for hawkers and vendors. The Harare Vendors and Hawkers Association fought hard to have the laws that prohibit the operations of these types of business reviewed or rescinded. The ruling party expressed its sympathy with this group. Members of this group were encouraged to join the party. In Harare, for instance, a membership in the party became a passport to obtaining a vending licence. Most "legal" hawkers in suburban areas owe their positions to their membership in the party. Municipal councillors could easily assure themselves of a vote by promising a vending licence. The party could also protect its members from police harassment. Other members were enticed to form cooperatives in exchange for protection or a promise of resources. This is precisely why by 1984, registered cooperatives had swelled from a mere 300 at independence to more than 2 000.
Before independence, the only recognized business associations were for white businesses. Those representing blacks largely operated informally. Under the policy of one industry – one organization, black-owned associations were persuaded to join those already established. The Zimbabwe National Chambers of Commerce (ZNCC), which represents commerce, elected its first black president during that decade. The same applies to the Confederation of Zimbabwe Industries (CZI).
A close examination of these organizations clearly shows that the small-business sector was totally marginalized. At congresses, their concerns made a few headlines but were never taken up in the formal lobby sessions between the government and the private sector. The government white paper on the reform program makes it quite evident that the well-organized business associations had greater influence than the small businesses. The concerns of the small-business sector were expressed only in general terms.
The cooperative sector also experienced the same divisions and marginalization. The 300 odd cooperatives that existed at independence and operated exclusively as suppliers of agricultural input were roundly condemned as organizations of the elite among the peasantry. The Government Policy on Cooperatives of 1983 clearly states that the government favoured cooperatives of a productive type, as this encouraged collective ownership of the means of production, in line with the government's socialist policies. By 1983, there were two fiercely opposed groups representing cooperatives in the country: the organization of Collective Cooperatives in Zimbabwe represented the new and favoured cooperatives; the Central Association of Cooperatives was officially considered capitalist. To complicate matters even foreign donors took sides and helped to deepen the divisions.
The failure of the government's economic policies to stimulate investment and employment was most likely the impetus to reconsider the small-business sector. Reviews undertaken in 1987 and 1988 clearly showed that controls on the economy had stifled investment and employment. The cooperatives and parastatals, on which so much hope had been placed, had failed dismally. Through its planning control mechanism, the government had failed to steer the economy toward the desired ends.
As in all developing countries where this situation is reached, it was time to call in the World Bank and the International Monetary Fund (IMF). In 1989, in a white paper entitled Zimbabwe: A Framework for Investment 1990–1995 (Zimbabwe 1989), the government endorsed the view that the way forward was through a market-led economy. In this paper, the government for the first time clearly acknowledged the need to promote small business as part of its economic development policies. Also for the first time, the government recognized the efforts of individuals to set up their own businesses.
Zimbabwe's economic reform program shares most if not all the features of reform programs assisted by the World Bank and the IMF in the past decade. The central features are monetary and fiscal reform, trade liberalization, deregulation, and the introduction of an instrument called the Social Dimensions of Adjustment, designed to cushion the blow for those most affected by the reforms.
It has been pointed out that most of the donor organizations have since 1980 confined their support to cooperatives and income-generating groups. Many reviews undertaken toward the end of the decade clearly showed that the donor's support had failed to achieve its objectives. Many groups that had formed as cooperatives had done so because that was the only way to gain access to resources. As soon as a cooperative gained access to resources it split up into individually owned enterprises. This clearly shows the outcome of a subsidized development process. Genuine development projects tend to be crowded out by many bogus ones in search of cheap resources.
A closer examination of the business environment in Zimbabwe of the 1990s clearly shows that very little has changed in the way small businesses are viewed, not only by the government but also by the population in general. The stereotypes that were used to describe small businesses well before independence are still prevalent. For example, hawkers are seen as dirty and, therefore, undesirable. Women who conduct cross-border trade are seen as smugglers. This is in contrast to the way people view similar trade practices of the elite (Gaidzanwa 1992). The policies that excluded blacks before independence now incorporate the new black elite, who through their positions in the government now help to perpetuate the exclusion of the poor, who are mainly black.
When the reforms were first announced, many institutions were extremely worried about the likely impact on the small-business sector. Although the government assured the general public that the Social Dimensions of Adjustment would shield all the vulnerable groups and businesses from the negative effects of the program, there were no instruments specifically designed to assist small businesses. There was also a fear that the private sector, through its well-developed lobby institutions such as the CZI and the ZNCC, could easily hoard all the benefits of the program. There was, therefore, no way the small-business sector could influence the outcome of the reforms for its own benefit.
There were basically two options open to institutions working with small business. The first approach involved trying to go along with what the government planned for the sector. This was precisely the approach pursued by development agencies in the first decade of independence. It only led to frustration as both the promoters of small business and the small businesses, mainly cooperatives, tried to work with unpalatable and unworkable policies.
The second approach, which the small-business promoters eventually adopted, involved collectively working with the government to arrive at appropriate policies for promoting small business. Small businesses were also encouraged to participate in shaping the policies that would affect them. This approach obviously marked a great departure from the norms of law- and policymaking pursued by the government in the past. It also meant that small-business promoters would require a lot of tact and skill to persuade the government to change the way it implemented policies for the sector. An institutional framework for promoting small businesses became necessary.
In such work, there is always a risk of donors such as the World Bank and the IMF imposing their will on the government in the name of facilitating development. The Government of Zimbabwe generally tends to be very sensitive to outside influences.
Against this background, deriving a policy for small businesses was not going to be easy. As things stood there was no common ground for achieving consensus on policy for small business. Both government and the donor community lacked experience in promoting small business in a competitive environment. They were operating at cross purposes, they had yet to coordinate their efforts, and they were unsure how to go about doing so. Out of this morass NSBAG emerged.
The NSBAG is made up of all bilateral and multilateral aid agencies, NGOs, government ministries, private-sector business associations and financial institutions that support small business in Zimbabwe. Emerging associations for small business and the informal sector have also begun to take part.
Membership is open to all institutions, and there are no membership fees, no constitutions, and no elections. The position of chair is purely honorary. The current chair of NSBAG was nominated because he had time to spare to administer its affairs. Members volunteer to fund its meetings, and a small secretariat organizes meetings, supervises the production of a bimonthly newsletter (the SSE News), and also supervises and coordinates research sponsored by members. Membership does not carry with it any obligations or responsibilities. In the 2 years NSBAG has operated, there has seemed to be no need to formalize its operations.
The NSBAG had been formed by organizations that felt that unless something was done to help small business, economic reforms would leave it behind. Initially, many donors were concerned only about the sectors they worked in. For instance, the Canadian aid agencies, such as the Canadian International Development Agency (CIDA), were more concerned about the impact of the reforms on women. These agencies did a lot of research in 1989 and 1991 to find out how women would fare under the reform program.
In 1990, the Friedrich Naumann Foundation also funded several studies on how the general opening up of the economy would affect small businesses on the whole. At informal meetings of representatives of the foundation and NSBAG, it became apparent that although there would be slight variations depending on whether the proprietors of business were men or women, all small businesses on the whole would be affected to the same degree.
After several informal meetings, government ministries were also brought into the discussion. In Zimbabwe after independence, the government made policies and everybody was expected to abide by them. This top-down approach applied to all sectors of the economy. The willingness of the government to accept input from NSBAG marked a real departure from the past.
Obviously, the government had learned from past mistakes. For example, in 1983, it instituted a policy on cooperatives that both the cooperative and government workers were supposed to abide by. The policy was designed by government officials and passed by the government. The policy failed. The failure of this approach to policymaking is well documented. The objective of bringing government operatives into the deliberations of NSBAG was to create a partnership with all parties concerned with the development of small business.
The first step to building cooperation is building confidence. Past efforts to achieve cooperation in the development of small business failed because institutions tried to achieve uniformity. Under a development policy that emphasized "one correct approach," very little room was left for those who wanted to use different methods. The approach adopted by the founders of NSBAG is based on the conviction that there may be a need to agree on objectives, but there is certainly no need to specify how these objectives should be accomplished, let alone by whom. If all that is required of development agencies is agreement on broad principles, cooperation is possible. Institutions are, then, free to borrow from each other whatever they consider essential to their own work.
As a way of building the confidence of its members, NSBAG held seminars to identify the core problems that would constitute the focal points for support. At its inaugural meeting in May 1991, NSBAG identified the following broad areas of concern:
• Financial problems — Small businesses have a difficult time obtaining loans and credit. Banks have a negative attitude toward small businesses, and there is a lack of appropriate financial schemes for those who would normally not qualify for bank loans.
• Regulation problems — Problems relating to the environment under which small businesses operate, in the main, relate to the regulations that affect businesses in general and small businesses in particular. Local laws and regulations top the list of such problems.
• Nonfinancial problems — Nonfinancial problems relate to the attitudes of officials who may resist reforms that favour small business because they fear they will lose their power, influence, or even jobs.
From the start, NSBAG acknowledged that it is the government that has to implement the reform policies. The NSBAG members, therefore, accepted the fact that their role was only to assist the government in achieving its goals. To ensure success, the members adopted the following principles:
• They would not claim any credit for their achievements.
• They would endeavour at all times to make specific initiatives fully acceptable to the appropriate agency.
• They would adopt a piecemeal approach instead of tackling all the problems of the sector at one go.
Whatever NSBAG undertakes is done for either government or the small-business sector.
After its inaugural meeting, when NSBAG identified the core problems that would constitute the focal points for support, the group developed an action plan, which member organizations are free to implement. At periodic meetings, members report on what they are doing within the framework of this plan. The periodic meetings also serve as an opportunity for the government to indicate the specific support it may require from NSBAG members. For example, in 1992 the government asked NSBAG to provide support in the area of deregulation. Several member organizations, including the Friedrich Naumann Foundation and the Overseas Development Agency of the British government, are now collaborating with the government of Zimbabwe in this endeavour.
Another approach is hosting major policy dialogues in the form of conferences that bring together researchers, government officials, and members of the small-business sector. Topics have included deregulation (Tager 1993), the role of small business in the economy, and the impact of monopolies on small business.
The small-business sector has benefited from seven achievements of NSBAG so far.
1. NSBAG represents the first working network to assist the growth and development of small business. Perhaps, it works so well because the networking arrangement remains loose. Similar arrangements largely failed because they were rigid and required conformity. One indication of success is the fact that NSBAG continues to grow.
2. NSBAG has become a forum for sharing ideas and experiences, allowing members to "bounce off" ideas before implementing them. When the members meet (every 2 months), one important item on the agenda is "who is doing what and who is in town."
3. In the early years of independence, the "us versus them syndrome" was very prevalent among government officials. The government saw itself as the champion of the weak and oppressed. Reforms of the economy were often seen as forms of retaliation against some past injustice, usually of whites. NSBAG has succeeded in bridging the gap between the private sector and the government on matters relating to the small-business sector. There is increasing recognition that economic reform can only work in a win–win situation.
4. NSBAG has effectively pressed for change. Through a system of action plans, it has been possible to target specific inputs in support of SMEs. For example, in August 1992, NSBAG supported the removal of regulations that denied minibuses the right to serve urban commuters. The fact that these regulations have been removed shows the value of collective action. Because the government, NGOs, and the private sector interact freely within NSBAG, consensus is reached even before proposals are tabled in Parliament. Also, because of pressure from the member organizations, a project team has been set up to speed the removal of regulations that inhibit the development of SMEs.
5. It is perhaps due to the work of NSBAG that SMEs are now broadly accepted as a development option by a wide cross section of society.
6. NSBAG has supported a lot of research that has assisted policy formulation. Notable achievements of NSBAG in research include publishing compliance cost studies on metal works, textiles, and food processing. In addition, researchers and advocates of small businesses are invited from time to time to address specific policy issues. For example, L. Tager, of the Law Review Project in South Africa, has presented papers on the process of deregulation (such as Tager 1993) that have contributed much to the current deregulation work in Zimbabwe.
7. The effective communication of ideas, experiences, and policies among those who promote small business is a major achievement of NSBAG. Communication is principally achieved through SSE News, the NSBAG newsletter that is published every 2 months. With a circulation of more than 500, the newsletter is read by many people, including policymakers. Conferences and seminars are another important means of communication. Each seminar or conference focuses on a specific aspect of the action plan. Members of NSBAG freely debate issues of concern, and resolutions constitute new action plans or re-enforce old ones. These resolutions are well received by both the government and other institutions that work with SSEs.
Through NSBAG, an open-ended network has been established. It is important to emphasize that NSBAG is merely a network. Real work takes place when NSBAG members embark on projects. The network can, therefore, not replace these efforts. Real credit belongs to individual members.
The NSBAG also acts as a catalyst. For example, in 1992 NSBAG targeted deregulation of the transport sector as a priority. A new Minister and Permanent Secretary for Transport was appointed that year. The British government funded a consultancy on transport reforms. NSBAG organized a number of seminars with transport as the major focus. In August 1993, NSBAG took a group of Zimbabwean civil servants and members of Parliament to South Africa to observe how deregulation was progressing in that country. They were very impressed with how South Africa had gone about deregulating the transport industry. On their return, they tabled an amendment to the Transport Act, and urban transport was deregulated.
The NSBAG is, in essence, merely a forum for consultation and coordination. No single member can claim credit for its achievements.
So far, NSBAG has concentrated on achieving results in its work with the government. To a certain extent, the major hurdles have been passed. But there is more to be done.
There is still a need for effective associations that owners of small businesses can join. As pointed out earlier, there were many strong associations for small businesses before independence. They all saw themselves as fighting against an illegitimate government that denied them their rights. When the new government took over, it presented itself as the legitimate authority that would not only meet all the needs of these special-interest groups but also represent their interests in future, and so there was no longer any need for them to exist. History has proven otherwise. There are no associations that really represent the interests of small business. If economic reforms are to be of real use to small business, small businesses themselves should be the ones to state their case.
The presence of small-business units at ZNCC and CZI reflects the desire on the part of big business to contribute to the development of the small-business sector. Such generosity is nevertheless no substitute for the direct representation of the small-business sector.
The real challenge for NSBAG is to facilitate the development of grass-roots institutions that really reflect the interests of the sector. Otherwise, there is the possibility that the government will enter into a dialogue with institutions that do not really represent small business. Carrying on a dialogue with individual proprietors of small business is certainly not the answer.
In an effort to involve small businesses in the national development dialogue, individual members of NSBAG sponsor seminars for small business. The objective is not only the articulation of special problems and the solutions desired by the sector but also the creation of a permanent platform for articulating the views of those in the small-business sector. This will not be an easy task. People operating in this sector have endured oppression for a very long time and may also be wary of those who with the best intentions may undermine or defuse small-business owners' own efforts. They have also learned not to vocally reject offers of support, as this never leads anywhere.
The challenge is, therefore, to build confidence in these entrepreneurs so that they can play a meaningful role in shaping the economic future of Zimbabwe. People in the small-business sector have learned to survive on their own. It is now very difficult to convince them that those in authority will ever do anything to help them. The network format is the only way to assist them.
Changing policy is necessarily a very slow process. Each step forward is a pioneering effort that carries with it a lot of risk. Any mistake can easily erase all that has been achieved. To ensure sustainability, sufficient time should be allowed for each step to undergo the test of time, especially at the beginning. NSBAG has learned that government officials do not like to be hurried, but once government officials gain confidence the pace of adoption of new measures is hastened. In fact, sometimes officials set a pace that is too fast for the facilitators.
The success of any effort to help small business can only be measured by the extent to which the proprietors assert themselves in the process and form a true partnership with those helping them. But the poor are generally wary of those who promise to alleviate their condition. Out of sheer politeness, they may show an interest in all offers of support. NSBAG has still some way to go before it is genuinely accepted by the poor.
There are many signs that NSBAG has indeed achieved what it set out to do. But the work may be ongoing — as long as the small-business sector remains weak, NSBAG will be of use.
An outstanding fact around the world today, and especially in Africa, is the retreat of the state from involvement in economic activity. Because most state enterprises have ended in failure, we are now witnessing a new approach that aims to reinvigorate the private sector.
This new direction that African countries are taking means promoting a dynamic, effective, diversified, and competitive private sector, at the national level of course, but also at the regional and international levels. To make this possible, steps have to be taken to encourage private investment. This is essential because the business sector in Africa, and in particular the SMEs, is called on to take the place of the state as the main engine of the continent's economic and social development. But up until now, the African SME sector has been viewed as ineffective. Indeed, it has been suffering from tremendous problems, which have hampered and discouraged its development.
In Togo, the public authorities have set up support structures to help the private sector develop to the point where it can assume the tasks of public enterprises. Have these efforts achieved their goals? What impact have these structures had on the growth of local entrepreneurship? Is there a proper environment for SMEs to grow and flourish? This paper attempts to answer these questions by analyzing some of the structures in place to promote SMEs in Togo.
Togo is a small rectangle of 56 000 km2, squeezed between the Republic of Bénin to the east, Ghana to the west, Burkina Faso to the north, and the Atlantic Ocean to the south. With a population of 3.5 million, Togo is essentially a land of farmers and merchants. It is especially famous for the Nanas Benz of the marketplace at Lomé.
Despite the changes that the Togolese economy has gone through since independence, the primary sector still contributes something more than 30% of the gross domestic product (GDP), as Table 1 shows. The secondary sector is not well developed and only accounts for about one quarter of the GDP. In contrast, the tertiary sector has been thriving and now contributes almost half of the GDP, despite having receded somewhat during the late 1980s as a result of the world economic crisis. Table 1 shows that restaurants and hotels are the most
Table 1. Structure of gross domestic product (GDP) of Togo, 1987–1991. | |||||
Contribution to GDP (%) | |||||
Economic sector | 1987 | 1988 | 1989 | 1990 | 1991 |
Primary |
|
|
|
|
|
Food production | 18.22 | 19.05 | 19.56 | NA | NA |
Export crops | 4.08 | 3.42 | 3.79 | NA | NA |
Total (entire sector) | 32.37 | 32.89 | 33.24 | 33.91 | 33.70 |
Secondary |
|
|
|
|
|
Extractive industries | 7.46 | 8.97 | 8.82 | NA | NA |
Manufacturing industries | 6.38 | 6.24 | 6.64 | NA | NA |
Construction and public works | 3.98 | 3.42 | 3.12 | 21.63 | NA |
Total (entire sector) | 20.33 | 21.83 | 22.46 | NA | 22.66 |
Tertiary |
|
|
|
|
|
Commerce, restaurants, and hotels | 24.70 | 23.59 | 23.13 | NA | NA |
Transportation | 6.33 | 5.97 | 5.80 | NA | NA |
Public services | 9.77 | 9.34 | 9.00 | NA | NA |
Total (entire sector) | 47.30 | 45.28 | 44.30 | 44.46 | 43.63 |
Source: Compiled from data in the Macroeconomic Framework, published by the Togo Ministry of Economy and Finance. | |||||
Note: NA, not available. | |||||
developed among commercial activities. This is why we speak of Togo as a country of merchants.
The public authorities have taken many steps to overcome the weakness in the country's secondary sector and, especially, to help increase the contribution of industrial output to the GDP, or to help encourage the private sector. Let us look first at the formalities for starting up a business, to see whether this goal has been met.
Start-up formalities constitute four stages that an entrepreneur must go through to create a business. Each of these four stages requires visits to, respectively, six, seven, five, and one different locations. According to a report from the United States Agency for International Development (USAID 1990), start-up formalities in Togo are cumbersome and costly. In the best case, it takes 62 days and at least 60 000 XOF (in 1994, 570 CFA francs [XOF] = 1 United States dollar [USD]) to set up an individual enterprise with a capital stock of 700 000 XOF. (One French franc [FRF] = 50 XOF; these expenses are, therefore, 1 200 FRF for capital of 14 000 FRF.) This means that at least 9% of a company's capital goes to administrative formalities. The entrepreneur is penalized by having to pay taxes even before the business gets off the ground.
Clearly, some real barriers stand in the way of setting up a business in Togo. These formalities lead many entrepreneurs to set themselves up informally. Bureaucratic formalities and requirements can eat up an entrepreneur's time in Togo, compared with Florida, for example, where it takes only 3.5 hours to register a small enterprise (de Soto 1989).
The Togolese entrepreneur has to start paying taxes in advance, even before he or she has the authorizations to launch a business. According to the tax officials, many small entrepreneurs "disappear into the woods" once the legal formalities are completed, to prevent this, advance payment for a licence (a professional tax) is required.
Generally, a business pays tax on the profits it has earned every year. In Togo, the normal rate of this tax is 40%. It is internationally acknowledged that paying taxes is always something of a problem for taxpayers. Because the tax payable by corporations is proportional to their profit at the end of the year, the tax officials say that many businesses escape paying tax because they end their year with a loss or with too small a profit. (During our research, we frequently came across two balance sheets for the same year and for the same enterprise. When we looked into this, we found that it was common practice for businesses to keep two or three sets of books for the same year: one for the owners [the only set that reflects the real situation of the firm], one for the banker, and one for the tax service.) To get around this currently widespread practice, the state charges all regularly established businesses a minimum tax of between 1.5 and 3% of their turnover, regardless of their profit or costs for the year (Togo Ministry of Economy and Finance 1983). In principle, this tax represents a down payment on corporate or income tax. At the end of the year, if the amount paid is less than the tax due, the business will pay the normal tax; if it is more than the tax due, the state keeps it anyway.
Having to pay this minimum tax can ruin a business that is having problems, especially if it has had a loss several years in a row. The direct result of the tax is the progressive reduction of its business capital. In the long run, the business may find its basic financial balance ruined. If the business has been borrowing from a bank, the business may find it is impossible to continue doing so, unless it agrees to put in fresh capital to reestablish its financial balance. So, it is easy to see why a Togolese SME subject to the minimum tax may well disappear over the long run if its profit cannot always cover its minimum tax obligations.
In the fiscal year 1990/91, there were 996 firms registered with the Statistics Office (Togo Ministry of Planning and Land Development 1991): 262 commercial firms (26.31%); 525 service firms (52.71%); 103 hotel companies (10.34%); and 106 industrial firms (10.64%).
These statistics confirm that commercial firms, hotels, and services make up the bulk (89%) of Togo's economic fabric beyond the primary sector. These are sectors that do not require a major investment. Togo's SMEs are preoccupied with the short-term bottom line, just like SMEs in general (Cloutier 1973; Robidoux and Garnier 1973; Deeks 1976). In a study carried out for the European Economic Community (EEC 1991), company executives insisted that in light of the constraints weighing on them, they could never afford to go into a business where they would have to wait for results. Furthermore, if entrepreneurs have to wait for profits to appear, they may have problems with their financiers, who are not necessarily bankers. Under these circumstances, then, it is easy to appreciate that the levying of a minimum tax on all firms is just one more factor that can drive Togo's SMEs to early bankruptcy, particularly the weaker ones. By way of example, a study currently under way on joint ventures in Togo shows that between 1980 and 1991, 590 joint ventures, mainly involving French partners, were registered with the Ministry of Trade and Transportation. When an attempt was made to trace them, it was found that only 150 of them, or 25%, were still in business. This study is being conducted by our local team from the Entrepreneurship Network of the Association of Partially or Entirely French Language Universities – University of Francophone Networks (l'Association des universités partiellement ou entièrement de langue français – Université des réseaux d'expression française, AUPELF–UREF) and will shed light on all the factors behind the closing of these businesses. It is worth noting that the registry kept by the Ministry of Trade and Transportation reports only information on established firms and has no up-to-date data on which ones are still in business. Of the 590 joint ventures, only the 150 still active are listed among the 996 firms registered with the Statistics Office (Togo Ministry of Planning and Land Development 1991).
Levying the minimum tax certainly helps the state minimize its losses on corporate income tax, but it represents a real obstacle to the development of Togo's private sector. According to the National Employers' Council (le Conseil national du patronat, CNP), "under present economic conditions, this tax serves to impoverish firms and foreclose their futures" (CNP 1991, p. 14).
The Investment Code became a part of Togo's economic system in 1965. The Code "represents a legal, fiscal and financial act by which the State undertakes to renounce certain of its prerogatives for a fixed period" (Togo 1989); its purpose was to attract investors to the country's industrial sectors by offering economic conditions favourable to their activities.
Under the first three versions of the Togo Investment Code, the sectors eligible for its investment benefits did not include many domestic SMEs, but the Code generally favoured foreign enterprises. Nevertheless, there were three areas of potential benefit to domestic investors:
• Industrial crops, fishing, and related activities were permitted under the Code to attract investment from domestic SMEs, but to this day these activities remain in the informal sector. There were some attempts to organize industrial crop producers into cooperatives, but these cooperatives soon disappeared because of their tremendous management problems.
• Although transportation businesses are largely controlled by Togolese citizens, these businesses are not organized to meet the terms of the Code or benefit from its investment advantages. There is an entire region of the country (the home of the Tem people) where the greatest part of investment goes into transport. This investment is often made by rich El Hadj, which are rarely organized as formal companies. This sector was in fact suppressed after the second revision of the Code, while the autonomous Port of Lomé was growing rapidly. The autonomous Port of Lomé serves Sahel countries like Burkina Faso, Niger, and Mali, and the development of this port was intended to encourage the creation of transportation firms to take advantage of the market for shipping goods to and from those land-locked countries.
• There is no doubt that social-housing societies could have attracted private-sector money, given the tremendous need for such housing in the country. But that business does not produce immediate profits. Domestic SMEs wanting to invest there will need special conditions to survive, and these the Code does not offer.
However, the new version of the Code promulgated in October 1989 (Togo 1989) does offer some real opportunities to Togolese SMEs. It incorporates new sectors specifically to encourage the national private sector. These include industrial equipment maintenance, local product packaging, and production-scale handicrafts.
The Investment Code is so cumbersome and ineffective that "it is of no interest to business" (EEC 1991, p. 41). As proof of this, only two businesses have been approved under it since 1989, and two others are under study (EEC 1991). (According to the EEC study, promoters are waiting for the Code to prove its effectiveness. Unfortunately, it can only do so if enterprises are interested in taking advantage of it.) Furthermore, in the period from 1969 to 1985, only 20 domestic SMEs were declared eligible for benefits, or fewer than two per year.
Yet this Code could be of real help and encouragement to SMEs if it were practical, effective, and simple in its application. If it were open to the traditional areas of Togolese entrepreneurial activity, it might promote the "formalization" of the country's countless struggling microenterprises and help turn them into true small businesses, better organized and more likely to be profitable.
