Report of the Auditor-General on the Support of Micro, Small

VALUE FOR MONEY AUDIT REPORT

of the

AUDITOR-GENERAL

on the

SUPPORT OF MICRO, SMALL AND MEDIUM ENTERPRISES

SMALL AND MEDIUM ENTERPRISES DEVELOPMENT CORPORATION

under the

MINISTRY OF WOMEN AFFAIRS, COMMUNITY, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT

Presented to Parliament of Zimbabwe 2019

V.F.M: 2019: 04

DISTRIBUTED BY VERITAS e-mail: [email protected]; website: www.veritaszim.net Veritas makes every effort to ensure the provision of reliable information, but cannot take legal responsibility for information supplied.

OAG VISION

To be the Centre of Excellence in the provision of Auditing Services.

OAG MISSION T o examine, audit and report to Parliament on the management of public resources of Zimbabwe through committed and motivated staff with the aim of improving accountability and good corporate governance.

OAG VALUES

ii 1/69/1696 VFM

The Hon. Doctor Sithembiso G.G. Nyoni Ministry of Women Affairs, Community, Small and Medium Enterprises Development 8th floor Kaguvi Building Central Avenue Harare.

Dear Madam

I hereby submit my Value for Money Audit Report, on the Support of Micro, Small and Medium Enterprises by Small and Medium Enterprises Development Corporation (SMEDCO) in terms of Section 11 of the Audit Office Act [Chapter 22:18].

Yours faithfully,

M. Chiri (Mrs) AUDITOR-GENERAL

Harare June 11, 2019

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TABLE OF CONTENTS

Page v

LIST OF ANNEXURES ... .. vii

LIST OF ABBREVIATIONS .. ...viii

... . x

1. INTRODUCTION

1.1 Backgrou ... 1

1.2 ... 1

1.3 ... 2

1.4 Organizational ...... 2

1.5 ..2

1.6 ... 3

1.7 ... 6

2. SYSTEMS DESCRIPTION

2.1 ...... 7

2.2 ...... 7

3. FINDINGS

3.1 Provision of support ...... 10

3.2 Compliances with established principles . 6

3.3 Monitoring of financed MSMEs .....30

4. CONCLUSIONS . .33

5. RECOMMENDATIONS 4

ANNEXURES ...... 35

LIST OF TABLES, PICTURES AND GRAPHS

Tables Page

Table 3: Number of

Table 4: Number

Table 7: MSME

Table 8: Written-

Table 10: Fin

Table 11: Proportion of revenue generated from factory shells and training fees against

Table 16: Pre- ...... 31

Table 17: Post- .

Table 18: Questionn .

Pictures

Pic

-17

Graphs

Graph 2: Losses incurred on a yearly

LIST OF ANNEXURES

Annexure Page

Annexure A: Organogram...... 35

Annexure D: Documents reviewed...... 38

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LIST OF ABBREVIATIONS

CEO: Chief Executive Officer

CGF: Corporate Governance Framework

GDP: Gross Domestic Product

MSMEs: Micro, Small and Medium Enterprises

SMEs: Small to Medium Enterprises

SMEDCO: Small to Medium Enterprises Development Corporation

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EXECUTIVE SUMMARY

Small and Medium Enterprises Development Corporation (SMEDCO) is a parastatal under the Ministry of Women Affairs, Community, Small and Medium Enterprises Development. SMEDCO was established by Section 3 of the SME Act [Chapter 24:12]. The parastatal is a development finance institution mandated by the SME Act, [Chapter 24:12] to promote and develop Micro, Small and Medium Enterprises (MSMEs) in Zimbabwe, whether operating in the formal or informal sector of the national economy, for sustainable development. SMEDCO achieves the mandate through encouraging and assisting in the establishment of Micro, Small and Medium Enterprises (MSMEs), providing financial assistance, management counselling, training, information and advice to these MSMEs. In addition, SMEDCO facilitates the establishment or sets aside premises or areas for the establishment and development of particular classes of MSMEs.

Apart from the SME Act [Chapter 24:12], the Corporation is also governed by the provisions of the Corporate Governance Framework (CGF) for State Enterprises and Parastatal of November 2010. The Corporate Governance Framework provides for transparency in corporate structures, operations, as well as reducing opportunities for role conflict among key stakeholders namely the Shareholders, Board and Management.

My audit was motivated by that in Zimbabwe, the MSMEs sector is considered to be a major player in the economy contributing an estimated 60% of GDP and an estimated 50% of total ars, assumed greater prominence as a source of livelihoods through the absorption of retrenchees from closing companies, school leavers, youths, women and those with disabilities. Potential benefits include employment creation, poverty reduction and a source of livelihoods, value addition and beneficiation of local natural resources utilizing available expertise.

During my pre-study audit it emerged that SMEDCO had not been fully implementing its strategic plans and was making perennial losses since 2010. In addition, SMEDCO was not supporting MSMEs with fixed capital loans but was only issuing working capital loans.

The purpose of my audit was to assess whether SMEDCO was fulfilling its mandate of supporting MSMES.

Summary of findings.

My audit revealed weaknesses in the support of MSMEs by SMEDCO as detailed in chapter 3. The weaknesses were on: Provision of support services. Compliance with established principles. Monitoring of financed MSMEs.

1. Provision of support services. My audit revealed that SMEDCO was not fully providing all the support services required for the growth of the MSMEs sector. From 3 583 loans amounting to $10 924 673 disbursed by SMEDCO at all its branches during the period 2010 to August 31, 2018, only 9 were loaned for fixed capital purposes. The rest were working capital loans. From 94 questionnaires administered that they were in need of fixed capital loans. Their appeal to SMEDCO was that if they could access fixed capital loans to buy machinery, equipment, fixtures and fittings, their businesses would grow sustainably.

I also noted that the number of MSMEs who were financially supported declined from 1 620 in 2010 to 82 in 2014. In 2015 and 2016 only 1 and 12 MSMEs were supported financially by SMEDCO. However, the number started to increase in 2017 to 233 after SMEDCO secured Treasury Bills to source funding from the market.

For the period 2012 to August 31, 2018, SMEDCO trained 2 451 MSMEs against a target of 8150. Thus 5 699 (70%) targeted MSMEs were not trained. However, a comparison between actual trained MSMEs and targeted MSMEs trainings could not be made for the years 2010 and 2011 since there were no set training targets in those years. Some of the trained MSMEs had not been financially assisted by SMEDCO to capacitate them to run their businesses. Furthermore, there was no evidence that there were new MSMEs which SMEDCO encouraged or assisted to be established during the period 2010 to August 2018. However, it conducted trainings to encourage students and retiring employees to venture into business.

SMEDCO did not construct any infrastructure (factory shells) which could provide MSMEs with operating space in the 6 branches for the period 2010 to August 2018. This was despite that in the strategic plans for 2012 to 2018 SMEDCO planned to increase the number of factory shells built to 2 per annum or on lease to 1 per province and increase the number of value addition projects completed to at least 3 per annum for selected MSMEs.

Inadequate provision of support services to the MSMEs by SMEDCO was attributed to poor financial performance due to the following: Disproportional matching of operational expenditure to revenue generated leading to losses. Inadequate financial controls leading to fraud. Weak debt recovery and rental collection mechanisms. Weak resource mobilization strategies.

Disproportional matching of operational expenditure to revenue generated leading to losses. My review of audited financial statements revealed that from 2010 to 2017, SMEDCO did not total revenue generated throughout the period under review. For more details, refer to Table below.

Analysis of operating expenses to total revenue generated. YEAR 2010 2011 2012 2013 2014 2015 2016 2017 Total revenue $790 272 $2 081 $1 807 036 $2 064 321 $1 381 457 $648 099 $303 351 $604 143 generated 692 Total operating $1 014 765 $3 517 $2 134 867 $3 971 837 $3 789 524 $2 219 843 $787 327 $1 474 143 costs 591 Total 128% 169% 118% 192% 274% 343% 260% 244% operating costs as a percentage of total revenue generated Source: Audited financial statements.

Audited financial accounts for the years 2010 to 2017 revealed that SMEDCO made cumulative losses amounting to $ 8 490 922. This hampered the capacity of SMEDCO to support more MSMEs from internally generated funds.

Inadequate financial controls leading to fraud. SMEDCO lost $1 137 573 through misappropriation of funds by staff during 2011, 2012, 2013 and 2015. This amount could have gone a long way in sustaining the operations of SMEDCO.

Weak debt recovery and rental collection mechanisms. SMEDCO failed to recover loans amounting to $2 132 168 issued during the period 2010 to 2012. The unrecovered loans were subsequently written off in 2013 ($1 765 225) and in 2014 ($366 943). As at August 31, 2018 there were 129 out of 166 financed MSMEs who were failing to repay their loans on time. This was an indication that SMEDCO was struggling to collect some of the outstanding loans on a monthly basis.

SMEDCO owns factory shells which it rents out to MSMEs at an average rental of $50 per shell per month. There were uncollected rentals amounting to $ 333 312 during the period January 2010 to August 31, 2018. If this amount had been collected for on-lending to MSMEs at an average of $5000 each it could have benefited 67 MSMEs.

Weak resource mobilization strategies. SMEDCO had planned to mobilize financial resources from the private sector and quasi- government organizations. Furthermore, SMEDCO planned to generate 5% revenue from renting out infrastructure such as factory shells and another 5% revenue from fees charged on training of MSMEs. SMEDCO could not mobilise financial resources required for its operations during the

xi period 2012 to August 31, 2018. A total of $6 558 569 was mobilised from the private sector and quasi-government organizations against a target of $41 350 000 resulting in a deficit of $34 791 431(84%). There were no set financial targets in 2010 and 2011. However, $1 000 000 was raised in 2010. From a total revenue of $9 680 371 generated by SMEDCO for the period 2010 to 2017, $1 328 228 was from factory shells rentals representing 14%, while $137 285 was generated from training fees representing 1% of the total revenue. The revenue generated indicates that there is great potential to raise more revenue if concerted effort is put to effectively manage debt collection.

If SMEDCO does not adequately support MSMEs, the sector may not grow as a result unemployment could remain high and poverty eradication might not be achieved.

2. Compliance with established principles. When supporting MSMEs with loans, SMEDCO was expected to disburse the available financial resources according to set sectorial targets to enable all sectors to benefit from the assistance and as per the provisions of the National Gender Policy. The details are explained below.

llocations to MSMEs across economic sectors were not in line with set sectorial targets for the years 2011, 2012, 2013, 2014, 2017 and up to August 31, 2018. Generally, the retail sector was allocated more as compared to the other sectors. Furthermore, the most affected sectors in terms of limited allocation were Micro, Other and Mining. The Cross border sector did not get any allocation during the period under review. MSMEs in the retailing sector constituted the majority of loan applicants since the lending conditions especially the repayment terms were favorable to the sector. SMEDCO indicated that MSMEs which were into manufacturing sector found it difficult to adhere to repayment terms which required repayment to start one month after disbursement. In 2015 and 2016 only 1 and 12 MSMEs were assisted. However, the sectors for the assisted MSMEs could not be established. For more details, refer to the Table below.

