SMME Finance Sector Background Paper:
A Review of key documents on SMME Finance 1994-2004
Client:
FinMark Trust
April 2004
Submitted by:
Angela Motsa & Associates
strategy, research, training and project management consultants
Tel: 011 4675167 / 083 281 7248
Fax: 011 467 8656
Email: [email protected]
22 Darter Ave, Norscot, Johannesburg
PO Box 344 Douglasdale, 2165
File ref: 1559
Contents
Executive Summary.............................................................................................................. i
1. Introduction ...................................................................................................................... 1
2. Characteristics of SMMEs and the Potential Market for SMME Finance ............................ 1
2.1 SMMEs defined ................................................................................................................................................... 1
2.1.1 South African Definitions................................................................................................................................ 1
Definitions focusing on Marginalisation of enterprises ................................................................................... 3
Legal Definitions: Formal vs. Informal............................................................................................................... 4
Statistical definitions: Labour Force Survey..................................................................................................... 4
Definitions linked to Sectors of the economy................................................................................................. 5
2.1.2 Comparison with international definitions................................................................................................... 5
Micro and Small Enterprises (MSEs) vs. Small and Medium Enterprises (SMEs)............................................. 5
Informal vs. formal sector.................................................................................................................................. 5
Opportunity vs. Necessity Entrepreneurship.................................................................................................... 6
Stage in the Life Cycle...................................................................................................................................... 6
2.1.3 Key findings and Analysis .............................................................................................................................. 6
SMME classification matrix................................................................................................................................ 6
An SMME focused Finscope Study?................................................................................................................. 6
Statistics South Africa data collection classifications..................................................................................... 7
Segmenting products in the micro-enterprise / survivalist category............................................................ 7
2.2. Scope, Size and characteristics of the SMME sector in South Africa................................................ 7
2.2.1 Size of sector................................................................................................................................................... 8
2.2.2 Contribution to Employment, Job creation and the Economy................................................................. 9
2.2.3 Characteristics of the Informal Sector........................................................................................................11
2.2.4 Entrepreneurship in South Africa compared to international standards................................................12
Level of Entrepreneurship...............................................................................................................................12
2.2.5 Financing requirements of SMMEs..............................................................................................................13
Sources of finance...........................................................................................................................................15
Differences between Formal vs. Informal business financing requirements..............................................16
Financing requirements of entrepreneurs from disadvantaged communities..........................................16
2.2.6 Obstacles to financing SMMEs....................................................................................................................17
2.3 Key findings and Analysis...............................................................................................................................18
Potential Demand for SMME finance............................................................................................................18
Characteristics of the informal sector............................................................................................................18
Entrepreneurship in South Africa....................................................................................................................19
Range of financial services requirements.....................................................................................................19
Obstacles and constraints on the demand side..........................................................................................19
3. Historical background to SMME Finance Sector in South Africa ..................................... 19
3.1 National Small Business Strategy (1995).....................................................................................................19
3.2 The National Small Business Act (1996)......................................................................................................21
3.3 Black Economic Empowerment Act..........................................................................................................22
3.3.1 Financial Sector Charter..............................................................................................................................22
3.4 Current Developments in the Legislative/ Policy Arena.......................................................................23
3.5 Key Findings and Analysis..............................................................................................................................23
Legislation related to Small Business Development .....................................................................................23
The Financial Sector Charter ..........................................................................................................................23
Procurement....................................................................................................................................................23
4. State Initiated Institutions involved in SMME financing ................................................... 24
4.1 National Empowerment Fund (NEF)...........................................................................................................24
4.2 Industrial Development Corporation (IDC)..............................................................................................25
4.3 Land Bank ..........................................................................................................................................................25
Micro Finance ..................................................................................................................................................25
4.4 Post Bank ............................................................................................................................................................26
4.5 Business Partners...............................................................................................................................................27
4.6 Umsobomvu Youth Fund (UYF)....................................................................................................................27
4.7 Khula Enterprise Finance Limited (Khula)..................................................................................................28
4.7.1 Products........................................................................................................................................................28
Loans.................................................................................................................................................................28
KhulaSt art .........................................................................................................................................................29
Private Equity Funds.........................................................................................................................................30
Credit Guarantee Scheme.............................................................................................................................30
Thuso Mentorship Programme........................................................................................................................31
a
4.7.2 Findings of the Khula impact assessment..................................................................................................31
4.7.3 Critical analysis of Khula’s role in the sector..............................................................................................32
Disappointing uptake of the Guarantee Scheme by Banks.......................................................................32
Problems with institutional capacity of RFIs...................................................................................................33
Criticisms and limitations of its impact assessment methodologies............................................................34
Khula’s role in facilitating access to micro-finance.....................................................................................34
Retailing vs. wholesaling.................................................................................................................................35
Ignorance about Khula’s role and mandate...............................................................................................35
4.7.4 Khula’s Future Role?.....................................................................................................................................35
The National Apex Fund..................................................................................................................................36
Coordinating efforts ........................................................................................................................................36
4.8 Key Findings and Conclusions......................................................................................................................37
5. Private sector programmes for SMME finance................................................................ 38
