In Zambia (population: 18 million), only 68 percent of females are financially included and many women do not have control of their household budgets. Not being financially included impacts women’s ability to engage in economic activities and secure themselves. Many women run micro, small and medium enterprises (MSMEs), such as trading goods across borders, market stalls, hair salons, restaurants and more. However, because they are not financially included and lack access to finance, are unable to grow their business or maintain a consistent supply of input. The COVID-19 pandemic further compounded women’s economic opportunities due to movement restrictions which led to the temporary closure of many businesses. These measures have resulted in loss of income and working hours because there are fewer customers to serve and limited access to supply chains. This reduction has restricted the ability of small businesses to stabilise, grow and contribute to the Zambian economy.

The UN Development Programme (UNDP) and UN Capital Development Fund (UNCDF) in Zambia are partnering to address some of these issues as part of post-COVID economic recovery activities. Both agencies will also work to increase digital and financial inclusion for these under-served and vulnerable communities. UNCDF, using its capital mandate and financial instruments, will support UNDP in implementing two projects that aim to:

1. Revive and strengthen cross-border trade (specifically women-led) which has been severely impacted by COVID-19-related border closures, resulting in supply chain disruptions, loss of income, and drop in the quality of life of micro-traders and women in the border towns of Zambia
2. Strengthen the livelihoods of youths by reducing barriers to credit access facilities for youth-led MSMEs that will help them recover quicker from the economic aftershocks of the COVID-19 pandemic

The two UN agencies recently collaborated on access to finance interventions for MSMEs, the majority of which were owned by women, including those with disabilities. The application for small business loans from these MSMEs are usually not attractive to financial service providers (FSPs) as the borrowers do not offer collateral to secure the loan. This hinders the entrepreneurs’ ability to invest in their business operations and growth. A loan guarantee facility, administered by UNCDF and UNDP, is a good way to address this barrier for MSMEs and improve their access to finance.

Loan guarantee facilities will allow FSPs, such as banks or microfinance institutions, to de-risk their loans to youth and women-owned MSMEs. It will allow UNCDF and UNDP to take on a percentage of the risk associated with the loans, rather than the standard scenario where FSPs take the entire lending risk. In addition, UNCDF will deploy its expertise in digital financial inclusion and finance to provide technical assistance to FSPs and MSMEs. MSMEs will also receive support to digitize their operations, improve financial literacy and governance, with the overall objective of making them investment ready. FSPs will be supported in developing their MSME finance capabilities, including but not limited to, rolling out digital finance products, expanding their agency networks and more. UNDP and UNCDF, in collaboration with the FSPs, will define and streamline the eligibility criteria for the MSMEs that receive loans.

This activity fits well within UNCDF’s strategy to build inclusive digital economies that include women, youth and rural populations, and will contribute towards existing interventions in Zambia’s MSME sector. The activities will be implemented over an initial period of 12 months, with an additional 12 months to service the funds and repayments from MSMEs.

The loan guarantee facilities will provide over $600,000 to MSMEs, a majority of which will be owned or managed by youth, women or persons with disabilities. A key aspect of the intervention is the technical assistance, offered to over 500 MSMEs, which will improve business operations and chances of success.

Lionel Laurens, UNDP Zambia Resident Representative, said: “Every sector of society has been affected by the COVID-19 pandemic. But women, youth and persons with disabilities have been hit harder due to a number of compounding factors including vulnerability, and exclusion, livelihoods precariousness and inequalities they experience in accessing information and key services as well as challenges in abiding to COVID-19 restrictions and prevention measures.

“The economic impact has made these underserved groups more vulnerable, and with this new intervention, we aim to assist them to bounce back faster and recover from the negative effects of the pandemic, increase their resilience and improve their contribution to the local communities via economic participation. We aim to support MSMEs strengthen their commercial viability and profitability by securing access to finance and expanded market outlets, provision of business support and technical assistance. The new partnership between UNDP and UNCDF will fortify Zambia’s MSME sector and is one of the many initiatives by the UN to ensure that the country addresses challenges brought about by the pandemic and accelerate full recovery to remain on track to achieving the SDGs. The UN is hopeful that this partnership will also ensure that digitally-enabled MSMEs will be supported and strengthened, so that they will be able to extend their services to reach all Zambians.”

Isaac Holly Ogwal, UNCDF Country Lead, said: “The COVID-19 pandemic quickly evolved from a health crisis, into an economic and employment crisis, and MSMEs in Zambia have felt the brunt of the its impact.

“The lockdowns and containment measures put in place have resulted in temporary or permanent shutdowns of MSMEs activity, leading to drops in sales, a dip in turnover, and revenue, whilst increasing operational expenses. Several MSMEs have been forced to re-focus their capital to fund household consumption and survival. This too has resulted in loss of jobs, regrettably for the already marginalized segments of women and youth.

“Post COVID-19 recovery interventions and programmes for the MSME sector in Zambia are necessary and timely. However, they need to be broad-based to drive the economic and social recovery particularly on access to finance, access to markets, and improvement in skills base and knowledge. They also need to digitally enable MSME operations. With the UNCDF’s capital mandate and array of available financial instruments, the UN system is well-positioned with the proficiencies to offer blended finance support, especially to the financial institutions, women, and youth enterprises to recover. The UNDP-UNCDF guarantee facility is designed to meet this exact objective.”

Loan guarantee facilities have, in recent years, emerged as a blended finance instrument of choice for spurring economic development in many countries. They are a particularly relevant solution in supporting access to finance in least developed countries such as Zambia. In these countries, MSMEs are the drivers of economic development, yet remain financially underserved as they are perceived by many financial institutions to be high risk. Loan guarantees provide a platform where modest amounts of public/donor funding can be leveraged to unlock much larger amounts of private funds towards alleviating MSME cashflow constraints.

In the context of COVID 19, loan guarantees have featured prominently as a business survival and recovery mechanism in developed and developing countries. This UNCDF-UNDP joint project will aim to maximise the strengths and technical expertise of both agencies in supporting the survival and recovery of small businesses in Zambia. Data from the Civil Society for Poverty Reduction (CSPR) 2014 Baseline Survey shows 97 percent of businesses are in the MSME sector, which employs 48 percent of the labour force.

UNCDF is extending its interventions in the sector, having already commenced implementation of another loan guarantee facility in Zambia jointly with the Swedish Government.

An intervention of this kind has many benefits, especially as businesses work to overcome the impact of COVID-19. Ensuring these businesses are stable in their operations and are able to access finance to improve and grow their businesses can have a positive impact on the Zambian business sector and economy. Most importantly, supporting women and youth-led businesses enables entrepreneurs in this space to be more resilient and continue earning income to meet their households’ needs.