Disbursement of loans against sectorial targets on a yearly basis. Sector Sectorial Actual allocations on a allocation yearly basis as a targets as a percentage. percentage 2011 2012 2013 2014 2017 Up to August 31, 2018 Agro based 10 12 8 10 5 7 9 Manufacturing 30 13 25 20 20 24 19 Micro 25 22 2 1 - - - Cross border 5 ------Retailing 10 41 52 53 66 41 66 Service 10 10 11 16 9 23 4 Other 5 1 1 - - 3 1 Mining 5 1 1 - - - 1 Total 100 100 100 100 100 100 100 Source: Loan books.

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If allocations of funds are not done according to sectorial targets, MSMEs in some sectors (with potential of promoting economic growth and employment creation) may be left out.

According to 2008 to 2011 strategic plan SMEDCO planned to reserve 30% of the available resources to women as per the provisions of the National Gender Policy. My audit noted that SMEDCO did not achieve the 30% allocation target to women entrepreneurs. The allocations achieved were; 2012 (29%), 2013 (21%) and 2017 (4%). However, in 2011 and 2014 the 30% target was achieved. In 2015 and 2016 there were no disbursements made to women entrepreneurs. In addition, a review of loan books at branches revealed that some branches managed to achieve the 30% allocation target to women entrepreneurs during some years while others failed.

The National Gender Policy provision of reserving 30% to women remained a challenge to the entity due to collateral security needed as most women did not own immovable properties in their names. As a result, most women were not accessing the loans.

3. Monitoring of financed MSMEs. SMEDCO monitors financed MSMEs through carrying out pre-disbursement and post- disbursement monitoring. Pre-disbursement monitoring is part of loan application assessment process meant to ascertain whether an applicant qualifies for a loan, for instance whether the applicant has security for the loan required. Post-disbursement monitoring is done to assess whether the MSME has properly utilized the loan as per the loan agreement. My audit revealed that SMEDCO had been conducting pre-disbursement monitoring visits as compared to post-disbursement. Out of 205 MSME files reviewed, pre-disbursement monitoring was done on all the 205 MSMEs, while post-disbursement monitoring was done to 45 MSMEs.

According to SMEDCO management, less of post-disbursement monitoring visits of MSMEs were caused by financial resource constraints. Thus, SMEDCO would normally carry out post- disbursement visits only to nearby MSMEs.

Inadequate monitoring of financed MSMEs may result in SMEDCO failing to identify MSMEs in need of technical assistance and those that might divert the loans. This may lead to high default rate.

RECOMMENDATIONS The following recommendations aim to improve SMEDCO in carrying out its mandate of supporting MSMEs.

1. Provision of support services. For SMEDCO to provide adequate support services to MSMEs, it should consider the following: align its expenditure to performance of revenue generated so that more resources are channeled towards supporting more MSMEs. urgently come up with strategies to turn around the entity so that it becomes profitable. enhance internal controls so that loss of financial resources through fraud are mitigated. continue enhancing due diligence when extending loans to MSMEs so that defaulting rate is minimized and engage tenants with rental arrears to come up with payment plans so that

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debts are cleared. This will go a long way in enhancing revenue collection needed to support more MSMEs. come up with robust strategies for mobilizing resources so that more MSMEs are supported and the entity operates sustainably.

2. Compliance with sectorial loan allocation targets. SMEDCO should equitably distribute loans across all the sectors and consider reviewing repayment terms to encourage all sectors to take up the loans. This will go a long way in supporting all the sectors for the benefit of the economy. Furthermore, SMEDCO ought to consider other forms of collateral for women without compromising risk management. SMEDCO should conduct awareness campaigns to the public informing them about the loans. The 30% threshold meant for women will be achieved.

3. Monitoring of financed MSMEs. SMEDCO need to enhance post-disbursement monitoring so that deserving MSMEs access more support and continue to grow their businesses sustainably. Post-disbursement monitoring helps the entity to identify stressed MSMEs and manage risk at an early stage of the loan. If this is not done on time MSMEs defaulting rate is likely to increase as they will be no early detection of the struggling MSMEs.

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CHAPTER 1

INTRODUCTION

1.1 Background. Small and Medium Enterprises Development Corporation (SMEDCO) is a parastatal under the Ministry of Women Affairs, Community, Small and Medium Enterprises Development. SMEDCO was established by Section 3 of the SME Act [Chapter 24:12]. The parastatal is a development finance institution mandated by the SME Act, [Chapter 24:12] to promote and develop Micro, Small and Medium Enterprises (MSMEs) in Zimbabwe, whether operating in the formal or informal sector of the national economy, for sustainable development. SMEDCO achieves the mandate through encouraging and assisting in the establishment of Micro, Small and Medium Enterprises (MSMEs), providing financial assistance, management counselling, training, information and advice to MSMEs. In addition, SMEDCO facilitates the establishment or sets aside premises or areas for the establishment and development of particular classes of MSMEs.

Apart from the SME Act [Chapter 24:12], the Corporation is also governed by the provisions of the Corporate Governance Framework (CGF) for State Enterprises and Parastatals of November 2010. The Corporate Governance Framework provides for transparency in corporate structures, operations, as well as reducing opportunities for role conflict among key stakeholders namely the Shareholders, Board and Management.

1.2 Audit Motivation. In Zimbabwe, the MSMEs sector is considered to be a major player in the economy contributing an estimated 60% of Gross Domestic Product and an estimated 50% of total employment m Term Plan 2011-2015). The sector has in recent years, assumed greater prominence as a source of livelihoods through the absorption of retrenchees from closing companies, school leavers, youths, women and those with disabilities. Potential benefits of the existence of MSMEs include employment creation, poverty reduction, value addition and beneficiation of local natural resources utilizing available expertise.

In addition, the audit was motivated by fraud cases at SMEDCO as reported in my financial audit reports for the entity and in the print media. My annual report on State Enterprises and Parastatals for the financial year ended December 31, 2013 reported that for the third year running, SMEDCO operations were affected by fraud and cash estimated to be over $29 000 was not accounted for.

The Newsday of September 16, 2014 reported that SMEDCO lost $800 000 between 2010 and 2012 due to fraudulent activities involving its staff coupled with ineffective accounting processes. The Chief Executive Officer of SMEDCO cited the use of manual system for capturing information as the major problem they had since 2009 to 2011. This resulted in manipulation of data such as under-receipting by officers leading to the subsequent loss of the $800 000.

The Newsday further reported that the Parliamentary Portfolio Committee on Public Accounts highlighted that SMEDCO failed to repay the loans to the parent ministry.

Another Member of Parliament said the Auditor- driver made claims worth $1 615 which had inconsistent dates, giving rise to suspicion that there could be fraudulent activities.

Furthermore, from the pre-study audit it emerged that SMEDCO had not been fully implementing its strategic plans and was making perennial losses since 2010. In addition, SMEDCO which was supposed to offer financial support to MSMEs in the form of fixed and working capital loans had only been granting working capital loans. SMEDCO supported already existing MSMEs without establishment of new MSMEs.

I was therefore motivated to conduct an audit on SMEDCO to assess if SMEDCO had put in place systems and procedures to ensure that it fulfils its purpose and objectives.

1.3 Mandate. SMEDCO is mandated by the SME Act, [Chapter 24:12] to promote and develop Micro, Small and Medium Enterprises (MSMEs) in Zimbabwe, whether operating in the formal or informal sector of the national economy, for sustainable development.

1.3.1 Vision. To promote strong, viable and profitable MSMEs for sustainable economic development and poverty alleviation by 2020.

1.3.2 Mission statement. To provide financial and capacity building services that promotes the establishment and growth of co-operatives and MSMEs.

1.4 Organizational structure. SMEDCO is directed by a Board. The Chief Executive Officer heads the management team and reports to the board. The following officers report directly to the CEO: Risk Manager, Operations Director, Loss Control Officer, Human Resources and Administration Manager and Finance and Adminstration Director. There are also six branch managers who report to the Operations Director. For more details, refer to Annexure A.

1.5 Funding. Section 2G (a-c) of the SME Act, [Chapter 24:12] outlines the sources of funding for MSMEs by SMEDCO as; a) Such moneys as may be payable to the Fund from moneys appropriated by Parliament. b) Moneys paid or repaid to the Fund by beneficiaries in terms of the scheme. c) Any moneys to which the Fund may lawfully be entitled.

Funding of SMEDCOs operations during the period 2010 to 2017 were mainly from operating revenue such as application fees, interest, debt recovery fees, establishment fees, service fees, rent

2 from Treasury loans, borrowings from financial institutions and government grants.

non-receipt of the government grants. However, for 3 years, 2011, 2012 and 2013 operating revenue constituted the biggest proportion of funding. Treasury loans had been on a downward trend from 2012 to 2017 and in the years 2014 and 2017 nothing was received. Borrowings from financial institutions decreased between 2013 and 2016. For more details, refer to Table 1 and Annexure B.

Table 1: Funding. Source Operating Treasury Borrowings Government Total Funding revenue loans from grants financial institutions $ $ $ $ $

2010 790 272 2 000 000 1 000 000 - 3 790 272 2011 2 081 692 1 500 000 - - 3 581 692 2012 1 807 036 200 000 570 000 70 000 2 647 036 2013 2 064 321 395 000 446 245 42 000 2 947 566 2014 1 381 457 - 334 663 - 1 716 120 2015 648 099 293 000 201 959 - 1 143 058 2016 303 351 200 000 158 326 - 661 677 2017 604 143 - 3 847 376 - 4 451 519 Total $9 680 371 $4 588 000 $6 558 569 $112 000 $20 938 940 Source: Audited financial statements.

1.6 Audit design.

1.6.1 Audit Objective. The purpose of my audit was to assess whether SMEDCO was fulfilling its mandate of supporting MSMES.