5.1 Banking sector involvement in the lower end of the market ..............................................................38
5.1.1 Specialised Banks to exclusively service the poor....................................................................................38
5.1.2 Banks setting up specialised divisions/ programmes exclusively to serve the poor..............................39
5.1.3 Linkage Banking...........................................................................................................................................40
5.1.4 Banks role in providing Savings and Transaction services for SMMEs......................................................41
5.1.5 Key Findings and Analysis............................................................................................................................42
Developing entrepreneurial and microfinance skills in the banking sector..............................................42
Pursuing Linkage strategies with village banks and cooperatives involved in providing informal
financial services to the poor.........................................................................................................................42
Providing best practice case studies and resea rch on small bank establishment in the sector.............43
Further promoting the provision of saving facilities for the lower end of the market for formal and
informal institutions..........................................................................................................................................43
5.2 Banks involvement in SME lending..............................................................................................................43
5.2.1 Products provided by Banks .......................................................................................................................43
5.2.2 Reporting on scale of SMME activity..........................................................................................................44
5.2.3 Risk Assessment.............................................................................................................................................45
5.2.4 Collateral......................................................................................................................................................45
5.2.5 Customer Service Issues...............................................................................................................................45
5.2.7 Regulatory Issues..........................................................................................................................................45
5.2.8 Role of the state...........................................................................................................................................46
5.2.9 Key findings and Analysis ............................................................................................................................46
5.3 Venture Capital and Private Equity Funds...............................................................................................46
Alternative Stock Exchange...........................................................................................................................47
5.3.1 Key Findings and Recommendations........................................................................................................47
5.4 Insurance Industry............................................................................................................................................47
5.4.1 Key Findings and Recommendations........................................................................................................48
5.5 Commercial Micro-lenders and their role (or potential role) in SMME financing .........................48
5.5.1 Historical Analysis..........................................................................................................................................48
5.5.2 Current status and potential role in SMME financing...............................................................................49
5.2.3 Key findings and Analysis ............................................................................................................................49
6. Non-commercial or community-based financiers of SMMEs......................................... 50
6.1 The Non-profit micro-finance Sector..........................................................................................................50
6.1.1 Status of Microfinance in South Africa: Overview of its overall impact and factors that have
influenced this.......................................................................................................................................................50
6.1.2 Factors influencing the performance of MFIs in South Africa ..................................................................53
6.1.3 Current debates regarding the segmentation of microfinance market................................................53
6.1.4 Key Findings and Analysis............................................................................................................................54
6.2 Village Banking in South Africa....................................................................................................................54
6.2.1 Key findings and analysis.............................................................................................................................56
7. Summary of key findings and recommendations .......................................................... 56
7.1 Defining more accurately the potential demand for SMME finance..............................................56
7.2 Opportunities presented by recent legislative / policy processes....................................................57
7.3 Role of Government Institutions...................................................................................................................58
7.4 Role of the Private Sector ..............................................................................................................................58
7.5 Role of Non-commercial providers.............................................................................................................59
Appendices .......................................................................................................................... 1
Appendix 1 - Table 1: Definitions of SMME by sector........................................................................................... 1
Appendix 2 - Table 1: Khula RFIs............................................................................................................................ 2
Appendix 3 - Findings of the Khula Impact Assessment Study........................................................................... 5
Appendix 4 - Table 1: SA Development Microfinance Sector............................................................................ 8
b
Appendix 5: Case Study on: Provident South Africa .........................................................................................11
Abbreviations
ASCAs:
AVP:
BMR:
BCRS:
BSM:
CLO:
COSATU:
DBSA:
DFIs:
DTI:
ECI:
ESOPs:
FNB:
FSA:
FSC:
GDP:
GEM:
HDIs:
HDPs:
IDC:
ILO:
Khula:
LBSCs:
LFS:
LSM:
MCOs:
MEA:
MFIs:
MLA:
MSEs:
NEF:
Ntsika:
NSBC:
PDIs:
PSA:
RFIs:
ROSCAs:
SA:
SEE:
SHGs:
SMMEs:
SMEs:
Stats SA:
USAID:
TACs:
UYF:
VAT:
Accumulated Savings and Credit Associations
Anicap Venture Partners
Unisa’s Bureau for Market Research
Bay Research and Consultancy Services
Business Sophistication Measure
Collateralised loan obligation fund
Congress of South African Trade Unions
Development Bank of Southern Africa
Development Finance Institutions
Department of Trade and Industry
Ebony Consulting International
Employee Share Ownership Plans
First National Bank
Financial Services Association
Financial Services Cooperatives
Gross Domestic Product
Global Entrepreneurship Monitor
Historically Disadvantaged Individuals
Historically Disadvantaged Persons
Industrial Development Corporation
International Labour Organisation
Khula Enterprise Finance Ltd
Local Business Service Centres
Labour Force Survey of Statistics South Africa
Living Standard Measure
Micro Credit Outlets (KhulaStart programme)
Micro Enterprise Alliance
Microfinance Institutions
Micro Lenders Association
Micro and Small Enterprises
National Empowerment Fund
Ntsika Enterprise Promotion Agency
National Small Business Council
Previously Disadvantaged Individuals
Provident South Africa
Retail Financial Intermediaries (funded by Khula)
Rotating Savings and Credit Associations
South Africa or South African
Survey of Employment and Earnings
Self Help Groups
Small Medium and Micro Enterprises
Small and Medium Enterprises
Statistics South Africa
United States Agency for International Development
Tender Advice Centres
Umsobomvu Youth Fund
Value Added Tax
c
Executive Summary
This SMME Finance Background Paper, which is a research document commissioned by
FinMark Trust, is a consolidation and synthesis of key documents on SMME finance from
1994-2004. FinMark commissioned the research in order to provide those involved or
intending to be involved in the SMME finance sector in South Africa with a credible and
accessible one-stop source document. The document also provides an analysis which
various players in the sector can build on as they seek to identify and exploit
opportunities. Section 1 of the report is an introduction to the report.
Section 2 of the report deals with the SMME potential market and the main finding was
that there are no systematic studies on the demand for financial services in the SMME
market broadly. Section 2.1 deals definitions of SMMEs and it was found that there are
various and differing definitions of the term “SMME” within South Africa which makes it
difficult to plan and target consistently. The development of an “SMME classification
matrix” as well as an SMME focused study similar to Finscope were recommended. This
would provide a more detailed picture of the SMME market in terms of its size, scope and
characteristics which could then be linked to the potential demand for finance within a
specific market segment. It would also give an indication of whether specific market
segments are substantial enough to develop specific products for, and would thus assist
financial services institutions in decisions around product development.
In terms of available data on the size, scope and impact of the sector, it was further
found in section 2.1 that Statistics South Africa’s (Stats SA) data collection classifications
for SMMEs are problematic. Certain categories of SMMEs are not included in their figures
for various reasons making it difficult to find consistent data, especially with regard to
estimating the impact of SMMEs on the economy and employment. Given the reliance
on Stats SA data for estimation of demand and potential market size, this issue deserves
attention as it is likely to hamper effective planning and targeting.