The eligible business areas have not attracted investors from either Togo or elsewhere in Africa. Either the investors have no interest, or, as one businessman put it, the conditions they would have to meet are beyond the reach of local entrepreneurs, and the procedures for establishing firms are too cumbersome. Perhaps, what is required is a number of special hand-holding measures, simple procedures that would appeal to local investors, and also perhaps some education to help them see the value of participating.
One way of encouraging the survival and development of a national private sector is to provide it with border protection through customs measures. On this score, everyone agrees that Togo's customs service needs reorganizing. According to business people, customs tariffs increase the purchase price of imported products considerably. Customs formalities are costly and time consuming, and the tariffs themselves can vary, depending on the relationship between the entrepreneur and the customs official. This situation works to the favour of a few large firms whose owners are especially clever. It has been noted in fact that it is of great advantage to foreign enterprises established in Togo. It is common to see two merchants import the same goods at different tariff rates.
The Credit Guarantee Fund for Togolese Enterprises (le Fonds de garantie des crédits aux entreprises togolaises, FGCET) is managed by the National Investment Corporation (la Société nationale d'investissement, SNI) "for the purpose of promoting national private initiative by guaranteeing access for Togolese enterprises to the credit necessary for their development" (SNI 1980, p. 1). To this end, "it assists by extending its guarantee for credits provided to corporations and individuals of Togolese nationality by banks, financial companies and suppliers, whether located in Togo or not" (SNI 1980, p. 2). FGCET also gives a counter guarantee to signed undertakings accepted by banks in favour of these same Togolese firms.
This should be an excellent initiative for encouraging the creation and development of SMEs in Togo. Unfortunately, the fund offers nothing as an incentive to banks or financial companies. It offers only a back-up guarantee, which means that bankers will turn to the fund only if their clients are unable to honour their obligations. In effect, the fund was stillborn. In any case, anyone wanting to make use of the fund's guarantee has to meet numerous conditions — the beneficiary firm has to agree to certain constraints and, in particular, to accept in writing the principle that SNI has control at all times of any business that is guaranteed and that credit obtained must be used according to conditions set by SNI's management committee. Togolese entrepreneurs often prefer individual enterprise over a corporate structure simply because they do not want other people meddling in their affairs. As a result, FGCET is unable to help many businesses, although they are nearly all in desperate need of funds.
We approached several Togolese entrepreneurs (20, to be exact) for their views of FGCET. Most of them (75%) would like to see the fund reactivated (as would the National Employers' Council), but they say the conditions of access should be changed. These entrepreneurs feel that if SNI is prepared to provide a guarantee, it should trust them to use the funds properly, without standing behind them like a policeman. The fund is now being reorganized and should be reactivated once the country returns to political stability.
The National Investment Fund (le Fonds national d'investissement, FNI) was set up to encourage businesses to invest. The businesses contribute 0.5% of their annual turnover to this fund. This is deposited with SNI, and FNI issues a certificate. To get these forced savings back, firms have to make an investment within 2 years equal to three times that of the certificate. Otherwise, the deposits become FNI bonds with a 40-year term, at 3% interest.
The FNI was originally created to force foreign enterprises to reinvest part of their profits in the country. In practice, however, it represents a tax on all businesses.
This system amounts purely and simply to the blocking of funds for the term of the bonds. In light of the special financial risks that SMEs face anyway, participating in FNI is a serious problem for them. Because most SMEs are chronically short of cash, they have to resort to bank overdrafts to pay this contribution (CNP 1991, p. 16), and the rate they pay on overdrafts ranges from 14 to 16%.
Thus, the conditions of access to FNI, far from encouraging private-sector development, represent a distinct handicap, and, of course, FNI has failed to achieve its purpose. Its logic is contrary to any rational theory of finance. How can someone in an economy where capital is scarce be expected to borrow at 14% and invest at 3% for 40 years? How can any company pay the difference without draining its own resources? Even when a company does not resort to bank credit to pay FNI, how can its managers justify the investment of its owners' money at 3%, when there are risk-free returns available at 7–8.5%? In light of all this, entrepreneurs are justified in calling FNI a tax.
The irony is that Togolese SMEs (especially those prospering to some extent) will some day have a pile of FNI certificates worth more than their company; in the meantime, they are continuing on in acute need of working capital.
In developing countries, priority should be given to mobilizing savings in support of the private sector and making the best possible use of such resources. Schemes to be avoided are those that extract what few resources these companies have. In the case of FNI, its intentions may be good, but the way it is working is strangling the country's SMEs.
This paper examines only a few of the structures set up to promote the private sector in Togo, but from these it is possible to conclude that public policies have a negative impact on the promotion of Togolese entrepreneurship. There are many brakes in the system. The complex bureaucratic procedures, the failure to recognize the realities faced by entrepreneurs, and the inaccuracies and inconsistencies in the ways officials apply the provisions make life difficult for business people. Far from helping to promote private-sector development in Togo, this environment is stifling such efforts.
The institutional framework that Togo has set up may indeed be favourable for business development, but what kind of business? It is certainly not much help to the local SMEs, which make up the bulk of the national private sector.
This situation has in fact encouraged the emergence of the informal sector. Thus, trade with countries of the Economic Community of West African States (la Communauté économique des états d'Afrique de l'Ouest, CEDEAO) and with the rest of Africa is largely conducted in the informal sector. Formally constituted SMEs play only a small role, as the official statistics demonstrate. This trade is essentially carried on by the women of the Lomé market. We talked with two of them — two young women among the 30 or so who sell goods of all kinds, ranging from cloth, to lingerie, to food products. The first woman we talked with had customers mainly in Central Africa. On each trip, she delivered about 5 million XOF worth of goods. The second woman we talked with traveled between Togo, Bénin, and Côte d'Ivoire, and on each trip she bought goods worth 6–10 million XOF. If each of these women made one trip a month, she would be doing between 60 and 120 million XOF worth of business each year.
Each time the women pass through customs, the customs officers hold them to ransom for 5–10% of the money they are carrying (the going rate is 10% in Abidjan). Of course there is nothing in the agreements governing CEDEAO trade that authorizes customs officers to impose levies on traders on their own initiative — the customs officers simply issue no receipts.
So, these traders must set aside at least 6–12 million XOF of their yearly turnover for bribes at customs. Of course, if the start-up formalities were faster and simpler, the tax rate were set more reasonably, and the rules were less constricting, then these traders might find it in their interest to set themselves up as formal SMEs, which would also give the state a new source of revenue.
From what we have now seen, it is easier to understand why the Nanas Benz are so active. They are happy to stay in the informal sector rather than formalizing their affairs. They are so well positioned that they are able to take on competition from the entire CEDEAO common market, something the formal SMEs are not ready to do. At present, these traders are the ones who are fulfilling the intention of CEDEAO.
Despite its good intentions, the state has not achieved its goals. In the laws and regulations we have reviewed, there was a definite intention to promote the private sector. However, the changes and measures that this implies are not yet taking place or being installed. The fact that the rules are out of step with the social context of the country poses a very serious problem for the expansion of Togo's private sector.
The rules and laws will have to be revised for the purposes of regional integration and allowing local SMEs to become more competitive. The government will have to cooperate with the private sector in developing a policy to promote SMEs that is more consistent and offers more incentives, so that everyone's interests can be reconciled.
Little use seems to be made of the business know-how of Togo's SMEs. Despite the plethora of assistance and promotion schemes — whether it is a World Bank project, a United Nations Industrial Development Organization (UNIDO) program, or any of the various other initiatives launched to improve the SME environment in Togo — Togo's SMEs are no better off.
This implies that the whole approach to promoting and helping Togolese enterprise should be changed for investment to be of any use. At the same time, there has to be better coordination of activities in this field — this is the goal of a project now under way to create a House of Enterprise. A lot of money has been invested, but so far its impact has been diluted because activities are not coordinated or consolidated. The political situation in the country for the last 3 years has not helped either.
In an attempt to improve this situation, a wide-ranging analysis was undertaken to design a master program for managing industrial development. It had the following main goals:
• dealing with institutional problems;
• creating greater dynamism in the financing of SMEs;
• studying the various routes to profitable investment;
• helping and encouraging SMEs;
• making use of local resources; and
• setting up free zones for export processing.
Despite the weak impact various initiatives have had, all the conditions are theoretically in place for promoting the private sector in Togo. The main objectives are to adapt bureaucratic rules and laws to present-day reality and to instill a greater sense of public morality in officials.
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One of the most important challenges facing the countries of Africa is the creation of jobs. With only limited absorptive capacity in traditional agriculture and with stagnant or declining employment opportunities in the public sector and in large private firms, attention is turning to the capacity of small enterprises to provide productive employment for an increasing number of job-seekers.
Efforts to support the growth of small enterprises generally focus on one of three different target groups: newly established businesses or people starting up a new business; existing enterprises struggling to survive and perhaps to grow a bit; and existing small businesses seeking to graduate to the intermediate size. These diverse groups have the potential to contribute in different ways to employment. They also face different problems and constraints.
This paper explores some of the employment growth patterns of small enterprises and microenterprises and the ways these enterprise dynamics are affected by the policy environment, particularly the legal, regulatory, and tax framework
1 The author is also Co-Director, Research on Growth and Dynamics of Microenterprises, with the GEMINI Project.
(LRTF), of countries in southern Africa. The paper starts with an examination of enterprise start-ups, then explores factors that have led some new enterprises to close. The third section looks at patterns of growth among existing enterprises, distinguishing between constraints faced by enterprises that expand only a little and those faced by enerprises that graduate to the intermediate size. The final section summarizes the findings.
Over the long term, most of the new jobs in small enterprises in southern Africa have come through start-ups of new enterprises. Studies indicate that 75–80% of all current jobs in small enterprises came into being when the enterprise itself was started (the remainder resulted from the expansion of existing enterprises some time after start-up). This growth in employment through new starts has several important characteristics:
• The rate of formation of new enterprises is quite high. The rate has been estimated at about 14% per year in Zimbabwe for the period 1981–1989, a figure that may be representative of the rates in other countries in the region. Contrary to what some have argued, there does not appear to have been an overall shortage of new starts of small enterprises in southern Africa.
• Most newly established small enterprises are very small, are located in rural areas, and rely heavily on the entrepreneur and unpaid family members.
• Many new enterprises do not last for long: the attrition rate of newly established units is substantial.
• There is considerable year-to-year variability in the number of new jobs created through start-ups of new enterprises.
Analysis currently under way will test the hypothesis that the rate of job creation through start-ups of small enterprises is inversely proportional to macroeconomic growth: when things are going well, there are fewer start-ups, but when the macroeconomy is under stress, start-ups increase. If this hypothesis is true, it would suggest that an important driving force behind many of these new starts is the unavailability of better alternatives.
How does the LRTF affect the rate of new starts of microenterprises? The answer appears to be this: at a micro level, very little.
Two sets of data support this answer. The first set is from an Organisation for Economic Co-operation and Development (OECD) study focusing on the impact of laws and regulations on small enterprises and microenterprises in Swaziland and Niger (Joumard et al. 1992). That study found that only about half of the small enterprises and microenterprises in Swaziland and two thirds of those in Niger had the requisite registration or trading licences. Those two countries were selected for study in part because it was expected that the burden of registration was much more onerous in francophone than in anglo-phone countries. When account was taken of other key variables (location, size, and sector), however, the likelihood of registering turned out not to differ significantly between the two countries.
As part of the OECD study, a survey asked those entrpreneurs who had the required permits how burdensome it had been to obtain them. It asked the entrepreneurs who did not have them why they remained unregistered and whether this had created problems for them. For those who were registered, the direct transaction costs of registration were surprisingly low. In Swaziland, for example, it took on average 2.2 months for an applicant to receive a licence; for more than half of the applicants, the waiting time was 1 month or less. The average amount of time required from the entrepreneur for this process averaged only 2.3 hours. In Niger, the comparable measures were even lower. These figures differ sharply from the "famous" 289 days required to register an informal enterprise in Peru (de Soto 1989). Of course, obtaining a licence generally implies subsequent obligations to comply with other regulations (including, especially, the payment of taxes), but the direct transaction cost of registration appears to be minimal.
Among those entrepreneurs that did not have a licence, only a few indicated that their not having one created problems for them. A few wished to advertise their products and were constrained from doing this by not having a licence. A few others indicated that not having a licence prevented them from obtaining loans from a bank (or, in a few cases, even from opening a bank account). For most, though, it seems to have mattered little whether they had a licence.
The same OECD survey asked owners of small enterprises two questions about the problems they had faced at the time of start-up. The first question asked them to identify the most pressing problems. The second asked specifically about regulatory and tax constraints. In response to the first question, only 5% of the respondents in Niger and 2% of those in Swaziland mentioned the LRTF as the most important constraint they faced at start-up. Even when prompted by the follow-up question to consider problems in the domain of government regulations and taxes, 88% of the respondents in Niger and 78% of those in Swaziland said that they had no such problems.
The second set of data is from surveys reported by Lied-holm and Mead (1993). For those surveys, some 3 500 enterprises in six countries in southern Africa filled in questionnaires investigating the most important problems faced at the time of start-up. The resulting data are grouped in Table 1.
The most striking thing noted by Liedholm and Mead (1993) was the limited extent to which taxes and government regulations were reported as a serious problem for most newly starting small enterprises. These findings, like those of the OECD study, suggest that the problems and constraints faced by newly established small enterprises are much more likely to be in the realm of markets and demand or of working capital, credit, and finance than in the area of taxes, licences, and other government regulations.
South Africa is a partial exception that deserves special comment. Prior to the mid-1980s, government regulations governing economic activities in the townships of South Africa were extremely restrictive (Liedholm and McPherson 1991). Many types of economic activities were forbidden, including all manufacturing, wholesaling, and finance; ownership of nonresidential business premises by blacks was against the law, as were all sales outside the township. Although many of these restrictions have since been removed, they reflect the context in which many existing small enterprises were first established.
Restrictions on business start-ups in other countries of southern Africa reflect two principal motives on the part of the authorities: the confinement of small enterprise activities to particular localities and the maintainance of health requirements. Police sweeps of people doing business in the "wrong places" are common in several of these countries. Sometimes,
Table 1. Perceived problems of microenterprises and small entrepreneurs at the time of start-up. | ||||||
| Respondents (%) | |||||
Type of problem | Botswana | Lesotho | Malawi | South Africa | Swaziland | Zimbabwe |
Working capital, credit, and finance | 52.0 | 21.2 | 41.0 | 35.3 | 51.2 | 32.9 |
Markets and demand | 16.7 | 37.9 | 23.5 | 28.1 | 21.6 | 23.3 |
Inputs, tools, and machinery | 6.0 | 12.2 | 13.5 | 6.9 | 9.0 | 25.6 |
Taxes, licences, and other government regulations | 2.0 | 1.5 | 5.5 | 10.9 | 4.0 | 3.7 |
Othera | 23.3 | 27.3 | 16.5 | 18.3 | 14.0 | 15.0 |
Source: Liedholm and Mead (1993, Table A-1). | ||||||
aThe most important problems cited in this category were working space and location, transport, and labour. | ||||||
this is due to a desire on the part of the policymakers to keep things neat and tidy. In other cases, police sweeps are aimed at protecting established traders from competition from informal sellers. Although a concern about health is appropriate, particularly with enterprises engaged in the sale of prepared foods, there is a risk of this becoming a cloak for protecting existing enterprises (such as when it is argued that the sale of used clothes constitutes a health hazard).
It should be recognized that these questionnaires were given only to existing enterprises. Some people surely have been prevented from starting new businesses by the LRTF. Although the start-up rates for enterprises in southern Africa have been high in recent years, they could have been even higher if regulatory constraints had been eased. This is particularly true for somewhat larger enterprises and for enterprises seeking to get started in product lines or in localities that are more strictly regulated. This suggests that the problem of the LRTF for new startups is not a general one but is specific to particular sizes of enterprise, sectors, and localities. For most newly established small enterprises, the LRTF appears not to have been a major issue.
In the developing countries of Africa, as in industrialized countries, many new small enterprises do not survive for long. Unfortunately, estimates of attrition rates among newly established small businesses are frustratingly imprecise. Survey work currently under way in Zimbabwe and in the Dominican Republic will provide more precise estimates of the small business attrition rates for developing countries. In the meantime, existing studies throw important light on the question of why small enterprises go out of business.
Available information is based on a survey approach involving interviews with people who had operated a small business that had closed (Liedholm and Mead 1993). Proprietors were asked to identify the principal reason for the closure of the business. The responses are shown in Table 2.
Table 2 shows that in most countries better opportunities and personal reasons (retirement, sickness, and the like) together contributed to a quarter to a third of the closures. This
Table 2. Reasons for closure of small businesses. | ||||||
| Respondents (%) | |||||
Reasons for business closure | Botswana | Kenya | Malawi | Swaziland | Zimbabwe | |
Business problems | 41.4 | 39.4 | 53.8 | 55.9 | 47.5 | |
Better opportunities in another business | 4.6 | 12.2 | 8.0 | 5.5 | 6.5 | |
Personal reasons | 30.3 | 4.1 | 21.2 | 22.2 | 27.9 | |
Legal problems or troubles with government | 5.3 | 20.5 | 2.9 | 4.3 | 5.7 | |
Other reasons | 18.4 | 23.7 | 14.0 | 12.2 | 12.4 | |
Source: Primary data from baseline surveys of small enterprises in each country. Detailed references are provided in Liedholm and Mead (1993) | ||||||
reminds us that significant numbers of closures should not be considered business failures.
Except in Kenya, only a small proportion of the closures were attributable directly to the LRTF. The case of Kenya deserves special comment. Unlike the other surveys from which the data in Table 2 derive, the survey in Kenya was not nation-wide; rather, it was restricted to one urban slum (Kibera) on the outskirts of Nairobi. This is an area where the government was seeking to control and regulate economic activities of which it did not approve. Episodes of bulldozing and other forms of harassment were not uncommon. The government actions not surprisingly contributed in an important and direct way to firm closures in that setting. In the other countries, though, only a few respondents reported that laws and regulations were directly responsible for the closure of their small enterprises.
These results need careful interpretation; they do not mean that the LRTF was irrelevant to patterns of attrition among small enterprises. Some of the factors reported in Table 2 as business problems were in fact attributable to government regulations and policies. In several countries, a common reason given for closure was limited access to operating funds (20–25% of all respondents in Botswana, Malawi, Swaziland, and Zimbabwe). It is well known that "shortage of funds" is a catch-all phrase concealing a wide variety of problems, particularly poor management; yet nearly a quarter of the respondents identified the shortage of funds as what principally led to the closure of their firms. Although this constraint is categorized here as a business problem, it reflects a host of government policies that make it difficult for many small enterprises to obtain credit. In a similar vein, in Malawi and Zimbabwe, the principal reason cited for closure by nearly 10% of respondents was "shortage or expense of stocks or raw materials." But we know that this shortage is in large measure a result of government policies that channel existing supplies primarily to larger enterprises.
In sum, it appears that the direct effects of the LRTF on firm closures has been limited. Aside from the entrepreneurs in Kibera (Kenya), very few referred to the LRTF as the principal cause of their going out of business. Of more importance are the indirect effects of the LRTF, particularly lack of access to raw materials and intermediate inputs (in Zimbabwe and Malawi) and to operating funds or credit for working capital (in Zimbabwe, Swaziland, Malawi, and Botswana).
Survey results from several countries suggest that 20–25% of all new jobs in small enterprises have resulted from expansion of existing firms. There are several points about this expansion that are relevant to the topic at hand.
1. Most small enterprises do not grow at all. In all the countries studied, only about one fifth of all enterprises had added to their workforce after they were first established.
2. Among the 20% that do grow, most grow only a little. The great majority of these start out very small, adding only a few workers to their labour force and ending up with well below 10 workers. This "small-growth" category accounts for about two-thirds of the new jobs that are due to expansion of existing enterprises.
3. Only about 1% of the enterprises that start out very small (with fewer than 5 workers) succeed in graduating to an intermediate-size group (with 10 or more workers). This type of movement from very small beginnings to medium size is of particular interest because it often represents the most dynamic segment of small-enterprise growth, creating jobs that may yield higher returns — such enterprises may be more heavily engaged in export, which may be a particularly good springboard for further growth (Mead et al. 1993). Although less than 1% of all newly established very small enterprises succeed in making this transition, this select group accounts for a third of the employment growth in Botswana and a fifth of the increase in employment in Swaziland and Zimbabwe.
Some have argued that the policy context is a principal determinant of the ability of small enterprises to grow (Young 1993). What evidence can be advanced concerning the LRTF's potential to limit growth?
Surveys in several countries in southern Africa have investigated the principal problem small businesses face during periods of growth (Liedholm and Mead 1993). The main findings of these studies are shown in Table 3.
As in the case of problems at start-up, one must interpret these findings with care. These are the perceptions of entrepreneurs and may not accurately reflect the underlying forces at work. Again, the problem of access to inputs (raw materials and intermediate products, machinery, and tools) appears a serious one in a number of countries. This problem is frequently due to government regulations aimed at controlling the supply of imports and domestically produced materials. Once again, the direct effects of the LRTF appear not to have been of primary concern to respondents.
This set of surveys (Liedholm and Mead 1993) also investigated problems currently faced by the entrepreneur (at the time of the survey). These data are shown in Table 4 for low-growth enterprises and high-growth enterprises (those that had grown a lot — graduated to the intermediate size). The data are from Malawi (for which the most complete information on this topic is available).
The data shown in Table 4 suggest that small enterprises that have grown rapidly face a somewhat different set of problems than small enterprises that have expanded only moderately. Among enterprises that have grown substantially, access to working capital and inputs are more pressing problems than finding markets for their products. There is little evidence here that the direct effects of the LRTF are a serious problem for either of these groups of small enterprises.
Table 3. Perceived problems of microenterprises and small enterprises during periods of growth. | ||||||
| Respondents (%) | |||||
Type of problem | Botswana | Lesotho | Malawi | South Africa | Swaziland | Zimbabwe |
Capital, credit, and finance | 25.7 | 14.3 | 22.8 | 28.2 | 45.3 | 20.0 |
Markets and demand | 21.8 | 21.4 | 14.3 | 23.4 | 4.5 | 24.0 |
Inputs, tools and machinery | 23.0 | 14.3 | 28.3 | 7.8 | 9.1 | 24.0 |
Taxes, licences, and other government regulations | 1.3 | 0 | 6.5 | 6.8 | 0 | 4.0 |
Other problems | 28.3 | 50.0 | 27.8 | 34.1 | 40.7 | 26.1 |
Source: Primary data from baseline surveys of small enterprises in each country. Detailed references are provided in Liedholm and Mead (1993). | ||||||
Table 4. Perceived problems at the time of the survey: Malawi. | ||
| Respondents (%) | |
Most important problem | Low-growth firmsa | Graduating firmsb |
Finance | 24.5 | 37.5 |
Working capital | 22.0 | 37.2 |
Fixed capital | 2.3 | 0.2 |
Other | 0.1 | 0 |
Markets | 26.1 | 1.9 |
Inputs | 35.0 | 55.2 |
Tools and equipment | 2.7 | 0.4 |
Raw materials or intermediate inputs | 32.3 | 54.8 |
Government policies and regulations | 3.2 | 2.3 |
Taxes | 0.2 | 1.7 |
Licences | 1.0 | 0 |
Zoning or location restrictions | 0.1 | 0 |
Other | 1.8 | 0.6 |
Transport | 3.6 | 1.8 |
Labour | 0.8 | 0.1 |
Other constraints | 6.9 | 1.5 |
Source: Primary data from baseline surveys of small enterprises in each country. Detailed references are provided in Liedholm and Mead (1993). | ||
aProportion reporting problems: 88.2%. | ||
bProportion reporting problems: 97.6%. | ||
Microenterprise dynamics involve a heterogeneous and diverse set of currents and trends. Looking at the four dimensions of change — start-ups, closures, small expansions, and transformations — one can clearly see that these categories of change reflect different forces at work, offer different opportunities, and are subject to different problems and constraints.
Examining the impact of the LRTF on these different categories of change, we find that some common themes emerge. The process of registration (licencing and authorization to operate legally) — steps that are sometimes grouped together under the heading of "formalization of informal-sector enterprises" — appears to have been of significance only to a few newly established enterprises. Exceptions were enterprises seeking to get under way in more closely regulated sectors (such as restaurants) or in localities where the government sought to protect existing producers or to control the geographic development of enterprises. For most new small producers, the process of formalization appears not to have been a major hurdle, at least, for those who passed it, nor does it appear to have been a major constraint for those who have chosen to bypass or ignore it.
The impact of the LRTF on enterprise dynamics goes far beyond that of registration. Two major themes emerge from this discussion. Access to credit was a major issue for firms that ceased production, as well as for those that have grown. Access to inputs was also a major issue in several countries (although not all). It is well known that complaints about the unavailability of credit can reflect a wide range of inadequacies in the management of the enterprise; conversely, an ability to establish effective procedures for input procurement and inventory control is a characteristic of good management. Yet it is clear that the ability of entrepreneurs to deal with these challenges is strongly influenced by the policy environment in which they operate.
In discussions of the process of change in the LRTF in which small enterprises operate, it is helpful to have some idea of which aspects of that environment are hindering growth in enterprise. The discussion of this paper suggests that these two areas — access to credit and access to raw materials and intermediate inputs — may be the most important factors affecting the ability of small enterprises to get started, to survive, and to grow.
The economy in Uganda had been devastated in the early 1970s and 1980s, so the National Resistance Movement government, which came to power in January 1986, faced the monumental task of reviving both the productive and the financial sectors. In particular, the government had to control inflation, which was running at an annual rate of more than 360%, reduce the imbalances in the external accounts, improve producer incentives, improve the allocation and use of public resources, rehabilitate the infrastructure, and promote growth.
In 1987, with the help of the International Monetary Fund, the World Bank, and other donors, the Government of Uganda launched its Economic Recovery Programme. The program had a macroeconomic thrust: the intent was that an improved macroenvironment would create a suitable business climate in which the private entrepreneur could thrive. The results of the program, especially in relation to growth objectives and inflation control, are now being realized. Growth for the period 1986/87 to 1992/93 has been more than 5% per annum. Inflation has declined to a level of –2% per annum as of June 1993, although the underlying rate appears to be about 8% if the food element, which constitutes more than half of the inflation index, is removed.
