Question

TASK TWO: secondly, and unrelated to the above task, management of NAPSA would like to set-up a Bank that will provide funding to SMEs in Zambia. Thus, management would like to understand: (i) why debt finance is expensive in Zambia, and (ii) factors that hinder access to debt finance by SMEs in Zambia.

Answer 1

Cost of debt financing is dependent upon the credit worthiness (riskiness) of the:

• Project
• Company
• Government

The debt funding evaluates the ability of the project / company and eventually the nation to repay the debt on time and in full amount. The probability of default is dependent upon the political, economic and social factors prevalent in the economy:

Zambia is subjected to political instability, economic instability, probability of recession, poor development, lack of industrialization, inflation, terrrorism and many other factors. Exchange rate risk is prevalent. Interet rate risk is high. Average income level is low, savings level is low, consumption is yet to pick up. Infrastructure is to be in palce. Lots of development is yet to be carried out.

All such factors increase the riskiness from the perspective of the lender. And hence, the debt finance is expensive in Zambia.

Factors that hinder access to debt finance by SMEs in Zambia

• No organized data on historical performance
• Not enough history of growth in the revenues and improvement in the margin
• Lack of growth drivers in the business
• Concentration of business within one city,
• Higher dependence on one product;
• Revenue base i not diversified
• Profitability is not assured and not on sustainable basis