Spanner in SME works

Research conducted in 2005, indicating that approximately 75% of small and medium-sized enterprises in Namibia had to close shop within the initial two years, likely remains applicable, especially when factoring in the effects of the recent economic recession since 2016 and the Covid-19 pandemic.

“It can be assumed that many Namibian SMEs fail in their first couple of years, as this is a global trend,” the Institute of Public Policy Research (IPPR) said in its recently released introductory discussion paper on SME financing in the country.

Micro and small-sized firms operating in Namibia are far more vulnerable than larger entities and many fold even before they had a chance to develop and grow, the IPPR paper pointed out.

Similar to other emerging and developing economies, SMEs serve as vital contributors to economic development by actively engaging in job creation and generating income within the nation, the IPPR stressed.

Namibia’s SME sector is relatively small compared to other African countries. “However, virtually all stakeholders believe that the sector holds a great deal of promise in terms of economic development or poverty reduction,” the IPPR said.

Data

Without a recent and thorough enterprise survey, it becomes challenging to accurately determine the scale of the SME sector in Namibia.

According to a 2017 study by the International Finance Corporation (IFC) focused on micro, small and medium enterprises, it was estimated that Namibia is home to approximately 71 000 MSMEs.

However, the ministry of industrialisation and trade acknowledged in its 2016 National Policy on Micro, Small and Medium Enterprises that only around half of these MSMEs are formally registered and admitted to a lack of recent data on the matter.

Despite this, the same policy document highlighted that MSMEs play a significant role in the Namibian economy, providing employment and income to approximately 160 000 Namibians, constituting roughly one-third of the country's workforce, and contributing to approximately 12% of the gross domestic product (GDP).

The policy also emphasised that Namibian MSMEs are active in diverse economic sectors, with a predominant share engaged in retail trade. Additionally, approximately 25% of these enterprises are involved in food processing, manufacturing, or the creation of crafts, while the remaining portion offers various services.

The challenge of formulating effective policy responses is magnified when current data is unavailable, the IPPR said. The 2016 policy document itself highlighted the importance of ongoing quantitative research on Namibian MSMEs to address this need.

Financing schemes

Financial institutions, which include banking institutions as well as development financial institutions, continue to be the most important source of external funding for businesses in Namibia, accounting for more than 90% of total SME financing in recent years, according to the IFC.

SMEs falling within the annual revenue brackets of up to N$10 million (Standard Bank Namibia, Bank Windhoek, First National Bank Namibia) and up to N$5 million (Nedbank Namibia) are eligible to access SME funding from the four major commercial banks in Namibia. These commercial banks provide a range of financial products, some of which have common features with a few exceptions, according to the IPPR.

In addition, Agribank Namibia and the Development Bank of Namibia (DBN) also assist with SME financing in their respective sectors.

Non-banking SME financing include Business Financial Solutions’ Nampro Fund I and Nampro Fund II, Bellatrix SME Finance, One Economy Foundation, as well as the Namibia Business Angel Network (Naban).

Challenges

Namibia's domestic capital markets are relatively small and provide minimal or even no viable financing opportunities for SMEs. The limited liquidity in these markets has been a point of serious concern for SME owners, the IPPR said.

Capital markets typically act as drivers for business and economic expansion by supplying essential capital to enterprises and facilitating the flow of funds from investors to businesses. “However, this is not happening in Namibia and many parts of Africa,” the IPPR said.

“Namibian capital markets are currently funders of government bonds and large and well-established firms, leaving most SMEs relying on traditional short-term debt, which can be a very expensive method of raising finance,” the think tank added.

The limited understanding of how capital markets operate has restricted the participation of SMEs in seeking funding through this avenue. This limitation does not necessarily stem from shortcomings on the part of the SMEs, but rather highlights the shortcomings of the capital market itself, according to the IPPR.

“For example, there is a need for the Namibian Stock Exchange [NSX] to educate the public and SMEs on the various funding possibilities available through the exchange,” the IPPR said.

Capacity

According to the IPPR: “The lack of experience and knowledge amongst SMEs in Namibia has led to the failure of many SMEs in the country.”

The lack of experience and knowledge has also resulted in a lack of confidence from potential investors, it added.

Many SMEs do not possess the essential governance and oversight mechanisms and adequate financial reporting, which results in diminished confidence from potential investors.

Additionally, SMEs are often apprehensive about relinquishing control of their businesses, which hampers their ability to secure equity financing.

Moreover, due to modest salary structures, SMEs frequently encounter challenges in retaining their skilled workforce and attracting new talent, the IPPR said.

Visibility

“SME visibility to the broader investment base can be described as the third most challenging obstacle SMEs face today,” the IPPR maintains.

“Visibility is crucial for investors, as most investors do not attend seminars or start-up events,” it continued.

A significant number of SMEs in Namibia face challenges in acquiring investment or capital, to the extent that many do not even have websites. This absence of an online presence complicates the process for international investors seeking information about SMEs with substantial potential, the IPPR said.

Moreover, Namibia currently lacks a comprehensive registry listing its SMEs. Nevertheless, the Namibia Investment Promotion and Development Board (NIPDB) has introduced a limited MSME catalogue.

It is crucial for businesses to establish an online presence, not only to attract customers but also to capture the attention of potential investors. In today's landscape, investment research firms heavily rely on online data, and SMEs that are not visible online risk missing out on potential funding opportunities, the IPPR stressed.

Government-led strategy

Governmental support, specifically targeted at SME development, is critical for their success, the IPPR said.

“Costly business registration costs, longer business and trademark registration times, taxation regulations that are not supportive of SME development, and nepotism and corruption affecting SME funding and tender opportunities have all hindered SME development in Namibia.”

The MSME policy for the period 2016-2021 has expired, and the goal of establishing a comprehensive SME fund, as outlined in Harambee II, remains unfulfilled, the IPPR said.

While the coordination of SME policy implementation has been assumed by the NIPDB, it is important to note that, at the time of the IPPR paper's publication, the NIPDB has not yet obtained statutory recognition, operating instead as a Section 21 company, which carries a less certain legal status.

Way forward

In response to these challenges, the IPPR proposes the following recommendations:

• Increased capacity-building programmes for SMEs and the creation of SME hubs;

• Raising the visibility and awareness of SMEs;

• Improved government policies to support and aid SME development and growth, including an SME Advisory Council; and

• A comprehensive enterprise survey which would give greater insight into the small, medium, and micro elements of the SME landscape.