MSME Microfinance
MSME Microfinance
Business Model Description
Establish and invest in financial technology that provides short-to-medium term purchase order and invoice financing, including to improve access to technology-enabled, low-interest, non-collateralized financial products, which target Micro, Small and Medium Enterprises (MSMEs).
Expected Impact
Enhance and support investment for sustainable economic growth, job creation and poverty reduction.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- Lesotho: Maseru District
- Lesotho: Leribe District
- Lesotho: Mafeteng Dstrict
Sector Classification
Financials
Development need
In Lesotho, lack of credit is a critical constraint to private sector investment due to stringent borrowing requirements by banks with implications for sustainable economic growth, job creation and poverty reduction (2). 97% of businesses in the 2022 Private Sector Survey mentioned lack of credit as the most important business constraint (38).
Policy priority
National Strategic Development Plan II prioritises increasing access to finance and financial inclusion as a major policy objective under financial sector development to support the productive sectors (2, 22).
Gender inequalities and marginalization issues
90% of businesses in Lesotho are MSMEs and 59% is female-owned, making lack of finance a culprit for gender inequalities in the investment space. Finscope 2022 also indicates that financial exclusion in the mountain areas averages 20% compared to the national average of 9% (30, 31).
Investment opportunities introduction
Initiatives, such as, the Partial Credit Guarantee Scheme helping with collateral requirements of commercial banks, Lesotho Enterprises Assistance Programme (LEAP) and Competitiveness and Financial Inclusion (CAFI) for entrepreneurial capacity building, create investment opportunities for lenders (33, 34, 35).
Key bottlenecks introduction
According to NSDP II, credit favours households at the expense of businesses. At the end of 2017, credit to households was M4,189 million (USD 220 million) compared to only M 1,967 million (USD 103 million) for businesses due to stringent requirements for businesses, which undermines investment (2, 29).
Corporate and Retail Banking
Development need
Over 90% of businesses in Lesotho fall in the MSMEs category where lack of access to finance is a critical business constraint (13). Conversely, MSMEs are part of the retail and services sectors, which contributed over 50 percent to GDP between 2011 and 2020, and this arguably makes MSMEs access to microfinance credit a priority (32).
Policy priority
The Government of Lesotho is encouraging the non-bank financing model for use by smallholders (21). It is also reviewing priority value chains and market linkages for smallholder farmers, through which non-bank financing can make the biggest impact (22).
Gender inequalities and marginalization issues
According to NSDP II, there are estimated 76,000 MSMEs in Lesotho, estimated to have created more than 118,000 jobs, primarily for women under the age of 35. Lack of sustainable funding for the MSMEs has negative impact on job creation, particularly for women and the marginalized (2, 30).
Investment opportunities introduction
There are 76,000 estimated MSMEs in Lesotho, of which only 17.5% is served by the microfinance institutions, leaving an estimated demand gap of between LSL 5 billion and LSL 15 billion (USD 263 and USD 789 millions) (2, 36, 37).
Key bottlenecks introduction
The 2016 Finscope shows that only 2 percent of MSMEs borrow from banks, 7 percent use informal financial services, and 91 percent refrain from borrowing due to concerns they will not be able to service the loans (30, 36).
Consumer Finance
Pipeline Opportunity
MSME Microfinance
Establish and invest in financial technology that provides short-to-medium term purchase order and invoice financing, including to improve access to technology-enabled, low-interest, non-collateralized financial products, which target Micro, Small and Medium Enterprises (MSMEs).
Business Case
Market Size and Environment
USD 100 million - USD 1 billion
Of the estimated 76,000 MSMEs, micro-finance institutions serve only 17.5%, leaving an estimated demand gap of between LSL 5 billion and LSL 15 billion (USD 263 and USD 789 million) (2, 36, 37).
High numbers of youth and young university graduates enrolling in entrepreneurship programmes adds to the potential market (35, 40).
