Developing non-traditional collateral mechanisms for small- to medium-sized enterprises funding in Zimbabwe

Abstract

Small to Medium Enterprises (SMEs) form the backbone of Zimbabwe's economy, yet access to formal finance remains severely constrained due to traditional collateral requirements based on immovable property that systematically exclude the majority of SMEs. Despite progressive legislation including the Movable Property Security Interests Act [Chapter 14:35] and the establishment of a Collateral Registry, a significant disconnect persists between legislative intent and practical impact. This study examined non-traditional collateral mechanisms for SME funding in Zimbabwe, guided by four objectives: exploring constraints hindering SME access to finance, identifying applicable non-traditional collateral mechanisms, analysing the regulatory framework, and examining existing collateral arrangements. The study adopted a pragmatist philosophy and sequential explanatory mixed-methods design. Quantitative data were collected from 36 SMEs in Harare using structured questionnaires, complemented by qualitative data from interviews and document analysis. Findings revealed that traditional collateral requirements remain the most significant barrier to SME finance, directly constraining business expansion and job creation. However, SMEs demonstrated strong willingness to adopt non-traditional mechanisms, particularly movable assets and social collateral. Awareness of the Collateral Registry was alarmingly low at 22.2 percent, with registration processes perceived as complex and costly. Financial institutions continued to demand traditional collateral or treat movable assets as supplementary security. Significant associations existed between legal status and loan approval, with private limited companies achieving 70 percent approval compared to 27.3 percent for sole proprietorships. Micro-enterprises experienced significantly higher financing barriers than larger firms. The study concludes that implementation gaps, low awareness, complex procedures, weak lender adoption, and absence of enforcement collectively undermine policy effectiveness. Recommendations include mandating lender participation in the Collateral Registry, launching aggressive awareness campaigns, simplifying registration procedures, strengthening enforcement, and promoting digital credit scoring. This study contributes empirical evidence from Zimbabwe's unique context, demonstrating that non-traditional collateral mechanisms have significant potential to enhance SME access to finance if implementation gaps are systematically addressed.