During all the economic hardships, the resilience of Uganda's economy can probably be attributed to an underlying but vibrant sector of the economy, namely, small-scale enterprises (SSEs). The predominant sector, agriculture, is on the whole characterized by small-scale farmers in the monetary and the nonmonetary (subsistence) sectors. These farmers have sustained Uganda's export industry, particularly that of coffee. This pattern is slowly changing as diversification into other agro-based exports takes root, again led by the SSEs. At present, no large-scale mining and quarrying are taking place in Uganda; this sector is also dominated by SSEs. The manufacturing sector, too, is not devoid of SSEs, especially in agro-processing. The same phenomenon is evident in the construction, commerce, and transport sectors. SSEs have sustained the economy of Uganda. Thus, there is a need to focus on the characteristics of the business environment in which they operate and to evolve policies that would make it easier for the SSEs to grow and achieve economies of scale through better management and productivity techniques.
For the purposes of this paper, the definition of SSEs is quite broad, ranging from a one-person business or venture to a company registered under the legal provisions. The definition of a small enterprise often revolves around such parameters as size, turnover, or number of employees. However, it is the opinion of the author that SSEs have to be defined in the context of the economy and the cultural and social peculiarities of a particular country. Enterprises in which a small-scale operator is engaged in a gainful business activity, whether as an individual, in partnership, or (to take advantage of limited liability) in a corporation, are what this paper means by SSEs. More explicitly, in the context of the economic activities in Uganda, SSEs would include the following:
• sole proprietors in various retail trades;
• service organizations, such as beauty salons, small construction companies, secretarial service bureaus, artisans, and private taxi operators;
• small-scale farmers;
• small agro-processing industries;
• small mining establishments; and
• professionals under the categories of medical practitioners, lawyers, architects, engineers, and accountants.
There has been some concern over the lack of SSE promotion in the mainstream of government policy and, in this context, tax policy. This lack has sometimes been attributed to two causes:
1. SSE policy is confined to a small section in the ministry responsible for industry and
2. SSEs do not have distinct and identifiable associations or groups through which they can forcefully channel their policy requirements.
It is argued that as a result, policy formulation is left to the whims and desires of macroeconomic planners who do not have sufficient knowledge of the sector and thus put in place policies that may not be consonant with the needs of the SSEs. Although this position may generally be true, the SSEs in Uganda, out of the dire need to have government listen to their plight, have formed specific and general organizations to advance their concerns.
On the government side, the Tax Policy Division of the Ministry of Finance and Economic Planning has been receiving tax policy proposals from various groups, including those representing SSEs. After study, the division has taken some of the proposals into account in formulating tax policy. Because this Tax Policy Division is in the ministry responsible for fiscal policy, the channel through which representative groups, including SSEs, have to pass to present their interests is shortened considerably. Further, the Uganda Revenue Authority, the tax-collecting arm of government is charged by statute to advise government on tax policy matters. Because the authority is in continual contact with the tax-paying public, it can gauge the practicability of tax measures and their impact on compliance. In this vein, the authority has opened up dialogue with representative groups of taxpayers and has offered formal seminars for them. Its advice to government has included some proposals presented to it by these groups, including those representing SSEs. To a large extent, therefore, private-sector involvement in the formulation of tax policy in Uganda has been institutionalized with the objective of providing a balance between macro-and microeconomic needs.
On the SSE side, starting in 1988, powerful lobby groups, whose aim is to promote the needs of enterprises in general, began to emerge. These groups include the Uganda Manufacturers Association (UMA), which was formed to further the needs of local manufacturers irrespective of size. Not to be outdone, and in the belief that UMA represents the larger and more powerful middle- to high-class enterprises, other manufacturers formed the Uganda Small Scale Industries Association (USSIA) to solicit manufacturing incentives, especially credit, for its members. Another institution that would normally look after the interests of the trading community in general is the Uganda National Chamber of Commerce and Industry (UNCCI). This institution, which used to thrive in the mid-1960s and early 1970s, suffered from mismanagement and self-interest and is now only reviving, although its "industrial arm" broke away to form the UMA. Offshoot SSE groups with the specific aim of advancing their own needs have also emerged under UNCCI. These groups include the Uganda Importers and Exporters Association, formed as a pressure group against high taxes; the Kikuubo Traders Association, which looks after the interests of small-scale traders and importers in the hub of the capital city; the Uganda National Farmers Association, whose aim is to promote the needs of Uganda's farmers, both big and small; the Uganda National Coffee Association, which is an association of private coffee processors and exporters; and the Uganda Clearing and Forwarding Agents Association, which represents the licenced customs-clearing agents who interact with the Customs and Excise Department of Uganda Revenue Authority on a day-to-day basis.
In Uganda, the major tax types can be divided into direct and indirect taxes as follows:
Direct taxes |
| Indirect taxes |
Personal income tax |
| Customs duty on imports |
Pay-as-you-earn (PAYE) personal income tax |
| Sales tax on imports income tax |
Income tax deposit |
| Excise duties |
Corporation tax |
| Sales tax on local products |
Withholding tax |
| Surtax |
Stamp duty |
| Commercial transactions levy |
Fees and licences |
| Re-export levy |
All SSEs that are not incorporated as limited-liability entities, that is, those that fall in the sole proprietor and partnership categories, are subject to the personal income tax schedule, but as businesses, they qualify for certain deductions. Their net incomes may fall into any one of the personal income tax brackets within which they will be taxed; in addition, they are given a threshold level that attracts no tax. The limited-liability SSEs are subject to the normal corporate tax rate also enjoyed by larger enterprises, and it is a moot point whether this rate was necessarily designed with the large-scale enterprises (LSEs) in mind. However, the trend in Uganda's tax system is toward lower taxes over a broader tax base, so SSEs would stand to benefit from the lower tariff structure.
With the general lack of a tax-paying culture and the underdevelopment of the voluntary declaration and self-assessment modes of tax compliance, the majority of SSEs, whether in the formal or informal sector, are subject to a presumptive income tax deposit. This is normally payable as a lump sum at the beginning of a trading year. In Uganda, each trading enterprise is required to obtain an income tax clearance certificate indicating that income taxes were paid before the relevant licencing authority can issue an annual trading licence. Whereas the limited liability enterprises can obtain an income tax clearance certificate on the basis of their annual tax returns and tax payment record, the smaller business enterprises would normally have to pay a lump-sum deposit before they are issued with a tax clearance certificate that qualifies them for a trading licence. The demand for a lump-sum payment (which is income tax in advance) rather than installments may easily be perceived as inequitable.
All SSEs that are involved in the import trade must pay customs duty and sales tax on imports. They are also subject to local sales tax if they manufacture goods in the domestic economy and this tax was not charged on the raw material inputs. Many SSEs are not registered for domestic sales tax purposes — those involved in small-scale manufacture, for example, normally pay their sales tax on inputs. Excise duties are confined to a small group of products: alcoholic beverages and spirits, cigarettes, and mineral and carbonated waters. However, SSEs are not, in the main, involved in manufacturing these. SSEs that import these products have to pay an import excise rate. All service-oriented enterprises, including SSEs, are subject to a commercial transactions levy, which is a sales tax at the point of retail. It can be argued that this retail sales tax is a tax on tax; however, it can only be eliminated if a broad-based tax on value added is introduced.
The SSEs convey their tax policy concerns to government through their representative groups. Both UMA and USSIA have prepared various economic studies with the aid of international organizations and have invited government policy planners to seminars and workshops. The executive committees of these organizations act as advocates for their members to the highest levels of authority in Uganda. The Parliamentary Committee on the Economy has also received representations from these and other groups, and their submissions are considered in Parliamentary debates on fiscal measures. In present-day Uganda, there has not been a shortage of channels through which SSEs can make representations.
A study prepared by USSIA and the Friedrich Ebert Foundation (1992) and presented to the Ministry of Finance and Economic Planning raised a number of tax-related issues. The study contended that SSEs have little or no capacity to keep and prepare annual books of accounts. Because of this, the SSEs were not being assessed on profits but had since 1974 been paying an income tax deposit or presumptive tax that was considered unfair. This deposit system was also perceived as punitive to the SSE because it was paid in advance of earnings in one lump sum, and the levels were considered too high. The study concluded with a plea to government to undertake a careful analysis of the implications for SSEs of the tax policy, keeping in mind the following issues:
• The business tax should be equitable and based on actual performance rather than being a lump-sum pre-payment or estimated assessment.
• Business beginners, regardless of size or type, should be exempted from tax deposits because investors are discouraged if they are required to pay income tax deposits before the business starts operating.
• Very small enterprises with capital assets worth 500–10 000 USD should be assessed a flat tax payable at the end of the year of operation. The SSEs with capital assets above this threshold could then be encouraged to pay taxes assessed on profitability, and only those that are unable to prepare books would be required to pay income tax deposits. All SSEs with capital assets worth less than 500 USD should be totally exempt from tax.
Apart from central government taxes, SSEs pay charges and levies to local authorities. These local fees include trading licence fees; a graduated tax or poll tax for individuals over 18 years of age; market dues, which are charged daily for market stalls; movement of goods licence (hawkers licence) fees; and ground rents. The USSIA study raised the complaint that the multiplicity of charges levied by different tax-collecting authorities had a negative effect on the profitability of the SSEs. Implicit was that these multiple charges inhibit growth of the SSEs and prevent them from graduating to formal status and thus from enjoying the benefits formal status provides.
The study also recommended the following reforms to government:
• To promote savings and investment, eliminate the distortions in personal income tax that affect business performance.
• Eliminate the indirect taxes that affect business performance; levy no tax on capital equipment and all imported raw materials.
• Strengthen tax administration and collection, increase taxpayer audits, and intensify efforts to identify taxpayers so that taxes are spread across a broader base to avoid overtaxation of individuals.
• Increase the tariffs on imported goods that have equivalents manufactured domestically.
• Severely restrict tax exemptions on imported goods.
• Discourage luxury commodities or regulate these through taxation.
• Streamline the procedures for setting up a business by removing high-cost impediments such as income tax deposits, registration charges, licencing fees, and complicated paper work.
• Simplify tax assessment procedures, tax forms, and tax payment processes because most small-scale entrepreneurs do not understand them.
• Increase the interaction between the tax assessors and the taxpayers by having the tax assessors visit SSEs, not only to carry out on-the-spot assessments, but also to educate and help the taxpayer meet the tax obligations.
• Tax authorities at the district levels should work hand in hand with the district USSIA offices while assessing taxes for their zonal members.
This last proposal was meant to enhance the tax education of USSIA members and encourage their compliance with income tax law.
Although many SSEs have groups to represent them, some are not represented by the "industrially oriented" USSIA. For this reason, the author carried out a limited survey of 130 SSEs around the capital city, Kampala, to get views on the tax system from a cross section of SSEs. A questionnaire similar to the one used in the survey is presented in Appendix A, and Appendix B shows a breakdown of the types of SSEs surveyed. The survey sought taxpayers' opinions on tariffs, direct and indirect taxes, and tax administration. With respect to tariffs, respondents were asked whether they considered the taxes high, fair, or low. With respect to tax administration, respondents were asked whether they felt that assessments of tax, mainly direct tax, were made fairly or unfairly. It was also important to determine whether the taxpayers knew when taxes were due; whether at the time of payment the taxpayers knew the amount owing; whether at the time of payment the taxpayers had funds with which to pay their taxes; whether (because the author had the impression that in general account books were not kept by SSEs) the taxpayers preferred the deposit (lump-sum) system or an assessment based on account books (profit). It was also important to gauge whether the taxpayers in the SSE category understood the tax returns they were meant to fill out (if they had ever filled them out at all). The respondents were also asked whether they kept some form of accounts and whether these were prepared by an accountant, bookkeeper, or external auditor. Taxpayers were also asked what reforms they would like to see in the tax system.
Responses on tariffs and tax rates — The majority of SSEs in the sample felt that the rates for the following were too high:
• customs duty,
• sales tax on imports,
• commercial transactions levy,
• corporation tax, and
• PAYE personal income tax.
In general, the respondents wished to see a reduction in the rates of the above-mentioned taxes.
Responses on tax administration — Of the 130 respondents, 66% felt that they were unfairly assessed. Cross tabulation of the results suggested that unfair assessment was attributable to high rates of tax and tax deposit, a taxpayer's not always knowing clearly the amount of tax payable, and a taxpayer's difficulty in understanding the tax return documents. The results did not indicate any preference for deposit or assessment of profits as the method of tax assessment. It is interesting to note that the majority of SSEs in the sample know when the tax is due and normally have the funds to pay the tax by the due date. Contrary to expectations, 78% of the respondents indicated that they keep some form of accounts; 49% keep comprehensive books, and 29% keep some form of income and expenditure account. This suggests that assessment of tax on income and profits should be relatively easy. Further, the results show that about 28% of the respondents employ both an accountant or bookkeeper and an external auditor; nearly 5% employ only an external auditor; and 19% employ only an accountant or bookkeeper.
Other comments made by the respondents — The following is a summary of comments made by the SSEs on reforms they would like to see in the taxation system:
• Most of the respondents wanted to pay income tax in installments, as this would spread the payments out and alleviate liquidity problems.
• Some respondents suggested that the withholding tax be removed because it depleted their working capital.
• Without being specific, some respondents preferred to see the number or quantum of taxes scaled down and consolidated, especially those that may be related.
• Another suggestion was to increase taxpayer education; tax assessors should be friendlier and should offer more explanations to the taxpayer about the taxes due.
• Respondents suggested that it would be more convenient if they could pay their taxes through banks other than the only one used now (Uganda Commercial Bank).
• The SSEs suggested that taxation policy and tariff documents be circulated to the taxpayer.
• The SSEs wanted to be given incentives and tax relief of up to 5 years so that they could grow and prosper.
• The SSEs also suggested that the Uganda Revenue Authority design simple accounting documents in which income and expenditure could be recorded.
• Some respondents suggested that taxes be collected by local authorities (this implies that the Uganda Revenue Authority should use the local administrations as tax collection agencies).
The tax concerns of SSEs as determined by both the USSIA study and the author's survey can be classified under three headings: tax policy, tax-rate structure, and tax administration. Tax policy addresses the concerns of whether, in principle, particular tax types, such as withholding tax, should be in place at all and whether income tax should be paid through a deposit system. Other concerns are the issues of equity, the policy on luxury goods, and the protection of local industry from competing imports. Tax-rate structure addresses the issue of the severity of the tax rates already in place. Issues addressed by tax administration are using simpler documentation, increasing taxpayer awareness of the taxation process and tax obligations, paying taxes in installments, and increasing tax compliance from the existing tax base.
The Government of Uganda has made significant strides in tax reform since 1987, establishing the following framework of medium- to long-term objectives:
• to increase domestic revenue;
• to widen the tax base and gradually lower the tax rates to enhance equity, improve taxpayer compliance, and minimize tax evasion;
• to increase the share of domestic consumption taxes through the introduction of value-added taxes (VATs) or refined sales taxes, preferably at the retail level, taking into account the level of accountability skills at the taxation point;
• to minimize taxes and tariffs that inhibit export competitiveness and have a direct bearing on production or output decisions;
• to limit the application of excise duties to a few goods such as petroleum, alcoholic beverages, and tobacco (these excises would not discriminate between imported and locally produced goods);
• to simplify the system of tax administration by reducing the number of tax-rate bands while allowing for flexibility in implementation of fiscal policy;
• to use the customs duty on imports for protection and to use the sales tax or consumption tax for revenue generation;
• to improve tax administration by offering attractive remuneration incentives to tax collectors, by improving the training of personnel, by rationalizing tax laws to simplify implementation and enhance equity, and by providing adequate facilities for the effective collection of taxes; and
• to avoid meaningless and uncoordinated adjustments and instead to allow a period of stabilization and forward planning.
The results of the tax reform effort show that the government has addressed some of the concerns of the SSEs. More specifically, the government, through the Uganda Investment Authority, has offered local and foreign investors duty exemption on capital equipment and has offered other incentives, such as tax holidays. As a policy, raw materials are subject to an import duty — registered manufacturers of whatever scale remit the sales tax at the time of importation. This sales tax is now recoverable after manufacture or processing. Tax exemptions on imported goods have been severely restricted, and any exemptions have to be justified to the Ministry of Finance and Economic Planning before being granted. Excise rates have been applied on a narrow band of goods (both locally manufactured and imported) including petroleum, cigarettes, alcoholic beverages, soft drinks, and a few luxury goods. To mitigate the costs of setting up a new business, the Uganda Revenue Authority has made it a policy to charge tax on profits that are earned, so new businesses are not required to pay income tax deposits at the outset.
Although some SSEs had suggested the elimination of the withholding tax, the government is undertaking a review to exempt only taxpayers with a good tax-paying record. Because the tax culture has been eroded over the years and because the withholding tax is advance income tax that is credited to the final tax liability of the taxpayer, it is unlikely that this tax will be eliminated in the near future.
The corporation tax rate has gradually been lowered from 60% in 1986 to 30% in fiscal year 1993/94. This rate affects both the larger establishments and the SSEs. The personal income tax rates were cut through a gradual increase in the threshold, widening of the tax brackets, and lowering of the top marginal rate to the current level of 30%. All those SSEs with net incomes falling within the designated brackets will not pay any more tax than that paid by the larger entities with net incomes in the same brackets. This is because the top marginal personal income tax rate and the corporate tax rate are both 30%. The SSEs also have the opportunity to pay taxes of 10% on the excess of their net annual income falling between 840 001 and 2 100 000 UGS and 20% on the excess of their net annual income falling between 2 100 001 and 4 200 000 UGS (in 1994, 1 075 Ugandan shillings [UGS] = 1 United States dollar [USD]). There is a built-in cumulative relief in the personal income tax structure that is not available to the limited-liability companies. It could be argued, therefore, that the tax system may be offering an incentive for the limited-liability SSEs to deregister and move into the nonincorporated category. For loss carry-overs, the Uganda tax law allows a business to exhaust the loss incurred in previous periods before paying corporate tax. The same applies to businesses that are sole proprietors and partnerships, even though they are assessed on the personal income tax schedule.
Through the preventive arm of the Uganda Revenue Authority, the government has strengthened the machinery for monitoring and controlling smuggled goods that unfavourably compete with the activities of the SSEs. The maximum import duty rate has been reduced from more than 250% in 1986 to 30% in July 1993, and during the 1992/93 financial year, the government started paying taxes for all its imports. The government also reduced the maximum sales-tax rate to 30% to pave the way for the introduction of a VAT. In June 1993, in pursuit of the objective of lowering the tax rates over time, the government announced it was lowering the indirect taxes across the board (Uganda Minister of Finance and Economic Planning 1993a, b). The government is also streamlining the valuation of imported goods by requiring all importers with consignments valued over 2 500 USD to have their goods pre-inspected. The resulting "Clean Report of Findings" and the taxable value therein are acceptable for customs purposes. These measures affect the SSEs involved in the import trade or small-scale manufacturing.
Almost every year since 1986, the government has stressed the need to strengthen the tax-collection mechanism. It has improved incentives to the collectors, provided tax-collection facilities, opened up new offices for wider tax coverage, and revived the inspectorate function. In the 1990/91 fiscal year the government studied the possibility of setting up a tax authority. As a result of this study, the government set up the Uganda Revenue Authority in September 1991, which made tax collection autonomous, businesslike, and more accountable than before. The Authority is currently distributing tariff- and tax-related documentation to taxpayers, and work on a taxpayer's guide is in advanced stages.
The Uganda Revenue Authority has further strengthened the revenue-collection process by appointing experts in customs and excise, income tax, and investigations and audit to plan, train staff, and manage the new institution. The experts also have the authority to improve the mobilization of domestic resources and to simplify tax procedures. Part of the process, which has already started, includes the review of tax tribunals, the preparation of operational manuals, the consolidation of the tax laws, and the intensification of taxpayer education programs and of interaction with representative groups of all enterprises, including SSEs. In addition, the Uganda Revenue Authority has opened up a desk to cater to the small taxpayer. At this desk, the taxpayer will get the necessary explanation for filing a tax return and, more important, the need for self-assessment. Another task of this desk is to simplify the tax return to meet the needs of the small taxpayer.
In the field, tax officers have intensified their educating and explaining role. The basic theme is that the taxpayer should not be looked on as a criminal. This approach is already yielding massive dividends. The payment of taxes in installments has been revived in the target group, the SSEs. The government took this measure after recognizing that tax compliance is improving and that taxes can be spread over an accounting period for the "hard-to-tax" categories, once mutual trust, monitoring, and follow-up audits have been established. The introduction of taxpayer identification numbers (TINs) will help the monitoring process — each taxpayer will have a unique identification number linked to a taxpayer ledger in which all assessments and payments will be logged.
The government is studying the possibility of allowing more financial institutions to function as payment points in the tax-collection network. Opening up additional payment points would go a long way toward answering the cry of the SSEs for a more convenient way to pay their taxes. Furthermore, the government is studying the possibility of allowing agencies to collect taxes on commission. This would also reduce the Uganda Revenue Authority's collection costs, especially those associated with collections from the numerous small-scale operators.
Tax reform in Uganda in the period 1986–1990 followed the macro-approach — the basic objective was to stabilize the macroeconomic environment for all business players. Further, the government's tax-reform objectives have been consonant with the concerns of the SSEs. Gradual but firm steps have been taken to create a tax environment conducive to business growth. The main features of the approach to tax reform in Uganda have been the following:
• The government encourages dialogue between the tax policymakers (Ministry of Finance and Economic Planning) and the tax collectors at the front line (Uganda Revenue Authority) and representative groups of taxpayers. These representative groups now have access to the Parliamentary Standing Committee on the Economy, which has considerable say in tax policy measures and takes the lead in fiscal debates in Parliament.
• The government also encourages small-scale operators to form associations or groups to interact with the Uganda Revenue Authority at the operational level and to provide taxpayer education for their members in partnership with the Authority.
• The government engages in research to predict the impact of tax measures on taxpayers so that it can propose policy changes that will simplify the tax system and set tax rates that will optimize collections.
• Linkages between the Uganda Revenue Authority and the local authorities are being forged to rationalize tax collection methods and to share information. Each taxpayer will have a TIN that will be used by both the central and local government authorities.
• The government has synthesized the taxation concerns of both the LSEs and the SSEs so that the interests of the LSEs do not overshadow the legitimate concerns of the SSEs. Indeed, in Uganda at present, some LSEs are accusing government officials of looking out more for the needs of the small-scale operator. However, the government favours a balanced approach to economic development because the mainstay of the economy has been, and is likely to continue to be, the small-scale operator.
One objective of the Government of Uganda is to mobilize more of its domestic resources through tax reform. At the same time, it is attempting to balance macro- and microeconomic needs. Tax collection in Uganda is now handled in a businesslike manner — the tax collector even has to market taxes like a storekeeper markets goods. This means that ultimately the tax collector has to woo the taxpayers by making it attractive to pay taxes and by listening more to their concerns. To achieve an effective and equitable taxation system, we should keep the following points in mind:
• There should be one tax-collection mechanism for both direct and indirect taxes and at all levels — the taxpayer wishes to see only one tax collector.
• The SSEs should form one strong and well-organized group that would have affiliates from different trades and sectors to, among other things, articulate tax concerns and present tax proposals logically and systematically. An apex organization for SSEs would make dialogue with the government more meaningful.
• The government has a duty to open up clear channels of representation and appeal, especially near the centre of fiscal policy formulation, so that the representations of the SSEs are not lost in a maze of bureaucracy.
• The government and the SSEs should undertake joint tax research to gauge the impact of tax measures and to identify areas of tax-base expansion so that the tax burden can be spread out and the government's objective of lowering the tax rates can be realized soon.
In conclusion, it can be said that in Uganda the government has progressively responded to the legitimate tax concerns of the SSEs and is continually reviewing its tax policy to find ways to eliminate taxation impediments to growth. The most feasible way of removing the sting of taxation for the SSEs, and indeed for other groups, is through partnerships between the tax collectors and the taxpayers. This approach removes ignorance of concepts and practices on both sides by bringing about transparency, and it can generate a responsive rather than a confrontational tax culture.
1. Nature or type of business ___________________________________
2. Number of employees _______________________________________
3. Source of production inputs: [imported] [local]
4. Ratio of imported to local inputs (estimate) ___________________
5. Indirect taxes paid
Customs duty | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Sales tax on imports | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Sales tax on output | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Excise duty on output | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Surtax or surcharges | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Commercial transactions levy | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Import licence commission (2%) | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
6. Direct taxes paid
Income tax deposit | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Corporation tax | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Pay-as-you-earn (PAYE) | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Withholding tax (2%) | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
Stamp duty (3%) | ||||
[high] | [fair] | [low] | [don't know] | [not appl.] |
7. Tax administration
a. Are your taxes assessed fairly? | |||||
[yes] | [no] | [don't know] |
|
|
|
b. Are you always sure of the time when you should pay your taxes? | |||||
[yes] | [no] | [don't know] |
|
|
|
c. Are you always sure of the amount of tax that you should pay? | |||||
[yes] | [no] | [don't know] |
|
|
|
d. Do you make tax deposits against your tax liability when you have the funds? | |||||
[yes] | [no] | [don't know] |
|
|
|
e. Do you prefer tax assessed on profits or the current system of tax? | |||||
[assessment] | [tax deposit] | [combination] | [don't know] |
| |
f. Do you understand the tax return forms you use? | |||||
[difficult] | [satisfactory] | [easy] | [never filled] | [don't know] |
|
8. General
a. Do you keep comprehensive account books? | |
[yes] | [no] |
b If the answer to 8a is "no," do you keep an elementary account of income and expenditures? | |
[yes] | [no] |
c. Do you employ an accountant or bookkeeper? | |
[yes] | [no] |
d. Do you have external auditors? | |
[yes] | [no] |
9. What modifications in the tax system would you prefer to see?
Note: You do not have to indicate the name of your business.
Table A1. Types of small-scale enterprises in the Kampala area. | |
Description of SSE activity | Number |
Food processing and preparation | 12 |
Entertainment | 3 |
Legal practice | 3 |
Medical services — human and animal | 11 |
Metal fabrication and carpentry | 25 |
Retail and wholesale trade | 21 |
Hospitality — bars, restaurants, accommodation | 14 |
Other professional — consultancy, secretarial, educational | 7 |
Beauty parlours or salons | 5 |
Building and construction | 1 |
Motor vehicle repair garages | 7 |
Coffee processing | 4 |
Photographic studios | 3 |
Filling stations | 2 |
Cobbling or shoemaking | 3 |
Other trades | 9 |
Total | 130 |
An unfavourable policy environment and strong competition can constrain small-scale enterprise (SSE) development. Despite regulatory restrictions, Burkina Faso has a highly competitive environment for SSEs. SSEs compete with medium- and large-scale units, male entrepreneurs compete with female entrepreneurs, and the formal sector competes with the informal sector. All face competition from imported products, which are relatively cheap because of smuggling and an overvalued CFA franc.