Indicative Return
> 25%
Prime Capital, a microfinance institution established in 2021, achieved ROI of more than 25% in two years of its establishment (37).
Investment Timeframe
Short Term (0–5 years)
The structure of debt is short to medium term with rapid rollover periods given the high demand for financing by the MSMEs, which supported return in two years (37).
Ticket Size
USD 500,000 - USD 1 million
Market Risks & Scale Obstacles
Market - High Level of Competition
Impact Case
Sustainable Development Need
Lesotho has over 76,000 MSMEs, which make 90% of the country's total business (36), but only 17.5% have access to credit (20) due to stringent bank borrowing requirements in the form of collateral of fixed assets and bank account deposits, which majority of enterprises are not able to meet (2).
Economic growth rates in Lesotho are low, estimated at 1.8% in 2022/23, which is very low for a developing country (4). Unemployment is high at 22.5%, particularly amongst youth, due to low private sector investment from a pervasive lack of access to credit (2, 39).
Gender & Marginalisation
59% of MSMEs are owned by female entrepreneurs and lack of credit in the subsector mostly affect women and exacerbate gender inequalities (31).
About 65% of youth, who do not transit to tertiary education are exposed to unemployment largely as a result of low investment in the MSMEs and youth unemployment is higher at 29.1% compared to national rate of 22.5% (2, 39).
Financial exclusion in the mountain areas averages 20% compared to the national average of 9% (31).
Expected Development Outcome
MSME microfinancing, through purchase order and invoice financing, will help serve as collateral and facilitate an increase from the current 17.5% to around 50% of access to credit by the MSMEs (2, 37).
MSME microfinancing is directly linked to increase in private sector investment - given that MSMEs make 90% of Lesotho's total business - and has the potential to contribute to a projected economic growth of 5% and employment creation estimated at 9,900 jobs annually (2, 4).
Gender & Marginalisation
MSME microfinancing will benefit mostly women as 59% of MSMEs are female owned (31). It also helps create jobs as MSMEs are estimated to have created more than 118,000 jobs, primarily for women under the age of 35 (2).
Investing in MSME microfinancing will provide credit and facilitate private investment, with employment opportunities, particularly for the youth under the age of 35 who do not transit to tertiary education (2).
Investing in MSME microfinancing has the potential to spread access to credit in the country, including boosting remittances, and consequently narrowing the national financial exclusion gap between the national average and mountain areas average (2, 31).
Primary SDGs addressed
8.5.2 Unemployment rate, by sex, age and persons with disabilities
8.6.1 Proportion of youth (aged 15–24 years) not in education, employment or training
8.10.2 Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider
Total unemployment is 22.5% spread between male 22.6% and female 22.4%. Among youth (15-35 years) is 29.1% spread between male 27.4% and female 31.1%. Data on PWDs not available (39).
Youth (15-35 years) Not in Education, Employment or Training (NEET) is 11.9% (39).
Adults with an account at a bank or other financial institution or with a mobile-money-service provider (% of population aged 15 or over) 45.6% as at 2017 (28).
NSDP II projects creation of 9,900 additional jobs annually (2).
NSDP II projects creation of 9,900 additional jobs annually (2).
Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all (41).
10.c.1 Remittance costs as a proportion of the amount remitted
Current remittance costs range between 1 and 10 % of the amount remitted depending on the service provider (17).
Below 5% globally by 2030 (9).
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Indirectly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Outcome Risks
Weak debt management has the potential of burdening MSMEs, resulting in repayment defaults, which can reverse the outcome.
An European study shows survival rate of female-owned businesses is lower than male-owned, which could exacerbate gender inequality with implications for indebtedness and household livelihoods (26).
Global commodity price volatility, including current geopolitical tensions, and the associated inflation may dampen demand for MSME products, and risk business growth.
Impact Risks
In the short to medium term, the impact may not be sustained resulting from the broader unemployment and associated disposable income squeeze.
