2.5 M EASURES TAKEN BY THE G OVERNMENT OF Z IMBABWE TO CREATE A CONDUCIVE ENVIRONMENT
2.5.1 SME Policy Index: Analysis of the Policy and Strategy Framework for SMEs in Zimbabwe . 45
2.5.1.3 Taxation and financial matters
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Figure 2. 2 Assessment framework for cheaper and faster start-up and better legislation and regulation for SMEs.
Figure 2.2 shows the SME Policy Index assessment framework for Cheaper and Faster start-ups and better legislation and regulations according to the OECD (2014:41). In order for the Government of Zimbabwe to allow for cheaper and faster start-up there is need to lessen the time it takes for the issuance of business establishment registration certificate and the completion of the overall registration process and entry in operations. Online access and one-stop-shop for registration and start-ups can facilitate the cheaper and faster start-up process OECD for ASEAN and East Asia, 2014: 41).
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collateral requirements, credit guarantee schemes and the further development of the legal and operational credit environment (SME Policy Index, 2002:15).
2.5.1.3.1 Taxation
The Government of Zimbabwe also undertook to minimise administration requirements such as taxation requirements will be undertaken by the government of Zimbabwe (National Policy and Strategy for SMEs, 2002:8). This was aimed at lessening the burden of compliance and administration on SMEs. Nyamwanza et al. (2014:2-3) point out that the compliance costs for SMEs in Zimbabwe are up to six times higher than those for large companies. This justifies Chipangura and Kaseke’s (2012:46) view that SMEs are most vulnerable in terms of survival because of their newness and smallness. Minimising and simplifying procedures for registration will lessen compliance costs for small businesses. It is therefore imperative for the National Policy and Strategy for SMEs in Zimbabwe to lessen the burden of compliance for SMEs in Zimbabwe.
Most SME owners are unskilled (Nyoni, 2002:10) as such complicated tax systems make it difficult for the registration and operation of SMEs. The National Policy and Strategy for SMEs (2002:8) also has an initiative to use standardised formulaes to calculate tax liability and tax forms that are user friendly for SMEs. These efforts acknowledge the lack of skills in most SME owners and managers thereby simplifying the tax system and enabling them to register and comply with requirements.
Ngwenya, Sibanda and Chitate (2014:1) concur that some of the factors that are ranked high as causes for non-tax compliance of SME are complexity of the tax systems and economic factors.
By simplifying the tax system and making it user friendly to SMEs, the government is making compliance easier for SMEs. By adjusting the tax regime to make it accommodative to SMEs government stands to benefit from more revenue which it needs because of the increase in its responsibilities (Nyamwanza et al., 2014:3).
Government made a commitment towards putting in place incentives that are aimed at lessening the burden of compliance as well as the registration process for SMEs. The incentives include tax
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relief where small businesses will be exempted from the full rate of tax (National Policy and Strategy for SMEs, 2002:8). This strategy sought to encourage SMEs to formalise their businesses. However, Karedza et al. (2014:38) found that SMEs are still demotivated from formalising their businesses because of the taxes. Gombarume and Mavhundutse (2014:105) note that SMEs are weak because of very difficult business conditions which include unattractive tax regimes. Therefore by offering tax relief the government can provide an incentive for small businesses to register.
Small businesses are also given a 5-year grace period on taxation during their start-up phase (National Policy and Strategy for SMEs in Zimbabwe, 2002:9). This is in recognition of the high failure rate of small businesses in the first five years of their establishment. By giving SMEs a five-year grace period small businesses have room to develop and establish a strong financial base. Nyamwanza et al. (2014:4) found that 55 percent of the SMEs in their study cited taxes as having a high impact on their business operations. It is therefore important for government to address the tax regime in order to make it accommodative to SMEs.
However, a decade after the inception of the SME policy Mudarikiri (2012) reports that there is a need to reduce the tax band for SMEs as the current one is too high for the sector and is suffocating growth. Although lessening the tax burden is an official strategy to assist SMEs, this is yet to be implemented as the failure of small businesses is still being attributed to the high tax band.
Tax breaks for companies which subcontract to SMEs or which earmark funds for the small businesses sector such as business angels will be introduced as incentives for raising funding for SMEs (National Policy and Strategy for SMEs in Zimbabwe, 2002:8). Subcontracting increases the profitability of small businesses and tax breaks for large companies work as incentives considering the many taxes that they have to pay. However, in a study on managing SMEs as suppliers Musikanzwa (2014:35) found that SME suppliers were very unreliable, provide poor quality material and perform below standard. This repels subcontracting by large companies as they fear risking the quality of their products or services. The government would, therefore, have
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to ensure quality goods and services provided by subcontracting SMEs as part of the tax break incentive.
2.5.1.3.2 Financial matters
The biggest financial constraints facing SMEs in Zimbabwe are limited access to finance, the high cost of finance, absence of security and the lack of a track record (National Policy and Strategy for SMEs, 2002:9). It is imperative to note that small businesses generally lack equity and are therefore dependent on financial institutions to start and expand their businesses (Gombarume and Mavhundutse, 2014:104). Towards this end, the government of Zimbabwe, through National Policy and Strategy for SMEs (2002:9), makes a commitment to establish institutions that will assist in the viability of SMEs in obtaining unsecured funding at concessionary interest rates. Beck and Dermiguc-Kunt (2006:2939) are of the view that credit availability to small enterprises depends on the infrastructure that supports financial transactions including the legal system and information environment. Government policy, therefore, has to focus on influencing institutions and systems that are central to accessing finances.