Section 2.1 further highlights the need to segment products targeted at the microenterprise / survivalist category. This category has on the one hand potentially viable
business that have the potential to grow and, on the other hand survivalist economic
activities which are simply income augmentation or survivalist strategies. Although they
have different types of financing needs, it is concluded that both these markets need to
be addressed, as they serve very important roles in the economy and in addressing
poverty.
Section 2.2 deals with the scope size and characteristics and found in terms of the
potential demand for SMME finance, that while there were differing estimates, it could
be estimated that SMMEs, particularly the small and medium ones, make significant
contributions to both job creation and the economy. It was also found that SMMEs
represent a potential demand of at least R 3 million people or businesses. Section 2.2
further deals with various characteristics of the informal sector as it represents an
important starting point for most businesses. The key finding was that by far the biggest
sources of finance for starting these businesses was found to be own funds or funds
borrowed from friends and relatives. This highlighted the importance of savings products
and services in this part of the market.
Section 2.2 further dealt with Entrepreneurship in South Africa, which was found to lag
behind significantly in comparison with international trends. It was argued that focusing
i
on access to finance without addressing other constraints to the growth of SMMEs, such
as the absence of an entrepreneurial culture and the lack of financial management skills
would fail. Efforts focused in the education sphere in terms of developing an
entrepreneurial culture were therefore recommended.
The last part of section 2.2 deals with the financing requirements of SMMEs. A wide range
of financial services requirements are identified in this section. It was found that these
requirements go further than just credit; transaction services were found to be crucial as
they are the basis for accessing other services. Obstacles and constraints to accessing
financial services on the demand side were identified including absence of financial
administration skills particularly among businesses run by PDIs. It is recommended that this
be addressed as it limits their access to formal financial institutions and results in cash flow
problems.
Section 3 provided a historical background to the SMME finance sector in South Africa
and outlines the various laws and policies that have contributed to the sector since the
early 1990s. New developments show that there is a realisation by government that while
the legal/ policy environment provided the framework for SMME development,
implementation has not been as effective. Thus an amendment to the Small Business Act
has been proposed as well as the establishment of an advocacy body to take over the
role of the NSBC. While it is not clear which direction this will take, this development
needs to be monitored closely. Furthermore it was found that developments in the BEE
arena, particularly the Financial Sector Charter provide a framework to engage formal
financial sector on issues related to SMME finance. Finally, the government’s
procurement programme was found to have been hampered by the lack of
appropriate financing mechanisms. The contracting of institutions by government to
accept government contracts as collateral for loans – where the loan is underwritten by
the government department offering the contract was also recommended.
The latter part of the report deals with various sources of SMME finance in South Africa.
Section 4 outlines key programmes initiated by government including the National
Empowerment Fund, Industrial Development Corporation, Land Bank, Post Bank, Business
Partners, Umsobomvu Youth Fund and Khula Enterprise Finance. Key issues identified in
this section are around the need to improve the effectiveness of National Empowerment
Fund as a venture capital provider in the SME market although the IDC does serve this
market quite effectively. The Post Bank’s role is highlighted in terms of its potential to
provide the full scale of services to the lower end of the market (micro/ survivalist
enterprises). Furthermore the Land Bank’s Step-Up scheme was also highlighted as a
source of micro-finance in rural areas, and lessons from the Land Bank’s experience with
this scheme should be harnessed by other institutions involved in micro-finance in rural
areas. The uncertainty regarding the future role of Khula and a possible mandate
change is identified as an opportunity, as it provided scope to influence the debate
related to its future focus given the imminent removal of its micro-finance portfolio. It is
also argued that the way in which sustainability is conceptualised and as applied by
Khula in its RFIs needs to be reviewed as it tended to limit innovation and the
development of solid MFIs.
The possibility of initiating micro-finance fund that is not linked to SMME finance (and thus
not through the DTI), potentially through the Department of Social Development is also
identified as there is a gap in the market in terms of state sponsored programmes. It is
also recommended that government consider more partnerships with the private sector
for SMME finance outside of the banking sector where guarantee funds have had limited
ii
impact. These could be partnerships with commercial micro-lenders and private venture
capital funds.
Chapter 5 deals with private sector’s existing and potential role in the SMME finance
market. Initially looking at Banks (section 5.1); on the micro-finance side various
approaches that have been used internationally and locally for banks to get involved in
this market were identified and evaluated. It was recommended that banks:
• Develop entrepreneurial and microfinance skills;
• Pursue Linkage strategies with village banks and cooperatives involved in
providing informal financial services to the poor; and
• Further promote the provision of savings and transaction facilities for the lower
end of the market.
It was also recommended that best practice piloting, case studies and research on small
bank establishment in the sector be developed to overcome negative perceptions
regarding the role of small banks based on experience so far in South Africa.
Furthermore it was found that banks can, beyond specifically servicing this market,
provide a back-up line to non-bank financial intermediaries, by for example, providing
services to business owners in their individual capacity, which are then used to access
services in the non-bank financial institutions. However it was also found that changes
may be required in the regulatory environment to give impetus to such developments.
The need for better research and disclosure on the exact extent of banks involvement in
the sector was also identified as well as the need to address the mutual
misunderstanding of each other’s requirements between bank staff and SMMEs. Finally, it
was proposed that government conduct another regulatory review of legislation that
impacts SMMEs, based on the findings and progress since the Ntsika review conducted in
1999.
In terms of Venture Capital and Private Equity Funds (section 5.2) the main
recommendation emanating from this section was the assessment of the feasibility of
venture capital funds focusing on the lower end of the market below R5 million. This was
found to be the gap in terms of private sector provision. The insurance industry’s role
(section 5.3) in the provision of services to the SMME sector was highlighted with respect
to risks associated HIV/ AIDS and with respect to its support to the informal insurance
industry. The Financial Sector Charter was identified as a framework through which the
insurance industry could be engaged in these issues. With regard to commercial microlenders (section 5.4) the issue highlighted was their limited role in SMME finance. The
need to further investigate this issue in term of product development and innovation was
highlighted.