1.6.2 Audit scope. I carried out the audit according to Section (6)(1) (b) of the Audit Office Act [Chapter 22: 18] which states that the Auditor-General may carry out examinations into the economy, efficiency and effectiveness with which any Ministry, public entity, local authority designated corporate, statutory fund or other body has used public resources in discharging its functions. The audit covered the period January 2010 to August 31, 2018. Nine years were covered because SMEDCO was almost inactive during the period 2013 to 2016. There was minimal support of

1.6.3 Audit questions and audit criteria. Audit criteria used in the audit were taken from the SME Act, [Chapter 24:12], Credit Risk Management Policies and Procedures manual, strategic plans (2012 to 2018) and the

Audit question 1 Has SMEDCO implemented its functions of providing support services to MSMEs namely; Encouraging and assisting the establishment of new MSMEs, Financial assistance, training, management counselling and business information and advice or otherwise to MSMEs, and Providing infrastructure.

Assessment criteria 1 Section 18 of the SME Act, [Chapter 24:12], provides that the functions of SMEDCO shall be among other things-: a) Encourage and assist in the establishment of new MSMEs. b) Provide assistance, whether in the form of financial assistance, training, management counselling, business information and advice to MSMEs. Financial assistance will be in the form of fixed capital and working capital. c) To implement schemes established in terms of Section 2D(2)(c) and (j) which provides that SMEDCO should facilitate renovation, expansion and modernization of infrastructure and facilitating the establishment or setting aside of premises or areas for the establishment and development of particular classes of MSMEs.

Audit question 1.1. Has SMEDCO been successful in attracting funding and generating revenue to sustainably fulfil its mandate?

Assessment criteria 1.1. Section 2G (a-c) of the SME Act, [Chapter 24:12] outlines the sources of funding for MSMEs by SMEDCO as; a) Such moneys as may be payable to the Fund from moneys appropriated by Parliament, b) Moneys paid or repaid to the Fund by beneficiaries in terms of the scheme, and c) Any moneys to which the Fund may lawfully be entitled.

According to the Strategic plans for the years 2008 to 2018, SMEDCO planned to mobilize financial resources from the private sector and quasi government organisations, generate 5% revenue from renting out infrastructure (factory shells) and another 5% revenue from fees charged on training of MSMEs on business management and entrepreneurship.

Audit question 1.2. Is SMEDCO operating profitably?

Assessment criteria 1.2. According to SMEDCO Credit Risk Management Policies and Procedures manual page 23, the entity is supposed to operate profitably so as to remain in business.

Furthermore, Section 20 of the SME Act [Chapter 24:12] provides for SMEDCO to conduct its business on sound commercial lines, having regard to national interest of Zimbabwe, and shall ensure that in each financial year its income is sufficient.

Audit question 1.3. Is SMEDCO following procedures when dealing with defaulters?

Assessment criteria 1.3. Once a loan has been granted, the lending Manager through the Business Analyst should ensure that the account is actively maintained in accordance with Credit Risk Management Policies and Procedures. Once overdue amounts are 30 days, a reminder letter must be sent to the owing MSME. If the account remains in arrears for 60 days, the account must be called-up and handed over to Risk Management Department for recovery. SMEDCO has power in terms of Section 38 (1) and (2) of the SME Act [Chapter 24:12] to commence legal action on accounts which are post 90 days due. After exhausting all efforts listed above to recover the outstanding balance, branch committee sits and recommend accounts for write-off. A request for write-off is send to the Head Office for approval. Head Office committee approves write-offs and sends a list of accounts approved for write-off to branches.

Audit question 2. Has SMEDCO been complying with the established principles when granting loans to MSMEs?

Assessment criteria 2. According to SMEDCO inter office memorandum of October 21, 2011 disbursements of funds should be according to the following sectoral targets; Micro finance 25% Manufacturing/value addition 30% Retail 10% Agro based 10% Service 10% Mining 5% Cross border 5% Other 5%

According to 2008 to 2011 strategic plan, SMEDCO should enforce the provisions of the National Gender Policy which provide for 30% of loan allocations to be reserved for women entrepreneurs.

Audit question 3. Does SMEDCO monitor financed MSMEs?

Assessment criteria 3. According to SMEDCO Credit Risk Management Policies and Procedures manual, monitoring of MSMEs is done in two phases, which are pre-disbursement and post-disbursement monitoring. Projects financed must be visited by the Business Analyst at least once every quarter and the Business Analyst must make a monitoring report.

1.7 Audit methodology. I conducted the audit in accordance with International Standards of Supreme Audit Institutions which ensures that an audit of high quality is carried out in an economic, efficient, effective and timely manner. In collecting data, I carried out interviews, reviewed documents, inspected projects and factory shells and administered questionnaires to supported MSMEs.

1.7.1 Interviews. all the branch managers in order to gather information about their roles and responsibilities in support of MSMEs. Explanations of how they operate were also highlighted through interviews. Interviews with key personnel in different functions involved in the area and activities selected for audit helped me to get an in-depth understanding of the processes, how they operate and the challenges they faced. This led me to request appropriate documents. Refer to Annexure C for further details of the interviewed people.

1.7.2 Documentary review. Documentary review was done to gather information on the functions, procedures and policies related to the support of MSMEs by SMEDCO. The documents reviewed were collected at each and every branch visited. The reason for requesting the documents at each branch was to gather each branch were also reviewed. The MSMEs files contained information pertaining to the MSMEs. These files were kept at each branch. Refer to Annexure D for the documents reviewed.

1.7.3 Questionnaires. A total of 94 questionnaires were administered out of 166 financed MSMEs in Harare, Bulawayo, Bindura, Mutare, Gweru and Masvingo branches. The questionnaires were administered to MSMEs with running loans, MSMEs who were located near branch offices and MSMEs clustered at the same locality. The reason for such a selection criteria was to cut on transport costs whilst ensuring wider coverage. The questionnaires were meant to assess whether SMEDCO was monitoring financed MSMEs, whether the MSMEs had used the funds as intended and to understand the challenges faced by MSMEs in conducting business with SMEDCO. In administering the questionnaires some MSMEs could not be found at their business premises as a result I could not gather information from such MSMEs.

1.7.4 Physical inspections or observations. Physical observati factory shells. The factory shells were only in Harare (Chitungwiza and Gazaland), Gweru (Mkoba Hives) and Masvingo (Nyika growth point).

CHAPTER 2

2. SYSTEMS DESCRIPTION. This chapter details the roles and responsibilities of key players involved in the support of MSMEs. It also details the systems description of areas key to the support of MSMEs by SMEDCO.

2.1 Roles and responsibilities of key players. The key players involved in the support of MSMEs are as follows:

2.1.1 Ministry of Finance and Economic Development. According to Section 2H of the SME Act [Chapter 24:12], the Minister responsible for finance may make advances to the Micro, Small and Medium Enterprise Fund for on-lending to Micro, Small and Medium Enterprises.

2.1.2 Ministry of Women Affairs, Community, Small and Medium Enterprises Development. The Ministry lends to SMEDCO funds received from the Ministry of Finance for on lending to MSMEs at an interest of 5%. It also helps capacity building for MSMEs and coordination with SMEDCO. This used to be done by the former Ministry of Small and Medium Enterprises Cooperative Development.

2.1.3 Financial Institutions. These are entities, which provide loans to SMEDCO for onward lending to SMEs. The loans advanced to MSMEs are treated as an investment whereby SMEDCO expects a return.

2.1.4 Borrowers/ (Micro, Small and Medium Enterprises). Borrowers refer to persons or business entities to whom loans have been made by SMEDCO. These are the beneficiaries of the SMEDCO loan facilities and any other form of assistance.

2.2 Process Description.

2.2.1 Provision of support services. Section 18 of the SME Act, [Chapter 24:12], provides that the functions of SMEDCO shall be among other things-: a) Encourage and assist in the establishment of new MSMEs. b) Provide assistance, whether in the form of financial assistance, training, management counselling, business information and advice to MSMEs. In providing the financial assistance, Section 6.3 of the SMEDCO operations manual, states that loans are advanced for two main purposes which are fixed capital requirements and working capital requirements. Fixed capital may be used to construct buildings, fixtures and fittings,

acquisition of machinery and equipment. Working capital is needed to finance day to day operations of the business such as purchase of inventory/stock and salary payments. c) To implement schemes established in terms of Section 2D (2) (c) and (j)of the SME Act [Chapter 24:12] which provides that SMEDCO should facilitate renovation, expansion and modernization of infrastructure and facilitating the establishment or setting aside of premises or areas for the establishment and development of particular classes of MSMEs.

SMEDCO should mobilise enough resources from different sources in order to support MSMEs sustainably.

2.2.2 Sources of funding. Section 2G (a-c) of the SME Act, [Chapter 24:12] outlines the sources of funding for MSMEs as; a) Such moneys as may be payable to the Fund from moneys appropriated by Parliament. b) Moneys paid or repaid to the Fund by beneficiaries in terms of the scheme. c) Any moneys to which the Fund may lawfully be entitled to such as rental income from factory shells.

2.2.3 Financial resource mobilization. According to Strategic plans for the years 2010 to 2018, SMEDCO planned to mobilize financial resources from the private sector and quasi-government organisations to support MSMEs activities. In addition, SMEDCO Credit Risk Management Policies and Procedures manual page 23, stipulates that the entity is supposed to operate profitably so as to remain in business.

2.2.4 Debt recovery. In terms of the Risk Operational manual, once a loan has been granted, the lending Manager through the Business Analyst should ensure that the account is actively maintained. Once overdue amounts are 30 days, a reminder letter must be sent to the MSME. If the account remains in arrears for 60 days, the account must be called-up and handed over to the Risk Management Department at Head Office for recovery. SMEDCO has power in terms of Section 38 (1) and (2) of the SME Act [Chapter 24:12] to commence legal action on accounts which are post 90 days due. After exhausting all efforts listed above to recover the outstanding balance, branch committee sits and recommends accounts for write-off. A request for write-off is send to the Head Office for approval. Head Office Risk Management Committee approves write-offs and sends a list of accounts approved for write-offs to the branch.

When disbursing available resources, SMEDCO should disburse loans to MSMEs in compliance with established principles as follows:

2.2.5 Sectorial allocation targets. disbursed according to the following sectoral targets;

Micro finance 25% Manufacturing/value addition 30% Retail 10%

Agro based 10% Service 10% Mining 5% Cross border 5% Other 5%

According to 2008 to 2011 strategic plan, SMEDCO should enforce the provisions of the National Gender Policy which provide for 30% of loan allocations to be reserved for women entrepreneurs.

2.2.6 Monitoring of Financed MSMEs. When loans are disbursed to MSMEs, SMEDCO has a mandate to monitor the funded projects. Section 6.8 of SMEDCO Procedures Manual states that the analyst who processed the project at application stage is responsible for monitoring such project from its infancy until the loan is paid up. According to Section 4.7 page 16 (ii-v) of the SMEDCO Credit Risk Manual monitoring is done in two phases which are:

Pre-disbursement monitoring. Pre-disbursement monitoring is part of loan application assessment process. All loans assessed and approved are disbursed on condition that a satisfactory pre-disbursement report is produced. A pre-disbursement monitoring report is prepared by the Business Analyst to confirm the registration of securities, payment of charges, existence of the business as articulated in the business proposal, current financial position and the existence of a proper accounting system.

