EUROPEAN UNION DELEGATION TO THE KINGDOM OF LESOTHO Remarks by the Head of the Delegation of the European Union to Lesotho, H.E. Ambassador Hans DUYNHOUWER on the occasion of seminar Improving access to credit under credit guarantees Maseru, 24 July 2012 [Protocol] It is a great honour for me to speak at this seminar. This seminar comes at a time when the call for vigorous private sector development has never been so strong. Lesotho has many strong points in attracting investment, both domestic and foreign. And this not least because of the fact that recently a new government was formed after a smooth and
democratic transition. This instils confidence and trust in the country's governance and economy. Capitalising in the period ahead on the recent democratic and smooth transition is our common opportunity and our challenge. The importance of private sector development is also emphasised in the National Strategic Development Plan. The Plan recognises that employment creation in the private sector is key to the country's future. The public sector in Lesotho has reached its limits, if not gone beyond its limits in providing employment for Lesotho's labour force. The National Strategic Development Plan calls for the creation of 50,000 employment opportunities in the private sector over the next five years, i.e. 10,000 employment opportunities per year. The challenge is huge; it means almost a doubling of employment in the manufacturing sector in the 5 years ahead. But there are also matters of concern affecting Lesotho as an investment destination. Lesotho's performance in the annual 'doing business ranking has been disappointing in recent years. Lesotho ranks now 143 th among 183 countries. This is a ranking below the regional Southern African average. Disappointingly, Lesotho's ranking has shown a gradual decline in recent years. In the area of 'getting credit', very relevant for today's seminar, Lesotho ranks only 150 th. This should be compared with the first ranking for South Africa, an 8 th rank for Namibia, a 48 th position for Swaziland, etc. It - 2 -
shows that there is great scope for improving the supply of credit for investment purposes. It also shows the competitive environment in which the country operates; Lesotho lags too far behind its immediate neighbours in the supply of credit. Credit guarantee schemes, the subject of today s seminar, are justified in conditions where the credit market does not function optimally. There are many reasons for this, including so-called information asymmetries, collateral requirements, higher risks associated with lending to smaller companies, etc. All this leads to a much lower than optimal level of lending to SMEs, with adverse consequences for economic growth and employment creation. By reducing the risks of lending to SMEs, credit guarantee schemes encourage banks to increase lending to SMEs. It is for that reason that today s seminar is so relevant to Lesotho; it has a direct relationship with the country s agenda for wealth- and employment creation and poverty alleviation. Before elaborating further on the matter, allow me to emphasise that credit guarantee schemes are not a panacea. A good functioning financial market also needs good governance, transparency, credit information, an adequate protection of property rights, etc. While Lesotho has made good progress in these areas, there is a considerable scope for further reforms. The 2012 doing business report provides some interesting insights in this regard. - 3 -
A recent study conducted in Lesotho confirms that access to finance is notoriously problematic for locally owned, private SMEs. Difficult access to finance was also recently shown in a survey carried out for the Ministry of Trade. The study showed that 71% of micro enterprises and 56% of small enterprises reported problems in accessing external funds. The most commonly mentioned factors that make access to finance problematic are the lack of appropriate collateral and high interest rates. As a result, the phenomenon of 'discouraged borrowers' is very significant in Lesotho. In the absence of bank financing, SMEs turn often to moneylenders. These moneylenders lend at rates sometimes in excess of 25%; when finance does not come forward, investment plans are postponed until enough cash can be raised internally. A well-functioning credit guarantee scheme addresses these anomalies. The creation of well-designed credit guarantee scheme can make an important contribution to a more dynamic entrepreneurial environment in Lesotho. Such a scheme must be well designed in terms of risk sharing, fees, governance, risk management etc. Moreover, it is important that prospective entrepreneurs are supported in the formulation of business proposals, management and record-keeping, compliance with legal requirements etc. - 4 -
The European Union is committed to contribute to the establishment of a Credit Guarantee Scheme in Lesotho. We have agreed to provide financing for an amount of LSL 16 million. Our support will target the areas I ve just mentioned: design of the scheme, training, support to business. This workshop has a very important role in formulating the parameters of this project. It provides an excellent opportunity to deepen our understanding on the potential contribution of credit guarantees towards a better functioning credit market. We believe that learning from past experience and building on the views of all interested parties (SMEs, banks, government, financial sector supervision authorities) are better ways to ensure that the funding we provide is as targeted, policy coherent and results-oriented as possible. The full association of the private sector is essential. Successful credit guarantee schemes are often examples of innovative public-private partnerships. I do hope that that today s workshop will meet your ambitious expectations. Thank you for your kind attention! KHOTSO, PULA, NALA - 5 -