The Role of Informal Finance in Financing Micro-Small-Medium-Enterprises in Zimbabwe

The Zimbabwean economy is significantly influenced by micro, small, and medium enterprises (MSMEs), which account for at least 75% of all businesses in the country. These MSMEs encounter various challenges in their efforts to grow, with funding shortages being a critical barrier. This issue is extensively documented in the literature. While the microfinance sector has aimed to mitigate these financial constraints, its solutions often fall short and frequently come at high costs. Consequently, many MSMEs resort to various forms of informal finance to maintain their operations. In the context of sustainable finance and insurance, this study examines the role of informal finance in supporting MSMEs in Zimbabwe. It is grounded in the pecking order theory, which posits that firms follow a hierarchical structure when seeking financing, and the lending theory indicates that high borrowing costs can hinder business initiatives. Our literature review reveals that most MSMEs in Zimbabwe rely more on informal finance for growth during their first five years than on formal funding sources. Informal financing mechanisms identified include borrowing from friends and family and engaging in rotating savings and credit associations (ROSCAs), often referred to as “money-go-rounds.” Lastly, while informal finance has proven essential for many MSMEs, its benefits are generally less favourable than formal finance, highlighting important considerations for sustainable financial practices.