Post-disbursement monitoring on operations of Borrowers. Financed projects must be visited by the Business Analyst at least once every quarter. The Business Analyst must make a monitoring report. Post-disbursement monitoring is meant to assess whether the client has utilized the loan as intended. If there is evidence of misuse of loan or diversion of use, the loan will be called-up and become immediately payable in full.

2.2.7 Strategic Objectives 2008 to 2018.

2011 and 2012 to 2015 (the latter was reviewed in 2014 to cover the period 2014 to 2018). SMEDCO had the following strategic objectives: 1. To provide Financial and Business Extension Services to MSMEs in order to enhance their contribution to national economic development. 2. lending capacity and self-sustenance. 3. To increase the number of trained MSMEs to 3000 per annum from 2012. 4. For 2012 to 2015 (reviewed in 2014), SMEDCO had planned to increase the number of factory shells built or on lease to two and one per province respectively. 5. To increase its funding to USD20 million for the years 2012 to 2016 and USD3.8 million to USD 16.15 million by December 31, 2018. 6. To increase MSMEs access to loans from USD1.75 million to USD7.5 million per annum by December 31, 2018. 7. Improve collections from debtors to 100% per month from 2012.

CHAPTER 3

3. FINDINGS. This chapter details my audit findings relating to the support of MSMEs by SMEDCO. The findings were on the following: Provision of support services to MSMEs. Compliance with established principles. Monitoring of financed MSMEs.

3.1 Provision of support services to MSMEs. Section 18 of the SME Act, [Chapter 24:12], provides that the functions of SMEDCO shall be among other things to-: a) Provide assistance, whether in the form of financial assistance, training, management counselling, business information and advice to MSMEs. In providing financial assistance, SMEDCO came up with policies and procedures for granting loans to MSMEs. According to Section 6.3 of the SMEDCO operations manual loans are advanced for two main purposes, which are fixed capital requirements and working capital requirements. b) Implement schemes established in terms of Section 2D(2)(c) and (j) which states that SMEDCO should facilitate renovation, expansion and modernization of infrastructure and facilitating the establishment or setting aside of premises or areas for the establishment and development of particular classes of MSMEs. c) Encourage and assist in the establishment of new MSMEs.

My audit noted that SMEDCO had not, for the period 2010 to August 2018, been adequately providing support services to MSMEs in the form of financial assistance, training and infrastructure. In addition, SMEDCO was not assisting in the establishment of new MSMEs. The paragraphs below give more details: a) Provide assistance whether in the form of financial, training, management counselling, information and advice to MSMEs. ai) Provision of financial assistance. From 3 583 loans amounting to $10 924 673 disbursed during the period 2010 to August 31, 2018 by SMEDCO, only 9 were advanced for fixed capital purposes. The rest were working capital loans. The 9 fixed capital loans amounted to $417 874, three for $130 000 were granted by Harare branch, one for $200 000 by Bindura branch, four for $77 874 by Mutare branch and the other one for $10 000 by Bulawayo branch. The Harare fixed loan was granted in June 2018 and that of Bulawayo in May 2018. Fixed capital loans are generally of bigger amounts compared to working capital loans. Fixed capital loans assist upcoming MSMEs to acquire equipment while existing MSMEs can replace old equipment or construct fixtures and fittings. According to management, SMEDCO was constrained to advance fixed capital loans to more MSMEs due to limited financial resources.

From 94 which were into manufacturing indicated that they were in need of fixed capital loans. Their appeal to SMEDCO was that if they could access fixed capital loans to buy machinery and

10 equipment, their businesses would grow sustainably. Below are pictures of a bakery in Mt Darwin that needed money to put up fixtures and fittings, and a piggery project in Nyika Growth point that needed fixed capital to complete the construction of a pigsty. According to interviews with the two MSMEs, the projects required $20 000 and $3 000 respectively to be completed. The MSMEs could not do so due to limited funding from SMEDCO, which was mainly granting working capital loans.

Picture 1: Bakery project at Mount Darwin Growth Point in need of money to put up fixtures and fittings.

Source: Pictures taken by OAG on February 07, 2018.

Picture 2: Piggery project at Nyika Growth Point (Masvingo) in need of money to complete construction of the pigsty.

Source: Picture taken by OAG on August 29, 2018.

If MSMEs are not supported with fixed capital loans, they might not be able to retool their operations. Consequently, they will be forced out of business, as their products may not be of good quality and competitive on the market.

On the other hand, a review of monthly reports revealed that Bulawayo and Gweru branches disbursed less financial resources to MSMEs than they targeted during 2013 to August 31, 2018. Bulawayo disbursed less than its target by $1 854 857 and Gweru by $145 487. However, Harare, Mutare and Bindura branches disbursed more than their targets. Masvingo had not been setting disbursement targets throughout the period under review. However, Masvingo disbursed $2 143 198 during the period under review except in 2015. Refer to Table 2 for further details.

Table 2: Branch lending targets against actual disbursements. Branch Period when targets Lending Actual Variance were set Target lending as at August 31, 2018 $ $ $ Harare 2012 to 2013 and 1 812 100 2 475 299 663 199 2017 to 2018 Bulawayo 2014 to 2018 2 550 000 695 143 (1 854 857) Gweru 2013 to 2018 660 000 514 513 (145 487) Mutare 2010 to 2013 and 1 464 250 1 805 111 340 861 2015 to 2018 Bindura 2017 to 2018 1 500 000 2 372 195 872 195 Masvingo - - 2 143 198 - Source: Branch monthly reports.

Harare, Mutare and Bindura branches exceeded their lending targets by 37%, 23%, and 58% respectively. Whereas, Bulawayo and Gweru disbursed 27% and 78% below the targets. For further details, refer to Graph 1 below.

Graph 1: Branch financial disbursements-2010 to August 31, 2018.

Budget Actual Variance

H ARAREBULAWAYOGWERUMUTAREMASVINGOBINDURA

Source: Branch monthly reports.

Furthermore, my audit noted that there had been a decrease in the number of MSMEs which were supported financially by SMEDCO during the period 2010 to 2014. The years 2015 and 2016 were the most affected where SMEDCO only supported 1 and 12 MSMEs respectively. Bulawayo, Gweru, Masvingo, Bindura and Mutare branches did not support MSMEs in 2015. In 2016 Bindura and Mutare did not support any MSMEs at all. Thus in 2015 and 2016 SMEDCO was almost inactive since only a total of 13 MSMEs were supported by the entity. The decline and non-support of MSMEs in 2010 to 2016 was attributed to failure by SMEDCO to collect the loans advanced to MSMEs and the frauds which were perpetrated by SMEDCO staff. However, in 2017 the number of MSMEs supported started to increase due to loans sourced by SMEDCO which were secured by Treasury Bills. For more details, refer to Table 3.

Table 3: Number of financially assisted MSMEs per branch. Branch Harare Bulawayo Gweru Masvingo Bindura Mutare TOTAL 2010 472 295 305 214 177 157 1 620 2011 249 179 116 171 101 101 917 2012 93 23 28 27 44 39 254 2013 57 52 36 46 69 47 307 2014 7 8 6 21 29 11 82 2015 1 - - - - - 1 2016 1 8 2 1 - - 12 2017 36 27 13 77 41 39 233 August 22 28 19 52 12 24 157 31, 2018 Total 938 620 525 609 473 418 3 583 Source: Loan books.

Management comments The capital expenditure product was more active as from May 1, 2018, the product was not active before as capital expenditure loans are long term and require more capital which SMEDCO did not have. Most of the funding was geared towards small and short term loans. By the end of 2018, 17 capital expenditure loans were disbursed for a total of $850 874. MSMEs are now being supported with capital expenditure loans. The MSMEs are welcome to approach SMEDCO to get capital expenditure loans as additional loans or when they have paid off the working capital loans.

The number of MSMEs funded decreased in 2010 to 2015 as the corporation had limited funding to extend as loans. The situation improved in 2017 in the first quarter after the recapitalization with treasury bills of $15 million in November 2016. aii) Training of MSMEs. According to the 2012 to 2015 strategic plan, SMEDCO planned to increase the number of trained MSMEs to 3 000 per annum from 2012. The 2014 to 2018 strategic plan further revised the number of trained MSMEs to 150 in 2014, 350 in 2015, 400 in 2016, 500 in 2017 and 750 in 2018.

I noted that SMEDCO was not training MSMEs as per the target. For the period 2012 to August 31, 2018, SMEDCO trained 2 451 MSMEs against a target of 8 150. Thus 5 699 (70%) targeted MSMEs were not trained. However, a comparison between actual trained MSMEs and targeted MSMEs trainings could not be made for the years 2010 and 2011 since there were no training targets in those years. Refer to Table 4 for more details.

Table 4: Number of MSMEs trained by SMEDCO on a yearly basis. Year Harare Bulawayo Gweru Masvingo Bindura Mutare Total Target Variance

2010 - - - 171 - - 171 - - 2011 - 350 - 637 - 313 1 300 - - 2012 128 80 - 71 - 19 298 3000 (2702) 2013 951 50 31 100 150 44 1 326 3000 (1674) 2014 188 20 25 37 50 38 358 150 208 2015 327 - - - - - 327 350 (23) 2016 46 - 27 - - - 73 400 (327) 2017 - - - 46 - - 46 500 (454) August - 23 - - - - 23 750 (727) 31, 2018 Total 1 640 523 83 1 062 200 414 3 922 8 150 (5699) Source: Branch training reports.

Out of the 94 questionnaires administered to MSMEs in 6 branches, 43 respondents indicated that they received training from SMEDCO on how to run their businesses. The remaining 51 respondents indicated that they were yet to receive training. For more details, refer to Table 5.

Table 5: Trained MSMEs as per questionnaires administered. Branch Harare Bulawayo Gweru Masvingo Bindura Mutare Total Number of 3 10 2 16 7 5 43 MSMEs trained Number of 3 12 8 7 6 15 51 MSMEs not trained Total 6 22 10 23 13 20 94 Source: Questionnaires administered.

Inadequate training may hamper growth and ability of financed MSMEs to properly manage their business.