This paper analyzes the effects of the regulatory framework on the informal and formal manufacturing sectors and of competition between the two sectors in Burkina Faso. It also describes the impact of government policies and regulations and recommends policies to integrate the development of small- and medium-scale manufacturing enterprises.
1 This paper, focusing on the comparison between surveys undertaken in 1976 and 1991, is one of a series. Other papers in the series discuss methodological problems of informal-sector research (van Dijk 1992b), the relevance of flexible specialization in the informal (and formal manufacturing) sector in Burkina Faso (van Dijk 1992a, d), the relations between the informal and the formal manufacturing sectors, the institutional problems of SSE promotion (van Dijk 1991, 1992c), and the importance of women entrepreneurs in the informal sector in Burkina Faso (Dijkman and van Dijk 1993).
Informal-sector SSEs functioning outside the regulatory framework play an important role in the economy of sub-Saharan African countries (World Bank 1989a). They account for 59% of sub-Saharan Africa's urban labour force and contribute, on average, 20% of the gross domestic product (GDP). The sector supplies one-quarter of Burkina Faso's GDP, second only to agriculture's contribution. The informal urban sector provides more than half of the value added of the secondary and tertiary sectors and employs about three-quarters of the urban working population. According to a 1985 census, the informal sector in Burkina Faso provides 70% of nonagricultural employment. Only 10% of the nonagricultural jobs are provided by the formal sector; about 15% by the government.
The industrialization process in Bobo Dioulasso started in the 1920s with vegetable oil production; in the 1950s, a cotton gin and a furniture factory continued the process of industrialization. In Ouagadougou, industrialization only started in 1954 when the railroad from Abidjan reached the city, an electricity plant was built, and part of the city was reserved for industrial activities. After independence in 1960, the number of enterprises in Ouagadougou jumped, particularly in the 1970s. By the time of the 1989 industrial and commercial census, 906 enterprises were located in Ouagadougou and 270 in Bobo Dioulasso.
The industrial sector contributed 26% to GDP in 1989. The sector grew at 3.9% per year in the period 1980–1989, or 1% per year in per capita terms. Manufacturing made up 15% of GDP in 1989 and grew only 2.4% in the same period. The difference can be explained by a construction boom in the early 1980s.
Exported manufactured goods contributed only 11% to total exports in 1989, with machines making up the biggest share, followed by textile products, tires, tanned leather, and metal household products (Chambre de commerce 1990, pp. 135–136). Informal-sector activities contributed 40% to the value added of the manufacturing sector and two thirds of the value added in the services sector. The formal manufacturing sector employed 9 000 people.
Investment in industries reached its peak in 1982 but was heavily concentrated in the food and textile industries. The economic crisis that started that year was related to a drought and an international economic recession. Droughts (including ones in 1983 and 1984), political instability, and a worldwide economic recession certainly contributed to the decline of the manufacturing sector in the first half of the 1980s. At the same time, international competition became stronger, the economic climate for the manufacturing sector weakened, and the prices of locally produced manufactured products increased.
The result of all these developments was a large number of bankrupt enterprises and enterprises losing money. According to the United Nations Industrial Development Organization's (UNIDO 1989) industrial development review for Burkina Faso, one third of the companies stopped their activity and more than half the enterprises ran at losses in 1982.
The analysis in this paper is based on the results of two surveys of SSEs in the informal and formal manufacturing sectors in Burkina Faso, one in 1976 (van Dijk 1986) and a follow-up in 1991 (van Dijk 1993). The definition of an informal-sector enterprise in the 1976 survey was "a unit without a legal status such as the société anonyme or société à responsabilité limitée, where the employees do not receive the legal minimum wage and do not benefit from the social security system." The 1991 study used this last criterion because it was easier to verify the accuracy of reported information by checking whether any employees were registered for social security.
In the 1976 survey, 300 SSE entrepreneurs from the informal sector were interviewed; in the 1991 survey, 350. (Seven of the entrepreneurs interviewed in 1991 were later reclassified as belonging to the formal sector because they had registered some of their personnel at the Caisse de sécurité sociale. For the current analysis, all 1991 percentages are based on the sample of 350.)
Nine different activities were studied in 1976. For the 1991 survey, a complete census of economic activities was carried out in three neighbourhoods of Ouagadougou to determine the type of activities to study. Eighteen activities were selected on the basis of three criteria:
• comparability with the previous survey;
• involvement of women in the activity (female-dominated activities turned out to make up 50% of the informal sector in one of the neighbourhoods where a complete census of economic activities was undertaken); and
• the promise shown by some activities to exemplify recent developments in the sector.
The average entrepreneur in 1991 was 33 years old (32 in 1976), but 50% of the entrepreneurs were under 30 years old and 80% under 40. Almost half were literate (39% in 1976), and 17% had received some vocational training (8% in 1976). This shows that education and training had improved somewhat in this period.
Job histories showed that about 60% of the entrepreneurs were farmers or still farming. The majority were also farmers in 1976. Less than 50% had learned their trade through apprenticeship (60% in 1976). In 1976, 12% of the entrepreneurs had some accounting system. This increased to 17% in 1991. Entrepreneurs in the informal sector who had work experience in the formal sector increased from 10% in 1976 to 13% in 1991. These indicators suggest that entrepreneurs in Ouagadougou's informal sector are better educated and have more experience.
These enterprises employed an average of 2.78 people (the entrepreneur included), slightly fewer than in 1976 (3.04). Number of employees by sector varied from 1.3 in the transport sector (1.81 in 1976) to 5.0 in the construction sector (5.62 in 1976), showing a similar decrease. In particular, the number of apprentices, workers, and daily workers had decreased, probably because in most cases they required a salary. For those who received a salary, the average salary had increased slightly.
The informal sector in Ouagadougou in 1991 was more dynamic than in 1976. There were more SSEs, there were all kinds of new activities, and new technologies were used. The range of available products had increased, and the quality of the products had often improved. In the neighbourhoods where a complete census of all economic activities was organized before, the number of activities had increased almost 70% since 1980. In one of these neighbourhoods, Wagadogo, half the number of entrepreneurs counted in 1991 were women; in a second neighbourhood, Tiendpalogo, just over one-third were women.
There were also changes in the composition of the informal sector (van Dijk 1993). Wagadogo and Tiendpalogo had a number of new activities. The most visible ones were photocopying, yogurt production (typically by women at home), and door-to-door services provided by manicurists, tailors, barbers, and bucket repairers. Other services that had not been available in 1980 were secretarial services and electrical engine and generator repair. Traders were also selling products that were not sold in 1980.
From 1976 to 1991, the informal sector also underwent a process of differentiation — this left only a few successful enterprises and marginalized a large number of artisans and traders. Examples of entrepreneurs who had poor prospects because of this differentiation were tailors who traveled by foot carrying their sewing machines on their heads and the door-to-door barbers, bucket repairers, radio repairers, and manicurists.
In 1991, the entrepreneur was no longer typically the head of a large family. One third of the interviewed entrepreneurs were unmarried men or divorced women.
In the informal sector, entrepreneurs tended to buy most of their raw materials and sell their products in their own neighbourhood. Entrepreneurs cited various reasons for choosing a location to set up business. In decreasing order of importance, these were
1. Because they lived there;
2. Because they owned or rented the place;
3. Because they expected more clients at that location; and
4. Because it was on a public road.
Entrepreneurs who gave the fourth reason said it was because that is where the clients were and nobody was chasing them. By contrast, formal-sector industries have the entire country as their market, although they rarely export a large part of their production.
Between 1979 and 1991, the number of formal-sector (modern industrial) establishments increased substantially from about 120 to about 150. The numbers are estimates because there is a somewhat fluid distinction between industries and some trading companies (for example, in the leather sector and the fruit and vegetables sector), and the demarcation between the informal and formal sectors is unclear.
The formal manufacturing sector is also dynamic: there were a number of new entrants, and many enterprises disappeared. In the sample of 50 enterprises studied in more detail in 1991, one-quarter had started or restarted during the previous 2 years. Nine enterprises (18%) were not operating either because of "technical unemployment" or because of bankruptcy. At least five enterprises in the sample needed to be reorganized to become profitable. Another five enterprises were waiting to be privatized. Others were looking for foreign partners, but most did not know how to go about this.
Is low demand a problem in Burkina Faso? Demand depends on the development of consumption, of backward and forward linkages, and of government and foreign customers. Macroeconomic developments and the preference of the population for informal-sector goods also affect demand. Several studies argue against the general validity of the assumption that informal-sector products are inferior goods, but there are insufficient data on expenditure patterns for different income groups to allow one to determine the income elasticity of the informal sector. Still, demand seems to have increased both relatively and absolutely over the period under review, although the informal sector had to compete with the formal sector and with imported products. Some formal-sector entrepreneurs complained about the lack of demand, but a number had managed to increase their sales.
In 1991, 60% of the entrepreneurs claimed that their sales had gone down, but a comparison of their reported turnover in 1993 and 1990 shows a substantial increase (not corrected for inflation). The perceived decline may be related to a jump in the number of enterprises. The entrepreneurs claimed that the lack of demand was related to decreased government spending and increased competition with other SSEs, formal-sector producers, and imported products. The situation in 1976 was certainly less gloomy — at that time 81% of the interviewed entrepreneurs reported that their sales had increased. These increases were probably related to increased foreign aid after the years of drought at the beginning of the 1970s.
The makeup of the client base changed as well. In 1991, the informal sector had the general population more often as its major client and had fewer business clients from either the informal or the formal sector.
Several questions in the 1991 survey were designed to elicit information on the backward and forward linkages between the formal and informal sectors. The following summarizes the findings:
• To what extent did SSEs buy raw materials from the formal sector?
Barbers, tailors, people processing food or running a breakfast table, electricians, woodworkers, and metal-workers bought one-half to one-third of their raw materials from the formal sector.
• Did SSEs sell to the formal sector?
Less than 10% of the entrepreneurs (23), particularly metalworkers and electric motor repairers, had the formal sector as their major client.
• Did formal-sector enterprises subcontract to informal ones?
Two construction firms and three upholstery firms worked mainly for the formal sector. The arrangements could hardly be called a subcontracting relation, although it boiled down to it in the case of some metal-workers, construction firms, and upholstery firms.
• Had SSE entrepreneurs learned the skills they would need to run their businesses by working in the formal sector?
In practically all informal-sector activities, entrepreneurs could be found with work experience in the formal sector. The largest number were among the metalworkers and construction workers. In general, these entrepreneurs fared somewhat better in terms of income and turnover than the entrepreneurs without this experience.
• Were the two sectors competing for the same market?
Artisans, barbers, tailors, fruit and vegetable sellers, woodworkers, metalworkers, and furniture makers, in particular, complained about competition from the formal sector.
• What was the role of the government in relation to taxes and registration?
The statistical evidence concerning taxes and regulations shows that SSEs paid many different taxes and were registered with a number of government services. The SSEs needed all kinds of permits, such as a market permit if they wanted a stall at a market, or proof that they were registered with the tax office if they wanted to obtain government orders.
Backward and forward linkages are limited in the informal urban sector, as well as in the formal sector. They exist for agro-based and agro-related activities, but many other activities require imported raw materials, tools, equipment, and spare parts. On average the small-scale entrepreneurs buy more raw materials in the formal sector than in the informal sector. Government orders and foreign customers are rare for small-scale entrepreneurs, who largely depend on the development of purchasing power in the local population.
The informal sector in Burkina Faso creates more jobs than the formal sector (World Bank 1989b). The formal sector is hampered by its lack of competitiveness because of high production costs and stifling regulations. The informal sector does not have these constraints to the same extent and could play an important role in developing an entrepreneurial class. It can be argued that because of the informal sector's innovative capacity, the artisanal part of the sector should be further developed (van Dijk 1992a).
The number of artisanal activities diminished substantially in Ouagadougou between 1976 and 1991 in both neigh-bourhoods where a census was undertaken. The productivity of the remaining enterprises had not increased enough to account for the difference. An additional census of economic activities in a peripheral neighbourhood found that artisanal activities had not moved to these neighbourhoods. This subsector of the informal urban sector has often been considered its most dynamic part. It was concluded that the number of artisanal activities declined because of competition from the formal sector and from imported products.
In the agroprocessing subsector the informal-sector enterprise operates at a very small scale with simple equipment, whereas the formal-sector enterprises are typically large scale and technologically advanced. Consequently, the two are not competing very much. For example, the most dynamic formal-sector activity, fruit and vegetable processing, is not open to SSE entrepreneurs because of the high cost and the complicated administrative procedures involved in exporting and arranging air transport. However, the appearance of so many new formal-sector enterprises in Burkina Faso proves that people there do have entrepreneurial skill and can mobilize the necessary capital. More integration between the informal and formal enterprises in this subsector is possible. SSEs could be encouraged to do more processing, and the formal enterprises could use SSEs more for selling their products, for supplying goods and services, and — to save on transportation costs — for processing.
Beer brewing is an example of an agroprocessing industry for which the Sankara government (1983–1987) increased competition. It did this by discouraging the consumption of modern beer by stimulating the consumption of the traditional beer, dolo. Sankara actively discouraged the modern breweries during the time he was in power. In 1991, sales of beer produced by modern beer breweries were still not at the level of the early 1980s. Two factors constraining sales for the formal sector are related to current regulations. SOBBRA is not allowed to sell beer to traders who are not agréé. The traders' card runs out every 3 months and will be renewed only if they have paid all their taxes. The breweries also have to sell their beer through a limited number of local traders. The breweries have the impression that those traders do not deliver outside the Bobo Dioulasso–Ouagadougou axis. When the breweries themselves used to do the transporting, they also delivered to clients in villages. Formal-sector brewers consider this a lost market for the time being.
Informal tailoring has suffered from all kinds of competition from, for example, the formal sector, illegal imports, and secondhand clothes. Besides the few bigger formal textile enterprises, there are quite a few small-scale tailors who have tried to formalize their businesses. They were eager to get bigger orders from local formal enterprises or from the government. One such entrepreneur interviewed in Bobo Dioulasso had set up a unit in the industrial zone of that city. However, the firm is now back to its old tailor workshop in the centre of town. The advantage of producing in series with electrical machines in a modern building didn't pay for itself.
The formal sector in leather competes with illegal imports. An entrepreneur from a formal-sector leather firm complained about the competition in the market, which has tarnished Burkina Faso's reputation as a quality exporter. The owner of a shoe factory complained about competition from illegally imported shoes and the problem of producing the models desired by customers. The owner of a plastic products factory, rather than keeping the factory running, was studying what was necessary to become competitive again.
There is only limited scope for traditional tanning and production of small-scale leather products in Burkina Faso. Traditional shoemakers cannot compete with industrially produced shoes, especially not with plastic ones. Their work was described as "traditional models for a traditional group of clients, who now prefer plastic products."
Plastic shoes provide work for plastic shoe repairers, who did not necessarily repair leather shoes before. At some of the city's markets one can see these "modern" shoe repairers, using plastic and iron threads instead of textile ones.
Metalworking firms operate in a very competitive market. In this subsector a great many formal enterprises started as informal units and gradually expanded their business. Two such entrepreneurs were interviewed in 1991. Their problems were different from those of the average formal-sector entrepreneur. One complained that many of his clients do not pay for their orders because they feel "he is one of them."
The formal-sector entrepreneurs complained about the price of electricity and the difficulty of getting credit from a bank. They also felt that it was becoming more difficult to get orders. Some complained that it was hard to find foreign partners and skilled labour.
The informal metalworkers felt that they were losing one of their major clients: construction firms. These small-scale entrepreneurs said that they rarely worked for construction firms any more because most construction firms now had their own metalwork departments.
Formal-sector entrepreneurs in the woodworking sector face a lot of competition from the informal-sector SSEs. Informal-sector producers have the advantage of lower production costs, particularly if they have managed to ignore payment of the different taxes. Two entrepreneurs from the informal sector complained that they were working at only 40% of their capacity at the moment, whereas a competitor was working at 70% of his capacity. They clarified this by saying that their competitor offered a wider range of products and that he was seriously involved in metalwork and construction activities.
The number of furniture makers went down substantially because of the emergence of more modern and bigger firms. At the same time, international competition became stronger, the economic climate for the formal sector became less favourable, and the prices of locally produced industrial products increased. Several entrepreneurs complained that it was difficult to be competitive given the high costs of production in Burkina Faso.
Government policies related to the informal sector went through three distinct phases during the 1976–1992 period. In the 1976–1982 period, the government was advised to help the informal sector by providing credit, technical assistance, appropriate technologies, and government orders. Very few of these ideas were implemented, and those that were carried out were not very successful or had little effect.
During the Sankara period (1983–1987), government interest in the informal sector mainly consisted of attempts to control the sector by registration, taxation, and regroupement (groupements d'intérêt économique). The industrial policies of the Sankara government stressed the development of SSEs and microenterprises. The medium- and large-scale industries were concentrated in the two big cities, often required protection and subsidies, but had little impact in terms of employment or relations with other firms. The Sankara government was not willing to continue providing support for formal-sector industrial enterprises. The number of years for which investment regimes were granted was not extended. The 1984 investment code encouraged private and foreign investment but was intended to ease the transition from special regimes to common rule and to increase the taxes to be collected from the formal sector. For most enterprises the new regime reduced import duties by 65%. This situation will continue until the new investment code, announced by Sankara's successors, comes into effect.
After Sankara's death in 1987 the government adopted a more positive attitude, as shown by the Plan directeur pour la promotion de l'artisanat au Burkina Faso (1990) and action program. In this third phase, SSEs were no longer closed immediately if they could not pay their taxes. The directors were no longer obliged to wear traditional clothes or pressured to drink traditional beer. Economic liberalization created a positive environment for SSEs. It seems that 50% of the SSEs surveyed started up during the last 2 years (1990–1991) because the people expected difficult times but felt confident about starting their own business.
Institutionally, the Direction de développement indus-triel is still officially responsible for industrial policies, although there is no corresponding department or service for the informal sector. Institutions like the Ministry of Economic Affairs, the Chamber of Commerce, the Office national de la promotion de l'emploi, banks, and NGOs all play a role, but their efforts are not coordinated.
Over time, registration has become more important for informal-sector enterprises. Almost 10% of the 1991 sample was registered by the government in some way. Only 10 entrepreneurs were registered or had registered some of their personnel at the Caisse de sécurité sociale, sometimes for very different reasons. Often the personnel had been registered in their previous job or were registered because they still worked in the formal sector (three cases). Other entrepreneurs were registered by the Chamber of Commerce (33, or 10%), the municipal authorities (29, or 9%), l'Office national de promotion d'emploi (16, or 5%), or the statistical office (4, or 1%).
Officially, all the entrepreneurs interviewed in 1991 paid taxes; 113 (35%) were registered for that purpose. In fact, a limited number of enterprises paid several taxes — professional, turnover, value added, and municipal. Other enterprises managed to avoid taxes, often because the business had started only recently or was mobile. Entrepreneurs often did not know how frequently they had to pay, what kind of taxes they had to pay, how much they should pay, and for what purpose the government uses the money.
In the informal sector, capital usually came from private sources and not from credit institutions. Friends and family were typical sources. Often, clients provided the working capital. Only nine entrepreneurs in the 1991 sample ever got a loan through a bank (18 in 1976), usually from a government-owned institution. One got a loan from an NGO to raise pigs. The other loans were for an investment (four cases), for buying a stock of raw material (three times), or for consumption (two cases). Most entrepreneurs would like a line of credit; on average they ask for 800 000 XOF, more than five times their average actual total investments (in 1994, 570 CFA francs [XOF] = 1 United States dollar [USD]).
The informal and formal sectors can contribute more to production, employment, income generation, and tax revenues if the government encourages their development and explains to small-scale entrepreneurs, for example, how much tax they have to pay and how often and for what purpose.
Successful SSE development policies require support from all parties concerned: small-, medium-, and large-scale entrepreneurs, existing business organizations (for example, the Chamber of Commerce), and different levels of government (particularly national and municipal). Donor organizations need to understand the government approach before we can expect to get their support for these policies. But Burkina Faso needs better donor coordination. The nine initiatives to start a centre for innovation and technical assistance show the need for such a centre, but they also show the need to avoid duplication.
Burkina Faso's structural adjustment program will try to improve the economy; the informal sector should also benefit. Burkina Faso also needs an integrated development policy for the informal and formal sectors. Such a sectoral policy program should be part of a broader industrialization or development policy, such as a sectoral adjustment program.
Structural adjustment policies and programs will affect the informal sector, but the magnitude of these affects is unknown. One potentially harmful effect could be a decline in purchasing power because real wages may decrease. On the other hand, this may also increase demand for informal-sector products if certain formal-sector products then become too expensive. Increased unemployment may lead to the establishment of more SSEs and microenterprises, which may mean more hardship for existing firms. Also, the informal sector is usually not a source of exports. It uses imported raw materials, tools, equipment, and spare parts and, therefore, may be limited in its ability to manufacture substitutes for imported products.
Potential benefits of structural adjustment include the possibility of manufacturing substitutes for imports if imported and formal-sector products and services become more expensive. The disappearance of inefficient (protected) formal-sector enterprises could mean that SSEs would take up some of the slack. SSEs and microenterprises should also benefit from the improved economic environment created through structural adjustment policies, particularly the correction of distorted prices. The number of structural adjustment projects to benefit the informal sector is limited, but some initiatives are forthcoming.
The Burkinabe government has indicated its willingness to encourage development of the informal sector. Burkina Faso will move to a more market-oriented economy by reducing state intervention and allowing the development of the private sector, of which the informal sector is an important part. The government will have to provide more incentives to the informal sector.
Deregulation should also involve administrative measures affecting the informal sector. It will be necessary to harmonize macroeconomic, fiscal, financial, and other policies with incentives for SSEs and microenterprises.
The purpose of this research was to discover the optimal combination of economic, social, and institutional arrangements to allow informal-sector enterprises to compete in national and, eventually, international markets. This aim has become even more important in Africa since private foreign capital fled Africa in the 1980s. The research findings suggest the following strategy.
The private sector is weak in Burkina Faso. But strengthening it depends on the integrated development of micro-, small-, medium-, and large-scale enterprises. The formal sector in Burkina Faso shows insufficient growth and a lack of competitiveness; it is made up of industries lacking forward and backward linkages. Integrated development would be hampered by the institutional setup because two different ministries formulate policies for informal and formal enterprises. The new Ministry of Handicrafts and Small Enterprises was created only in 1991, setting off a dispute over where the cutoff point between small- and medium-scale enterprises should be. Some claimed an SSE could have annual revenues of up to 30 million XOF. In the Burkina Faso economy, however, this figure seems too high.
The new investment code should not make a distinction between small-, medium-, and large-scale enterprises, but it should consider the existence of economies of scale (or the lack of such economies) as one of the criteria to support enterprises of a certain size. Second, the code should aim to integrate modern industries and SSEs. There are still too many enterprises importing almost everything and achieving a very low value added.
Some dynamic enterprises that changed their business strategy to survive focused on producing a product appropriate for the local situation, as far as taste and price were concerned. They selected technologies that were not too sophisticated. This allowed them to easily change the production process or the kind or quality of the product.
A few entrepreneurs realized that they had to be competitive to survive and looked to export. In the textiles sector, enterprises have been using cooperatives to produce products whenever there is a demand. An increasing number of formal-sector firms are using local SSEs to supply products or provide specific services.
Given the important role of women in the informal sector, some special initiatives for women are justified. Some training centres train only girls and women. A number of projects for women in the informal sector are under way or ready to begin. Vocational training for women also needs to be stimulated because it can enhance innovation. Such training should also explain the practical aspects of starting small- and medium-scale enterprises in Burkina Faso. For a separate analysis of this issue, see Dijkman and van Dijk (1993).
Many informal-sector entrepreneurs complained about taxes. The tax base needs to be broadened in this sector. Currently, one-third of informal-sector enterprises pay 80% of all taxes collected. In the formal sector, entrepreneurs are waiting for the new investment code. They expect tax benefits for their additional investments. It is important for the government to tell them soon what can be expected.
The government should be tracking the prices of imported raw materials and spare parts. Cheaper raw materials can give small-scale industries a chance to become competitive. Lower prices can be achieved by revising the system of import duties. Electricity costs also need to be reduced by the introduction of differentiated prices (lower prices for off-peak use). Finally, transport costs could be reduced through a transport and infrastructure project.
The government should stimulate the development of genuine private-sector organizations — the Chamber of Commerce is currently controlled by the government. Both the United States Agency for International Development (USAID) and the World Bank are interested in working with the Chamber of Commerce, but the two agencies require that it be free of government control and have an elected chair.
More consultation with the private sector implies that the government would accept a different role. Its role would shift from directly providing credit training and technical assistance to encouraging private initiatives in these fields. Government policies should not focus on artisans or formal-sector industries but should apply to all private-sector activities, informal and formal, trade, transformation, rural, and urban. The aim should be to develop and implement an integrated approach to private-sector development, taking into account how various activities are related, weighing the interests of enterprises of different sizes, and acknowledging that the informal sector is an important part of the private sector.
Officials and formal-sector entrepreneurs often claim that not enough areas have a proper infrastructure, such as roads and power lines, for new industries. However, the industrial estate Kossodo is not fully occupied yet. Some tracts of land need to be reclaimed from their current owners and then redistributed among entrepreneurs willing to invest. Some of that space should be reserved for SSEs.
The government provides hardly any infrastructure specifically for SSEs and microenterprises. There are no special zones for the informal sector in Ouagadougou, and only one third of the entrepreneurs in the 1991 sample had access to electricity or had water connections. Usually, electricity is used only for lighting.
An industrialization strategy based on flexible specialization would promote clusters of enterprises of different sizes (van Dijk 1992a). Industrial zones should be open for establishments working in different subsectors. Cooperative competition could develop at such locations. Clusters of enterprises would also stimulate the formation of networks and encourage subcontracting relationships. The government should support such arrangements as a way of strengthening the industrial base.
