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IFLIP Research Paper 03-9

The Determinants of Transactions Cost And Access to Credit by SMEs and the Poor In Zimbabwe

Louis Masuko, University of Zimbabwe* Desmond Marufu, University of Zimbabwe

May 2003 Copyright. International Labour Organization 2003

ISBN 92-2-113743-0 ISSN 1609-8382

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The Determinants of Transactions Cost and Access to Credit by Small and Medium Enterprises (SMEs) and the Poor in Zimbabwe Louis Masuko, University of Zimbabwe* Desmond Marufu, University of Zimbabwe

May 2003

Abstract Focus is on the determinants of transactions cost and access to credit by SME and the poor in Zimbabwe. Studies have shown that transactions cost constrain the access to credit by SMEs and the poor. This study attempted to answer the question on whether the transactions cost associated with the exchange of credit for a promise to pay later could be minimized to facilitate access to credit by SMEs and the poor. Results from a sample of sixty SMEs have shown that such costs can be minimized if only policy proposals could target the sources of such costs.

JEL Classification Number: O12 Keywords: Transactions cost, SMEs, Imperfect information, access to credit, loan size, borrowing experience, group credit guarantee scheme. Corresponding author: Mr. Louis Masuko, P. Box MP 167 MT. Pleasant, Harare. E-mail: masukol@ ___________________________________ * We would like to thank Dr D.M. Gross and Prof. R. Davies, from the University of Zimbabwe, for their comments on the initial and final drafts as well as an anonymous referee; Mr. C. Magaya for logistical assistance and the Zimbabwe IFLIP National Steering Committee for policy guidance. Our thanks also go to Mr. Mabenge, Mr. Tongoona and Mr. Takwada who worked tirelessly behind the scene, and lastly to the Government of The Netherlands without whose financial assistance the study would not have been possible. The usual disclaimers apply.

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THE DETERMINANTS OF TRANSACTIONS COST AND ACCESS TO CREDIT BY SMALL AND MEDIUM ENTERPRISES (SMEs) AND THE POOR IN ZIMBABWE

Louis Masuko, IDS, University of Zimbabwe Desmond Marufu, University of Zimbabwe

May 2003 R?sum? Cette ?tude se concentre sur les d?terminants des co?ts de transactions et l'acc?s au cr?dit par les PME et les d?favoris?s au Zimbabwe. De nombreuses ?tudes d?montrent que les co?ts de transactions emp?chent les PME et les d?favoris?s d'acc?der au cr?dit. La question est donc est-ce que les co?ts de transactions associ?s avec l'?change du cr?dit contre une promesse de paiement ? une date future peuvent ?tre minimis?s pour faciliter l'acc?s au cr?dit des PME et des d?favoris?s? Les r?sultats d?riv?s d'un ?chantillon de soixante PME montrent que de tels co?ts peuvent ?tre minimis?s seulement par des politiques cibl?es sur la source de tels co?ts.

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Table of Contents

1. Introduction.......................................................................................3 2. Transactions Cost: Theory and Concept....................................................5

2.1 Theoretical Context............................................................................5 2.2 Transaction cost.................................................................................7 2.3 Sources of Transactions Cost and their Variation.........................................8 3. Financial Sector in Zimbabwe before and after Reforms...............................10 3.1 Financial Sector Before Reforms..........................................................11 3.2 Post Reform Financial Sector................................................................12 4. Literature Review..............................................................................13 5. Methodolgical Framework.....................................................................17 5.1 Research Design...........................................................................17 5.2 Population...................................................................................18 5.3 Sampling Procedure........................................................................18 5.4 Data Collection.............................................................................19 5.5 Questionnaire Design, Validity and Tools of Analysis...............................19 5.6 Interviews, Field Visits and Data Entry.................................................20 6. Access to Credit and Constraints face by SMEs..........................................21 6.1 Year Business Started.......................................................................21 6.2 Location......................................................................................22 6.3 Labour Force.................................................................................22

6.4 Nature of Business..........................................................................23 6.5 Source of Capital for SMEs...............................................................24 6.6 Sources of Loans and Loan Size.........................................................24 6.7 Success Rate.................................................................................26 6.8 Distance From Lending Institution.......................................................26 6.9 The Costs of Applying for Loans: Contacts before and after Submission..........27 6.10 Means Used To Contact Lending Institutions by SMEs.............................29 6.11 Decision La g..............................................................................30 6.12 Application Requirements...............................................................31 6.13 The Estimated Borrowing Transactions Cost Function.............................33

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7. Conclusions and Recommendations.........................................................37 7.1 Conclusion..................................................................................37 7.2 Policy Relevence...........................................................................39 7.3 Recommendations..........................................................................40

References...........................................................................................42 Appendix.............................................................................................44

List of Tables

Table 1: Effective Transaction Cost...............................................................8 Table 2:Year Business Started....................................................................22 Table 3: Contact Before Submission of Application...........................................27 Table 4: Contact After Submission...............................................................28 Table 5: Decision Lag..............................................................................30 Table 6: Application Fees.........................................................................31 Table 7: Fees for Application Requirements....................................................32 Table 8: Estimated Borrowing Transaction Cost Function....................................35

Figure 1: Location Figure 2: Labour Force Size Figure 3: Nature of Business Figure 4: Source of Start Up-Capital Figure 5: Loan Size

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