Considering their household and societal responsibilities, women may be negatively affected if the impact is not sustained.
Impact Classification
What
Access to credit increases investment and buying power, and contributes to sustainable economic growth and job creation.
Who
Businesses benefit from enhanced cashflows, particularly MSME business operations, and consumers' access to cash enhances their purchasing power as customers of the MSMEs.
Risk
The impact of the IOA may not be sustained and broadly inclusive due to the current high unemployment rate and the associated disposable income, in the short to medium term.
Contribution
Access to finance can increase the current served MSMEs from 17.5% to at least 50% and boost investment, trade, economic growth and job creation (37).
How Much
Increasing private investment from the current 28.1 to 50.3%, will help achieve 5% economic growth and 9,900 new jobs annually (2).
Impact Thesis
Enhance and support investment for sustainable economic growth, job creation and poverty reduction.
Enabling Environment
Policy Environment
National Strategic Development Plan II (2018) prioritizes access to finance and financial inclusion as an enabler, underpinning efficient financial services and enhancement of financial stability and soundness, which create a favourable financial environment in Lesotho (2).
To enhance financial inclusion and help derisk loans in the agricultural sector, the Business Environment and Technical Assistance (BETA) of the Millennium Challenge Corporation (MCC) Compact II, collaborating with LNIG Hollard, is supporting introduction of agro-insurance (18).
Maseru Securities Market (MSM) launched in 2016 under Central Bank of Lesotho (CBL) has provided an opportunity for companies to raise capital domestically, while also creating an investment opportunity for Basotho and companies to invest in securities (23).
Financial Environment
Financial incentives: Partial Credit Guarantee scheme (PCG), run by LNDC, guarantees MSMEs loans covering up to 75% of the loan issued by commercial banks, and has made borrowing possible for more MSMEs (33).
Fiscal incentives: Under the Ministry of Trade & Industry, Lesotho Enterprises Assistance Program (LEAP) provides technical and financial support to private owned Basotho MSMEs, which capacitate their business management skills (34).
Other incentives: Competitiveness and Financial Inclusion Project provides business support services and financial products targeted at MSMEs and entrepreneurs, especially women and youth, which capacitate them with business management skills (35).
Regulatory Environment
Repeal of the Money Lenders Act replacing it with the Microfinance Institution Act in 2018 strengthened regulatory framework and created transparent environment for MFIs operations and enhanced integrity of the industry, including mandatory registration and licensing of all MFIs (32).
Introduction of the Consumer Protection Act 2022 has facilitated the rights of consumers and enhanced transparency and levelled the playing ground in the borrowing-lending space (16).
Credit Reporting Act of 2011 has enhanced access to credit through critical debtor information provided by credit providers to the Credit Information Bureau, which contributes to risk mitigation and management (24).
Marketplace Participants
Private Sector
Pension Fund Administrators, Standard Lesotho Bank, NedBank Lesotho, First National Bank, Lesotho Microfinance Association, Lesotho National Farmers Union.
Government
Ministry of Finance and Development Planning, Central Bank of Lesotho, Ministry of Trade & Industry, Lesotho National Development Corporation, Basotho Enterprises Development Corporation, Revenue Services Lesotho.
Multilaterals
World Bank, International Monetary Fund, United Nations Development Programme, Macrocosmic and Financial Management Institute of East and Southern Africa (MEFMI),African Development Bank, African Development Fund.
Non-Profit
Finmark Trust, World Vision, Care Lesotho, Catholic Relief Services.
Public-Private Partnership
Lesotho National Development Corporation runs a Partial Credit Guarantee Scheme (PCGS) in which it partners with banks to provide loan guarantees of up 75% to mitigate risk on the private sector bank lending (34).
