Migrating from Collateral-Based to non-Recourse Finance: Manufacturing Finance Reforms for SMEs in the CMA
Abstract
Manufacturing small and medium-sized enterprises (SMEs) are crucial for industrial growth and job creation within the Common Monetary Area (CMA), yet they face significant financing challenges. In Lesotho, Namibia, South Africa, and Eswatini, SMEs largely depend on collateral-backed loans and short-term overdrafts that do not match the capital-intensive nature of manufacturing, especially in the context of Industry 4.0. This study analyses financing options for manufacturing SMEs in the CMA using data from 420 firms between 2015 and 2024. It employs various methods to assess how different financing types impact borrowing costs, liquidity, and growth. Findings indicate that traditional secured loans incur higher costs and tighter restrictions, whereas alternatives like receivables-backed financing and digital solutions are more cost-effective (about 160 basis points less) and enhance liquidity. However, access to these innovative methods is limited, pushing many SMEs towards conventional bank products. The study calls for policy reforms to improve movable-asset financing, increase risk-sharing mechanisms, and bolster digital financial infrastructure to attract private investment for manufacturing SMEs in the CMA, concluding with recommendations for regulators and development finance institutions.
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