Section 6 dealt with non-commercial or community based providers that focus enterprise
finance or have the potential to do so. This included micro -finance institutions and
village banks. The role of the state in both cases was highlighted in terms of subsidising
operations during the slow, painstaking business of institution building; and in providing
an enabling regulatory environment as well as in supporting capacity building. However
it was concluded that different approaches to the concept of sustainability needed to
be applied depending on which market (micro or survivalist) is being targeted by these
institutions. Experience shows that institutions focusing on survivalists will tend to need
longer periods of subsidisation.
Section 7 consolidates the main findings and recommendations made in the report.
iii
1. Introduction
As part of its role as a catalytic and facilitative agency in making financial markets work
for the poor, FinMark Trust commissioned this background paper on SMME finance. The
paper reviews key documents on SMME finance during the period 1994-2004 and thus
provides an analysis of the development of the sector through this period and its current
status. FinMark intended that this paper becomes a credible and accessible one-stop
source document which various players in the sector can use as they seek to identify and
exploit opportunities.
The paper was compiled mainly as a desk top study and is subdivided into the following
sections:
•
•
•
•
•
•
Section 2: Characteristics of SMMEs and the potential market for SMME finance
Section 3: Historical background to the SMME finance sector in South Africa
Section 4: State initiated institutions involved in SMME financing
Section 5: Private sector programmes for SMME finance
Section 6: Non-commercial financiers of SMMEs
Section 7: Summary of key findings and recommendations.
2. Characteristics of SMMEs and the Potential Market for SMME Finance
This section considers:
• Various definitions of SMMEs
• The scope, Size and characteristics of the SMME sector in South Africa
2.1 SMMEs defined
2.1.1 South African Definitions
The abbreviation “SMME” which refers to small, medium and micro enterprises came into
being with the release of the White Paper on the National Strategy for the Development
and Promotion of Small Business in South Africa in 1995. The categorisation of SMMEs was
used as a basis for defining the policy stance taken in the White Paper. However
although SMMEs were categorised in terms of their characteristics, there was no attempt
to target strategies accordingly. Table 1 below outlines the various categories used in the
White Paper and financing requirements within each category.
The 2001 Ntsika State of Small Business Development in South Africa Annual Review
although not specifically using the division between the formal and informal sector,
identifies survivalist and single-person micro enterprises as constituting the informal sector.
Medium and large enterprises constitute the formal sector. Micro enterprises employing
one to four people, very small and small enterprises are considered to be a mix of the
formal and informal sector.
1
Table 1: Characteristics and financing requirements according to size of enterprise
Size / class
Survivalist
enterprises
Characteristics
• little or no collateral
• no paid employees and minimal asset value
Microenterprises
•
•
•
•
Very small
enterprises
•
•
•
•
•
•
•
•
•
•
•
turnover below R150 000 per annum
less than 5 paid employees
may have access to collateral, (e.g. a house) but are generally
unwilling to risk their property
few have the type of collateral required by formal financial institutions.
employ fewer than 10 paid employees
their equity requirements are generally too small for equity financiers –
thus the only equity in the business is generally the owner's own
contribution.
may have established relationships with their suppliers, but generally do
not buy in adequate volumes to obtain credit
often considered formal micro -enterprises by institutions
sometimes have access to formal financial institutions but often
constrained by collateral requirements imposed by formal financial
institutions
while they may have some life insurance policies or pension funds and
are often home owners, they usually are overly leveraged
Most business failures occur in this sector
fewer than 50 paid employees
more established than very small enterprises
greater capital needs, especially for equipment and working capital.
often have some form of collateral that would be acceptable to formal
financial institutions, but it is usually not sufficient to meet their
requirements – collateral thus remains a constraint
Financing requirement1
• working capital to purchase supplies and inputs, often for
periods of less than a week
• alternative lending approaches, such as group lending – to
overcome the collateral constraints
• small fixed asset loans for equipment, such as sewing
machines, deep freezes, etc.
• working capital for supplies and material inputs
• longer period loans (than micro) - ranging from 3 months to
3 years (longer periods required in some industry sectors),
• amounts ranging from R2,000 to R30,000
•
•
•
•
•
could benefit from a combination of debt and equity, but
their equity requirements are generally too small for equity
financiers.
debt financing needs are usually for fixed assets investment,
capital outlay for enterprise establishment such as office
equipment etc.,
working capital needs especially bridging finance or
revolving credit facilities
leasing finance
average credit requirements of very small enterprises range
from R10,000 to R200,000
•
•
•
•
rely more upon leasing finance and factoring
long-term outlays for machinery and equipment
overdraft facilities and suppliers credits for working capital
equity injections - but as with very small enterprises, the
equity amounts required are often too small for equity
financiers to consider (below R5 million).
• loan finance requirements of small enterprises range from
R20 000 to R5 million
• generally have established relationships with their bankers
• those with growth potential are also targeted by equity
Medium
financiers a range of institutions serve their financing needs
enterprises • more likely to seek a listing on the stock exchange.
Source: Adapted from Department of Trade and Industry 1998, cited in Bathuthukazi Consultancy cc, 2000
Small
enterprises
1
Note: based on 1998 prices and economic conditions
2
While medium sized enterprises were included in the White Paper, this focused only on
those that faced obstacles and constraints which could not be solved through normal
market forces and private-sector action.
The White paper gave a lot of focus to survivalist and micro-enterprises due to their
potential as a vehicle for poverty alleviation particularly for the unemployed and
unskilled. The 1997 UNDP Microfinance Assessment Report for South Africa indicated that:
“The smallest microenterprises tend to be run by people unable to find a paid
job. Little capital is invested and the individuals running the microenterprises often
have no skills training and limited growth opportunities. ……. Self-employment in
the form of such enterprises remains critically important survival strategies for the
poorest sectors of the economy, especially for women living in rural areas” (Ashe
et al, 1997: 2)
As such survivalist enterprises have been described as “pre-entrepreneurial” and
involved in activities such as hawking, vending, household industry; the argument being
that shortage of financial resources, social barriers and lack of access to markets
prevents this group from being entrepreneurial (Ntsika, 1999).