The entrepreneurs surveyed felt that the financial sector was not really supporting the development of the manufacturing sector. Entrepreneurs found it difficult to borrow money, even when they could offer some collateral. Entrepreneurs mentioned that factories, equipment, and villas offered as guarantees were valued far below their market price. The banks argue that these assets may be difficult to liquidate in times of hardship. The banks also do not accept land in the industrial estate Kossodo as a guarantee because this land is not currently the property of the entrepreneur. Letters of guarantee are difficult to get and expensive. The banks debate such issues as the problem of arrears, the merits of individual versus group loans, the interest rates to be charged, the securities to be provided, and the collateral to be requested.
Does the informal sector need credit? If so, how should it be provided? Donor agencies currently favour minimalist credit approaches, but no schemes with real impact exist at the moment in Burkina Faso.
The World Bank has provided credit to the informal sector in Burkina Faso through the Artisanat and SSE promotion project, which started in 1979. This project proved how difficult it is to reach a target group through government institutions. A better approach is to interest the private sector, particularly commercial banks, NGOs, and savings and credit institutions, in a cooperative approach (like the Caisse populaire Desjardins) to making loans available to informal-sector enterprises.
To improve SSEs' access to existing credit (and other development) programs, the following are needed:
• policy support for NGO initiatives;
• innovations in requirements for collateral;
• availability of and access to financial resources for venture capital; and
• windows in existing savings and credit institutions for SSE and microenterprise financing at the national and regional levels.
Several donors in Burkina Faso have considered setting up a credit scheme for SSEs and microenterprises. The Caisse centrale de co-opération économique (CCCE) will provide a line of credit to the Caisse nationale du crédit agricole to improve the marketing system and to promote small- and medium-scale agroindustries that process, for example, grains, shea nuts, anacarde, groundnuts, milk, meat, or fish. At the same time, CCCE will provide some technical assistance.
The Fonds de promotion de l'emploi is an interministerial initiative coordinated by the president. It envisions, among other things, a guaranteed fund for private-sector initiatives, particularly concerning "the self-employed, the informal sector and micro enterprises." The UNDP commissioned a study identifying SSE projects that could be financed as part of the Fonds de promotion de l'emploi.
The creation of a centre for innovation and quality improvement — helping entrepreneurs with product design, production methods, and the use of multipurpose equipment — requires support. A centre like this was created through a structural adjustment loan for Chad. The centre could recommend the use of multipurpose equipment, particularly for small production enterprises, and promote its introduction. This is in line with the flexible specialization strategy, which was tested in Burkina Faso and turned out to be relevant (van Dijk 1992a).
Several donors are considering financing SSE service centres. The main problem will be the coordination of these efforts. As part of the CCCE project already mentioned, the service centre would be for small- and medium-scale enterprises processing agricultural products. The centre would help small-scale entrepreneurs select projects, would provide technological advice, and would assist them for a period after the enterprise started operating.
It is impossible for Burkina Faso to control all its borders. Instead it should develop exports for sectors in which it has a comparative advantage: agroprocessing, fruits and vegetables, and skins and hides. The government could increase exports by instituting export subsidies, as is done in Senegal, or by devaluing its currency. Regional markets, particularly in west Africa, need to be explored.
The policy and institutional framework within which informal-sector activities could develop has never been adequately defined in Burkina Faso. But there are now many initiatives to develop the informal sector, so these efforts must be coordinated. Too many different Burkinabe ministries and agencies want to get involved. This could lead to an unclear division of responsibilities, an illogical division of the work, or duplication of activities. Donors should also coordinate their efforts and avoid doing the same thing twice or doing what others have found absolutely not feasible or useful. Recently, the Conseil du plan has invited all donors interested in SSEs and microenterprises to discuss coordinating their efforts.
Government policies can contribute to the development of the broadly defined industrial sector by encouraging more industrial development. Policies for the industrial sector should consider the following recommendations:
• Revise the tax system to bring down production costs and eliminate pricing distortions.
• Revise the new investment code so that support is not based on a distinction between small-, medium-, and large-scale enterprises but rather on economies of scale; it should also give more weight to the interrelatedness of industries.
• Reduce electricity costs by introducing differentiated prices (that is, lower prices during off-peak periods).
• Reduce transport costs through a transport and infrastructure project.
• Revise the system of import duties to lower the cost of raw materials.
• Increase export through export subsidies or a devaluation of the currency.
• Explore the possibility of developing regional (West African) markets.
• Concentrate on industries in which Burkina Faso should have a comparative advantage: agroprocessing, fruits and vegetables, and skins and hides.
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The economic health of any country is intricately linked to the vitality and dynamism of its business sector. Business is in fact an economic agent that produces the goods and services needed to meet public demand, and its development and survival, therefore, represent sure guarantees of economic prosperity. This is why since the dawn of their independence and until the end of the 1970s, the countries of sub-Saharan Africa have been making efforts to set up a wide range of new national and regional production units, based on the availability of raw materials.
It is hard enough to create a business, but it is no easier to keep it on the path to smooth and ever-increasing growth and profitability. The growth and profitability of a business depend not only on the quantity and quality of available natural resources, but also on the way all production factors are combined to make a given product. This presupposes proper management of all these factors, and the most important of these is the human factor.
It is a fact that governments in sub-Saharan Africa have underestimated the importance of the private sector — the businesses these governments have launched have generally failed or are now being privatized. The last few years have, thus, seen a new dynamism in both the formal and the informal private sectors.
Yet in many countries of sub-Saharan Africa, which is characterized by a rapidly growing informal economy, the efforts both of governments and of international agencies to promote the private sector have run into obstacles. These originate partially in African culture itself, with its traditions of family solidarity, the insistence of entrepreneurs on building up their own businesses, confusion between social success and business creation, mistaken notions of time and credit, and so on. To these obstacles must be added technical and production problems, unrealistic feasibility studies, ever more pressing burdens of taxes and border customs, the business and financial culture of entrepreneurs, and so on. Overwhelming competition and problems of access to some subregional markets are merely a reflection of the failure to carry out reliable market and feasibility studies.
In addition, small enterprises most frequently cite lack of access to bank credit as the most serious handicap to their growth, and they blame this mainly on the inadequate and short-term nature of bank lending. Governments and international agencies have attempted to deal with this financing problem (which affects mainly the formal private sector but also affects the informal sector to some extent) by making long-term lines of credit available to business and development banks. Yet, in most cases, these lines of credit have been so poorly managed by sluggish bureaucratic structures that they have produced feeble results, if any.
More than 25 years of financing by both traditional and international financial institutions in Africa has not improved the financial balance, economic impact, and social appropriation. If we are to find mechanisms that would be appropriate in this socioeconomic context, we must bear in mind the informal financing mechanisms that the African people know and understand. We will have to adopt indigenous mechanisms to complement those imported from abroad.
One such indigenous mechanism that mobilizes savings in developing countries, especially in Africa, is the tontinier ambulant, or itinerant banker. These individuals visit the markets and urban and rural neighbourhoods to collect daily, weekly or monthly savings from the many minor operators and the small to medium-sized enterprises and industries (SMEs–SMIs) in the informal sector. Were it not for the presence of these itinerant bankers, even the most enterprising business operators in the informal sector would be condemned to stagnation.
To gain a full appreciation of this problem, we shall look at the obstacles facing the development of SMEs–SMIs; banking deregulation in the West African Monetary Union (WAMU); lines of credit from international agencies; informal financial innovations that have sprung up in Togo and Benin; and regulation of the informal sector. In this work, I used information obtained from surveys and interviews conducted in Benin, Côte d'Ivoire, Senegal, and Togo and supplemented it with my own bibliographic research.
The banking reform undertaken in 1975 by the Central Bank of the West African States (la Banque centrale des états de l'Afrique de l'Ouest, BCEAO) eliminated the regulatory distinction between commercial and development banks. In addition, BCEAO introduced a selective credit policy, differentiating priority and nonpriority sectors. The goals for implementing this selective credit policy were to be defined each year by national credit committees. The impact of the policy on the priority and nonpriority sectors of Togo during the period 1985–1989 is shown in Table 1.
The 5 years of data in Table 1 show the effect of this selective credit policy on credit-access rates for the priority and nonpriority sectors. In agriculture, the goal for the period was never once achieved, and the SMEs–SMIs exceeded their target only once, in 1985. For these SMEs–SMIs, the average rate of attaining credit in 1986–1988 was generally around 7%, whereas the goal was 15%. The goal for 1989 was reduced to 12%, and the actual rate for that year was 9.2%. This brief analysis of the SMEs–SMIs in the sectors classed as having priority shows that results fell far short of the hopes of the monetary authorities and demonstrates that the selective credit policy was a failure. Access to credit is very difficult for these SMEs–SMIs, mainly because of their weak finances and the heavy
Table 1. Selective credit policy for the priority and nonpriority sectors of Togo and its results. | ||||||||||||||
| 1985 (%) |
| 1986(%) |
| 1987 (%) |
| 1988 (%) |
| 1989 (%) | |||||
Sectors | T | A |
| T | A |
| T | A |
| T | A |
| T | A |
Priority |
|
|
|
|
|
|
|
|
|
| ||||
Agriculture | 15 | 10.4 |
| 15 | 6.5 |
| 14 | 12.9 |
| 12 | 10.7 |
| 9 | 8.6 |
SMES–SMIS | 20 | 23.4 |
| 15 | 7.1 |
| 15 | 7.4 |
| 15 | 7.7 |
| 12 | 9.2 |
Social housing | 7 | 5.8 |
| 8 | 4.3 |
| 8 | 3.9 |
| 3 | 4.3 |
| 5 | 4.4 |
Livestock, fishing | — | — |
| 2 | 0.5 |
| 3 | 0.3 |
| 3 | 0.2 |
| 3 | 0.2 |
Nonpriority |
|
|
|
|
|
|
|
|
|
| ||||
Industry | 28 | 18.8 |
| 28 | 22.5 |
| 28 | 26.5 |
| 28 | 26.8 |
| 28 | 26.7 |
Commercial | 20 | 27.9 |
| 20 | 43.1 |
| 20 | 38.7 |
| 27 | 40.1 |
| 31 | 40.9 |
Construction, public works | 5 | 8.3 |
| 5 | 8.7 |
| 5 | 3.7 |
| 5 | 2.7 |
| 5 | 3.4 |
Transportation, communications | 5 | 3.1 |
| 4 | 4.4 |
| 4 | 3.6 |
| 4 | 4.5 |
| 4 | 3.6 |
Misc. services (such as tourism) | 0 | 2.7 |
| 3 | 3.0 |
| 3 | 2.9 |
| 3 | 3.1 |
| 3 | 2.9 |
Source:CEAO-Lomé. | ||||||||||||||
Note: T, target; A, actual. | ||||||||||||||
guarantees that are demanded of them. It can be seen from Table 1 that the commercial sector — not a priority area — succeeded in obtaining the most credit, not only surpassing goals but actually doubling the target for 1986. The gap between goals and achievement is also very high for the other years.
After the failure of the 1975 banking reform, the monetary authorities decided in 1989 on a new approach to economic adjustment and restructuring in the WAMU countries to create the right conditions for sound and sustainable financing of growth and development (BCEAO 1989).
According to BCEAO (1992), "At the regulatory level, stricter prudential standards were set for the banks, without discriminating among them, and in accordance with the nature of the activities being financed." Under these conditions, the banks will finance only the activities they judge creditworthy, which means that they will increasingly ignore the SMEs–SMIs. According to our calculations, which are based on data from the credit risk bureau of the BCEAO in Lomé, short-term credit represents on average 64.5% of all credit approved from 1987 to 1991.
Because of the problems of financing SMEs–SMIs in both the formal and informal sectors, lines of credit were made available to commercial and development banks in the form of long-term resources. The use made of these long-term resources is examined in the next section.
SMES–SMIS cannot get financing from conventional banks, which are much more interested in providing short-term credit to major firms. Generally speaking, conventional banks do not have long- or medium-term resources because their term deposits are renewed for a maximum of 1 year. Many think that lines of credit might solve this problem, and at the present time direct financing to small business is being tried by some international agencies (OECD 1990).
In Senegal, as in most of the WAMU countries, nearly all lines of credit provided to governments through the central banks have failed. The reasons for this lie basically in the conditions that have to be met for these lines of credit. This is especially true in Senegal, where the line of credit from the International Development Association (IDA) went unused for 5 years until a redefinition of its guidelines made it operational. (This is based on several interviews with private and state business managers and international organizations based in Dakar, which we conducted in March 1993 as part of our university research work.)
In Senegal, the Economic Promotion Fund (EPF) is a line of credit of almost 39 billion XOF (in 1994, 570 CFA francs [XOF] = 1 United States dollar [USD]) from the African Development Bank (ADB). EPF's main innovations consist of making it possible to benefit from an equity loan for 10% of the project cost, which reduces the required personal contribution from 30% to 20%. The annual interest rate is 13%, including a spread of 4%. Applications for credit are processed according to joint criteria of the bank and the EPF, and the risk of default (loss) assumed by each of the parties is 50% (CCAI-Dakar 1992). According to interviews with various business people in Senegal, EPF would have had better results if there had been a specialized financial structure for SMES–SMIS. In 1993, almost 140 financing applications were approved, 70 of which were of the new kind and made use of self-investment loans. Funding for EPF was only released in May 1992, and we shall have to wait until the end of the fiscal year 1993/94 to learn the first results. According to an officer of the ADB who we met in Abidjan in March 1993, the "EPF recipe" is succeeding in Senegal and Nigeria. Yet, for the Chambre de commerce d'agriculture et d'industrie de Dakar (CCAI-Dakar), the development finance problem remains, because financing goes to the big companies at the expense of the SMES–SMIS.
In Togo, IDA has provided the government with a line of credit under the Private Enterprise Promotion Project (le Projet de promotion de l'entreprise privée, PPEP) for 2.8 billion XOF, or 80% of the amount approved in the credit agreement. This agreement was signed 30 March 1988, but it had a slow start because of various problems arising in 1990. This line of credit is intended to finance SMES–SMIS for periods of 2–15 years, as well as to assist micro- and small enterprises, mainly in the informal sector.
The government of Togo set up the Equity Fund for Services (le Fonds de participation aux prestations de services, FPPS) to conduct feasibility studies and is making an initial contribution of 150 million XOF. The ministerial decree creating the fund was only signed on 12 October 1990. If a feasibility study results in going ahead with a project, the promoter must pay 50% of the cost of the feasibility study. Otherwise, the promoter does not have to bear any of the cost.
In 5 years, fewer than 10 projects have been financed. The basic reasons for this modest record are largely institutional:
• There was a delay in signing the ministerial decree.
• Two mutual-guarantee societies — one for the SMES–SMIS and one for artisans — were not created as planned.
• There were disagreements on the interest rate spread, 4.5%, which the banks wanted to raise to 6%. (This problem was finally resolved in February 1991, when the final interest rate was fixed at 11%.)
• Promoters have a difficult time finding their 30% of the project cost when their feasibility study is accepted. (It is often hard to put this money together even if the promoters ask other investors to participate.)
• A pilot project on micro- and small enterprises was never launched.
• The bureaucrats carrying out and coordinating the project weigh it down.
The credit agreement will have to be revised to make it fit reality in Togo. There are other lines of credit that are going unused, as well, such as those of the West African Development Bank (WADB) and the ADB — the funds are simply being placed in the money market, mainly by the commercial and development banks.
Analysis of projects financed with lines of credit shows that the approach of the EPF and the ADB seems more realistic than the approach of the PPEP and the IDA.
Although the problems of financing the informal sector's activities have been ignored by the conventional financial institutions, I have been observing these problems for several years (Soedjede 1987, 1990a). My work has consisted of identifying the problems faced by so many business people in the informal sector and providing help to the people who finance them (Soedjede 1990b). Two of my publications were about the role of women, whose dynamism makes them the main players in national economic development (Soedjede 1993a, b). In addition to these publications, I have expanded my work and writings on the activities of itinerant bankers (Soedjede 1995a, b) and have helped in creation of the Lomé Itinerant Bankers' Mutual Solidarity Fund (la Mutuelle de solidarité des tontiniers ambulants de Lomé, MUSOTAL). (At my initiative, a meeting of all Togolese tontiniers was held in Lomé on 17 October 1992, under the patronage of the Principal Secretary of the Ministry of Economy and Finance.)
This paper focuses much more on innovative, informal financing methods and will deal with the products that itinerant bankers offer their customers. It is not my intention to cover all the work we have done on informal financing but rather to discuss the various innovative products offered by some of Togo's itinerant bankers and those operating in Cotonou, Benin.
In the case of tontines (itinerant bankers' financial schemes), according to Lelart (1993), what debtors and creditors are looking for is not the best rate of interest but the availability of funds that they can exchange among themselves every day. This is the justification for the freedom these itinerant bankers enjoy in setting the interest rate on a loan to increase the working capital of a client in the informal sector.
The itinerant bankers of Togo offer a variety of financial products to their customers, as we shall see.
An itinerant banker and an entrepreneur may enter as two partners into an agreement to put together a risk capital operation. Some itinerant bankers in Togo and Benin already engage in this practice, although it is not formally recognized, as far as we know, in any WAMU country.
In the case of Togo, my survey of 29 itinerant bankers showed that 14 of them, or about 48%, engage in risk capital activities. The most commonly used technique is to monitor the growth of the customer's working capital. The daily or weekly visits that the itinerant bankers make to collect payments from their customers give them a chance to find out whether and how much the business is growing. Risk assessment is based on studying the profitability of the customer's business. Some of these bankers limit their share of the risk to 60% of the project's cost (Soedjede 1992).
A survey I conducted of itinerant bankers' customers in Cotonou, Benin, showed that 54% of customers would be willing to use risk capital. This result was little different from the survey of itinerant bankers in Togo (48%) and confirms that this is a source of financing for some activities in the informal sector.
In another scheme, customers make daily deposits with the itinerant banker. If the customers do not take an advance, they will later recover 30 out of 31 units from their deposit; the first unit is the itinerant banker's remuneration. This represents an attempt at savings and the building of economic security.
Carte blanche is a guarantee fund to meet the ever-growing demand for credit. Deposits are made monthly and range between 30 000 and 50 000 XOF. To make management easier, the itinerant banker will, after 6 months of savings, give a credit for the equivalent of 9 month's savings to a first group of customers. Three months later, another group will get a credit, and so on. The monthly savings and the credit carry no interest. The itinerant banker does not take any remuneration from these deposits, but this is implicit.
Another of the itinerant bankers' arrangements involves collecting between 3 000 and 10 000 XOF from customers every week for 12 weeks. The customers get their deposits back 3 months later to finance their business. This kind of service allows the itinerant banker to give the customers short-term credit on favourable terms.
What is called a back-to-school special is a type of credit extended to regular customers for 3 months at a rate of 6% for the entire term of the credit. This service lets the itinerant banker gain customers' confidence by helping them meet specific needs, especially at the beginning of the school year.
In a joint-liability group, members are jointly responsible for repaying the credits granted to each member in turn, as is the case with customers of the itinerant bankers in Cotonou (this topic will come up again in a later section).
A no-bidding tontine is one where deposits are made weekly over a period of 52 weeks. The amount saved plus interest cannot be recovered until the 52 weeks are up (Soedjede 1990c). The itinerant banker makes a profit on this arrangement because it builds up a stable pool of money while meeting the customers' needs for credit. This product differs from the financial tontine with bidding, as practiced in Cameroon (Bekolo-Ebe and Bilongo 1988; Henri et al. 1991), where the funds are taken up by the highest bidder (that is, the one who offers the highest interest rate). In the no-bidding variety, the interest rate is fixed in advance.
After studying the borrower's motives, honesty, and profit record, an itinerant banker may decide to put up working capital.
The relationship between these different products becomes clear when we realize that the pool of funds from a financial tontine can be used to provide credit to customers using other forms (commercial) of tontines. This is useful because the flexible nature (generally, monthly repayments to clients) of the commercial tontine means that the itinerant banker does not always have money available, whereas funds from the no-bidding financial tontine are usually left with the itinerant banker for a year, so the pool of funds available for lending out is more stable. Furthermore, the customers of the itinerant bankers' commercial tontine may participate in the financial tontine. The latter fund can also be used to buy goods to make loans in kind, for example, to help set up new merchants and encourage them to join the itinerant bankers' tontine or to win back former clients who see their business falling off.
For analytical purposes, I conducted a survey among the customers of itinerant bankers in Cotonou, Benin. Of the 386 people interviewed, 267 (about 70%) were clients of individual or associated itinerant bankers. The customers surveyed were chosen at random, after I verified that they had permanent market stands. I did the same thing with artisans, and I am working with some of the results of the surveys conducted in early August 1993 to understand the role of informal finance in the resurgence of informal business activity (Soedjede 1994). A study of customers at the St Michel market in Cotonou was completed earlier by Lelart and Gnassounou (1990).
The survey of the customers of individual or associated itinerant bankers in Cotonou confirms that there is risk capital activity. Out of 267 customers, 145 (about 54%) would be willing to have an individual or associated itinerant banker take an equity interest in the financing of a selected piece of business in the form of risk capital and let the itinerant banker share in any profit or loss, as Table 2 shows. Of the 145 customers who would participate in a risk capital scheme, the main reasons given were (a) for additional financial support (37%); (b) for sharing profits and risks (31%); and (c) for the good of both parties
Table 2. Opinions of 145 customers in Benin who would participate in a risk capital scheme. | ||
| Respondents | |
Response | No. | % |
Would do it for supplementary financial support | 53 | 37 |
Would do it to share the profits and the risk | 45 | 31 |
Would do it for the good of both parties | 26 | 18 |
Would not accept profit sharing | 9 | 6 |
Frequently use such schemes | 4 | 3 |
Prefer doing business alone | 2 | 1 |
Would do it for other reasons (small share and no alternative) | 2 | 1 |
No response | 4 | 3 |
Total | 145 | 100 |
(18%). I found that 6% would not accept profit sharing, whereas 3% do so "fairly often."
Of the 120 who responded negatively to the idea of equity in the form of risk capital, 101 (about 84%) were afraid of the risk involved, 2 (about 2%) simply preferred to take care of their business themselves, and the remaining 17 (about 14%) gave no reason.
Daily deposits were made by merchants (128 of 267 respondents, or about 48%); by artisans (82 of 267, or about 31%); by taxicab and motorcycle taxi drivers (45 of 267, or about 17%); and by salaried employees (12 of 267, or about 4%).
We asked the 267 customers for their opinion on setting up joint-liability groups of three to five people to get credit, knowing that each member would be responsible for the default of any other. On this point, 112 (about 42%) would agree to set up such a group. These 112 customers cited the following advantages of doing so: (a) mutual guarantee or group solidarity (71%); (b) greater creditworthiness (15%); (c) business development (10%); and (d) responsibility and independence (4%). This is a good result because, even in the formal financial sector, innovation is not always readily accepted. The main drawback to setting up groups of three to five people was lack of confidence or the possibility of default by individual members, according to 198 (about 74%) of the 267 respondents.
Out of the 267 survey respondents, 162 (about 61%) obtained credit or advances at least once from other itinerant banking schemes. This credit was used for, among other things, (a) business expansion (about 62%); (b) financing a specific deal (about 10%); or (c) school or funeral expenses (6 and 4%, respectively). For 80% of the customers, the largest amount they borrowed was between 50 000 and 200 000 XOF. Four of those surveyed had borrowed 700 000 to 2 million XOF. The repayment terms ran from less than 1 month to 10 months for the majority of the 162 who obtained credit or advances. One of them was able to get 2 years.
The other (non-credit-taking) 105 of the 267 (39%) surveyed gave the following reasons for not having obtained credit or an advance: (a) they never asked for credit (about 68%); (b) their itinerant banker did not give credit (about 18%); (c) they didn't request it in time (about 3%); or (d) they had doubts about their own creditworthiness (about 2%). Only 10 out of the 105 surveyed (about 10%) did not give a reason.
Those interviewed clearly saw these financial innovations (risk capital, joint-liability groups, various other financial products) as potentially of help to them in their business. Although there is now regular contact between these business people and the itinerant bankers, more will have to be done to make people in the informal sector aware of how effective these innovations can be.
In one of my articles (Soedjede 1995a), I suggested that
A genuine relationship should be established between the Togo Federation of Itinerant Bankers, once it is established, and the Professional Bankers' Association for planning the future of the Togolese economy. This is the only way to get these two sources of finances mutually integrated. We have had almost twenty-five years of experience and involvement in the work of various types of tontine organizations, and we believe it would be a serious mistake to try to stamp out this informal financing business by imposing strict regulations. If this were attempted, it would only lead to spectacular growth in the informal financial sector, for, as everyone knows, the informal sector has plenty of innovative ideas, and they will flourish very well underground.
Within the Central Bank of the West African States...at Dakar, thought is being given to developing an "adequate" legal framework within which the various tontines and savings and credit cooperatives could grow. Because there are so many different types and methods of intervention, it will be necessary to undertake the following:
• Make everyone aware that there is no question of trying to forbid these forms of mobilizing savings and credit; instead, encourage those who are pursuing these financing activities after the failure of the development banks.
• Involve these people at every step of decision-making during the development of the institutional framework, and in particular get their input and comments on the statutes, internal regulations, and so on.
• Avoid the error of focusing on the semi-formal financial institutions; always keep in mind the previous point.
• Try as far as possible to design a number of institutional frameworks suited to each of the many types of business.
A working group on banking reform should look first at ways to stimulate and increase the volume of savings from firms and households and then determine how to keep these savings in place and how to invest them in the most worthwhile and profitable business activities. We should not regulate or suppress the informal financial sector but rather help it to "piggyback" on the formal banking sector by building two-way links between the informal and the formal financial sectors (Zeral 1990).
There is much to be learned from all the experience gained in promoting mutual societies and cooperatives in both rural and urban settings. Business and financial managers are now discovering the virtues of cooperative and mutual structures in the field of banking. According to Zeral (1990), what is needed is to encourage this positive approach by defining the operating rules that such structures should follow. This is all the more important because of the losses that the shaky practices of commercial banks have caused in the absence of banking regulation.
Throughout this article, I have been examining the failure of the selective credit policy created by the 1975 banking reform. The failure of this banking reform led the monetary authorities to adopt a new money and credit policy in October 1989, which resulted in banking deregulation. The main tools adopted to reach this goal were the prudential ratios and the classification of some companies as a credit risk. These two tools, however, have not done much for the SMES–SMIS.
