By Thoboloko Ntšonyane
MASERU
Lesotho’s economy is driven by the services sector, followed by industry and agriculture, with key activities including textile manufacturing, diamond mining, and water exports.
A significant contributor to this economic structure is reportedly the Micro, Small, and Medium Enterprises (MSME) sector, which plays a crucial role in employment creation and income generation, particularly in trade, services, and small-scale manufacturing. Despite their importance, MSMEs face challenges such as limited access to finance, regulatory constraints, and market access difficulties, which hinder their full potential in driving economic growth.
Strengthening this sector through targeted policies and financial support is critical in so far as the country’s economic resilience and reducing dependence on government employment and remittances.
MSMEs form a critical pillar of the national economy, providing employment of 363 174 people and generating an estimated monthly turnover of US$52.4 million approximately M971 million.
A recent survey, FinScope MSME Lesotho 2023, has shed light on the financial inclusion, challenges, and growth patterns of the MSME sector. The survey, funded by the European Union, SADC Secretariat, and the World Bank Group, was conducted in partnership with the Ministry of Finance and Development Planning, the Central Bank of Lesotho (CBL), and other key stakeholders.
Building on previous studies, particularly the 2016 MSME survey, this report captures significant shifts in business structure, financial access, and sectoral trends.
About 2 430 adult businesses have been sampled at the enumeration area for the results of The FinScope MSME survey Lesotho 2023.
One of the survey objectives was to assess the size and scope of MSMEs in Lesotho; to identify the drivers and barriers to financial access for MSMEs; to identify and describe market segments with specific development needs in order to stimulate segment related product innovation and assist policy response by the authorities; to identify constraints to MSMEs development and growth with a focus on access to financial markets and to describe the levels and landscape of access, usage and quality to financial products and services- formal and informal, as well as track the level of financial access since 2016.
Expansion of the MSME sector as driver of employment
According to the survey, Lesotho’s MSME sector comprises 138,723 enterprises, with 107,753 business owners and a total workforce of 363,174 people. These figures indicate an expansion from 2016, when MSME owners stood at 76,000.
A significant portion of MSMEs are individual entrepreneurs (71%), followed by micro-enterprises (24%), small enterprises (4%), and medium-sized businesses (1%). This structure reflects the predominance of informal business activities, with a large share of entrepreneurs operating without formal registration.
The MSMES sizes differ within the sector or sub-sector. The survey highlights that at micro level, the establishment employs between one to five people, in a small sector from six to 20 people while in the medium sector the absorption ranges from 21 to 50 employees.
“There is a shift from individual entrepreneurs towards more organised business structures, with a significant growth in micro enterprises and smaller increases in small and medium enterprises,” reads the findings in pertinent part.
Sectoral distribution reveals dominance in:
- Wholesale and retail trade (42.6%)
- Agriculture and farming (20.3%)
- Manufacturing (16.9%)
- Business services (9.5%)
These sectors have reportedly shown resilience and adaptability despite economic shocks such as the COVID-19 pandemic and supply chain disruptions.
Gender and geographic distribution
There has been a shift in business ownership.
The survey highlights a growing gender balance in MSME ownership, with 55% of women operating businesses in urban areas compared to 45% of men. However, in rural areas, male entrepreneurs (59%) still outnumber female business owners (41%).
Geographically, Maseru leads with 40% of all business owners, followed by Berea (12%) and Leribe (11%). Business activities tend to be concentrated around urban centres and border posts, where commercial opportunities are more abundant.
Financial inclusion: A mixed picture for MSMEs
One of the survey’s key objectives was to assess MSMEs’ access to financial products and services. The findings reveal that while financial inclusion has improved, significant gaps remain:
- 88% of MSMEs are financially included, meaning they use at least one formal or informal financial service.
- 85% are formally served, but only 34% are banked.
- 83% use other formal financial institutions (mobile money, microfinance, insurance, etc.).
- 35% rely on informal services such as savings groups and loan sharks.
- 12% remain financially excluded.
The proportion of business owners relying exclusively on banks has decreased, with many preferring mobile money and other financial alternatives. Mobile money adoption has surged to 66%, driven largely by transaction convenience.