Management comments The observation was noted. SMEDCO training had decreased and mainly focused on collaboration with the parent ministry, as the ministry was capacitated with a training officer in every district of Zimbabwe which SMEDCO did not and still does not have. SMEDCO focused more on lending than training as it worked alongside the parent ministry and development partners to train MSMEs where possible. In addition, the developmental agencies usually offered training for free unlike SMEDCO which sought to recover costs expended on training. The corporation was also not extending loans as most potential candidates were reluctant to attend its training programmes. aiii) Management counselling, business information and advice to MSMEs. Management counselling, business information and advice is general guidance given to MSMEs by SMEDCO before disbursement of loans. For instance, educating MSMEs on consequences of defaulting and how to run their businesses sustainably. The guidance is needed as it equips MSMEs with knowledge on how to utilize loans properly and run their businesses sustainably.

From the 94 questionnaires administered, all the MSMEs indicated that they received some form of management counselling, business information and advice during their loan application process.

Management comment Observation was noted. Business counselling occurs from the moment a client has an interview with the branch staff (before application). The counselling can include advising the client to address issues with compliance and business linkages among others. b) Provision of infrastructure to MSMEs. My audit noted that SMEDCO did not construct any infrastructure (factory shells) during the period 2010 to August 2018. This was despite that in the strategic plan for 2012 to 2015, SMEDCO had planned to increase the number of factory shells built to 2 per annum. Furthermore, in the 2014 to 2018 strategic plan SMEDCO had planned to increase the number of factory shells built or on lease to one per province by December 31, 2018. Documentary review and interviews with management revealed that SMEDCO acquired land in Gwanda and Bindura

15 in 2002. As at August 31, 2018, the two pieces of land were yet to be developed. Financial resources amounting to $27 320 and $30 181 had been incurred on local authority rates for the pieces of undeveloped land during the period 2010 to August 31, 2018 respectively.

SMEDCO had infrastructure (factory shells) in Harare, Gweru and Masvingo which were being rented out to MSMEs. Pictures 3 below shows the Mkoba Hives factory shells in Gweru where MSMEs had extended the shells using plastics and poles since the current space could not accommodate their operations. In the event of a fire outbreak, all their wares could be burnt. Thus, SMEDCO was not complying with Section 2D (2) (c) of the SME Act [Chapter 24:12] which provides that SMEDCO should facilitate renovation, expansion and modernization of its infrastructure.

Picture 3: Mkoba Hives factory shells in Gweru.

Source: Pictures taken by OAG on July 27, 2018.

If SMEDCO does not assist with adequate infrastructure, the MSMEs might end up operating from undesignated and unsuitable or unsafe places.

Management comment The observation was noted. For SMEDCO to facilitate renovation, expansion and modernization of its infrastructure, finances are required. In the period under review, SMEDCO was not able to improve and build new infrastructure due to lack of finances. c) Encouragement and assistance in the establishment of new MSMEs. There was no evidence of new MSMEs that were established in all the 6 branches audited during the period 2010 up to August 2018. SMEDCO was only concentrating on supporting already established MSMEs.

However, SMEDCO was conducting trainings to encourage students and retiring employees to venture into business. For instance, Bulawayo branch ran an Entrepreneurship Development Program to Global Institute of Hospitality and Tourism students at King George VI School for the Disabled and a Pre-Retirement Entrepreneurship Development Program to TelOne employees. 225 TelOne employees were taken through the Pre-retirement Entrepreneurship Development program in Bulawayo during 2013, 2014 and 2016. The number of students at King George V1 School trained under the Entrepreneurship Development Program was not availed at the time of audit. Gweru trained 20 MIMOSA retiring employees in 2013. Harare also conducted Pre-Retirement Entrepreneurship Development Program to TelOne, Marlborough school and ZRP employees during 2013 and 2016. However, the number of employees trained was not availed for audit. In other branches there was no evidence that Pre-retirement Entrepreneurship Development Program was conducted.

If SMEDCO does not adequately encourage and assist in the establishment of new MSMEs, the MSME sector might not grow and unemployment rate may remain high. At the same time, poverty eradication may not be achieved.

Management comments The observation was noted. SMEDCO encourages and assists establishment of businesses through training especially counselling and mentorship when individuals enquire about - retirement Entrepreneurship Development programme. In addition, SMEDCO encourages students through training to set up businesses instead of relying on employment.

Inadequate provision of support services to MSMEs by SMEDCO was attributed to poor financial performance as a result of the following: Disproportional matching of operational expenditure to revenue generated leading to losses. Inadequate financial controls leading to fraud. Weak debt recovery and rental collection mechanisms. Weak resource mobilization strategies.

Disproportional matching of operational expenditure to total revenue generated leading to losses. My review of audited financial statements revealed that from 2010 to 2017, SMEDCO did not total revenue generated throughout the period under review. This was contrary to the provisions of Section 20 of the SME Act [Chapter 24:12] which requires SMEDCO to conduct its business on sound commercial lines and ensure that in each financial year its income is sufficient. For more details, refer to Table 6.

Table 6: Analysis of operating expenses to total revenue generated. YEAR 2010 2011 2012 2013 2014 2015 2016 2017 Total revenue $790 272 $2 081 $1 807 036 $2 064 321 $1 381 457 $648 099 $303 351 $604 143 generated 692 Total operating $1 014 765 $3 517 $2 134 867 $3 971 837 $3 789 524 $2 219 843 $787 327 $1 474 143 costs 591 Total 128% 169% 118% 192% 274% 343% 260% 244% operating costs as a percentage of total revenue generated Source: Audited financial statements.

According to SMEDCO management, the increase in employment costs in 2011 was caused by salary increments and bonuses. The increase in 2012 and 2017 was due to recruitments. A

18 decrease in 2016 salaries was due to the downward adjustment of salaries by 40% and terminations.

Further to disproportional matching of operational expenditure to total revenue generated, SMEDCO made cumulative losses of $ 8 490 922 for the period 2010 to 2017. This was contrary to the provisions of Section 20 of the SME Act [Chapter 24:12] which requires SMEDCO to conduct its business on sound commercial lines. This hampered the capacity of SMEDCO to support more MSMEs from internally generated funds. Refer to Graph 2 for more details.

Graph 2: Losses incurred on a yearly basis. Losses incurred

Losses incurred

2 010 2011 2012 2013 2014 2015 2016 2017

Source: Audited financial statements.

Management comments It is true that operating expenditure exceeded revenue. However, it must also be noted that most of the operating expenditures were of a fixed and contractual nature arising from the architecture of SMEDCO whereby it has to be represented in every province in order to support SMEs from the whole country. As such during the years when SMEDCO could not generate sufficient revenue it could not be represented in just one province. For example, staff costs could not be quickly scaled down without going through the due process, either to reduce compensation or right-size as some staff were permanent. The corporation, however undertook cost-cutting measures during this period which included short-time and non-replacement of staff.

The main revenue stream of SMEDCO derived from lending was affected by non- disbursement budgetary allocations from Treasury. For the period under review under 20% of budgetary allocation was disbursed to SMEDCO, this severely affected its capacity to lend and generate the income that could have assisted it to meet its operational costs.

Relief was only received with the recapitalization in form of Treasury bills issued in November 2016.

Inadequate financial controls leading to fraud. SMEDCO lost a total of $1 137 573 to internal fraud in the years 2011, 2012, 2013 and 2015. Some of the cases had taken too long to be finalized.

by 2 staff members. Records of criminal cases reported to police showed that one of the 2 staff staff member were not mentioned in the reports. $10 298 and $157 656 was lost at Harare and Bulawayo branches in the same year. On the $10 298 lost at Harare branch, the accused was convicted and sentenced to 7 imprisonment. 6 months were suspended on condition that the accused paid back $5 000 to SMEDCO on or before April 21, 2014 through the clerk of court. The accused failed to repay the amount and was jailed. The amount of $157 656 lost at Bulawayo branch involved one person in 2 different cases. The accused absconded trial and a warranty of arrest was issued. However, his whereabouts were not known as at August 31, 2018.

Gweru branch lost an amount of $311 829 in 2012 and 2013 to two staff members. The 2 staff members got away with $302 929 and $8 900 respectively. The one involved in the $302 929 was acquitted after being found not guilty and the one involved in the $8 900 was found guilty and sentenced t 568 through the clerk of court on or before December 31, 2013. However, the accused later appealed against the judgement and sentence. He was granted bail. SMEDCO provided further evidence to the courts and the accused absconded. The accused was said to be at large as at August 31, 2018.

Furthermore, Harare branch lost $448 377 in 2012. The fraud involved 4 staff members. The 4 staff members defrauded SMEDCO as follows: $5 131 (1 staff member) and $443 246 (3 staff members). The one who was involved in the fraud of $5 131 was acquitted and the other 3 involved in $443 246 had their case still under police investigations and trial had not yet kicked off as the principal accused person was still at large as at August 31, 2018.

In 2015, $14 413 was also lost at Harare and Masvingo branches. The fraud involved 2 staff members. Harare branch lost $10 298 and Masvingo branch lost $4 115. As at August 31, 2018, both cases were still under p

If the $1 137 573 lost through fraud could have been loaned to MSMEs at an average of $5 000 each, 228 MSMEs could have benefitted.

Management comments The observation was noted. However, some cases were committed by fraudsters and not SMEDCO employees. The corporation is now working closely with the investigating officers and monitoring the progress and providing assistance when called upon as well as

20 to ensure that the suspects on remand are prosecuted. The Corporation has also started disciplinary action against members who failed to discharge their duties diligently.

Weak debt recovery and rental collection mechanisms. My audit noted that SMEDCO was not effective in collecting outstanding loans and rentals from rented out factory shells as explained below:

Weak debt recovery. In terms of the Risk Operational manual, once a loan has been granted, the lending Manager through the Business Analyst should ensure that the account is actively maintained. Once an amount is overdue by 30 days, a reminder letter must be sent to the MSME. If the account remains in arrears for 60 days, the account must be called-up and handed over to the Risk Management Department at Head Office for recovery. SMEDCO has power in terms of Section 38 (1) and (2) of the SME Act [Chapter 24:12] to commence legal action on accounts which are post 90 days overdue. After exhausting all efforts listed above to recover the outstanding balance, the branch committee sits and can recommend accounts for write-off. A request for write-off is send to Head Office for approval. Head Office Risk Management Committee approves write-offs and send a list of accounts approved for write-offs to the branch.

Review of files for MSME foreclosed accounts (accounts which SMEDCO intends to commence legal action on recovery of debts) showed that SMEDCO branches had not been adequately complying with operational procedures on defaulting MSMEs. Reminder letters and demand letters were not sent to defaulting MSMEs as required. 37 out of 50 MSMEs were not served with reminder letters and 35 were not served with demand letters when their accounts became due. For more details, refer Table 7.

Table 7: MSMEs not served with reminder and demand letters. Branch Number of foreclosed Number of MSMEs Number of account files reviewed not served with MSMEs not served with reminder letters demand letters Harare 17 14 13 Bulawayo 11 8 8 Gweru 6 2 3 Masvingo 16 13 11 Total 50 37 35 Source: MSME files.