The rise of various types of tontines, including itinerant bankers' services, is an innovation in the area of financial products. Customers turn to these sources even though the cost of credit is very high by conventional banking standards. The efficiency of the informal financial system no doubt led to the lowering of the maximum interest rates in October 1993 in the WAMU countries. Zeral (1990), of the French Treasury, noted this phenomenon.
After his 1989 communication on the setting of interest rates, Zeral (1990) was critical of the maximum margin of 5% allowed in the WAMU zone and was worried about how the banks could afford to lend at a 5% margin, given the risk factors and the management costs, when the informal sector can lend at 30 or 40% per month. Zeral added that the informal sector was a characteristic reflection of the liveliness of African society. But competition needs to be fair, and restructuring will not be of much help if at the same time the banks are not allowed to make a profit (Zeral 1990).
Some customers of itinerant bankers attempt to cover themselves against loss by getting quotes from several different itinerant bankers, keeping part of their savings in their own hands and taking part in mutual or no-bidding financial tontines. But now, with the itinerant bankers forming associations, such as MUSOTAL in Togo and the Cotonou Tontiniers Association in Benin, and companies or groupings of itinerant tontiniers, especially in Benin, customers are beginning to have more confidence.
This paper examines the financial services available to the informal and small-scale enterprise (SSE) sectors in Ghana. These sectors have hardly any access to institutional credit in Ghana. Formal financial institutions find offering services to these sectors risky, costly, and unprofitable, and the various informal financial arrangements available to these sectors offer too little financial resources at too high a cost to enable them to sustain growth. This paper, therefore, shows that other providers of financial services should bridge the gap between the formal banks and the informal financial economy.
The development of financial services for the informal and SSE sectors will be looked at in the context of the continuing pervasive development crisis in the African continent and the fact, noted by the World Bank, that our continent is the only one where poverty is increasing. The informal and SSE sectors contain the majority of the economically active, indigenous population and provide the means of livelihood for the majority of the poor. The Ghana Statistical Service, which is conducting a study to determine the exact scope and output of the informal
1 I am grateful to William Steel of the World Bank for his most helpful comments, which were of immense use in the revision of this paper.
sector, at the lower end of the SSE sector, estimates that the informal sector's contribution to GDP could be about 50%. If the output of the upper end of the SSE sector were included, this contribution would appear even higher. If the African continent is to achieve self-reliance and self-sustaining growth and the seemingly inexorable slide to poverty is to be reversed, the production, productivity, and incomes of the private entrepreneurs in the informal and SSE sectors must grow, and this growth will have to be accomplished through innovative and bold policies.
These policies must be targeted at the rural and inner-city areas because most of such enterprises are in those areas, and these policies must have a gender focus because women's activities are prominent in these sectors. For instance, the 1984 Ghana Census (Ghana 1984) indicates a total population of 12.3 million people, of which 8.4 million (67%) live in rural areas. Out of a total of 5.4 million employed persons aged 15 years or older, 3.3 million work in agriculture (for example, food crops, livestock, fisheries, and cocoa).
The main agents for providing financial services in our economy are listed in Table 1. I shall briefly discuss why some of these financial agents are not providing effective and sustainable financial services to the SSE sector.
There are 14 banks in the formal banking sector of Ghana, 8 of which are government owned. All operate as commercial banks, although three of them started out as development banks.
The deposit structure of commercial banks is essentially short term, and their decision-making is highly centralized. Therefore, they concentrate preeminently on meeting the short-term financial needs of public and private enterprises at the top end of the commercial and business market in urban centres. The risks of such lending are minimal, transaction costs are relatively low, turnover is quick, and profits are high.
Commercial banks do not lend in any significant way to SSEs. The banks consider such lending too risky and too costly. SSEs in the agriculture and related sectors in the rural areas are scattered throughout large, remote areas subject to natural
Table 1. Agents providing financial services in Ghana. | ||
Formal |
| |
Banks | Nonbanks | Informal |
The Bank of Ghana (BOG) | Savings and loans companies (S&Ls) | Private money lenders |
hazards, such as droughts, floods, and pests. These SSEs cannot give the type of collateral, such as immovable property, that commercial banks usually require. They do not meet the credit criteria of commercial banks. Their activities are not amenable to the normal feasibility studies, and they do not have the assets required by commercial banks. These SSEs require relatively small loans, largely unsecured, which commercial banks find costly to make, monitor, and retrieve. The location of the commercial banks, their operational guidelines, and their limited human resources make them unable to meet the financial needs of the informal and SSE sectors.
The ongoing Financial Restructuring Programme in Ghana has led commercial banks, in their quest for efficiency, to close down a number of their branches outside urban areas and to concentrate on a few centralized outlets in urban areas, thus making these banks less accessible to SSEs. The same can be said of the development banks, which engage in commercial banking and provide banking services for specific sectors of the economy, such as agriculture, construction, housing, and industry. They provide financial services to large and medium-scale clients in their areas of operations and are unable to cater to the needs of the SSE sector owing to their structure, mode of operation, and limitations in human resources.
Some formal nonbank providers of financial services in Ghana's financial system are unable to seriously provide financing for SSEs, owing to fairly stringent and rigid regulations. There is one consolidated discount house and one securities discount house. There is also one building society and four leasing and hire purchase companies. These are fairly strictly regulated by the financial authorities. For instance, the minimum capital requirement for consideration for registration is 100 million GHC (in 1993, 601 Ghanaian cedi [GHC] = 1 United States dollar [USD]). There are also fairly rigid capital, liquidity, and other requirements that they have to meet, and penalties are imposed for noncompliance.
These stringent regulations ensure that there are very few formal nonbank providers of financial services and that these, to remain viable, competitive, and profitable, cater only to medium- and large-scale enterprises. There are about 20 insurance companies and a social security and national insurance trust that cater to medium- and large-scale enterprises. A stock exchange has operated since November 1990, and its listing and membership regulations, despite the recent introduction of a "Third List," effectively bar the exchange's facilities to SSEs.
The National Board for Small-Scale Industries (NBSSI) was established in 1985 to implement policies and programs for the accelerated development of small-scale industries in Ghana. NBSSI's main activities facilitate access of SSEs to credit and promote nonfinancial programs, including training and business advisory services, such as extension, support to business associations, and dissemination of business information to SSEs.
NBSSI's endeavours are impeded because of the absence of any nationally established development policy clearly defining the different types of sses and the roles of various institutions in implementing such a policy. NBSSI has, therefore, to deal with enterprises ranging from the micro, to the medium sized, to the large. It has also found itself doing the same things for sses as other agencies, such as training of entrepreneurs, without being able to coordinate these activities. The result is that NBSSI's impact has been very diffuse, to say the least.
But much more important, NBSSI's efforts have not been effective. First, it tries to facilitate access to credit by linking up enterprises and individuals (whom it trains) with financial institutions. This has not been very successful. The sses cannot meet financial institutions' collateral and equity requirements. Commercial bank officials perceive the sector as risky and costly to lend to and are not attuned to offering credit to this sector. The borrowers' skills and managerial experiences are also considered inadequate to support traditional loans.
Second, since 1991, when NBSSI merged with the Ghana Enterprises Development Corporation, which was giving loans, it has itself been operating a number of small credit schemes. This credit program has a number of problems. The source of funds is neither stable nor sustainable. For instance, NBSSI was promised funds totalling 340 million GHC from the Programme of Action for Mitigating the Social Costs of Adjustment (PAMSCAD), but so far only 150 million GHC has been released to it. The PAMSCAD program is itself being wound up. NBSSI also fails to meet some demands from applicants for these funds. The loans committees — with representatives from relevant departments and ministries, such bodies as the National Council on Women and Development, and the commercial banks — established to help select loan recipients, also work poorly.
The best way for institutions to promote the development of sses would be to divest themselves of their credit and financial service functions. They have neither the institutional capabilities nor the staff to perform these functions. Furthermore, they do not have access to regular sources of funds to make their financial programs sustainable. Their financial functions could be taken up by the banks or the credit unions and savings and loans (S&Ls), which can forge operational links with commercial banks. Strong links can be established between these financial agents and such bodies as NBSSI through their nonfinancial programs. Institutions such as NBSSI, with sufficient funds and adequate and appropriate human resources, could build up good databases on sses to strengthen entrepreneurial development and to provide advisory service programs to identify and develop entrepreneurs eligible for loans from the banks. Such institutions could help the banks and intermediary financial institutions, such as credit unions, monitor and follow up on loans. They could thus help the SSEs develop into viable enterprises beyond the limits of self-finance.
The Fund for Small and Medium Enterprises Development (FUSMED) is the administrative unit established by the International Development Association (IDA) of the World Bank to pass a credit line on to participating banks to finance the development of private, small- and medium-scale enterprises in the productive sectors. FUSMED has provided 25 million USD since March 1990. The Development Finance Department of the Bank of Ghana (BOG) passes on proceeds from FUSMED to about 11 participating commercial banks to lend to their clients.
The procedures used to administer FUSMED are cumbersome and actually raise the transaction costs. For instance, participating banks are expected to prepare feasibility studies or to have them prepared by consultants. They or the banks are to apply to the BOG for the facilities. Furthermore, participating banks are to contribute 10–15% of the cost of the investment project from their own resources. If the application is approved by the World Bank and BOG, the credit is made available to the participating bank at an interest rate equivalent to the average cost of the 180-day deposits mobilized by the bank. The bank then, in turn, passes on the credit and other costs. The procedures actually raise rather than lower transaction costs, and not many banks are prepared to incur such outlays or go to such trouble for SSEs who are not their clients.
Other conditions make FUSMED unsuitable for SSEs. For instance, eligible enterprises should have total fixed assets not exceeding 2 million USD. Theoretically, therefore, any enterprise with fixed assets of any amount less than 2 million USD is eligible, other things being equal. Most SSEs usually have very modest, if any, fixed assets. Again, the applications of those seeking to benefit from FUSMED are to be channeled through their banks. Most SSEs at the lower end of the sector do not have bank accounts. Another limiting factor is that private enterprises are eligible only if they are engaged in productive sectors other than primary agriculture, trading, and real estate. This effectively bars large numbers of SSEs. Finally, participating SSEs are required to contribute at least 25% of the cost of their projects in equity or from their own resources. Most SSEs are unable to meet this condition.
For all these reasons, FUSMED has supported the relatively large enterprises. But even for such large enterprises, the cumbersome and lengthy procedures of FUSMED, which do not facilitate quick disbursement, make it unattractive as a source of funding. Indeed, as of September 1991, according to BOG sources, actual and potential commitments under the FUSMED scheme amounted to 11.3 million USD. The lowest was for 9 091 USD for working capital for a printer of stationery, and the highest was for 500 000 USD to a lumber products industry for importing equipment. A BOG source further states that FUSMED has not generated new lending to SSEs since September 1991. Banks were using FUSMED largely to provide loan funds to preferred SSE clients when the banks lacked their own funds.
A number of NGOs — mostly the foreign ones — usually offer credit as part of their programs to rural and other low-income communities. In Ghana, some of the NGOs in the developmental field have programs with credit components.
The problems with credit from NGOs derive from a number of factors:
• Whereas banks mobilize savings and lend these resources to borrowers, NGOs rely on financial allocations from their governments and grants from foreign benefactors. The amounts are usually too small for the tasks. The regularity and availability of such financial resources are also not usually assured. This puts the financial programs initiated by NGOs at risk.
• NGOs that offer credit often lack guidelines clearly specifying whether such funding is a loan or a grant. If they are loans, there are uncertainties, for instance, about what interest and repayment rates to charge. If they are outright grants, the precise conditions for them are unclear. Recipients may sometimes take the funds, thinking they do not have to account for them in any way, and generally divert them to other uses.
• NGOs also lack the machinery, mechanisms, and staff to offer, monitor, and control the end-use or to collect interest or recover assets. Questions about the effectiveness of NGOs inevitably arise. For instance, project officers of NGOs are seen hurtling around rural areas on their mopeds, hanging on to large sacks of coins they are supposed to be giving to their clients. The danger posed to the security of such funds is obvious.
• The fact that NGOs usually do not coordinate their activities with the development priorities of either other NGOs or the government makes their impact as financial intermediaries diffuse at best and not too relevant to the country's development priorities.
NGOs should, therefore, leave the role of financial intermediary to those institutions specifically established and equipped to undertake this function.
NGOs can cooperate with intermediaries in areas where they are peculiarly suited to work, that is, by providing information about clients and by supporting training programs of all kinds for small-scale entrepreneurs who are unacquainted with the credit system.
Guarantee funds have not been effective in improving the access of SSEs to credit from institutions in Ghana. They are usually established to bridge the gap between formal banking institutions and small and microenterprises and operate by a mechanism that should make it easier for banks to help small borrowers, at minimum financial risk. The fact that they are operated through the commercial banking system with operational procedures that are not geared to lending to SSEs poses problems. The procedures involved have been cumbersome and in some cases unrealistic, and the banks have usually not been interested in making even minimal changes in their procedures to successfully operate these schemes, with the result that these funds are ineffective. The schemes either do not take off or just peter out.
Women's World Banking (Ghana) — Women's World Banking (Ghana) (WWBG) started its operations as a credit guarantee institution. It established an arrangement with one of the leading commercial banks in Ghana, whereby it used some seed money from the Women's World Banking (New York) as a guarantee fund for women who as small-scale entrepreneurs sought loans from that commercial bank. But the bank's normal eligibility and operational criteria were used. As a result, only a few, relatively large loans went to women with SSEs, mostly in the urban areas. The program ignored the women with very small SSEs in the rural and urban informal sectors. WWBG hoped that the commercial banks would leverage their guarantee fund by lending as much as four times the amount of the fund. But the banks never actually lent more than was deposited as a guarantee.
Mutualist Credit Guarantee Scheme — There is a Mutualist Credit Guarantee Scheme (MCGS) for micro- and small enterprises under the FUSMED facility. Under MCGS, mutualist guarantee associations (MGAs), expected to be formed by groups of 20–25 entrepreneurs, are registered to act on behalf of the members. Members then contribute to the MCGS through the payment of registration fees, monthly dues, and a guarantee fee calculated at 3% of the loan. The FUSMED contribution to the MCGS consists of 33.33% of the total contributions of the members of the MGAs. Both the participating financial institutions and the SSEs have found the eligibility rules and the loan appraisal, approval, and other procedures too cumbersome and unrealistic. The banks have not been anxious to encourage the formation of MGAs. The result is that since July 1993 only one MGA has been formed with one participating financial institution, and the bulk of the MCGS funds remains unused.
There are a variety of providers of informal financial services all over the rural areas and in the urban informal sector. Organized by individuals or groups of entrepreneurs for their own benefit, these agents provide different kinds of credit and support to entrepreneurs with SSEs. These informal providers of financial services include private money lenders; susu collectors; rotating savings and credit associations, such as the susu system; other self-help associations, like business associations, Amassachina groups, and other work groups; traders and distributors of farm inputs; and friends, relatives and the SSE owners themselves, with their personal savings.
The informal financial services satisfy both economic and social needs. They are fully participatory, are based inter alia on personal references, mutual trust, convenience, simple procedures, and easy access to resources, and are truly self-reliant. Their main disadvantage is that they do not serve many SSEs. Furthermore, the limited amount of credit they give does not significantly increase the production, productivity, or income of the SSEs. Innovative links with formal and intermediate financial institutions may improve their impact.
Commercial banks cater to the financial needs of large-scale public and private enterprises. Commercial banks find lending to SSEs risky, costly, and unprofitable. The informal financial system also does not adequately meet the growth needs of SSEs. Many banks and nonbank financial institutions are or will be, if adequately nurtured, effective agents of change, bridging the gap between formal financial institutions and the informal financial market and offering adequate credit access to SSEs.
Ghana's rural banks were established to provide institutional credit and banking services to small-scale farmers and rural entrepreneurs, to arrest a growing rural debt and a consequent pervasive stagnation in agricultural production, to make sure that resources mobilized in rural areas are used in rural areas, and to promote growth in the rural sector. Rural banks are unit banks operating as limited liability companies in accordance with the Companies Code of 1963 and the Banking Act, 1989 P.N.D.C. L 225. Since 1976, 123 such banks have been established, spread all over the rural areas of Ghana.
Rural banks mobilize savings from their catchment areas and lend these resources to deserving rural SSEs. In 1992, the rural banks mobilized some 9.68 billion GHC and lent 4.81 billion GHC to a variety of SSEs. During the same period, rural banks bought 3.06 billion GHC worth of treasury bills. Rural banks have also participated effectively in the Akuafo cheques scheme whereby cocoa farmers are paid for their cocoa with cheques issued through the banking system. Indeed, in the 1991/92 cocoa-purchasing season, rural banks collectively purchased 20 billion GHC out of a national total purchase of 61 billion GHC — the highest purchase of cocoa by any of the banks in the formal sector.
The rural banks are able to be such effective financial intermediaries for rural SSEs because of a number of factors:
• They are decentralized and accessible. They are located in the rural areas among the people they serve and are expected to operate in a catchment area with a 32-km radius. In this catchment area, they can establish agencies to take banking services virtually to the doorsteps of their rural clients.
• They can make decisions locally and thus quickly.
• They are owned, managed, and controlled by the local communities and are thus fully participatory, operating under community sanctions and mores.
• Their operational guidelines are flexible. These banks use simplified procedures and clearly established eligibility criteria with a built-in equity system to ensure that credit goes to rural SSEs, especially those in priority areas of the economy.
• They emphasize savings as essential to credit, thus helping to inculcate a certain banking culture among rural populations.
• Their procedures are realistic. For instance, borrowers are required to find two people of standing in the community or account holders in the bank to be guarantors.
• They rely on locally mobilized resources for their operations. The survival of these banks thus depends on local initiative, local commitment, and local innovation.
The rural banks are basically self-reliant institutions, owned, managed, and controlled by the people of the community, mobilizing resources from the community and providing the institutional framework within which deserving members of the community can use these resources to improve their productivity and income.
Rural banks face some major difficulties. These derive, in part, from the sheer lack of basic amenities in our rural areas. Other problems include the following:
• There are many hazards to agriculture. Agriculture depends on rain, and we have not found any adequate responses to natural hazards such as drought, floods, and pests. This adversely affects agricultural production and, therefore, loan repayments.
• Because of the seasonal nature of agriculture, all the farmers' financial needs tend to occur at the same time. All the farmers want to take loans or to make deposits at the same time. This makes it difficult to balance net savings and net loans at any one time.
• Although dependence on local initiative, leadership, commitment, and integrity is an advantage, banks find it difficult to survive where these qualities are absent in a community.
• Most of the rural banks are short of the capital required by the Banking Act, and this restricts their banking services.
• Most important of all, it is difficult for banks to recruit and retain qualified and honest management and support staff for the rural areas. The greatest problem facing rural banks, therefore, is the problem of human resources.
The Association of Rural Banks and BOG are pursuing a vigorous program of training for all cadres of rural-bank staff in all areas of banking, including operational procedures and financial-assets management. Customer service training programs are also being started. These training programs have greatly improved the efficiency of rural banks.
Under the Rural Finance Project, the World Bank is assisting the Association by helping it develop training materials and strengthening its capacity to deliver training programs.
The latest figures indicate that 19 of the 123 rural banks are in trouble financially and are to be phased out. Forty-three have met the capital adequacy and other prudential requirements of the Banking Act and are operating satisfactorily, and 61 are working hard to fulfil the requirements of the Banking Act.
The fact that 19 out of 123 rural banks are "distressed" should not lead to pessimism or despair about rural banks. The majority are providing effective financial services to the informal and SSE sectors and making critical improvements to the rural economy. The experiences gained during the 17-year history of rural banking should be used to help those 19 distressed banks survive and to help the good banks become even better.
S&Ls have been on the Ghana scene since 1985. These operate by collecting savings from entrepreneurs and accumulating them for at least 6 months to build a deposit base for the saver. At the end of this period, the saver may withdraw his or her savings and also receive a loan proportional to the amount saved.
S&Ls can be good financial intermediaries for SSEs. The S&Ls usually locate where SSEs are, in markets and near work-places. The S&L structures and procedures are very simple. The S&Ls operate with low overheads; they handle small amounts; and their transaction costs are low. Their personnel are usually knowledgeable about the entrepreneur and his or her experience and ability to save and handle credit.
Unfortunately, the kind of people who initially established the S&Ls in Ghana did not have the liquid resources to sustainably meet loan demands. Most also did not have the technical expertise and integrity to follow prudent financial management practices. Some defaulted. Others collapsed. Public confidence in them ebbed, and BOG was obliged to impose stringent laws regulating their establishment. These laws, among others, enjoin all those wishing to establish S&Ls to register with BOG, deposit 100 million GHC, and have permanent premises. S&Ls are also to follow certain regulations regarding capital adequacy and liquidity ratios.
Few people can readily meet these conditions. According to BOG, as of mid-1993 only eight companies had applied to be licenced. Of these, none had been licenced before, although two, CITI Savings and Loans Company and WWBG's Mutual Assistance Susu Ltd (MASU), are operating. We are awaiting approval for revisions to the Financial Institutions (Non-Bank) Act, 1993 P.N.D.C. L 328 to reduce the minimum capital requirement for S&Ls from 100 million GHC to 20 million GHC and to establish more realistic capital adequacy and liquidity ratios.
To improve SSEs' access to financial services, it will be necessary to look at the whole regulatory framework for S&Ls. The amount paid for registration will have to be flexible. There should be greater monitoring and supervision of the S&Ls' operations to ensure that sound financial management practices are being followed. We should encourage innovative links with commercial banks, with mutual benefit to both the banks and the S&Ls. Two important examples of S&Ls are CITI Savings and Loans Company and WWBG's MASU.
CITI Savings and Loans Company operates as a limited service bank in one of the thriving markets of the capital city. It mobilizes savings from all its customers and has current accounts for customers who wish to put in their day's earnings. Initially, it concentrated on short-term revolving loans for wholesale and retail dealers operating in the food trade and those who process foodstuffs in the market. In addition to providing overdrafts to the food processors, the company has a hire–purchase system, under which the food processors can purchase equipment like cornmills, grinders, and cauldrons.
CITI Savings and Loans Company helps customers develop their own forms of collateral through savings, bank balances, fixed deposits, certificates of deposits, and Ghana Government securities. The company accepts savings bank balances as security and is making efforts to establish a loan insurance fund, which will be equivalent to a certain percentage of the value of all the loans granted. This fund is expected to be used to cover cases of involuntary loan defaults, such as those resulting from the sudden illness or death of a customer. CITI Savings and Loans Company has a direct relationship with commercial banks operating deposit accounts and shares overdrafts with them.
MASU, licenced in 1991, operates more as an S&L than a bank and has less direct relationships with commercial banks.
MASU has evolved from the susu system, which female entrepreneurs established to help themselves. Becoming operational in 1992, MASU seeks to improve the traditional susu system. It offers services such as security, deposits, loans, hire–purchase financing, and payment to female entrepreneurs of interest on deposits that accumulate for 6 months without withdrawal. The sustainability of its operations can be assured if it can establish effective links with the commercial banks.
It is clear from the examples of CITI Savings and Loans Company and MASU that S&Ls can mobilize savings from a wider spectrum of customers than commercial banks. S&Ls could keep these savings as deposits in commercial banks and be eligible for loans and advances, which they could in turn lend to their customers. This would increase the commercial banks' resources and improve the S&Ls' liquidity and their ability to give reliable credit to their clients.
Because S&Ls are already effectively supporting microenterprises and SSEs, such links with commercial banks will improve SSE access to credit and make S&Ls good intermediate agents.
The 300 or so credit unions in Ghana are concentrated in two regions of the country (the Upper West and Brong Ahafo). There are "closed" unions, catering exclusively to certain categories of people, such as teachers and members of certain churches. There are also "open" credit unions, which anybody can join and where small-scale farmers, traders, and tradespeople make deposits and borrow to finance their activities. The credit unions pay dividends on the members' shares and charge an interest rate of between 1 and 2% monthly on credit.
The advantages of credit unions for SSEs are the easy accessibility of funds, simple procedures, a system of mutual trust, and the links between savings and credit that are characteristic of credit unions. On the other hand, credit unions have limited funds and weak management and operate with untrained staff. Credit unions also lack the machinery and mechanisms for adequately offering, monitoring, and retrieving loans. Their funds are usually at risk. To make credit unions more efficient financial intermediaries for SSEs, their operational systems, policies, and procedures should be strengthened, especially in areas such as accounting, auditing, and loans policies. The credit unions could be one of the best intermediatary agents for SSE financing if they had links with commercial or rural banks. In this way, the strengths of the credit union system — namely, customer orientation and trust — would be combined with the better refinancing and better trained management of the commercial and rural banks. The monitoring and inspection activities of BOG should encompass the activities of credit unions to help them strengthen their management and their working operations, to enable them to become institutions that cater effectively and reliably to the needs of the SSEs.
If banks and nonbank financial institutions are to effectively and reliably fill intermediary roles in the provision of financial services, BOG will have to provide the enabling environment.
BOG is the overall regulator of the financial system. BOG approves new financial institutions and supervises the operations of all financial institutions. It sets monetary and credit policies and supervises the implementation of these policies. As the regulator of the financial system, BOG's role is crucial to ensuring that SSEs have access to credit and other financial services.
Currently, the commercial banks control the bulk of the assets in the banking system in Ghana and offer minimal services to the majority of the economically active, indigenous population, who support the poor. Sustainable growth and the alleviation of poverty cannot be achieved unless commercial banks improve their services to this segment of the population.
Accordingly, BOG should consider taking a number of measures. First, BOG should initiate reforms to encourage commercial banks to develop innovative links with the intermediary banks and other financial institutions, such as rural banks, S&Ls, associations, and credit unions, which provide the bulk of the services to the SSE sector. This should deepen financial intermediation all around and make more resources available for growth in the sector.
Second, BOG will have to exercise its regulatory functions with some imagination and flexibility to enable these institutions to grow, rather than stifling them. As BOG itself recognizes, a minimum capital requirement of 20 million GHC, which BOG has recommended (awaiting approval), is more realistic, although even this may be changed, depending on experiences in the field. The same applies to the more realistic prudential regulations relating to capital adequacy and liquidity ratios that BOG has recommended.
