LNDC loses M3 million to credit scheme



MASERU – Investment promotion company, Lesotho National Development Corporation (LNDC), has lost in excess of M3 million to commercial banks in payments of default loans by SMEs. This was revealed in an LNDC-backed Partial Credit Guarantee (PCG) conference to weigh the effectiveness of PCGs as a public sector response to supporting enhanced access to finance for SMEs in Maseru this week.

The gathering was also supported by the World Bank Competitiveness and Financial Inclusion (CAFI) programme. The conference brought together policymakers, financial institutions, PCG beneficiaries and other key stakeholders to discuss and reflect on the rationale and implications of national PCG schemes. PCG beneficiary businesses between 2011 and 2022 are reported to have defaulted on their loan payments after the collapse of most of the businesses. PCG is a government financial scheme under the Ministry of Trade, Industry, Business Development and Tourism and executed by LNDC aimed at responding to the financial gap necessary to stimulate the much-needed growth in the private sector.

Speaking on the performance of the scheme during the conference, LNDC Development Finance Manager, Semethe Raleche, said since inception in 2011, the scheme has experienced some losses amounting to about M3 million. “The scheme has experienced some costs and these are sitting at M3 336 000. This is the amount of money that the LNDC paid to the banks because of failed projects,” he said. Speaking on achievements, he said between 2020 and 2022, the LNDC supported 99 enterprises and enabled them to qualify for 104 loan applications to the total value of around M172 million, with a total 3 266 jobs created during the time of application, with belief that because of the scheme, more job opportunities were created.

“As at December 2022, we had 57 active credit guarantee certificates, 41 have expired, six were fully paid and one is cancelled. From the launch of the scheme in 2011, the total amount that has been disbursed is sitting at M203 million with current exposure sitting at M51.1 million and a total 4 402 jobs created,” he said. PCG has been operational from 2011 and, since then, the government through LNDC financead 50 percent loan guarantee but later in April 2020, as a result of Covid-19 impacts, the guarantee was raised to 75 percent of the loan amount and froze administration fees that could have been incurred by beneficiaries. Raleche said the PCG scheme provides a credit guarantee to a level for the obligations of the prospective borrower where the respective borrower cannot secure credit for a market sustainable professional project, notably for the reasons that the prospective borrower does not satisfy general lending requirements concerning quality collateral, business experience and history.

“When we award a credit guarantee, we only cover the principal loan amount and recovery costs, interest is excluded, and other charges including penalties,” he said. Articulating reasons behind the collapse of many businesses after getting financed through PCG, Molemo Motseki from LRG Consulting and Training – a consultant engaged by LNDC – pointed to lack of consistent support and monitoring of small businesses as the main reason for their failure. He also highlighted lack of clear communication channels to help access markets for local producers. “One of the key issues is sustainability. LNDC and PCG have a mandate as well as a clear strategy on how they ensure that there is access to funding but the problem is you find a business today then you go a year later and find the business has collapsed. 

“We never get to attempt the problem of unemployment the PCG has raised, the question of unemployment can be attended to if we ensure that we fund businesses and provide support so that the businesses are sustainable and they grow,” he noted. He said some businesses have remained stagnant for the past five years without growing or graduating from being small businesses. “The ecosystem needs to be looked into so that it does ensure that businesses grow and graduate. We must be intentional about growing these businesses by providing businesses with funding and support on an ongoing basis to ensure that the business owners have the right skills set that will enable them grow,” added.

Motseki said some of these businesses do not need funding, but support in the form of skills while others do not need to grow their businesses as they have excess supply of their produce with no market – yet others are in demand of such products. He said market issues are not communicated properly across the country. He noted that there is need to engage in a more friendly way and ensure that there are clear lines of communications that enable people to know who has what in which district and at what quantity so that facilitation of transportation of products to the market is facilitated. In an interview with Public Eye on the failure of most businesses supported through PCG, Chartered Accountant Robert Likhang said despite LNDC or government providing credit guarantee, banks still do not reduce pricing (interest rates) which keep the cost of capital high thereby reducing financial viability.

He said the credit guarantee is not the panacea for SMEs’ challenges, articulating that businesses still need proper ongoing financial management, risk management and good corporate governance. Likhang said that sometimes it becomes difficult for business persons and there is need for coaching and mentorship. “I believe credit guarantee must include a condition of having a chartered public accountant providing support,” he said. The scheme’s effectiveness has also been under scrutiny following claims that it benefits SMEs with financial muscle only but sidelines the majority of MSME. Out of 76 067 SMEs in Lesotho, the financial scheme that is aimed at supporting small businesses to grow their enterprise has only managed to support 99 businesses from 109 loan applications between 2020 and 2022.

According to a 2016 government of Lesotho report, there are about 76 067 MSMEs in the country of which 18 percent (13 680) are registered and active SMEs while the rest are micro and survivalist businesses. Asked which small businesses are supported by PCG, Raleche noted that PCG supports only SMEs that are viable and bankable, projects that contribute to the development of Lesotho in terms of economic growth. “Employment and poverty alleviation is our main key as well; it is committed to mitigate risks to encourage banks to lend SMEs and improve the investment climate, especially to the local private sector,” he said. He said, however, that in Lesotho there is a need for start-up capital or working capital to stay afloat or even grow small businesses further articulating that SMEs find challenges in accessing credit services from formal financial institutions.

As a result, he said, half of SMEs rely on personal savings to finance their start-up projects while many others rely on money lenders despite of the high interest rates. He said failure to meet banks’ requirements is one of the constraints met by SMEs in accessing PCG. He said financial institutions in the country see most SMEs by nature as unsafe borrowers. Molefe Nthabane is one of the small business owners who were denied financial support because he could not afford the 25 percent deposit that the bank demanded for him to get financed through PCG. He is a farmer, and believes that the scheme favours only businesses with some level of financial muscle. Chabalala Chabalala is also a beneficiary of PCG. He said the funding helped his business a lot, especially given that he received it during the Covid-19. He said he was able to overcome Covid-19 storms that he would have not been able to if it was not because of the financial support. He said he has also been able to achieve his business’s goals which would have taken him longer without the support.

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