Furthermore, review of the audited financial accounts for the period 2013 to 2014 revealed that SMEDCO made two write-offs of defaulting MSMEs, one in 2013 of $1 765 225 and another one in 2014 of $366 943 bringing the total to $2 132 168.

If the $2 132 168 written off had been collected and loaned to MSMEs at an average of $5 000 each it could have benefited 426 MSMEs.

There were more defaulters for the period 2010 to 2012 where loans were granted without collateral and no proper due diligence was done when disbursing the loans. The overall default

21 rate was 48% of the loans granted during the period 2010 to 2012. The rate of defaulting at branch level ranged from 23% to 76%. Harare branch recorded the highest defaults followed by Bulawayo branch and the least was Bindura branch. High default rate indicates weak debt collection mechanisms at SMEDCO. For further details, refer to Table 8.

Table 8: Written-off amounts per branch for the period under review. Harare Bulawayo Gweru Mutare Masvingo Bindura Total $ Amounts written off 896 833 367 412 117 704 185 081 103 169 95 026 1 765 225 Number of accounts written-off 617 282 104 141 107 82 1 333 Number of loans disbursed 814 497 449 297 412 322 2 791 Default rate per branch 76% 57% 23% 47% 26% 25% 48% Source: Audited financial statements-2013 and 2014.

However, SMEDCO in an effort to recover debts, handed over a total of $550 548 and $106 333 to debt collectors and lawyers respectively during the period 2010 to August 31, 2018. The respective amounts had not been recovered as at the date of audit on August 31, 2018. Meanwhile, 129 out of 166 financed MSMEs on the current loan book were at least 30 days in arrears as at August 31, 2018 indicating weaknesses in debt collection by SMEDCO. This was despite that SMEDCO had planned to improve debt collections to 100% as per the 2012 to 2015 strategic plan.

y and liquidity. This may incapacitate If reminder and demand letters are not sent to defaulting MSMEs on time default rates and bad debts might increase.

Management comments The files that were reviewed during the audit had been foreclosed. It is a requirement before the foreclosure to ensure that both reminder and demand letters are sent to clients. This assists in ensuring that the collateral is executed. If reference is being made for the demand letters for loan booth clients, the letters could have been sent but not filed in the original file.

The other files had evidence of being followed up as per the notes, but actual demand letters were not in the file. This was due to poor management of the scheme, which was one of the reasons for the facility to be discontinued.

The funds disbursed in 2009 to 2011 proved to be difficult to collect. All efforts to track and force the beneficiaries to pay proved futile. There was no collateral security pledged and most of the clients in this sector were not owners of houses. In addition, the beneficiaries stayed in rural settings where there were no addresses that the letters could be sent. The

22 facility was difficult to manage as it was politicized, lending to the sector therefore stopped in 2014. The Corporation has since blacklisted the beneficiaries who did not pay back. Focus is now on organized and registered cooperatives, sole traders and companies. Failure by MSMES to meet their repayment obligations timeously is not out of the ordinary as most of them are sometimes affected by changes in operating environment but eventually they rectify their positions.

Rental collections from factory shells. SMEDCO owns factory shells which it rents out to MSMEs at an average rental of $50 per shell per month. According to Section 4 of SMEDCO Lease Agreement, rent shall be payable in advance, on or before the 7th day of each month. A review of rent returns showed that SMEDCO was owed a total of $333 312 for the period January 2010 to August 31, 2018. If this amount was collected for on-lending to MSMEs at an average of $5 000 each it could have benefited 67 MSMEs. For more details, refer to Table 9.

Table 9: Rental arrears from factory shells for the period January 2010 to August 2018. Location Total outstanding rentals as at August 31, 2018 $ Chitungwiza 176 511 Gazaland 45 031 SMEDCO Head Office 4 919 Nyika 51 065 Bindura (sub-letting) 35 898 Gweru (Mkoba Artisan Hives) 19 888 Total $333 312 Source: Rental returns.

Ineffective collection of rentals by SMEDCO may incapacitate its ability to support other MSMEs.

Management comments In Chitungwiza, one of the tenants was Litefold Engineering (Pvt) Ltd which had a balnce of $35 200 which was uncollectable. Litefold was a wholly-owned subsidiary of SMEDCO. A Board resolution was however made in 2016 to hand over Litefold Engineering (Pvt) Ltd equipment to the parent ministry and for the rental arrears to be written off.

In addition, at Gazaland, the Harare Leather Cluster which was under the parent Ministry occupied two bays which where renovated in 2018. The transfer of SMEDCO from the Ministry of Small Enterprises and Cooperative Development in 2017 to the Ministry of Industry and Commerce and to the Ministry of Women Affairs, Community, Small and Medium Enterprises Development in 2018 affected the payment of rentals. The Parent Ministry will settle the rentals in 2019 amounting to $76 871. Nash Paints refurbished the premises and amortised the costs with rentals. These two cases contributed to the low rental payments.

The Corporation has engaged Executive Credit Consultants to recover outstanding rentals. The other tenants have been asked to come up with payment plans and those who failed will be evicted after the mandatory notice period.

The Corporation is in the process of employing a Business Infrastructure Development Officer to effectively manage the rental portfolio and infrastructure issues.

Weak resource mobilization strategies. According to the strategic plans for the years 2010 to 2018, SMEDCO planned to mobilise financial resources from the private sector and quasi-government organisations. Furthermore, SMEDCO planned to generate 5% revenue from renting out factory shells and another 5% from fees charged on training of MSMEs.

a total of $41 350 000 from the private sector and quasi-government organisations. However, my audit noted that only $6 558 569 was mobilized. There were no set financial targets for the years 2010 and 2011. However, $1 000 000 was raised in 2010. In 2017 SMEDCO surpassed the target of $400 000 by $3 447 376. For more details, refer to Table 10.

Table 10: Financial resource mobilisation. Year Target $ Actual $ Variance $ (refer to Table 1) 2010 - 1 000 000 1 000 000 2011 - - - 2012 20 000 000 570 000 (19 430 000) 2013 20 000 000 446 245 (19 553 755) 2014 150 000 334 663 184 663 2015 400 000 201 959 (198 041) 2016 400 000 158 326 (241 674) 2017 400 000 3 847 376 3 447 376 Total $41 350 000 $6 558 569 ($34 791 431) Source: Financial statements and strategic plans.

My audit revealed that out of a total of $9 680 371 revenue generated by SMEDCO during the period January 2010 to December 2017, $1 328 228 was rent from factory shells. This was 14% against the 5% target.

Furthermore, revenue generated from training of MSMEs on business management and entrepreneurship courses was $137 285. This was 1% of the total revenue generated. Thus, the 5% revenue target from training was not achieved. For more details, refer to Table 11.

Table 11: Proportion of revenue generated from factory shell rentals and training fees

Year Total annual Rent Percentage Training Percentage revenue $ received $ of rent fees $ of training received fees against against annual annual revenue revenue 2010 790 272 123 464 16 11 131 1.4 2011 2 081 692 144 407 7 50 464 2.4 2012 1 807 036 162 064 9 27 957 1.6 2013 2 064 321 181 763 9 24 740 1.2 2014 1 381 457 179 374 13 3 383 0.2 2015 648 099 228 608 35 11 430 1.8 2016 303 351 174 713 58 5 400 1.8 2017 604 143 133 835 22 2 780 0.5 Total $9 680 371 $1 328 228 14 $137 285 1 Source: Audited financial statements.

The revenue generated indicates that there is great potential to raise more revenue if concerted effort is put to effectively manage debt collection.

In November 2016 SMEDCO was capitalized by government through issuance of $15 000 000 Treasury Bills in tranches of $10 000 000 and $5 000 000 for operations. The Board of SMEDCO through resolutions made on December 14, 2016 and March 24, 2017, authorized the usage of the Treasury Bills as follows: $5 000 000 of the $15 000 000 of the Treasury Bills was to be used as Tier 1 capital for a microfinance bank license. The resolution was not yet implemented at the time of concluding the audit on August 31, 2018. $10 000 000 Treasury Bills was to be utilized as follows: o $5 000 000 of the $10 000 000 to be used as security in a buy-back transaction. SMEDCO raised $2 250 000 from Agribank for on-lending to MSMEs. The $2 250 000 Agribank loan had been paid off as at August 31, 2018. o SMEDCO further raised $1 500 000 from Homelink. This was secured against $1 500 000 Treasury Bills. o The Treasury Bills worth $5 000 000 had not been used to source additional funds to support MSMEs as at August 31, 2018.

The Treasury Bills improved SMEDCO capitalization as evidenced by an increase in the number of MSMEs supported from 1 and 12 in 2015 and 2016 to 233 in 2017 and 150 as at August 31, 2018.

Management comments The observation balance sheet should be taken into account. SMEDCO relied heavily on the Public Sector Investment Programmes (PSIP) budgetary allocation for funding. However, the allocations

25 in most of the years did not result in actual disbursements from Treasury. Local private financial institutions required collateral for any loans to be extended to SMEDCO, which was limited. Regional and multilateral institutions that SMEDCO could approach were deterred by the weak balance sheet and currency challenges. For example, the BADEA facility of US$3 million which was approved on September 24, 2014 could not be disbursed due to the non-remittance of previous country repayments to the same institution. In 2015, the Common Fund Facility of US$1.5 million could not be concluded as the institution cited the currency issues bedevilling Zimbabwe. Subsequent submissions to Common Fund for Commodities (CFC) have been unsuccessful as currency uncertainties for the loan repayments have been cited. Efforts were affected by such challenges and SMEDCO was only able to start mobilising from the local private sector financial institutions after being capitalised with Treasury Bills that could be used as collateral.

The $15 000 000 Treasury Bills was utilized as follows:

Board authorised the use of $5 million in Treasury Bills as security for local private sector financial loans, which was exhausted in getting loans from Agribank and Homelink. $5 million was to be used for the NSSA Retrenchees facility whose modalities were not finalised. The additional $5 million of the capitalization was set-aside as Tier 1 Capital as the corporation intends to transition into a microfinance bank.

The corporation was unable to moblise the 5% target from trainings due to the fact that training activities decreased over the years as SMEDCO was focusing more on the provision of funds to MSMEs. In addition, trainings were also being provided by Development Partners and the Parent Ministry who charged less.

3.2 Compliance with established principles. When supporting MSMEs with loans, SMDECO was expected to disburse the available financial resources according to set sectorial targets and as per the provisions of the National Gender Policy. The details are explained below.