Third, BOG's monitoring and supervisory functions will have to be stepped up, especially those for rural banks, S&Ls, and credit unions, to ensure that their operations are efficient and conducted in accordance with the regulations and also to ensure that the interests of depositors and borrowers are effectively protected. Such constant and regular monitoring and supervision should reveal areas in need of improvement. BOG needs to cut down and simplify the myriad returns that it requires the rural banks to complete. It should ensure the prompt analysis of these returns to aid in policy formulation and to improve operations. Indeed, it will be necessary for BOG to establish a databank, especially for rural banks, S&Ls, and credit unions, where current information about them (based on prompt analysis of returns they submit) will be available to those financial agents themselves and to others.
Fourth, BOG should promote training for the staff of rural banks, S&Ls, and credit unions. This should improve the financial services they offer the SSE sector. With the help of the Rural Finance Project (established under World Bank auspices) the Association of Rural Banks has in place an expanded program of training. Happily, the Association has funding from BOG to broaden and improve its training programs. BOG should help S&Ls and credit unions establish similar training schemes for themselves.
The development of the SSE sector is crucial to the overall development of Ghana and of Africa and to the alleviation of poverty and the creation of employment.
Properly developed, rural banks, S&Ls, and credit unions can bridge the gap between the formal banks and the informal financial system, bringing much needed financial services and development to the SSE sector.
By helping to promote these SSEs, BOG and the intermediary institutions can together be agents of change.
The Côte d'Ivoire Fund for Development and Investment (Fonds ivoirien de développement et d'investissement, FIDI) is part of an international network of local financing companies, inspired and launched by the International Investment and Development Corporation (Société d'investissement et de développement international, SIDI).
SIDI is a French limited-liability corporation with capital of 1 billion XOF (in 1994, 570 CFA francs [XOF] = 1 United States dollar [USD]). Its main shareholder and founder is the largest French NGO for development, the Catholic Committee Against Hunger and for Development (Comité catholique contre la faim et pour le développement, CCFD). Other individual and institutional shareholders are banks, credit unions, the Caisse française de développement, and foundations.
SIDI has made direct investments ("participations") in micro- and small enterprises and has developed a network of local finance companies and structures around the world, including Latin America (Bolivia, Chile, Colombia, and Uruguay), Africa (Côte d'Ivoire, Madagascar, Mauritania, Morocco, Senegal, and Uganda), Asia (Laos, Sri Lanka, Thailand, and Vietnam), Europe (Poland), and the Middle East (in the occupied territories).
Local companies participate in the financing of projects for creating or expanding small enterprises through the use of various techniques (direct investments, loans, lease–purchase arrangements, guarantees), according to local needs and conditions. SIDI is trying to use the means at its disposal to create an international network of local finance companies. It also provides technical assistance to various companies in response to their internal requirements or other needs associated with their activities.
FIDI arose when the World Bank asked SIDI to help set up a local finance company in Côte d'Ivoire. FIDI-SA is a public company (société anonyme, SA), created on 11 July 1991 with its own capital of 217 million XOF. Besides SIDI, its shareholders include some large Côte d'Ivoire companies — the Côte d'Ivoire Oil Refining Company, the Côte d'Ivoire Water Company, BLOHORN, SHELL-CI, and TOTAL-CI — a bank, COFINCI; and various individuals and associations. The members are united by their desire to contribute to the development of a class of profitable micro- and small enterprises in Côte d'Ivoire.
FIDI's uniqueness lies in the fact that its shareholders are interested in entrepreneurs who, without its intervention, would have no access to bank credit. FIDI has set itself two main goals. First, it participates in financing the creation or development of small enterprises, in particular ones that are considered feasible but that cannot meet the restrictive socioeconomic criteria needed to gain access to conventional financing. Second, FIDI follows the progress of promoters and business leaders and provides technical assistance where it is needed: both upstream (by counselling and by assessing a project and helping to launch it) and downstream (by offering advice and management assistance).
The initial goal of FIDI is basically financial — to help small enterprises get started when their promoters cannot gain access to bank credit. The process of FIDI's providing financial support begins as follows:
• FIDI works directly with the project promoter and places great weight on the promoter's abilities and motivation.
• FIDI prefers productive activities that use local resources and are labour-intensive.
• FIDI insists that the promoter provide a 50% share of the financing.
• FIDI invests directly in the capital of formal companies, supplementing this with working capital support. FIDI's contribution is always less than that of the promoter.
• FIDI's contribution ranges from 3 to 20 million XOF. All financing depends on the appropriate guarantees.
FIDI's role has evolved as follows:
• FIDI asks the promoter to initially put up a share of 15–30%. This can be done either in cash or in kind.
• FIDI tries to promote the development of existing small enterprises, rather than continually creating new ones.
• FIDI is broadening its field of financing activities to embrace all economic sectors, including the commercial and services sectors.
• FIDI is trying to design ways to help the so-called structured, informal sector.
• FIDI is hoping to use new formulas for lending and lease–purchase arrangements that are better suited to the needs of promoters.
As a general rule, were it not for external technical support, at least 5 or 6 (or maybe more in some countries) out of every 10 new enterprises would disappear, with the attendant economic, financial, and social costs that such loss entails.
On the other hand, people engaged in providing technical and cooperative support to entrepreneurs claim that the chance of survival for small firms exceeds 80% after 5 years if they take advantage of such support. Here is clear proof that properly adapted or personalized support can have an important impact. FIDI, therefore, offers a range of services to project promoters — initial consultation, counseling, studies, documentation, and so on. At the same time, FIDI provides the firms it finances with continuously updated tools to monitor the firms' progress. FIDI has a permanent research team and a network of experts to mobilize at any time.
FIDI's willingness to provide technical assistance is rooted in the need to secure its investment, of course, and its desire to ensure the survival of the companies it is helping to launch or promote. This activity has its costs, however, which we might call the extra costs of development. These extra costs include, in particular, those of providing expert supervisory support:
• attending to the management and technical aspects of a great number of small investments;
• screening and monitoring to ensure that project and promoter are properly matched; and
• taking an active part in setting up and monitoring the business, ensuring the best possible conditions.
The extra costs of providing such support can, of course, neither be completely recovered from the small entrepreneurs themselves nor be borne indefinitely by financing agencies like FIDI. This explains why the conventional banking system has given up financing small enterprises. Groups involved in small enterprise development, however "voluntary" they may be, must find a way to cover these extra costs — basically, they will have to be assumed by other partners.
Public authorities, financiers, and business people will have to choose — either they pay for the kind of technical cooperation that will prevent the premature failure of an enterprise, or they pay the price for the noncreation or nondevelopment of enterprises. In the short term, the choice may be difficult, because the question is, Who is going to pay? In the long term, however, the choice is clear if we consider the following consequences of refusal to pay:
• loss of capital when an enterprise fails;
• unpaid invoices from other firms;
• loss of workers' jobs and of their dependants' subsistence; and
• lost tax revenue.
FIDI's method of supporting small enterprises consists of four stages, for each of which support systems have been created.
The first stage, the initial consultation, is a key part of the overall process. The initial consultation provides a first screening filter to identify those would-be entrepreneurs who have the ability and the wherewithal to go further. This first stage of the process consists of one or two individual interviews that must take place on the promoter's own geographic and cultural turf. In the first 18 months, we met with 300 promoters, listened to them, gave them advice, and provided some of them with further technical assistance.
FIDI has created a series of computerized files for each of the promoters we have had contact with. These might involve a preselection file, for assessing the promoter and his project; a project creation file, for developing a feasibility study of the project; a business plan created with a business-plan software program adapted for small enterprises; and an assessment file on the promoter and project.
In the second stage, FIDI provides the project promoter with technical assistance on several aspects of business planning, including an analysis of the project to be launched, developed, or restructured; periodic management advice; a study of potential market niches; and guidance and help in performing feasibility studies.
The promoter receives ongoing and personalized support from the FIDI training team. In this way, we help promoters develop their own ability to act independently, instead of doing everything for them. The training team has helped an estimated 150 promoters. Depending on the case, this second stage can last anywhere from a few months to 2 years.
Everyone knows how closely production, sales, human relations, and financing are linked in a small firm. If one of these functions is poorly managed, the whole operation is at risk. This is why FIDI always tries to look at each project in its entirety. This, in turn, means the advisers must give the promoters psychological support and advice and help them overcome difficult obstacles. About 50 promoters have already had the benefit of this approach. In this stage, FIDI helps with the actual setting up of the project (the launch plan), finds financing partners, and leads the promoter through various procedures and formalities. In addition, when the need arises, FIDI can use its team of specialists to advise on the best legal structure for a given project.
In its role as a financing agency, FIDI's Board of Directors has voted to approve investments in seven sectors: (1) rice hulling, (2) salt grinding, (3) aluminum-plate production, (4) candy making, (5) hotels, (6) butcher shops, and (7) charcoal making. This may seem like a modest number, but it must be viewed in the Côte d'Ivoire context and in light of the financing tool that FIDI has used to date, that is, having a direct stake in the company.
In the fourth stage, FIDI provides technical assistance in business management and control. This is an essential part of FIDI's approach because it gives the best assurance that the enterprise will survive. Bookkeeping assistance is always provided in close cooperation with the young operator of the business and can take two forms, depending on the size of the business:
• For microenterprises, FIDI can set up simple support mechanisms for recording and keeping accounts, with a view to gradually training a member of the business.
• For formal small enterprises, we will enlist the help of a professional accountant who specializes in small business. This accountant will deal with social and tax issues and handle accounting matters.
Management assistance covers every aspect of good business: interpretation of accounting data, personnel management, relations with suppliers, sales management, and so on. This type of assistance is provided by a person specifically assigned to the case, who knows the business and its promoter well and can offer full and personalized support.
FIDI's operating methods mean that it is involved in the very fabric of national and regional socioeconomic life. We strive to develop a synergy of efforts and abilities among the various players interested in promoting private initiative in Côte d'Ivoire. We create a real working network that can include both volunteers and professionals (experts, NGOs, accounting firms, financiers, and so on).
For FIDI, it is essential in any small-enterprise development project to articulate a dual strategy for helping promoters:
• offering technical support to the promoter or entrepreneur in setting up or expanding his or her enterprise; and
• offering the financing tool best suited to the entrepreneur's capacities and the specific needs of the project.
If it is to be effective, this dual strategy must lead to a partnership where roles and responsibilities are clearly delineated among the promoter, FIDI, and any third parties. In this regard, FIDI has been trying (so far without success) to engage the cooperation of local banks in the joint handling of small- to medium-scale enterprises (SMEs). It has also proposed two avenues of approach for large firms:
• expanding their subcontracting service by inviting tenders from small firms; and
• supporting laid-off personnel who are trying to start their own businesses.
There has never been a detailed sectoral study specifically focused on small enterprise in Côte d'Ivoire. It would, indeed, be useful to have surveys of all the economic sectors where small enterprise could potentially operate profitably and successfully, but the lack of reliable economic data makes it difficult to perform market and feasibility studies. As a consequence of our approach and the cooperation of various promoters, we have had occasion to study the following industries: charcoal production, rice growing, mining, fishing and aquaculture, water pumps, poultry raising, commercial beef operations, and the manufacture of aluminum housewares.
Other industries are under study, and we hope to make documents available soon to promoters looking for information on techniques and methodology.
FIDI has so far developed two main services:
• technical assistance (initial consultation, feasibility studies, setup, advice, monitoring, and so on); and
• financial participation in the project, through either a direct investment in new or expanding formal companies or setting up a joint venture, where a formal structure is unnecessary.
FIDI is now studying how it might act as an "outside incubator." In other words, we are trying to expand our range of services to microentrepreneurs to include the following:
• providing work space;
• organizing orientation and training sessions for setting up a small enterprise;
• organizing sessions on various themes about business and its environment; and
• establishing a database and library of business-related information (technical books, financing sources, and so on).
We will have to introduce these services gradually, depending on demand and resources; the objective is to provide answers to the practical needs of promoters and young entrepreneurs. Those who benefit from these services will be expected to make a financial contribution.
To assess the past record of and future prospects for a structure like FIDI, we need to look at it from two perspectives, the short and the long term.
In the short term, FIDI's technical assistance record shows that it has handled applications from more than 300 promoters. FIDI has listened to these applicants and tried to sensitize them and guide them. Thus, it has played a role rather like that of a small-business promotion bureau — a necessary function, even if the results have been less than spectacular. By contrast, the results have been more modest for the enterprises that we have tried to help finance — in about 50 cases examined, FIDI's efforts have led to only seven investment decisions. Still, FIDI is more interested in quality than in quantity, both for its own sake and for the sake of the promoters.
It is hard to make a long-term, objective assessment of these first few months of activity. FIDI has taken time to make itself known, both to the public and to the professional circles and organizations working with SMEs. We are, on balance, satisfied with the network we have established, although we have been somewhat disappointed by the lack of closer involvement of others working in the SME sector.
What lessons, then, can we draw from this breaking-in period?
From the experience that we share with all those people who took part in the creation of FIDI, we have learned that it is useful to involve both individuals and companies — to try to have both private citizens and businesses engaged in a common project. FIDI has managed to put together a diverse group of shareholders, a point of some significance, I think, in the context of Côte d'Ivoire. Let me emphasize one point: our shareholders made their contributions to FIDI's capital more as an investment in society, with a business angle, than as a strictly financial investment.
FIDI chose to organize itself legally as a limited-liability corporation. This is an advantage because a corporation is governed by clear and incontrovertible rules of management, a fact that no doubt attracted many of our shareholders. But this is a costly route, both in terms of launching the company and managing it day to day (particularly owing to the taxes). It is unclear whether our shareholders would still have invested their money if the company had been organized as a partnership of some kind.
Consider FIDI's method of involving itself in the financing of projects. FIDI has worked essentially by taking a direct interest and providing working capital as a partner. FIDI has favoured financing the expansion of formal businesses in sectors where there is high value added.
It quickly became apparent that in Côte d'Ivoire this approach was too restrictive and that for the micro- and small-enterprise niche we needed to offer simpler instruments (loans and lease–purchase arrangements) and to open up our services to all business sectors (commerce, service industry, and so on), indeed to get into the financing of the "structured" informal sector. In trying to recast its activities in this way, FIDI faces the problem that the central bank requires lending organizations to comply with the banking laws in the West African Monetary Union (WAMU) zone. FIDI is, in effect, being asked to transform itself into a financial institution.
We have seen a great number of candidates wanting to launch small enterprises, a fact that has two explanations:
• The current economic situation implies a fair number of bankruptcies and people who are victims of downsizing.
• There are few employment opportunities available to young people, even those with education.
We thus face a dilemma: are we a social or a business organization? (We know, of course, that the two are closely linked.) To the extent that we are trying deliberately to act as a business, FIDI has had to set up a selection process for projects and promoters, based on their profitability and economic feasibility. This of course does not exclude taking account of the personal and human aspects of a project.
Although our small entrepreneurs are loathe to admit it, our business culture is very underdeveloped. Too often, promoters will reduce the complicated question of launching a business to one of financing it, neglecting the market potential or the sources of supply that regular production will have to rely on. Promoters often lack basic business awareness or training.
To sum up, we find, at present, that about two out of every three projects presented have to be turned down at the outset, for any one of several reasons. Here are two:
• The project may be proposed for a business sector that offers few prospects. To this must be added a certain lack of foresight on the part of the promoters, who often think they can create a business in a sector that is already saturated — this is the case with dry cleaners, bars, and soap makers in Côte d'Ivoire.
• The promoters may have no personal savings, in which case FIDI has to turn them down.
Managing a small enterprise these days is difficult enough in Western countries; to manage a small formal enterprise successfully under conditions prevailing in Africa is a real feat. This is where FIDI's technical assistance is most important: even if an apprentice manager is a true orchestral conductor, he or she cannot do everything alone but has to be able to delegate and maybe even use outside help (for example, to keep the books). We have repeatedly found new managers in difficulty when it comes to dividing up the work or putting in place simple but essential rules of management.
For one thing, it is very hard to persuade young business operators to set up internal procedures for collecting accounting data. Yet foresight of this kind is what management is all about.
It is also hard to instill a climate of trust or to convince entrepreneurs that they need help in managing their business. We have found that a promoter may always be ready to accept cooperation in the form of financial support, but he or she may be reluctant after the business is launched to submit the documents and data FIDI needs despite having signed the agreement and despite FIDI's having met its obligations to the operator.
It takes patience and perseverance to pull together private funds to finance private initiatives in a country where, until recently, the state was omnipresent. Roadblocks and constraints are everywhere. Then too, we have to remember the lack of dialogue and coordination among the various players involved in the SME sector in Côte d'Ivoire.
We have experienced limitations linked to the sociopolitical environment. In the days when Côte d'Ivoire had the means, it would rather launch grand industrial projects than promote the birth of a class of local SMEs in productive sectors. This attitude tended to stifle any individual spirit of enterprise, or "daring to take risks," in those sectors where value added was high. Thus, from our vantage point, we have received many demands for assistance to set up commercial or service companies but very few for engaging in resource-processing businesses.
Then too, we must realize that for a promoter, launching a business is an adventure that requires something of the attributes of both a priest and a soldier. It takes a real sense of civic duty to take the risks involved in setting up a formal enterprise in this economy. We estimate that the cost of doing so is 20–40% higher than it would be in the informal sector — even then, the entrepreneur has to count on wasting at least a quarter of the time fiddling with administrative details, time that could be better spent looking after customers or improving the quality of the product. After all, as everyone knows, the small-business entrepreneur must do everything for everybody.
Key questions then are, What role should the public authorities play in the creation and expansion of SMEs? Should the authorities try to expand the scope of formal enterprises through tax incentives or would it better to see economic activity "informalized"? This is a vicious circle. The state, of course, is in desperate need of resources to finance its budget outlays, and business taxes represent a considerable part of its resources. But a fruit does not give as much juice if you pick it green as it does if you leave it to ripen. This is a strategic issue that the authorities must address, and, unfortunately, we must admit that even the current tax incentives are not working very well.
Conditions are very difficult for those in small-business development. The world recession has had especially dramatic effects on African countries: reduced demand for raw materials (owing to structural adjustment programs) has put thousands of people out of work and has led to a drop in household purchasing power.
Côte d'Ivoire has furthermore suffered a serious banking crisis, which has precipitated the failure of some institutions and has forced most commercial banks to reduce or even suspend their support for SMEs. Individuals and companies alike are losing confidence in banks and financial institutions.
This state of affairs has had several effects on the emergence and growth of the small-business sector in Côte d'Ivoire:
• potential markets have shrunk;
• promoters have no savings; and
• lines of credit are hard to get.
We have also encountered a number of limitations linked to the legal and legislative environment. We must clearly warn prospective creators of small businesses that the promoter has every incentive to remain in the informal sector. We have drawn their attention to bothersome bureaucratic meddling and how difficult it is to take advantage of existing tax incentives. But could there not be a framework that is really adapted to the emergence and operation of small businesses? Shouldn't it be possible to set up a simple legal framework, one that would not require establishing limited-liability corporations but that would give legal recognition to entrepreneurs and offer them the assurance that they can defend their rights and interests before the courts? And one that would let entrepreneurs do business without putting at risk all their personal belongings on some chance mishap that is not the fault of their own management?
The new banking law for the WAMU zone poses some real problems for companies that have a legal status like FIDI's. Here is a perfect example of the pendulum effect: we have gone from one extreme to the other. Thus, until recently, any individual or company could set up a business to collect and use savings, with every imaginable leeway. Then, along came promulgation of this new law, a necessary law no doubt, but one that forces any person who engages in direct investments, loans, or lease–purchase agreements to become a financial institution, with all the constraints that implies, regardless of the source or end use of the funds. To turn FIDI into a financial institution would alter completely the spirit in which it was created, and, indeed, it is not at all clear that businesses like FIDI would be able to meet the regulatory requirements to become financial institutions.
Thus, setting aside for the moment SME development projects that are financed through bilateral or international cooperation and that, therefore, have a transnational status, it is impossible today for an organization like FIDI (which does not draw on the savings of the general public) to engage in lending or lease–purchase agreements. This is a severe limitation on our ability to promote SMEs in Côte d'Ivoire. Lending and lease– purchase arrangements are in fact two instruments that are more flexible and suitable for SMEs than taking a direct investment interest, which can only be done within a formal legal framework.
Let us look finally at the limitations stemming from the sociological and cultural environment. These influence, first of all, the social and personal pressures that surround the new entrepreneur, and, second, the ability of promoters to become prudent and wise business managers. You can set up all kinds of financial instruments for microenterprises and provide all kinds of technical assistance and lines of credit, but if the family and friends of the entrepreneur are not interested in the project's success or if they do not realize that a new business cannot be treated like the goose that lays golden eggs, then there is no point in the promoter's undertaking an adventure like setting up a business.
The sociological and cultural setting is hard to manage — after all, how can FIDI know how all these people feel about a project? As everyone knows, African families are large. One solution, already tried in some countries, might be to make financial assistance conditional on setting up a joint-and-several liability grouping within the family. But that takes time, and time is money, even for organizations like ours.
Entrepreneurial skills are, of course, a function of education, and it is clear that the people who approach FIDI do not have a high level of education. How can this situation be improved? We think there should be short and simple training modules available to help teach the ABCs of business — the skills needed both for launching a project and for managing a small enterprise. This of course would be outside FIDI's scope — it is up the public authorities to act on the issue of education.
FIDI's experience has been too brief for a proper assessment of its performance and impact. We must admit, in all humility, that we are still learning while we are doing. It would be unfair to judge the soundness of FIDI's activities solely from the economic viewpoint (on the basis of whether it makes a profit). Nevertheless, FIDI's long-term goal is to be self-financing.
From my own experience in the field, I offer the following observations on developing a class of micro- and small enterprises. I believe, first of all, that the problem in Côte d'Ivoire is not mainly a lack of financing (although it is true that some projects are not helped by the entrepreneur's lack of savings or the absence of commercial banks willing to lend to small business). Any serious and competent promoters who have financially feasible projects can now find financing suited to their needs (their own funds, loans, lease–purchase arrangements) and their type of business (informal sector, micro- and small enterprise, SME, and so on).
On the other hand, this study identifies two real obstacles to the growth of micro- and small businesses:
• The first of these obstacles has to do with the business environment (economic, regulatory, taxation, and bureaucratic) and the discrepancy we see between the statements and the actions of the public authorities in this area.
• The second is the scarcity of bankable projects submitted for FIDI's consideration and the weak entrepreneurial abilities of the promoters we have seen.
It is going to take a long-term effort to change mentalities. This can be done through sensitization and training of promoters and young entrepreneurs and the creation of a new profession: the microenterprise adviser. The entrepreneurial spirit and the abilities that go with it do not invent themselves — they must be acquired and passed on. We need to promote a coherent and comprehensive national policy (tax incentives, appropriate regulations, simplified administrative procedures, and so on) and put a competent person in charge to see to its implementation.
For the short term, we need to establish a training and orientation centre, a sort of business promotion centre for SMEs. We should also make the banking law more flexible, so that private savings can be mobilized for micro- and small-enterprise development programs. Finally, we must make available technical assistance adapted to the needs of promoters and young entrepreneurs to give them the training they need and to help enterprises survive beyond their first year.
I will end by stressing a point that should be obvious: there is no way that an organization like FIDI can continue to expand its financing activities solely on the basis of direct investments. Loans and lease–purchase arrangements are much better suited to micro- and small enterprises. These are especially needed if we ever hope to see enough activity for an organization like FIDI to become self-financing.
Over the years, governments in Nigeria have developed regulations and guidelines to make credit facilities more accessible to small-scale enterprises (SSEs). Some of these regulations and guidelines are directed at the establishment of more industrial development centres; the establishment of model industrial states to encourage prospective small-business entrepreneurs; full exploitation of existing World Bank programs for SSEs; introduction of the National Economic Reconstruction Fund (NER-FUND); setting up of small and medium-scale enterprises (SMEs) loan schemes; the establishment of a rural banking scheme and the requirement that the rural banks lend 50% of deposits generated in the local areas for investment in industrial projects in the same local areas; the requirement that banks lend 16% of their total loans and advances to SSEs, and so on.
Despite these efforts by government, small-business owners continue to be denied access to credit. The banks insist on collateral that the small-business owners do not have. Unfortunately, high interest rates and lack of funds may have forced about 1 000 small and medium-scale industries nationwide to fold since the inception of NERFUND ("Small, medium-scale firms fold-up.... Association accuses NERFUND," The Nigerian Guardian, 6 April 1993). NERFUND is known to be granting loans to big industrialists. This has driven many SSEs in Nigeria to rely mostly on personal funds and informal financial sources for their credit needs (Osoba 1986; Ekpenyong 1991).
Having realized this dilemma, government decided on 31 October 1989 to establish the People's Bank of Nigeria (PBN) to extend credit to SSEs. The Bauchi Cooperative Financing Agency (BCFA), established in 1976 by a few farmers, has also made significant contributions to financing of SSEs in Nigeria. The PBN is a governmental institution, whereas the BCFA is privately owned.
Because of the effectiveness of these two funding institutions in Nigeria, the objective of this paper is to examine their operational mechanisms and loan recovery rates.
PBN is structured after the Grameen Bank in Bangladesh, India, with modifications to reflect the traditional nature of Nigerian society. Decree 22 (1990 People's Bank of Nigeria Decree) established PBN and gave it the following specific functions:
• Meeting the basic credit requirements of underprivileged Nigerians who are involved in legitimate economic activities in both urban and rural areas and who cannot normally benefit from the services of the orthodox banking system, owing to their inability to provide collateral.
• Accepting savings from this same group and paying interest on these savings after investing the money in short-term deposits with commercial and merchant banks.
This decree defines underprivileged Nigerians by their various trades and professions, including roadside mechanics, the self-employed, plumbers and electricians, small-scale traders, small-scale farmers and poultry and other livestock keepers, dressmakers, barbers and hairdressers, washermen and washer-women, and other people throughout the country who need financial assistance to improve their trade and economic well-being.
As the managing director of the bank confirmed in 1993, PBN will not abandon its primary role of catering to these people to start soliciting deposits from the rich. The role of PBN is to ensure that the peasants and market men and women can obtain loans from PBN easily. PBN has been set up not necessarily to make profits but to give able-bodied and disabled Nigerians without access to commercial banks the necessary assistance to set up small-scale concerns.
Decree 22 provides for a board of directors for PBN. The Board of Directors is responsible for the overall policy and general management of the bank and has the Chairperson; the Managing Director; representatives of the Economic Affairs Department of the Presidency, the Ministry of Finance, and the Governor of the Central Bank of Nigeria; and four other people.