It has also been argued that although some survivalists have grown into micro enterprises
and formal SMEs the majority are likely to remain poor (Baumann, 2002) since they are
‘constrained by a number of factors which constantly reinforce their position at the
bottom of the pile’ (Horn, 1995: 35, cited in Rogerson (undated): 133). This most affects
women. This implies differing strategies for addressing constraints faced by SMMEs at
different levels.
The lumping together of SMMEs and the resulting tension between micro-enterprise
development for poverty alleviation as against small and medium business development
for employment creation and economic development is often identified as a reason for
the limited impact of policy on SMME development in South Africa. A report by David
Porteous (2002) also further identifies the conflicting policy objectives in South Africa that
result in promoting small businesses for job creation (which are likely to be mainly white
owned) versus transformation efforts in the form of black economic empowerment to
achieve socio-political stability. In a similar vein the 2002 GEM SA report (Foxcroft et al,
2002) argues that policy interventions need to distinguish between social upliftment/
poverty alleviation programmes and targeted small business support and that the former
should be aimed at unregistered businesses and the latter at registered businesses. This
links in with definitions that argue for a distinction between formal and informal and
targeted support based on these definitions. (see below).
Definitions focusing on Marginalisation of enterprises
Other definitions differentiate and target SMMEs based on their marginalisation. For
instance, the Small Business Strategy differentiated SMMEs in terms of the constraints they
faced, placing particular emphasis in addressing constraints faced by SMMEs initiated,
owned or controlled by those who were disenfranchised and/or otherwise discriminated
against in the past. This included enterprises owned or controlled by black South Africans,
women and all other disadvantaged and marginalised groups, including those in remote
rural areas as well as the disabled, elderly people and the youth (South Africa, 1995).
Similarly, Rogerson (undated) made a distinction between the established group of
formal SMEs (largely owned by whites and sometimes Asians and operating in urban
areas, particularly larger cities) and the group of emerging SMMEs largely under black or
3
coloured ownership and operate in urban townships, informal settlements and rural
areas. The 2002 GEM South Africa report (Foxcroft et al, 2002) also distinguishes
enterprises in disadvantaged communities in terms of their characteristics and business
support requirements. However it also notes that there are significant differences in the
constraints faced on formal and informal entrepreneurs in disadvantaged communities
and argues for more effective targeting of support and resources to these two groups of
entrepreneurs is required (Foxcroft et al, 2002: 6).
Legal Definitions: Formal vs. Informal
The GEM 2002 South African Report (Foxcroft et al, 2002) makes distinctions between
informal and formal enterprises and characterises these in terms of economic
contribution, education, resources, and needs. Policy implications are also outlined in the
report within these categories. Porteous (2002) also makes the distinction between formal
and informal based on legal status (registration), tax registration, and the keeping and
auditing of accounting records. According to Porteous (2002) SAtoZ has taken this further
by introducing the Business Sophistication Measures (BSMs) similar to the LSMs for
consumers. BSMs use indicators such as whether a business has a separate phone line,
kitchen, canteen, board room and written mission statement. However, this methodology
has not yet been fully extended to informal businesses, although this is currently planned
(Porteous, 2002).
Furthermore, according to Porteous (2002) the credit provision industry also proposes a
distinction between:
• Formal SMEs which should be treated as distinct businesses, separate from their
owners; and
• Informal SMMEs which are essentially from a legal and risk position no different
from lending to the owner/s, and hence would involve providing loans to
individuals who do not have a pay slip.
A study conducted for the Micro Enterprise Alliance (MEA) by ECI (2000) distinguishes
between ‘organised’ and ‘unorganised’ SMMEs in urban areas where organised
enterprises have salaried employees and fixed premises. No reference is made to legal
status however. Unorganised firms are said to consist mainly of artisans without fixed
premises, few or no salaried employees (ECI, 2000).
Statistical definitions: Labour Force Survey
The Labour Force Survey (LFS) conducted by Statistics South Africa (Stats SA, 2003) also
distinguishes between the formal sector including businesses that are registered in any
way and the informal sector which consists of those businesses that are not registered in
any way, are generally small in nature, seldom run from business premises and are
instead run from homes, street pavements or other informal arrangements. There are
however discrepancies in the figures provided by Statistics SA in terms of their definition
of informal sector employment. Stats SA provides formal sector employment figures from
the quarterly survey of employment and earnings (SEE), which specifically collects
information on employment in SA (excluding non-VAT registered businesses as described
below) while in the LFS households, rather than businesses are sampled. Households
contain people working in small industries whether the owners of those businesses and
pay VAT or not. The SEE collects only information from businesses that are VAT registered
and have a turnover over R 300,000. The SEE therefore misses certain formal sector and
informal sector businesses that are covered by the LFS. The SEE also has a short coming in
that it does not distinguish employment in terms of size of industry. SEE also excludes
employment in a host of industries including agriculture, restaurants and small scale
4
tourism establishments, financial institutions which are not banks, insurance companies,
private educational and medical services (Lehohla, 2002).
As a result while the SEE indicated that 6.6 million were employed in the formal sector
(excluding commercial agriculture), a further 0.8 million people said to be working in the
informal sector were covered by the LFS but not the SEE.
Definitions linked to Sectors of the economy
The National Small Business Act (South Africa, 1996) further differentiated the definition of
SMMEs according to the sector that the business is operating within. This is outlined
according to number of employees; turnover and assets (refer to Appendix 1). There was
also recognition in the Act in terms of the government's SMME support strategy, that the
problems of each of these four categories need a somewhat different policy stance
(South Africa 1996). Although these differences were recognized at this stage policy did
not specifically address this, leaving this for more specific implementation processes.
2.1.2 Comparison with international definitions
International literature on small enterprise development definitions generally focus on
distinguishing between micro and small enterprises (MSEs) on the one hand and small
and medium enterprises (SMEs) on the other (Mead, 1998 (cited in Rogerson, (undated)).