Target Locations
Lesotho: Maseru District
Lesotho: Leribe District
Lesotho: Mafeteng Dstrict
References
- (1) Government of Lesotho, National Strategic Development Plan I 2012/13 - 2016/17
- (2) Government of Lesotho, National Strategic Development Plan II 2018/19 - 2022/23
- (3) Government of Lesotho, Lesotho Economic Roadmap, 2018/19 – 2022/23
- (4) Government of Lesotho, Annual Budget Speeches 2020/21 - 2022/23
- (5) Government of Lesotho, Annual Budget Strategy Papers 2020/21 - 2022/23
- (6) World Bank, Lesotho Systematic Country Diagnostic Update 2021
- (7) World Bank, Private Sector Solutions to Helping Smallholders Succeed: Social Enterprise Business Models in the Agriculture Sector 2018
- (8) World Bank, Kingdom of Lesotho Financial Sector Assessment Program 2021
- (9) World Bank, Remittance Prices Worldwide 2023
- (10) Central Bank of Lesotho. https://www.centralbank.org.ls/images/Public_Awareness/LFI_Double_Spread_Newspaper_Insert_May_2023_.pdf
- (11) United Nations, Sustainable Development Reports 2019, 2020 and 2022 – UN
- (12) World Bank, Human Development Report, 2021
- (13) Government of Lesotho, National Annual Accounts, 2020
- (14) World Bank, Expanding Women’s Access to Financial Services
- (15) Government of Lesotho, Bureau of Statistics Business Register 2016
- (16) Government of Lesotho, Consumer Protection Act 2022
- (17) SDG Investor Map MM Finance Consultation Responses, October 2023
- (18) Governments of Lesotho and United States of America, Millennium Challenge Compact II Agreement 2022
- (19) Bill & Melinda Gates Foundation, Women’s Digital Financial Inclusion in Africa Report 2019
- (20) World Bank, Unlocking Potential of Lesotho’s Private Sector: Focusing on Apparel, Horticulture and ICT, 2018
- (21) Lesotho Suppplier Development Programme, Innovative Financing Instruments for Smallholder Farmers – Focus on Botswana and Lesotho, Lesotho Suppplier Development Programme, 2022
- (22) Government of Lesotho, Lesotho Financial Inclusion Refresh 2021
- (23) Central Bank of Lesotho. https://www.centralbank.org.ls/index.php/financial-markets-prospectus
- (24) Government of Lesotho, Credit Reporting Act of 2011
- (25) Government of Lesotho, National Gender Documents, 2018 - 2028
- (26) Organization for Economic Cooperation and Development, Policy Brief on Women's Enterpreneurship, 2017
- (27) Government of Lesotho, 2017/18 Mapping Subnational Poverty Report, August 2021
- (28) United Nations, Sustainable Development Report 2022 and 2023. https://s3.amazonaws.com/sustainabledevelopment.report/2022/2022-sustainable-development-report.pdf
- (29) Central Bank of Lesotho, 2019 - 2021 Lesotho Economic Outlook, June, 2019
- (30) FinMark, Lesotho Finscope Micro, Small and Medium Enterprises Survey 2016
- (31) Lesotho Finscope Consumer Survey Highlights 2022
- (32) Government of Lesotho, Microfinance Institutions Act 2018
- (33) Government of Lesotho, Supporting Economic Diversification. https://www.psc.org.ls/economic-diversification
- (34) Lesotho National Development Corporation. https://www.lndc.org.ls/content/lndc-partial-credit-guarantee-scheme-now-accommodates-more-types-businesses
- (35) World Bank, Competitiveness and Financial Inclusion Project Document, 2022
- (36) Government of Lesotho, Financial Inclusion Policy Report, 2022
- (37) SDG Investor Map Prime Capital Consultation Responses Document, January 2023
- (38) Lesotho Rapid Private Sector Assessment Report, 2022
- (39) Government of Lesotho, Labour Force Survey, 2019
- (40) Government of Lesotho Handover Report, 2020 - 2022
- (41) United Nations. https://unstats.un.org/sdgs/indicators/Global%20Indicator%20Framework%20after%202023%20refinement_Eng.pdf