3.2.1 Sectorial allocation targets. According to SMEDCO inter office memorandum of October 21, 2011 disbursements of funds should be according to the following sectoral targets; Micro finance 25% Manufacturing/value addition 30% Retail 10% Agro based 10% Service 10% Mining 5% Cross border 5% Other 5%

SMEDCO did not manage to disburse the available financial resources to MSMEs according to the sectorial targets during the period January 2011 to August 31, 2018. The retail sector was allocated more as compared to the other sectors. While the manufacturing, micro, other and mining sectors were allocated less than the sectorial targets for the period under review. The most affected sector in terms of none allocation was the cross border. For more details, refer to Table 12 and Annexure E.

Table 12: Disbursement of loans against sectorial targets on a yearly basis. Sector Sectorial Actual allocations on a yearly basis allocation as a percentage. target as a 2011 2012 2013 2014 2017 Up to percentage. August 31, 2018 Agro based 10 12 8 10 5 7 9 Manufacturing 30 13 25 20 20 24 19 Micro 25 22 2 1 - - - Cross border 5 ------Retailing 10 41 52 53 66 41 66 Service 10 10 11 16 9 23 4 Other 5 1 1 - - 3 1 Mining 5 1 1 - - - 1 Total 100 100 100 100 100 100 100 Source: Loan books.

According to SMEDCO management, non-adherence to sectorial targets for the period under review was attributed to the fact that most MSMEs were into the retailing sector. MSMEs in the retailing sector were also forthcoming in their numbers as the loan conditions especially the repayment terms were most favourable for MSMEs in this sector. SMEDCO indicated that the MSMEs which were into manufacturing sector found it difficult to adhere to repayment terms which required repayment to start one month after disbursement. This was not compatible with the manufacturing sector as their products took time to manufacture and sell. As a result, they ended up making repayments out of capital.

If disbursements are not done as per the sectorial allocation targets, MSMEs which do not get adequate funding may not operate sustainably.

Management comments The observation was noted. SMEDCO sector targets will be readdressed and changed as they are not reflecting the current MSMEs environment. The nature of SMEDCO loans being short term (due to funding constraints) do not attract mining sector clients due to their need for large capital. Due to the losses from micro and cross border clients in the Loan Book Scheme from 2010 to 2012, those two sector targets will be revisited.

The reasons why sectorial targets were not adhered to were not responded to other than providing the way forward.

3.2.2 Allocation to women entrepreneurs. According to 2008 to 2011 strategic plan, SMEDCO planned to enforce the provisions of the National Gender Policy which require 30% to be reserved to women entrepreneurs from the available financial resources.

My audit noted that SMEDCO did not achieve the 30% allocation target to women entrepreneurs in 2012, 2013 and 2017. However, in 2011 the 30% target was exceeded by 10% and in 2014 the 30% target was achieved. In 2015 and 2016 there were no disbursements made towards women entrepreneurs. For more details, refer to Table 13.

Table 13: Analysis of loan allocations to women entreprenuers. Year 2011 2012 2013 2014 2015 2016 2017 Total amount 1 464 850 980 100 1 648 365 352 250 0 0 1 907 146 disbursed Total amount 584 500 289 000 354 200 106 500 0 0 79 200 disbursed to women entreprenuers Percentage 40% 29% 21% 30% 0 0 4% Source:Loan books.

A review of loan books at branches revealed that some branches managed to achieve the 30% allocation target to women entrepreneurs during some years while others failed.

For instance, nothing was allocated to women entrepreneurs out of $7 000 loaned by Harare branch in 2016. In 2015, only $6 000 (16%) out of $37 150 loaned was allocated to women. However, the branch surpassed the 30% target in 2012 and 2014 by 3%. That is, out of $347 800 and $126 540 disbursed in 2012 and 2014, $115 500 (33%) and $41 653 (33%) were allocated to women. Records pertaining to 2010, 2011 and 2013 were not availed at the date of audit.

Bulawayo branch did not meet the 30% target allocation to women in the years 2013, 2014, and 2017. However, the branch exceeded the women target percentage by 23% and 3% in 2012 and as at August 31, 2018 respectively. The branch did not avail records for 2010, 2011, 2015 and 2016 at the time of audit. For more details, refer to Table 14.

Table 14: Bulawayo women entrepreneur beneficiaries. Year Total amount Amount Target Percentage of disbursed to allocated to Percentage to women women women be allocated to entrepreneurs entrepreneurs $ entrepreneurs women who benefited $ entrepreneurs 2012 131 400 69 500 30 53 2013 262 160 25 000 30 10 2014 63 550 7 000 30 11 2017 170 190 19 500 30 11 August 31, 2018 151 500 50 000 30 33 Total $778 800 $171 000 - - Source: Loan books.

At Gweru branch women entrepreneurs got $10 000 (6%) out of $173 260 disbursed to MSMEs as at August 31, 2018. In 2017, out of the $80 000 disbursed, $5 000 was disbursed to women which was 6% of the total amount. For the years 2010, 2011, 2012 and 2014, the records were not availed at the date of audit. No disbursements were made in 2015 and 2016.

At Masvingo branch, the 30% allocation was not achieved in 2010, 2014, 2017 and as at August 31, 2018. In 2013, 3% was allocated to women and in 2012 nothing was allocated to women. The branch exceeded the 30% in 2011 by 4%. There were no disbursements made in 2015 and 2016. For more details, refer to Table 15.

Table 15: Masvingo women entrepreneur beneficiaries. Year Total amount Amount Target Percentage of disbursed to allocated to Percentage to women women women be allocated to entrepreneurs entrepreneurs entrepreneurs women who benefited $ $ entrepreneurs 2010 526 800 154 000 30 29 2011 222 200 75 700 30 34 2012 120 000 0 30 0 2013 232 500 8 000 30 3 2014 78 000 20 000 30 26 2017 398 648 117 200 30 29 August 31, 2018 545 500 78 500 30 14 Total $2 123 648 $453 400 - - Source: Loan books.

At Mutare branch, $76 000 (21%) out of $364 800 was loaned to women in 2017. In 2014 and 2012, out of $68 450 and $179 000 disbursed, $20 000 (29%) and $45 000 (25%) were loaned to women entrepreneurs. The branch exceeded the 30% in 2010 when it disbursed $99 500 (44%) out of $224 200 to women.

Bindura branch allocated available resources mainly to small companies which were ran by families. In 2014, out of $150 080 loaned to MSMEs, only $30 300 (20%) was allocated to women. Out of $642 176 disbursed in 2017, $70 800 (11%) was allocated to women. Of the $148 000 loaned between January 9, 2018 to February 2, 2018, $3 000 (2%) was allocated to women entrepreneurs.

According to management, the 30% target to women entrepreneurs was a challenge for the entity due to collateral security needed as most women did not own immovable properties in their names. For instance, married women may need approval from their spouses to pledge matrimonial houses as security. As a result, the majority of women entrepreneurs were not accessing the loans.

Management comments The observation was noted. Alternative forms of collateral for women are being considered since the Board approved in March 2018 and Export Credit Guarantee Corporation (ECGC) is also used to guarantee as additional cover. The other forms of collateral are shown below:

A fully insured motor vehicle. A guarantee, a written obligation on the part of a third party to repay a debt in case of default by the borrower. Guarantor must earn a salary and be of fixed abode. Moveable assets.

SMEDCO has also increased targeted marketing towards female owned MSMEs through expos and business associations such as Women Alliance of Business Association in and Small and Medium Enterprises Association of Zimbabwe (SMEAZ).

3.3 Monitoring of financed MSMEs. SMEDCO monitors financed MSMEs through carrying out pre-disbursement and post- disbursement monitoring. Pre-disbursement monitoring is part of loan application assessment to ascertain whether an applicant qualifies for a loan, for instance if the applicant has security for the loan required. Post-disbursement monitoring is done in order to assess whether the MSME had properly utilized funds disbursed. According to Section 4.7 (i-iv) of the SMEDCO Credit Risk Manual, monitoring is done in two phases which are pre-disbursement and post- disbursement.

Pre-disbursement monitoring. According to Section 4.7 (ii) of the SMEDCO Credit Risk Manual, after loan approval, the Business Analyst writes a pre-disbursement monitoring report which should confirm the registration of securities, payment of interest charges, existence of the business as articulated in the business proposal, current financial position and the existence of a proper accounting system.

My audit noted that out of 205 files reviewed pre-disbursement monitoring was done on all the 205 MSMEs. For more details, refer to Table 16.

Table 16: Pre-disbursement monitoring. Branch Projects monitored Harare 64 Bulawayo 16 Gweru 17 Bindura 16 Mutare 51 Masvingo 41 Total 205 Source: MSMEs files.

Furthermore, responses to questionnaires administered to 94 MSMEs in Harare, Bulawayo, Gweru, Bindura, Mutare and Masvingo confirmed that pre-disbursement monitoring was done.

Post-disbursement monitoring. According to Section 4.7 (iv) of the SMEDCO Credit Risk Manual, projects financed must be visited by the Business Analyst at least once every quarter and the Business Analyst must produce a monitoring report. The Business Analyst who processed the project at application stage is responsible for monitoring such project from its infancy until the loan is paid up.

From the 205 MSMEs files reviewed in the 6 branches only 45 had been monitored after disbursement and 126 were not monitored. 34 MSMEs were not yet due for post-disbursement monitoring as at August 31, 2018. However, the results of 94 questionnaires administered to MSMEs revealed that 76 MSMEs were visited for post-disbursement monitoring. Refer to Tables 17 and 18 for more details.

Table 17: Post-disbursement monitoring file based. Branch Total files Number of Number of Number of reviewed MSMEs MSMEs not MSMEs not monitored at monitored at all yet due for least once monitoring Harare 64 16 37 11 Bulawayo 16 1 0 15 Gweru 17 5 9 3 Bindura 16 9 7 - Mutare 51 13 38 - Masvingo 41 1 35 5 Total 205 45 126 34 Source: MSMEs files.

Table 18: Questionnaires administered. Branch Number of Number of Number of Number of Questionnaires MSMEs visited MSMEs not MSMEs not Administered post- visited post- due for post- disbursement disbursement disbursement Harare 6 4 2 0 Bulawayo 22 11 3 8 Bindura 13 13 0 0 Gweru 10 10 0 0 Mutare 20 17 0 3 Masvingo 23 21 2 0 Total 94 76 7 11 Source: Questionnaires administered.

Review of MSMEs files showed that SMEDCO was not visiting most MSMEs quarterly for post-disbursement monitoring as required by the standard.

Management cited financial resource constraints as a reason for not carrying out post- disbursement monitoring on MSMEs. Thus, SMEDCO would normally carry out post- disbursement visits to nearby MSMEs only.