The Small Enterprise Development Corporation (SEDCO) was established as the disbursing arm of the MinSMECD (Portfolio Committee on Small and Medium Enterprises and Cooperative Development, 2010:2). The National Policy and Strategy on SMEs in Zimbabwe (2002:3) mentions SEDCO as a government support programme aimed at facilitating small businesses’
access to finances. The SEDCO Amendment Bill (2010:5) places the responsibility of ensuring proper coordination and implementation of national policies, legislation and programmes that have direct impact on the development of SMEs on SEDCO. Thus SEDCO is central to the development of small business sector as it occupies a critical position. Chadamoyo and Dumbu (2012:29) highlight that the establishment of SEDCO by the government is a demonstration of the importance of the small business sector to the economy as well as government’s commitment to their development.
However, the Portfolio Committee on Small and Medium Enterprises and Cooperatives Development (PCSMECD) (2010:3) found that SEDCO in 2010 was financially paralysed and incapable of carrying out its mandate. SEDCO has a lot of responsibilities but is underfunded
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and as such meeting its objectives is a difficult task. Failure by SEDCO to meet its many objectives in relation to SMEs implies that challenges faced by small businesses become difficult to resolve. If an institution given the responsibility of financing SMEs and coordinating SME related programmes and polices is struggling financially then policy implementation and financing of small businesses becomes a mammoth task. Findings by the PCSMECD (2010:2) show that SEDCO has been under capitalised since its inception, a factor which has impaired its ability to raise capital and meet rising costs. Under such circumstances the institution is therefore unable to execute its duties of promoting and developing SMEs. As this is the organisation tasked with funding SMEs without collateral, its failure to secure funding for this task makes SME development envisaged in the National Policy and Strategy for SMEs difficult.
The government, in the Short Term Emergency Recovery Programme (STERP) (2009:60) makes a commitment to recapitalise SEDCO in order that it fully plays its role of financing, training and providing incubation to SMEs. Such an endeavour by the government shows that SEDCO has been underfunded. However, it is important to note that although the government makes a commitment to recapitalise SEDCO, Muzari and Jambwa (2012:1709) in their study on the constraints to SME development in Zimbabwe found out that SEDCO was among institutions that were inadequately funded. The problem of funding SMEs through SEDCO still persists.
Munanga (2013:377) points out that Zimbabwe has a liquidity crisis which makes it even difficult for the government to fund SEDCO.
The government of Zimbabwe also sets to put in place incentives for existing financial institutions that are SME friendly so as to improve lending to SMEs (National Policy and Strategy for SMEs, 2002:9). Incentivising lending is a noble strategy that will ensure that access of funds for both starting up as well as developing. This strategy is in realisation of the fact that financial institutions are complacent to lend to SMEs because they lack a borrowing track record (Cull et al., 2006:3038). Financial institutions require evidence of the borrowers’ capability to pay back the loans as evidenced by their track record. Through incentives, the government of Zimbabwe ensures that SMEs are able to access funding. However, the SME policy fails to define the range of incentives that will be put in place. The incentives would have to be such that financial institutions will be willing to overlook their stringent requirements.
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Credit guarantees also form part of the Zimbabwean government’s intervention strategy which are aimed at addressing finance accessibility and collateral constraints (National Policy and Strategy for SMEs, 2002:9). According to Bukaliya and Hama (2012:61) a credit guarantee is a written obligation on the third party to repay a debt in case of default by the borrower. Garcia- Tabuenca and Crespo-Espert (2010:113) argue that public administrations use guarantee systems in order to facilitate credit access due to the existence of restrictions and imperfections in the markets. In this instance the government makes a commitment to providing a guarantee fund for SMEs in an effort to solve the problem of collateral. However, Chirisa, Dumba and Mukura (2012:117) point out that because financial institutions consider SMEs to be a high risk sector, very few SMEs have been successful in getting any loans disbursed by banks despite government’s efforts to assist them. Muzari and Jambwa (2012:1708) assert that SMEs cannot rely on government guaranteed loans as the government will never have sufficient funds for the sector. Nyamwanza et al. (2014:2) concur with this view and argue that the government’s responsibilities are on the increase while sources of revenue are narrowing. Although there are credit guarantee systems in place, government is incapacitated to guarantee loans by SMEs.
Therefore, although there is a plan in place to facilitate easy access to loans for SMEs, the problem is its fruition because government is cash strapped.
The National Policy and Strategy for SMEs (2002:9) also has venture capital as one of its intervention strategies which is aimed at promoting private equity, business angels and corporate venturing. This corresponds with the need for funding in order to realise maximum benefits from SMEs as these have also been indicated in the SME Policy Index as possible areas that the government may seek to influence (SME Policy Index, 2007:15). Tax breaks have also been stated as some of the incentives for those investing their own equity into high growth sectors (National Policy and Strategy for SMEs, 2012:9). However, failure by the government to set clearly defined incentives and strategies to stimulate risk capital makes the provision of SME funding difficult.
Bukaliya and Hama (2012:6) point out that small businesses have a reputation of high financial indiscipline, whereby some SME operators, having been granted loans, divert the funds to other personal expenditures. Therefore, although government has allocated some funds to small
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business development misplaced priorities increase the of risk failure to realise the set objectives.
This necessitates the development of strategies to ensure that SMEs that are issued loans channel the funds towards the projects for which the funds were given.