Investigating the Effect of Alternative Financing on the Performance of Micro, Small and Medium Enterprises in Zambia (MSME): A Case of Lusaka District

Abstract

Micro, Small, and Medium Enterprises (MSMEs) are vital to Zambia's economic growth, especially in urban centers such as Lusaka. According to the Zambia National Statistical Agency (ZNSA), MSMEs account for over 97% of all businesses in Zambia and contribute approximately 30% to the country’s Gross Domestic Product (GDP). These enterprises are instrumental in driving job creation, with the World Bank estimating that they provide around 70% of employment opportunities in the private sector. This study aims to investigate the effectiveness of alternative financing mechanisms for Micro, Small, and Medium Enterprises (MSMEs) in Zambia, with a focus on improving their access to capital and mitigating the challenges they face in traditional financing channels. The specific objectives of the study were to evaluate the role of effective alternative finance on the performance of SME in Lusaka district, to evaluate the involvement of effective alternative finance on the performance of SME in Lusaka district and to determine the challenges faced by SME on implementing alternative finance in Lusaka district. The researcher adopted a mixed approach and employed qualitative and quantitative research designs. The study employed Purposive sampling techniques to mobilise the quantitative and qualitative data. The Purposive method was used to identify and select a homogenous sample of 1663 registered SMEs within Lusaka district that met the predetermined criterion of importance. The research comprised of questionnaires, and interview schedules. The questionnaires were used because they are the main means of collecting quantitative primary data. The questionnaires enabled quantitative data collected in a standardized manner, to ensure the data is consistency and coherent for the analysis. From the findings, the study concludes that equal access to alternative finances is important for SME and that 76.4% SME leaders that experience borrowing constraints from institutional banks are seeking AF options to boost their businesses. Furthermore, the study found that 175 respondents representing 62.5% thought that AF methods could provide useful sources of external funding for SMEs, and that 225 respondents representing 80.4% indicated that AF is designed to help their SME in order to successfully raise financial capital. Furthermore, the study found that most respondents (201) representing 71.8% choose flexible debt or equity options when information asymmetry exists, and that 207 respondents representing 73.9% SMEs thought that traditional bank loans remain a dominant source, with banks like ZANACO and FNB Zambia offering credit products tailored to MSME needs. However, the study found that 179 SMEs representing 64% lack the necessary knowledge and skills to effectively navigate alternative financing options and prepare credible business plans. Statistical analysis calculates aggregate level of agreement and attitudes on all statements with the following conclusions; if equal access to alternative financial capital was important for SMEs within Lusaka, it would be represented by a median of 4.00, representing a positive result. Therefore, the study concludes that there is a relationship between effective alternative finance and SME performance. Using thematic analysis, the study found that lack of financial literacy and lack of capital to adopt technological facilities are major challenges and that many SMEs do not know or lack the knowledge to effectively access these options. Major themes indicated that regulatory constraints, cultural attitudes towards new financial technologies, and the nascent state of Zambia's digital financial ecosystem have hindered the widespread adoption of these alternative funding sources.