Inadequate monitoring of MSMEs may result in SMEDCO failing to identify MSMEs in need of technical assistance and those which might have diverted the loans. This may lead to defaulting by MSMEs.

Management Response The observation was noted. Effective post disbursement monitoring of clients is currently hampered by lack of resources especially motor vehicles. However, this monitoring is also done through monitoring loan repayments on a monthly basis and the physical visits were reduced from once every quarter to at least once every six months. The Business Analysts tasked with generating new business are also expected to conduct post disbursement monitoring.

CHAPTER 4

4 CONCLUSIONS This chapter details general and specific conclusions to my audit.

4.1 General conclusion My audit concludes that SMEDCO is not adequately promoting and developing Micro, Small and Medium Enterprises (MSMEs) in Zimbabwe, whether operating in the formal or informal sector of the national economy, for sustainable development. In addition, SMEDCO is not effectively encouraging and assisting in the establishment of new MSMEs, providing financial assistance, and training to MSMEs. Furthermore, SMEDCO is not constructing more factory shells where MSMEs can operate from. However, SMEDCO is providing management counselling, business information and advise to the MSMEs.

SMEDCO is not mobilizing adequate funding to support MSMEs sustainably. In addition, SMEDCO is not achieving strategic objectives as enunciated in the strategic plans of 2012 to 2015 and 2014 to 2018. Inadequate support of MSMEs by SMEDCO may hinder government objective of employment creation, improving the lives of the people and empowering women since MSMEs are contributing at least 60% to the National Gross Domestic Product.

4.2 Specific conclusions

The following are specific conclusions:

4.2.1 SMEDCO is not adequately providing financial assistance to MSMEs. This is evident by that only 2 fixed capital loans were disbursed during the period under review.

Business trainings are not being provided to MSMEs as per the strategic plans.

Management counselling, business information and advice to MSMEs are being provided during loan processing.

SMEDCO is not fully encouraging and assisting the establishment of new MSMEs and not constructing factory shells as per the strategic plans.

4.2.2 SMEDCO is not complying with established principles when granting loans. Firstly, the entity is not allocating available resources equitably as per the sectorial targets. Secondly the 30% quota reserved for women as per the National Gender policy has not being adhered to.

4.2.3 Pre-disbursement monitoring is done on all MSMEs audited. However, post- disbursement is not done on most of the MSMEs to ensure that the loans are put to good use.

CHAPTER 5

5. RECOMMENDATIONS The following recommendations aim to improve SMEDCO in carrying out its mandate of supporting MSMEs.

5.1. Provision of support services. For SMEDCO to provide adequate support services to MSMEs, it should consider the following: align its expenditure to performance of revenue generated so that more resources are channeled towards supporting more MSMEs. urgently come up with strategies to turn around the entity so that it becomes profitable. enhance internal controls so that loss of financial resources through fraud are mitigated. continue enhancing due diligence when extending loans to MSMEs so that defaulting rate is minimized and engage tenants with rental arrears to come up with payment plans so that debts are cleared. This will go a long way in enhancing revenue collection needed to support more MSMEs. come up with robust strategies for mobilizing resources so that more MSMEs are supported and the entity operates sustainably.

5.2. Compliance with sectorial loan allocation targets. SMEDCO should equitably distribute loans across all the sectors and consider reviewing repayment terms to encourage all sectors to take up the loans. This will go a long way in supporting all the sectors for the benefit of the economy. Furthermore, SMEDCO ought to consider other forms of collateral for women without compromising risk management. SMEDCO should conduct awareness campaigns to the public informing them about the loans. The 30% threshold meant for women will be achieved.

5.3. Monitoring of financed MSMEs. SMEDCO need to enhance post-disbursement monitoring so that deserving MSMEs access more support and continue to grow their businesses sustainably. Post-disbursement monitoring helps the entity to identify stressed MSMEs and manage risk at an early stage of the loan. If this is not done on time MSMEs defaulting rate is likely to increase as they will be no early detection of the struggling MSMEs.

Annexure A

Organogram

Annexure B: Detailed sources of funding Year 2010 2011 2012 2013 2014 2015 2016 2017 Total $ $ $ $ $ $ $ $ $ Revenue source Fees 403 546 897 979 392 517 715 132 214 175 69 894 20 134 100 684 2 814 061 (applicatio n, debt recovery, establishm ent, service, legal, sales and training) Other 861 87 839 523 250 183 729 441 551 100 454 44 422 42 016 1 424 122 income (gain on disposal of fixed assets, sundry) Treasury 2 000 000 1 500 000 200 000 395 000 - 293 000 200 000 - 4 588 000 Loan NSSA 1 000 000 - 500 000 400 000 - - - - 1 900 000 Loan African - - - - 210 150 - - - 210 150 Century Internatio - - 70 000 42 000 28 000 - - - 140 000 nal Labour Organisati on Grant for - - 70 000 42 000 - - - - 112 000 loan advances Loan 262 401 951 467 729 205 983 697 546 357 249 143 64 082 327 608 4 113 960 Interest Agribank ------12 000- 2 250 000 2 262 000 Loan Home ------1 500 000 1 500 000 Link Loan POSB - - - 42 45 96 513 201 959 146 326 97 376 546 439

Rent 123 464 144 407 162 064 181 763 179 374 228 608 174 713 133 835 1 328 228 received Grant $3 790 272 $3 581 692 $2 647 036 $2 947 566 $1 716 120 $1 143 058 $661 677 $4 451 519 $20 938 940 Totals Source: Financial Statements.

Annexure C: Interviews held POSITION Location Purpose Chief Executive Harare To allow the CEO, to explain his or her roles, how Officer they operated and what challenges they were facing and also to help the auditors understand the operations of entity.

General Harare To allow the General Manager to explain his or Manager/Operations her roles, how they operated and what challenges Manager they faced and also to help auditors understand the documents.

Finance and Harare To allow the Finance and Administration Manager Administration explain his or her roles, how they operated and Manager the challenges they faced. Human Resources Harare Manager organogram. Risk Manager Harare To allow the risk Manager to explain his roles, how they operated and challenges faced in supporting MSMEs. Branch Managers Harare, To allow the Branch Managers to explain their Bulawayo, roles, how they operated and challenges faced in Gweru, Bindura, supporting MSMEs. Mutare and Masvingo Accountant Harare To allow the Accountant to explain his/her roles, how he/she operated and challenges he/she faced in supporting MSMEs. To get an insight on how funds were disbursed. ICT Head Harare To get an in-depth understanding of the processes and roles he/or she performed. How they operate and the challenges they faced.

Internal Auditor Harare To get an in-depth understanding of the processes. How they operated and the challenges they faced.

The then Ministry of Mutare To try to establish the relationship between Small and Medium SMEDCO and its parent Ministry. Enterprise Development Official

Annexure D: Documents reviewed Document Purpose 1 Small Enterprises Development Act To examine and understand the mandate of [Chapter 24:12]. SMEDCO. 2 Current organizational Structure. To understand the reporting structure of the entity. 3 Strategic and Annual Plans (2010 to To appreciate and evaluate Strategic plans of the 2017). entity, Vision, Mission and goals/objectives. 4 Operating Procedure Manuals, To understand the description of significant Financial Disbursement Manual, processes of the operations of SMEDCO. Circulars and Policies. 5 Annual reports, financial reports To evaluate the operations of SMEDCO. and budgets (2010 to 2017). 6 Registers of Small and Medium To assess the distribution of SMEs throughout entrepreneurs per province. the country and to confirm the total number of SMEs receiving funding from SMEDCO. 7 Disbursement processes. (including To understand the description of significant flow charts). processes of loan disbursement by SMEDCO. 9 Internal audits reports. To identify issues reported by the internal auditor. 10 Copies of external regulations To understand the external regulations applicable to SMEDCO. applicable to SMEDCO. 11 Loan Books. To appreciate loan beneficiaries. 12 Loan agreement form. To get the term and conditions of the loan. 13 Corporate Governance Framework To understand the governance principles for State Enterprises. applicable to State Enterprises.

Annexure E: Sectorial allocations of loans on yearly basis.

2011 Sectoral allocation Sector Amount Sectorial Actual Variance % allocated $ allocation % allocation % Agro based 142 926 10 12 (2) Manufacturing 154 837 30 13 17 Micro 262 031 25 22 2 Cross border 0 5 0 5 Retailing 488 331 10 41 (41) Service 119 105 10 10 - Other 11 911 5 1 4 Mining 11 911 5 1 4 Total $1 191 052 100 100 -

2012 Sectorial allocation Sector Amount Sectorial Actual Variance % allocated $ allocation % allocation % Agro based 81 768 10 8 2 Manufacturing 255 526 30 25 5 Micro 20 442 25 2 23 Cross border 0 5 - 5 Retailing 531 492 10 52 (42) Service 112 431 10 11 (1) Other 10 221 5 1 4 Mining 10 221 5 1 4 Total $1 022 101 100 100 -

2013 Sectoral allocation Sector Amount Sectorial Actual Variance % allocated $ allocation % allocation % Agro based 168 507 10 10.26 (0.26) Manufacturing 323 546 30 19.70 10.3 Micro 9 196 25 0.56 24.44 Cross border - 5 - 5 Retailing 874 560 10 53.25 (43.25) Service 265 078 10 16.14 (6.14) Other - 5 - 5 Mining 1 478 5 0.09 4.91 Total $1 642 365 100 100 -

Annexure E: Sectorial allocations of loans on a yearly basis. (continued) 2014 Sectoral allocation Sector Amount allocated Sectorial Actual Variance % $ allocation % allocation % Agro based 17 368 10 4.9 5.1 Manufacturing 70 180 30 19.80 10.2 Micro - 25 - - Cross border - 5 - - Retailing 234 638 10 66.20 (56.2) Service 32 254 10 9.10 0.90 Other - 5 - - Mining - 5 - - Total $354 440 100 100 -

2017 Sectoral allocation Sector Amount Sectorial Actual Variance % allocated $ allocation % allocation % Agro based 134 300 10 7 3 Manufacturing 486 724 30 24 6 Micro - 25 - 25 Cross border - 5 - 5 Retailing 819 603 10 41 (31) Service 487 500 10 24 (14) Other 64 300 5 3 3 Mining - 5 - Total $1 992 427 100 100 -

Up to August 31, 2018 Sectoral allocation Sector Amount Sectorial Actual Variance % allocated $ allocation % allocation % Agro based 146 500 10 10 - Manufacturing 296 035 30 19 11 Micro - 25 - 25 Cross border - 5 - 5 Retailing 1 021 510 10 66 (56) Service 56 850 10 4 6 Other 10 000 5 1 4 Mining 10 000 5 1 4 Total $1 540 895 100 100 -