Micro and Small Enterprises (MSEs) vs. Small and Medium Enterprises (SMEs)
According to Labie (1995) small and microenterprises (MSEs):
•
•
•
•
Are generally more labour than capital intensive;
Have high relative production costs (because raw materials are purchased in
small quantities);
Lack technical experience in production, accounting, administration and stock
control (due to low levels of qualification);
Are mainly unregistered (or partially registered) and family-based.
The USAID’s definition of micro-enterprises as distinct from small enterprises characterizes
them as:
•
•
•
•
tiny, informally organized business activities other than crop production
low -technology, labour-intensive activities.
Mainly involving only one person, the owner-operator or microentrepreneur some
with unpaid family workers and others including paid employees.
low level of assets or income -- both of the business and of those working in it
(USAID, 1995a and 1995b)
USAID limits the term "microenterprise" to firms with ten or fewer employees, including the
microentrepreneur and any family workers.
Informal vs. formal sector
On the other hand the International Labour Organisation (ILO) distinguishes between its
programmes supporting the informal sector (including home based work) (Xaba et al,
2002) and the small business development programmes focusing on small and growing
enterprises (Trulsson, 2001). The ILO also focuses on supporting enterprises that grow in a
labour-intensive manner, thus focusing on size with respect to the number of employees.
5
For instance ILO’s SSIYB, GYBI, SYB and IYB programmes cater for a wide range of
enterprises that employ anything from the single owner up to approximately 20 people
(where the majority employs five people or less). Growth Oriented enterprises are on the
upper end of this (10-30 employees) but beyond this the ILO argues it would move into
the territory of consultancy firms; the argument being that the upper end of ILO
interventions with regard to small enterprises should be targeted towards a market niche
where these firms are not yet active (Trulsson, 2001).
Opportunity vs. Necessity Entrepreneurship
The GEM uses the distinction between ‘Opportunity’ and ‘Necessity’ Entrepreneurship
where Opportunity Entrepreneurs are those driven primarily by the desire to take
advantage of a business opportunity, while necessity entrepreneurs are those driven
primarily by lack of better choices for work (Driver et al, 2001, p11). This implies different
policy approaches based on understanding the factors driving the entrepreneur to start
his/her busines s.
Stage in the Life Cycle
Another definition that is commonly used internationally, particularly with respect to
financing SMMEs is stage in the life cycle where the differences between demand for
finance are distinguished based on the stage of the business from start-up through to
growth or expansion finance (see table 8 below).
2.1.3 Key findings and Analysis
SMME classification matrix
There are various and differing definitions of the term “SMME” within South Africa. South
Africa differs from international categorisations that broadly define two categories one
at the lower end of the market grouped as micro and small enterprises (MSEs) and the
higher end of the market grouped as small and medium enterprises (SMEs. While South
African definitions have been much more detailed, they are also varied and have not
resulted in effective targeting of services to SMMEs. The Global Entrepreneurship Monitor
(GEM) 2002 South Africa Executive Report (Foxcroft, et al 2002), indicated that there is a
growing recognition of the need for careful segmentation of different types of
entrepreneurs and targeting of specific policies and services according to different
needs. The report argued that size categorizations such as “SMME”, are so wide that they
are not helpful for targeted policy-making. They further argued that effective targeting
requires appropriate segmentation of entrepreneurs and better understanding of the
constraints facing entrepreneurs within each segment.
An SMME focused Finscope Study?
The most significant finding within this section is that SMMEs require specifically tailored
financial products and services which go beyond simply targeting informal and formal or
small and micro. While SMMEs within each category do face some common constraints,
the lack of innovative product development or packaging may be partly due to a
tendency to focus on one parameter of defining SMMEs, without considering the overlap
with others. Anicap Venture Partners (2003) highlight this problem by arguing that the
SME marketplace, its participants and performance, are too poorly monitored and
understood to be effectively managed and developed. They further argue that this
results in the market being too opaque for either the public or private sector to develop
satisfactory assistance programmes and in benchmarking being almost impossible to do,
6
given the paucity of hard information about South African SMEs. They conclude that this
area needs future attention.
While it could be argued that there is a large amount of research that has been done on
SMMEs since 1994, very little of this focuses on understanding SMMEs to the level of detail
required to the effectively target SMMEs. To address this issue, the development of more
refined SMME classification matrix (for lack of a better name) using combinations of the
definitions outlined above (and perhaps others not covered here) is proposed. Each
category defined using this matrix would then be linked to the potential demand for
finance within that specific market segment which would give an indication of whether
this is a substantial enough market to develop specific products for, and would assist
financial institutions in decisions around product development. It also could be linked to
existing products that address each market segment and identify where there are
blockages or gaps in supply.
However a key requirement for developing this matrix and ensuring it has the required
detail is accurate enough information on the SMME market in the level of detail currently
found in the Finscope Study. FinMark Trust developed FinScope as the most
comprehensive national survey exclusively focused on financial service needs and usage
across the entire population. Like the original FinScope, an SMME focused Finscope could
provide a credible, regular profile of needs for and usage of financial services among
SMMEs to support better policy making and innovation in service provision. The Business
Sophistication Measure developed by SAtoZ could also form an important basis for this
SMME Finscope much as the LSMs have formed the basis for the original Finscope study.
Statistics South Africa data collection classifications
It was found in categorising the differing definitions of SMMEs, that there is conflicting
information regarding the classifications used by Statistics South Africa which include or
exclude certain types of businesses depending on VAT registration, sector and other
factors. Additionally information on employment in terms of size of business is not
included. This issue hampers effective policy making, benchmarking and the
measurement of impact of the sector on the economy. What would be required to
enable this is a review of the definitions or classification of SMMEs used by Statistics South
Africa with a view to ensuring they coincide with DTI’s classifications.
Segmenting products in the micro-enterprise / survivalist category
The micro -enterprise /survivalist portion of the SMME market clearly presents a challenge
both in terms of policy and targeting of financial products. If one is focused on
employment creation then this would mean only supporting businesses that have the
potential to grow. However given the importance of micro-enterprise and survivalist
economic activities in supporting livelihoods, particularly in marginalised communities,
there is clearly a need to target financial products and services to this group. However
different models of institutional sustainability would need to be applied as financial
sustainability will be more difficult to achieve when targeting the latter group.
