Challenging Assumptions: What SMEs in Zambia Really Need from Lenders

Authored by Micheil Banoub, Director of Programs at the Kuo Sharper Initiative KSI

Originally Shared Via LinkedIn

In my previous blog, I discussed how we at the Kuo Sharper Initiative (KSI)—an impact investing fund committed to supporting small and medium-sized enterprises (SMEs) across Africa through debt financing—continuously explore innovative solutions to address the challenges of operating in volatile markets. KSI collaborated with the Legatum Center for Development and Entrepreneurship at MIT to host an FX Innovation Workshop focused on tackling currency risks in African economies.

I also touched on my trip to Zambia in my previous blog. I shared a hypothesis that I had before arriving in Lusaka: That the primary concern for SMEs is the prohibitively high cost of borrowing.

In this blog, I reflect on why this assumption was incorrect and examine its implications for how development finance institutions (DFIs) and impact funds could approach SME lending in Africa. To clarify, KSI primarily focuses on SMEs with at least $100K in annual revenues, typically borrowing between $5K and $50K. These businesses are on a growth trajectory and have demonstrated market traction.

During my visit to Zambia, I met numerous SME owners across diverse sectors such as agriculture, retail, and hospitality. I always asked each owner to rank in order of priority three factors in accessing credit: interest rates, collateral requirements, and loan disbursement time. To my surprise, the most critical factor was always the loan disbursement time. This finding challenged my initial assumption. Like many, I’ve viewed loan sharks charging over 70% annualized interest as predatory. While I still see this as exploitative behavior, I now recognize that loan sharks are a symptom of a larger systemic issue, not the root cause.

But why such urgency? Why do SMEs choose to borrow from microfinance institutions (MFIs) at twice the interest rate of commercial banks, even when collateral requirements are comparable? A common scenario provides clarity: traders supplying to government tenders often win contracts without fully securing the funding needed to deliver. For these traders, delays in financing can mean losing the deal entirely. Commercial banks in Zambia typically take 2-3 months to disburse a loan, while MFIs take about a week, and loan sharks can provide funds on the same day. Consequently, SMEs often choose faster access to capital even if that came with a bigger cost.
 

This raises another question: how can SMEs afford annualized rates exceeding 70%? The answer lies in short loan tenures and high profit margins. Many supply contracts have short tenures of 1-2 months, meaning the interest accumulated is minimal relative to the loan term. Moreover, as I learned during meetings with businesses in Kitwe which operate in the mining sector’s supply chain, some supply orders boast profit margins of up to 200%. In such cases, securing an expensive loan to preserve a high-margin deal makes perfect financial sense.
 

There are lessons we could learn from such behavior of SMEs. For those involved in SME lending—whether DFIs, fintech platforms, or traditional lenders—it is essential to design credit products that align with the real needs of local SMEs. While efforts by catalytic capital to lower interest rates are commendable, they often pressure the profitability and sustainability of local lending institutions. Instead, prioritizing fast loan turnaround times can better serve SMEs’ operational realities. Faster disbursements, even at higher interest rates, can make lending vehicles more viable while maintaining capital accessibility for SMEs.
 

Ultimately, balancing speed with affordability will unlock growth for SMEs while ensuring the sustainability of lenders operating in these markets. I re-stress that my experience was with a certain size of SMEs. The reality maybe different for smaller businesses or pre-revenue startups.