The Board of Directors is the highest policymaking body of PBN. The fact that government does not control policy-making explains the effectiveness of PBN's operations.
Decree 22 sets out conditions for PBN's operations:
1. Funds — Before August 1990, the maximum loan to a beneficiary was fixed at 2 000 NGN (in 1994, 22 Nigerian naira [NGN] = 1 United States dollar [USD]) and the minimum at 50 NGN. Since then the maximum loan has increased to 5 000 NGN. The size of loan provided to any one client is expected to increase over time.
2. Service charges — The service charge on a loan is not to exceed the bank's administrative costs for the loan. Initially, the service charge was fixed at 5%, but it was increased to 15% in August 1990 and has remained at that level. The commercial banks, in contrast, charge up to 80% and in many cases more.
3. Repayment periods — Every loan granted by PBN has to be repaid within 1 year, with a 2-week grace period. Repayment is in small, weekly instalments. New loans may be granted to people who have repaid their loans in full within the period specified.
4. Procedures when a borrower dies — If the loan recipient dies, the bank endeavours to retrieve as much as possible of the loan or its residue by whatever means it may consider appropriate, including the disposal of the assets or property purchased with the loan. This provision has been very effective because traditionally an outstanding debt is considered a disgrace and humiliation to the family. The borrower, therefore, tries not to leave such a legacy.
5. Investments — Decree 22 also requires the borrower to invest the loan from PBN within a short period, except in very extenuating circumstances, such as the death of a close relative or serious illness of the borrower. The borrower must use the loan only for the purpose PBN agreed to and cannot, under any circumstances, divert it or use it to pay staff salaries.
It is PBN's policy that prospective borrowers be organized in groups, each consisting of about 13 people. Loans are granted to no more than five borrowers in the group at any one time. Each loan is jointly guaranteed by all the members of the group. This explains the success of the bank's operation. The repayment performance of the group determines the chances another batch of members has of receiving a loan. The group leader is the last to be considered for a loan. The group leader can only qualify for a loan if the bank is satisfied with the repayment performance of the group members.
Loan requests are received at the various centres by field officers. The field officers visit the loan seekers to ensure that they are actually low-income earners and require financial assistance in their trade or profession. The field officers then forward the loan requests to the appropriate branch managers. The branch managers evaluate the requests and send their recommendations to the respective zone managers for approval. The zone managers send the approvals to the head office for consolidation and control. The branches disburse the approved loans.
The field officers at the centres monitor the use and repayment of the loans, with the cooperation of the borrowing group leaders. The zone managers also send reports of the borrowing group's repayment performance to the head office.
The bank requires no collateral from any loan beneficiary — tight supervision by the the field officers and the joint responsibility of the group members replace the need for collateral. A default by a member of a group jeopardizes the chances of any member of that group qualifying for another loan.
Regular meetings between the bank staff and the members of the various groups ensure the cooperation of the loan beneficiaries. At such meetings, PBN informs the group members of the loan regulations and repeatedly emphasizes the importance of cooperation.
A study conducted by Ekpenyong (1992) on the performance of PBN showed that as of 31 March 1991, PBN had established eight zones in the 30 states and Abuja and a total of 175 branches. The branches and loan beneficiaries were evenly spread among the states. The number of beneficiaries was estimated at 140 000, of which 60% were women.
Disbursements totalled 207 million NGN; 178.4 million NGN had been recovered, leaving a total outstanding of 28.6 million NGN. (Data from the Central Bank of Nigeria show that by 31 December 1991, 6.2 billion NGN had been granted in loans and advances by the entire banking sector to rural borrowers.)
Long-term loans for cocoa or palm oil, for example, have a 1-year repayment period; seasonal loans for seasonal crops, poultry, and fishing have a 1-year repayment period, subject to a 3-month moratorium; and loans for other trades have a 1-year repayment period, subject to a 2-week moratorium.
Loans have so far been concentrated on agricultural projects. Recipients are given the option of repaying weekly or monthly (as they are able) within the 1-year repayment period. Recent data issued by PBN show a loan recovery rate of about 93%.
Factors contributing to the high loan recovery rate include the following:
• The loans are "soft loans" at concessional rates of interest.
• Because borrowers obtain the loans easily, they feel obliged to pay them back just as easily (compared with a situation where they might have to pay heavy fees to obtain the loans). Transaction costs are low.
• Rather than granting loans to individuals, the PBN grants loans to groups of traders or farmers, and so on, who come from the same locality and know each other very well.
• Loan recipients are always certified creditworthy.
• Repayments can be staggered. Loan recipients can pay any time they can afford to within the repayment period, instead of paying large sums at one haul.
• PBN staff effectively monitor the repayment of the loans.
These findings reveal some important dimensions of this new program:
• There is an even spread of loan disbursements across the country — something the commercial banks have failed to accomplish, despite the government directive that they lend 50% of the deposits they collect in the rural areas for industrial projects in these areas.
• Some of the principal urban beneficiaries are in the local government areas in Lagos State, often referred to as the "slums," and inhabited by low-income earners. Modern financial institutions (the commercial banks) would not under any circumstances lend to these people.
• The sectoral distribution of the loans shows that they are meant for the core of the SSEs, that is, craftspeople, artisans, small-scale traders, mechanics, and so on.
• Women are not discriminated against, as is the practice of the orthodox banks. In the subsectors traditionally dominated by women (such as trading), women received as much as four times the number of loans granted to men in that subsector.
The BCFA was founded and registered as an apex cooperative society on 4 June 1976, under the Cooperative Societies Law of Northern Nigeria, with the objective of financing SSEs.
The agency has a board of directors consisting of 10 members — 7 elected and 3 seconded from the business or financial sector, as provided by the bylaws.
Activities are conducted at the zonal level, where the zone managers have direct contact with the members of the cooperative unions registered with BCFA. Each member of an affiliated union contributes a capital share of 5 000 NGN and is entitled to all the rights and privileges of a member, including attending and voting at the annual general meeting and receiving loans and advances from the agency.
The applicant submits a loan request to the local Cooperative Society, which evaluates it and submits it to the zone manager for BCFA. The zone manager then evaluates the loan application, visiting the Cooperative Society and evaluating its records and also visiting and assessing the applicant. If the zone manager considers the application satisfactory, it is sent to headquarters. When the loans are finally approved at headquarters and the money is released, both the headquarter's staff and the zone manager undertake the disbursement.
The zone officers, together with the headquarters staff, also undertake the recovery of the loans when due. The zone officers provide support services (helping the cooperative unions to organize, plan, and produce bankable project documents, maintain adequate records, and so on), which have greatly enhanced the efficient use of the funds and recovery of the loans. Where a member of the cooperative defaults, the rest of the members are bound to pay back the defaulting member's share of the loan, which imposes on all members the responsibility of exerting pressure on each beneficiary to repay his or her loan.
The loan-recovery strategy adopted by BCFA is built around the planting and harvesting seasons — loans are granted during the planting season and recovered during harvest. The repayment periods are staggered to suit the different crops for which BCFA grants loans: maize, sorghum, millet, and beans. The maximum period granted for loan repayment is usually 9 months.
The project is currently sponsored by the World Bank, but it was initially sponsored by the state government. Satisfied with the operations of BCFA, the World Bank disbursed $2.8 million USD for BCFA activities in the financial year 1990/91. When the activities of the agency were assessed for that year, the recovery rate was as high as 96%. The 1991/92 unpublished financial statement shows a similarly high recovery rate. The following year, the rate declined only slightly to 91.5%.
The following factors contribute to these high loan-recovery rates:
• The agency directly provides critical inputs (fertilizer, bull tractors, and so on) to the farmers. This enables the farmers to plant in time and to have a good yield.
• The agency awards a trophy to the society that pays up first.
• The structure of the cooperative unions is effective, coordinated, and built around the local members. These members know each other and encourage each other to pay up. There are known cases of the society collectively paying for a defaulting member and recovering the money from this member later.
• The agency screens the cooperative unions and registers only those that are well organized.
• The member unions strictly screen applications for loans.
• The zone officers and the headquarters personnel effectively monitor union activities.
• The agency disburses loans promptly, ensuring timely planting, which results in a good harvest.
• The agency considers the union's prompt payment as a factor increasing its loan eligibility.
• The agency uses effective education and training to inform the farmers of the benefits of prompt payment. Between September and December, the agency conducts education and training sessions for all its affiliated unions on the benefits of prompt loan repayment.
• The agency's organizational structure is simple and unbureaucratic, so things get done quicky.
• There is no government interference in the agency's operation.
The success of PBN and BCFA clarifies certain important facts:
• SSEs in Nigeria, and in Africa as a whole, can be viable.
• It is possible to grant loans to SSEs without collateral and still recover the loan. It is not collateral that guarantees recovery of a loan but the way the enterprise is managed and the way it is treated.
• Government bureaucracy or involvement in the financing of SSEs is a serious hindrance to their growth and development. The management of PBN and BCFA is free from government interference.
• The operational framework of a lending institution needs to take account of social tradition. The operational frameworks of PBN and BCFA are built around the family and village, where there is loyalty to one's family and obedience to the elders. A borrower, for example, feels obligated to repay the loan to avoid the disgrace of being labeled "a borrower and debtor." The debtor is inclined to repay the loan before he or she dies, so that the surviving family will not have to suffer because of the unpaid debt.
• The terms of the loan agreement also motivate the borrowers to repay the loan. For example, no member of the society or group will obtain another loan if one isn't repaid, and this certainly puts pressure on everyone in the group to repay, if for no other reason than to escape the wrath of the other members.
• The tight administration and supervision of loan beneficiaries prevent their diverting the loans to other uses than those agreed to, a phenomenon very common among beneficiaries of loans from other financial institutions.
It is my view that informal financial institutions in Africa can be made to serve SSEs effectively.
In Kenya, as in many developing countries, policies for promotion of small-scale enterprises (SSEs) have been based on perceptions of SSE operators as poor and in need of cheap credit. Policies and credit programs based on this perception ignore the indigenous informal credit systems that for a long time have been the only source of credit for most SSE operators.
This paper looks at current and past credit schemes for SSEs and analyzes the changing roles of the key institutions. The paper also looks at the policies, programs, and activities of the major institutions providing credit for SSEs in Kenya, namely, a government direct-lending program, the Joint Loan Board Scheme (JLBS); an NGO, the Kenya Rural Enterprise Programme (K-REP); two commercial banks, Barclay's Bank of Kenya and the Kenya Commercial Bank (KCB); and, two development finance institutions (DFIs), the Kenya Industrial Estates (KIE) and the Small Enterprise Finance Company (SEFCO).
This paper has four sections. The first section discusses the consequences of past policies for the promotion of SSEs. The second examines the changing roles of the key institutions. The third discusses two issues that influence the demand for and supply of SSE credit — interest rates and the use of collateral and securities. The final section presents some conclusions concerning SSE credit policies.
This paper draws on the findings of studies of SSEs in Kenya by Mutua (1992) and Tomecko and Aleke-Dondo (1992).
Policies for promoting SSEs in Kenya and many developing countries have been based on premises that ignore such informal credit systems as rotating savings and credit associations (ROSCAs). Some of these mistaken assumptions are the following:
• SSE operators are unable to organize themselves.
• They are too poor to save.
• They need cheap credit for their enterprises.
There were three major policy consequences of this misconception of SSE operators:
• Development banks and special credit programs set up to provide credit for SSEs neglected the role of savings mobilization in sustainable credit systems.
• Credit was subsidized.
• Credit guarantee schemes were set up by the government and donor organizations to cover anticipated losses.
These policy strategies had the following results:
• The scope of credit remained severely restricted, as there was no built-in growth factor that would have resulted from mobilizing internal resources.
• Few people received loans. The majority of SSE operators had no access to credit from the development banks or special credit programs implemented by the government or NGOs.
• Special credit programs were not managed professionally, which resulted in low repayment rates and decapitalization of the credit programs.
• Commercial banks, through which some of the credit guarantee schemes operated, had little motivation to screen their borrowers and recover their loans, which resulted in high default rates and continuous decapitalization.
In recent times, however, as a result of increasing shortages of external funds for credit programs for SSEs and growing dissatisfaction with credit programs implemented by government and NGOs, there has been a reorientation of credit programs. New models have been introduced that are designed to help the lenders achieve financial sustainability and to reach many SSEs. The focus is on promoting, not replacing, existing indigenous credit mechanisms, such as ROSCAs. These changes have become more pronounced in the 1990s.
Kenya has one of the longest histories of promoting SSEs in Africa. The first real effort was made in 1967, when KIE was established. KIE was set up to provide credit, management assistance, and industrial estates to encourage Kenyan citizens of African origin to form enterprises in urban and rural areas. Today, there are 75 credit programs for SSEs in Kenya, implemented by the government, DFIs, commercial banks, and NGOs. Table 1 provides an estimate of their relative contributions as of July 1992. Because commercial banks are not required to report the volume of credit they extend from their own resources, these estimates only include special programs that the commercial banks have implemented, usually in collaboration with donors or NGOs.
The significant increase in the number of institutions supporting this sector has not been matched by significant changes in policy, although many policy pronouncements have been made. However, significant operational changes have occurred among some implementing institutions. In the last 3 years, new lending methods and innovative strategies have been adopted for providing credit to this sector.
The government has been a key actor in SSE development, directly implementing two credit programs: the JLBS and the Rural Enterprise Fund. The government is involved in four others through parastatal organizations.
The government, which has not been particularly successful in the credit and extension services programs it directly supports, is now, according to Sessional Paper No. 2 (Kenya
Table 1. Number of borrowers and portfolio outstanding by institution (July 1992). | |||||
| Borrowers |
| Portfolio outstanding | ||
Institution | No. | % |
| (KES)a | % |
Kenya Industrial Estate | |||||
Formal | 1 544 |
|
| 612 000 |
|
Informal | 1 700 |
|
| 26 000 |
|
Total | 3 244 | 37 |
| 638 000 | 58 |
Small Enterprise Finance Company |
| ||||
Formal | 258 |
|
| 109 400 |
|
Informal | 204 |
|
| 3 000 |
|
Total | 462 | 5 |
| 112 400 | 10 |
Barclay's Bank | 582 | 6 |
| 292 800 | 27 |
Kenya Commercial Bank | |||||
Jua Kali 1 | 50 |
|
| 500 |
|
Graduates | 130 |
|
| 14 000 |
|
Women | 98 |
|
| 2 400 |
|
Total | 278 | 3 |
| 16 900 | 2 |
NGOs (K-REP)b | 2 940 |
|
| 23 784 |
|
NGOs (other) | 1 470 |
|
| 11 892 | |
Total | 4 410 | 49 |
| 35 676 | 3 |
Total | 8 976 | 100 |
| 1 095 776 | 100 |
Source: Tomecko and Aleke-Dondo (1992). | |||||
aIn 1993, 41 Kenyan shillings (KES) = 1 United States dollar (USD). | |||||
bK-REP, Kenya Rural Enterprise Program. | |||||
1992), expected to play a facilitative role in a number of vital areas, which could improve the overall climate for investment and expansion of SSEs.
The Treasury of Kenya has liberalized interest rates, which is expected to increase the availability of investment funds for SSEs. Price controls have been removed on a wide variety of goods, and import quotas have been replaced with selective tariffs. The Treasury is also pursuing a more market-oriented exchange-rate policy, which is making imported products more expensive than those locally produced.
The government, however, is uncomfortable with its new role as a facilitator of SSEs. This is clear from the contradictions apparent in the Sessional Paper. The most obvious of these is the inclusion of a newly created Rural Enterprise Fund with a loan capital of 400 million KES (in 1994, 41 Kenyan shillings [KES] = 1 United States dollar [USD]). The fund is interventionist, charges subsidized interest rates (8%), and ignores all the past failures of the government in implementing the JLBS, which is discussed below.
Started during the colonial period in 1955, the main objective of the JLBS was to help indigenous African entrepreneurs start and run small businesses. The main focus was and continues to be on retail and wholesale trade, small hotels, restaurants, transport, and commission agencies. Tangible securities are replaced with guarantors and in some cases chattels. Loan terms are between 2 and 5 years, and the interest rate since the inception of JLBS has been 6.5%. There is a board in every district and major municipality. The boards are in charge of managing the credit scheme. All these boards have substantial arrears, and their continued support has on several occasions been questioned. The scheme continues to operate with direct subsidies from the government, which in the fiscal year 1990/91 amounted to 4 million KES from the central government, with a matching amount from local authorities, and also with what JLBS receives from the borrowers who do repay. There have been no rigorous evaluations done on JLBS, but even in the absence of such studies, its large arrears categorize this program as a failure.
NGOs as a group of lenders are the newest and potentially most interesting, as they are likely to bring about further growth and sustainability of institutionalized credit for SSEs. Although there was some lending by NGOs in the late 1970s and early 1980s, it was not until 1984, with the advent of K-REP, financed by the United States Agency for International Development (USAID), that any comprehensive approach to SSE credit emerged. K-REP was established primarily as a subdonor of USAID. It channeled loan funds to other NGOs, who either wished to extend their lending operations but lacked funds or wanted to start their own programs and needed technical assistance as much as they did loan capital.
Experience reveals that the performance of the participating NGOs was mediocre, despite major efforts at institution building, staff training, and the provision of funds for lending to SSEs.
Somewhat surprisingly, the first attempts were similar, but on a more modest scale, to the "integrated approach" popular with DFIs in the 1970s. The program provided training to individual borrowers before they received their loan and also provided them with postloan counseling. K-REP also supported the institution building of the NGO borrowers by giving a great deal of assistance for staff development, loan-monitoring systems, and conceptual planning.
After several years of trying this approach and recording recoveries averaging 78% and very low levels of disbursements, K-REP decided to alter course and adopt the minimalist model developed in Asia by the Grameen Bank of Bangladesh. Not only K-REP itself but all major NGOs operating credit schemes in Kenya today have adopted this model.
The main features of the model are the use of groups of five borrowers to secure the loans, the disbursement of small loans, high recovery rates, relatively low operational costs, and the mobilization of savings. Although this approach is still new in Kenya, it offers hope of cost-effectively providing small loans to a large number of SSE operators. This method has improved the cost-effectiveness of these programs to the extent that the ratio of credit administration costs to credit disbursed is 1:4.
Despite the fact that some of these NGOs are doing well, the long-term commitment of most of them to SSE lending is questionable. Many still have a social orientation and find it difficult to harmonize a tough-banking approach with their original goals of public welfare. The NGOs, however, that were set up specifically for lending to SSEs are less confused about their missions and offer some of the best prospects for sustainable programs for the SSE sector.
K-REP was established in 1984 with funding from USAID. In the beginning, K-REP's strategy for developing microenterprises was to promote Kenyan NGO credit programs. The objective, then, was to build the institutional capacity of Kenyan NGOs. K-REP provided them with grants, training, and technical assistance. In a period of 4 years, K-REP supported a dozen credit programs. All these credit schemes were supplements to welfare programs. Eventually, it became clear that NGOs primarily involved in traditional social-welfare programs found the transition to sustainable lending difficult to make. It also became obvious that the "integrated" method of developing microenterprises — largely through grants or subsidized loans — had a limited impact on the beneficiaries, was costly, and could only be sustained or expanded through grant funding.
In light of this experience, the strategy was changed in 1989 in four ways.
• The program was redesigned to involve only four of the most promising NGOs.
• The method of credit delivery was changed from the integrated to minimalist approach.
• Financial assistance to assisted NGOs, which previously took the form of 100% grant but no loan, was changed to 70% loan and 30% grant.
• To address self-sufficiency concerns and put into practice what K-REP learned from experience, it broadened its program focus beyond the NGOs by launching its own direct-lending programs, the Juhudi and the Chikola credit schemes.
The change from the integrated to the minimalist approach in lending to small and microenterprises improved the impact and cost-effectiveness of the programs significantly.
Using the integrated method of credit delivery, seven K-REP-assisted NGOs lent only 15.7 million KES to 2 500 borrowers in 3 years (1985–1988). Start-up and operating costs totalled 15.05 million KES. On average, each loan cost the NGOs 5 976 KES, or 96 cents for every shilling, to disburse and administer. With repayment rates averaging 78%, the programs were losing 22 cents for every shilling disbursed. The only way they could continue operating was by acquiring more grant funds, which, in the face of dwindling donor resources, could not be sustained.
Results under the minimalist approach portray a brighter picture for the four K-REP-assisted NGOs and K-REP's own Juhudi Credit Scheme, which have adopted the minimalist group-based method of lending. In 3 years, the five programs lent a total of 132 million KES to 14 754 borrowers. The cost per shilling lent has declined, on average, from 96 cents to 25 cents, and repayment rates have improved from 78 to 94%. Revenues generated through credit activities now cover about 66% of operating costs. In addition, a total of 23 million KES, or 17% of the total amount lent, has been mobilized as savings.
• Can the current NGO welfare programs implement effective credit programs?
One major concern is whether microenterprise credit programs can succeed if they are run by traditional welfare NGOs. Although the Kenyan NGOs that have adopted the mini-malist credit approach have made significant improvements, these NGOs are faced with the problem of balancing the objectives of welfare and the focus on sustainable credit programs. This conflict threatens the success of their schemes, as the attention of their management is split between credit and welfare objectives.
Welfare-oriented NGOs have traditionally approached the issue of development from a very broad perspective. Usually, the welfare programs focus on alleviating poverty by providing a number of free or subsidized services. Programs with a focus on sustainability, in contrast, are supposed to be providing a service poor people want and are willing to pay for. In the case of welfare NGOs, the focus is not on delivering credit efficiently but on providing another service to the poor. These differences in focus are largely responsible for the NGOs' slow transition to a financial-systems approach to lending to poor entrepreneurs. Part of the problem is probably lack of a common understanding among NGOs about who are or should be the beneficiaries of credit and who are or should be the beneficiaries of welfare services. Because NGO welfare programs focus on the poorest of the poor, their credit programs tend to serve the same constituency. When the criterion used to select clients for credit programs is poverty, the programs end up with borrowers who are not entrepreneurs. The poorest people in any community are not likely to be business operators. They are more concerned with the basic needs of survival and would likely divert loan money to serve needs more urgent than those of starting a business.
• Should NGOs pursue goals of financial self-sufficiency?
One issue that remains unclear to most welfare-oriented NGOs is whether the pursuit of financial self-sufficiency might subordinate the goals of broader community development. Emphasis on efficient access to credit and financial self-sufficiency is often misconstrued as a condemnation of the role of welfare services. Many argue that NGOs should not be satisfied merely with efficient disbursements of loans, high repayment rates, and maximum profit.
This argument contains some valid points. NGOs are development agencies and should not forget their development mission. The alternative, however, is not providing credit as a welfare service. This would not only waste resources but also work against broader development goals. It is possible for NGOs to provide credit to poor entrepreneurs efficiently without sacrificing the goals of broader development. This can be achieved by an NGO's specializing in credit and collaborating with NGOs that provide other services, such as training, promoting, and partly subsidizing SSEs.
Credit for microenterprise development has become a very specialized operation, which relies on sound credit-management principles. If these principles are compromised, efficiency is sacrificed.
• Do NGOs have the capacity to manage credit programs?
It is common for NGOs to start credit programs without being prepared. Often credit programs start before proper management information systems or qualified personnel are in place. Such programs are managed by staff who have no experience in the credit management field and are often unable to judge the quality of their portfolios.
Lack of capacity to manage credit is largely a result of remuneration policies that are not attractive compared with those in the commercial sector. Generally, welfare-oriented NGOs pay much lower salaries than the private sector. This limits their ability to recruit and retain qualified staff. Some organizations have a problem justifying a higher salary scale for credit staff and a lower one for welfare program staff. In some cases, staff implementing welfare programs are asked to double up as credit officers, even when the two roles conflict.
Like many countries the world over, Kenya has thousands of ROSCAs (chikola groups), which are a source of credit for thousands of people with SSEs. Many rural credit analysts are enthusiastic about the apparent success of such associations.
In Kenya, ROSCAs are found in rural and urban areas, either as registered social welfare groups (mostly women's groups) or as unregistered groups of friends and family members. ROSCAs operate on simple principles. At regular meetings, each member contributes a fixed sum of money, which is given to one member, and each member gets a turn as a recipient.
The chikolas provide credit to those who would be ineligible to borrow from other sources. They also mobilize savings, serve a social function, and provide a form of insurance (from the group's savings). The chikolas offer a number of advantages to members. The main one of these is that their operations are simple and easily understood by even illiterate or semiliterate people, who form the bulk of their membership. Springing from local initiative, chikolas generate a sense of ownership and loyalty and embody truly participatory development. The chikolas are a promising approach to developing sustainable credit schemes for SSEs in Kenya.
One of the problems faced by these groups is their small capital base and thus a limited ability to meet the credit needs of the membership. With a larger capital base, a chikola could give more group members larger loans more often.
K-REP, beginning in 1991, recognized this need and began a loan program designed to meet it. K-REP prepares a contract with the chikola, which gives a loan to a group at market rates of interest for 1 to 2 years.
The chikola then lends a prespecified amount of the money received from K-REP to an individual at a rate of interest higher than that the chikola pays K-REP. Each member makes repayments to the chikola, which repays K-REP in monthly instalments. The money resulting from this rate spread is retained by the chikola as a way of building up its capital base. Benefits accrue to both the individual chikola member and the chikola itself.
This arrangement is a cost-effective way of extending credit because much of the administrative work, normally done by the loan officer, is done by the chikola. As many as 25–35 people may receive loans for the same amount of work as for one loan prepared by one loan officer. Because the groups that K-REP sponsors have been around for a number of years, they have achieved high levels of cohesiveness and thus avoid the interpersonal conflicts typical of new groups. In 2 years, K-REP made 62 loans to 55 groups. The loans, worth a total of 23 million KES, were made to 1 340 members. The repayment rate was 100%.
Despite the fact that Kenya has a relatively sophisticated banking sector — 28 commercial banks with more than 400 branches, subbranches, agencies, and mobile units — most of the commercial banks are passive observers as far as lending to SSEs is concerned. Until the 1980s, none of the commercial banks had a credit program specifically for SSEs.
Although commercial banks have historically been the main deposit mobilizer and source of credit in the economy, their share of the economy has been declining as a result of the proliferation of financial institutions of other types. The system of commercial banks in Kenya is dominated by four major banks — KCB, Barclay's Bank of Kenya, Standard Chartered Bank, and the National Bank of Kenya — which together account for more than 60% of the deposits in and credit volume of commercial banks.
Although most ba