2.2. Scope, Size and characteristics of the SMME sector in South Africa
Most literature on SMMEs begins with the rider that figures on SMMEs are either difficult to
find or are not measured. As a result many of the figures found are based on
interpretation of various types of employment statistics provided by Statistics SA; which
are not provided in the same categorisation commonly used by SMME practitioners.
7
2.2.1 Size of sector
Various estimates for the size of the sector are outlined below:
•
The Small Business Development Strategy in 1995 (South Africa, 1995) initially
estimated that over 800,000 people were involved in the SMME economy. In
addition it also estimated that about 3,5 million people were involved in some or
other type of survivalist enterprise activities.
•
Falkena et al 2001 estimated the number of SMMEs to be between 1 and 3 million
in South Africa. Excluding survivalist and micro-businesses, this number decreases
to a range between 250 000 and 650 000 enterprises.
•
The following estimates (table 2) are provided by Coetzee and Grant (2001) and
show the growth of the informal and micro-enterprise sector. The informal sector
accounted for over 1.8 million in 1999. The figures further highlight the slightly
higher grow th rates achieved in the informal/ micro -enterprise sector.
Table 2: Total Growth in number of Businesses in South Africa
1998
Formal private
Public service
TOTAL FORMAL
Informal
Micro enterprise
TOTAL INFORM.
GRAND TOTAL
Source: Coetzee and Grant, 2001
•
1999
349,720
83,430
433,150
840,720
922,000
1,762,720
2,195,870
Falkena et al (2001) also highlights the different size estimations of the SMME
sector used by different institutions (table 3 below). This again highlights the
difficulty in correctly estimating the size of the sector.
Table 3: Different Indicators for size of SME sector
Source
% chg
2.3
5.5
2.9
2.6
4.2
3.4
3.3
357,780
88,100
445,880
862,580
960,740
1,823,320
2,269,200
Survivalist
Micro
Very
Small
180,000
Small
Medium
Large
Ntsika 1997
184,000
466,100
58,900
11,322
6,017
totals
Business
2.3 million
600,000
35,000
Not
Partners
reported
Management
960,740
862,580
445,880
sciences
group, 1999
Eskom Survey
900,000+ ‘in home businesses’: total 3 million if one includes small/
1999
emergent/ established
Statistics SA
2000
Source: Falkena et al, 2001
Total
906,700
2.9
million
2.3
million
N/A
1, 628,
797
8
2.2.2 Contribution to Employment, Job creation and the Economy
There are also differing estimates of the employment, job creation and economic
contribution of the SMME sector, making it difficult sometimes to take a consolidated
view of SMMEs economic impact. Various estimates of the contribution of SMMEs to
employment and the economy are outlined below.
Focusing on SMEs (excluding survivalist and micro -enterprises), Falkena et al (2001)
estimated that they represent a contribution to GDP of about 50% based on the figures
provided in the table 4. Falkena et al (2001) also found that the contribution of SMEs to
GDP is dependent on the definition used. For example, if ‘survivalist and micro firms’ are
excluded, the SMEs’ value added was estimated at 39 to 42 per cent of GDP in 1997. This
grows substantially however, if these are included to between 52 to 57 per cent. While
these estimates were found to depend on the statistics available, the assumptions made
and the definitions used, Falkena et al further argue that they do show that the material
significance of SMEs in the South African economy and lead them to the conclusion that
SMEs constitute the backbone of the economy and would thus have a huge impact on
employment. Falkena et al (2001) estimated that the share of SMEs in national job
creation is as much as 62 per cent. They also suggest that due to structural changes in
the economy affecting bigger firms, the job creation capacity of SMEs is expected to be
more significant and to more increasingly generate jobs that are skill intensive and well
remunerated and as the economic significance of SMEs is likely to increase over time.
Table 4: Contribution to total gross value added by types of enterprises (1997)
Value added
GVA in million
R
% of GDP
Type of Enterprise
Survivalist
Micro
7 622
67, 721- 81,
572
1.24
11.00-13.25
Very small
58, 061
9.43
Small
92, 302106, 153
14.9917.24
Medium
93, 076
15.11
Large
269, 312297, 015
47.7348.23
Source, Falkena et al 2001
However Ntsika’s (2001) estimates for GDP are slightly lower; in the year 2000, SMMEs
(excluding the survivalist and microenterprises with no employees) were said to
contribute only 34.8% to GDP, up from 32.7% in 1995. Ntsika’s estimates for employment
are also lower than Falkena et al as SMMEs were said to account for over 50% of
employment. Table 5 below outlines Ntsika’s the estimated contribution of SMMEs to GDP
per size class.
Table 5: Estimated % sectoral contribution to GDP by size-class, 2000
Size Class
Survivalist
Micro (0)
Micro (1-4)
Very Small
Small
Medium
Large
Source Ntsika, 2001
% Total Employment
2.2
3.5
6.5
13
15.7
13
46.1
9
According to Baumann (2001) nearly 40% of employment in the South African retail trade
sector is in micro-enterprises2, but their contribution to the national retail trade output is
only 2.3%3. Furthermore, 53% of South African personal services employment is said to be
in microenterprises, but these contribute less than 10% of the national sector’s output.
Overall microenterprises are said to provide nearly 20% of South Africa’s ‘jobs’ but
contributes only 5% to Gross domestic product.4
Estimates from the March 200 3 LFS on employment in the sector are provided in table 6
below. The total number of workers as at March 2003 was estimated at 11.6 million
people, the majority of these being employed in the formal sector (63.6%). The share of
employment in the informal sector (excluding subsistence or small-scale agriculture and
domestic service) as estimated at 16%, while commercial agriculture at 7.5 % and
subsistence or small scale agriculture at 3.6 %, while domestic workers constituted 8.7% of
the employed and 0.6 % did not specify their sector. As indicated above the SEE figures
(provided by Stats SA) do not currently differentiate employment according to size of
business.