Barriers to financial access
Despite a rise in financial inclusion, access to credit remains a major constraint for MSMEs. The survey shows that 79% of MSMEs do not borrow, citing reasons such as:
- Fear of debt (43%)
- Irregular income (30%)
- Lack of collateral (21%)
- Perceived complexity of borrowing (14%)
Only 7% of MSMEs access bank loans, while 3% borrow from other formal sources (e.g., microfinance institutions), and 9% rely on family and friends. Informal borrowing (loan sharks, savings groups) has declined to 2%, suggesting a shift towards more structured financial services.
This results previal despite initiatives established to enhance access to finance for MSMEs. The Competitiveness and Financial Inclusion (CAFI) project, a six-year endeavour by the Government of Lesotho under the Ministry of Trade, Industry and Business Development, aims to increase access to business support services and financial products for MSMEs, with a particular focus on women and youth.
Within CAFI, the Lesotho Enterprise Assistance Programme (LEAP) operates as a matching grant scheme, covering up to 80% of eligible expenses for enterprises to bolster their competitiveness.
The Lesotho Entrepreneurship Hub and Seed Financing Facility have been launched to serve as an entrepreneurship knowledge hub and business incubator, assisting entrepreneurs in transforming their ideas into viable enterprises.
Also, the Basotho Enterprises Development Corporation (BEDCO) is mandated with promoting Basotho-owned enterprises by providing business development support services, advocating for an enabling regulatory framework, and facilitating access to finance and markets.
Savings and insurance
While this is a growing sector, it remains to some extent underutilised.
Despite this, the savings habits among business owners have improved:
- 66% of MSMEs save money, with 15% using banks, 22% opting for other formal institutions, and 41% keeping savings within family/friend networks.
- The proportion of businesses saving informally has dropped from 25% in 2016 to 10% in 2023, indicating increasing trust in formal institutions.
Insurance penetration remains low, with only 11% of MSMEs having business insurance, despite rising awareness. Many business owners cite cost concerns (48%) and lack of product knowledge (27%) as key barriers.
The impact of COVID-19: Lessons from a global shock
The pandemic significantly impacted MSMEs. According to the findings, 54% reporting negative effects such as:
- Declining customer bases (32%)
- Partial or full closure due to lockdowns (23%)
- Supply chain disruptions (20%)
Interestingly, 6% of MSMEs reported positive outcomes, such as increased demand for goods or services during lockdowns. This group largely comprises businesses that pivoted to essential services, online commerce, and home delivery solutions.
Business formalisation
Business registrations still remain a challenge. Despite government efforts to encourage business registration, only 18% of MSMEs are registered, and 24% are licensed. A staggering 82% of businesses remain unregistered, citing reasons such as:
- Perceived lack of benefits (53%)
- Lack of awareness on how to register (21%)
- Financial constraints (11%)
Notably, 76% of informal businesses expressed willingness to formalise if registration were made simpler, free, or incentivised.
Technology adoption: A boon for MSME growth
Data reveals that a trend towards technology use among MSMEs has risen, with 97% of business owners owning mobile phones, and 54% accessing the internet. However, only 25% of businesses use computers, and less than 1% have business websites, highlighting a need for digital literacy and e-commerce integration.
What lies ahead for Lesotho’s MSMEs?
The FinScope MSME Lesotho 2023 survey provides insights into the growth, resilience, and challenges of small businesses. While progress in financial inclusion, savings, and technology adoption is evident, several key issues require urgent policy intervention:
- Bridging the credit gap through targeted financial products
- Encouraging business formalisation with incentives
- Enhancing financial literacy to increase banking participation
- Expanding digital financial services to MSMEs in rural areas
Lesotho’s policy framework for MSMEs is designed to foster entrepreneurship and economic growth.
The CAFI project, a six-year initiative, seeks to support over 500 entrepreneurs and SMEs, ensuring that at least 50% are women-owned and 25% are youth-owned.
In Eswatini, the government is undertaking reforms to improve the business environment for MSMEs. The Eswatini Companies and Registry Reform aims to modernise the Companies Act of 2009, making it quicker and more cost-effective to start and manage businesses.
Their initiatives include the development of an online registry system to streamline company formation and reporting requirements, thereby enhancing transparency and accessibility.
In Botswana’s, the Economic Diversification Drive (EDD) encourages enterprises to register for the initiative to benefit from government and parastatal tenders. Eligible enterprises, including those engaged in manufacturing, service provision, and agricultural production, are required to register to access these opportunities.
This strategy aims to diversify the country’s economic activities and reduce reliance on traditional sectors.
With continued government support, private sector collaboration, and development partner investment, Lesotho’s MSME sector can unlock its full potential and drive inclusive economic growth.