Table 6: Formal Sector Employment According To the LFS and the SEE of March 2003
(‘000)
Empl oyed according to SEE
6,497
Employed in formal sector in activities not covered in SEE
Total
825
7,322
Source: Statistics SA 2003
A recent survey of the contribution of non-VAT registered small and micro enterprises
(considered informal in the LFS) to the economy of the country based on the LFS
(Lehohla, 2002) is summarised in table 6 below. Out of an estimated national population
of 44.4 million, 2.3 million were estimated to be running an informal business.
Table 7: Contribution of non-VAT registered small and micro enterprises to the economy
Index
No of people estimated to be running at least
one non-VAT registered business
Of these, proportion running the business from
a fixed location.
Size
2.3m
Proportion
5.1% of the population
1.9m
Provinces with highest concentration
Proportion living in urban areas
Gauteng: 0.616m KwaZuluNatal: 0.58m Limpopo:
0.265m
Eastern Cape 209
1.3 m
83% of those running
at least one non-VAT
registered business
top 3 = 63%
Proportion of females
1.4million
Proportion with licenses
166,000
57% of those running
at least one non-VAT
registered business
61% of those running
at least one non-VAT
registered business
7.3% of those running
Source Baumann, 2002, note Because official statistics measure this in terms of number of employees, these
micro-enterprise figures include ‘formal’ sector firms that are by nature small
3
Source Baumann, 2002 Statistics in this paragraph computed from data from South Africa Survey 2001/ 2002,
South African Institute of Race Relations, Johannesburg 2001
4 Source Baumann 2002, Figures from own calculations based on data from the South African reserve Bank and
Statistics South Africa
2
10
Service levels
Sector Concentration
Employment
Number requiring finance to start their
businesses
Proportion those requiring finance that
received a grant
Proportion that borrowed money to start
Sources of finance
Gross revenues per month
Average monthly profit
at least one non-VAT
registered business
Piped water: 24.6%, Electricity: 63.3%, Telephone
30.6%
Wholesale and retail trade industry: 69.4%
Total No. of Employees:
67% of those running
0.7m
at least one non-VAT
registered business are
paid
1.4 million
61% of those running
at least one non-VAT
registered business
16,000
1% of those running at
least one non-VAT
registered business
15.5% of those running at least one non-VAT
registered business
Friends and relatives: 83%, Loans from others: 5.5%,
Banks 5%, Money lenders 4.6%, Credit societies +/-1%
Business associations +/-1%, Business partners: +/-1%,
NGOs: +/-1%
R 2,707 million
R 1,807 million
In terms of job creation potential the 2001GEM report (Driver et al) found that only a small
proportion of entrepreneurs are likely to account for most of the job creation by new
firms. In the 2002 report it was estimated that:
• start-ups created 140,000 jobs since the inception of GEM 2001;
• New firms close to a million jobs in South Africa between Jan 1999-July 2002;
and
• Established firms (older than 3.5 years old) have created 2.4 million jobs in
same period.
Based on the February 2002 LFS (Statistics South Africa 2003) it was estimated that
entrepreneurial firms account for a third of total employment (excluding the owner/s of
entrepreneurial firms) and thus play a vital role in job creation in South Africa. It was
found that informal entrepreneurs on average employ 0.8 people whereas formal
entrepreneurs employ on average 7.2 people. Formal businesses account for 56% of all
employment in privately owned businesses in disadvantaged communities.
While the employment generated by SMMEs may be significant Rogerson (1997) noted
that the quality of the jobs that are generated through the SMME economy may be of
concern with respect to poor wage and work conditions.
2.2.3 Characteristics of the Informal Sector
Lehohla (2002) (refer to table 6 above) found that most informal businesses were found in
the wholesale/ retail sector (69.4%), are in urban areas (57%) and are run by females
(61%). Important indicators of the serviceability of this market by financial institutions is
highlighted be their access to services such as electricity (63.3%) and telephones (30.6%).
The majority (61%) required finance to start their businesses, while the majority borrowed
funds were from friends and relatives (83%). This goes against findings from Falkena et al
(2001) that there challenges with SMEs owned by PDIs, particularly in the Start up phase in
that have been found to have little or no savings; little or no access to family finance/
11
neighbourhood finance; and little or no valuable investment in residential property.
Loans from others, banks and money lenders were the other sources of finance (roughly
5% each). NGOs and credit societies were not significant sources of finance (less than
1%).
2.2.4 Entrepreneurship in South Africa compared to international standards
The Global Entrepreneurship Monitor (GEM) measures, monitors and compares
entrepreneurship levels across participating countries around the world. The GEM (2003)
currently monitors 31countries. Key issues elicited from the various GEM surveys are
categorised below:
Table 8: GEM indicators for SA over time
Index
South
Africa’s 2001
GEM
Ranking
29
14t h
13t h
25t h
*
*
Number of countries studied
TEA index5
Start -up index6
New firm index7
Necessity Entrepreneurship
Opportunity Entrepreneurship
* not ranked in that year
Sources: GEM South Africa Report 2001-2003
South Africa’s 2002 GEM
Ranking
South Africa’s 2003
GEM Ranking
•
•
•
•
•
•
31
22nd
37
19t h
15th
29t h
9th
29th
*
*
*
*
It was found that South Africa was consistently behind most developing countries on the
GEM indicators. Falkena et al (2001) also found that South African SMEs on average grow
less than first-world SMEs. In the GEM 2002 report (Foxcroft et al 2002) it was found that
South Africa ranked lowest in all measures of entrepreneurship among developing
countries and was in the lowest quantile of all GEM countries in two key measures,
namely opportunity entrepreneurship and new firm activity. It was also found that South
African start-ups have a low success rate in that South Africa has a reasonably high
number of start-ups, but few of these reach a stage where they can pay their salaries
and wages for longer than 3 months.
The GEM 2002 report further estimated that entrepreneurs in the informal sector
(unregistered businesses) account for 88% of all businesses in disadvantaged
communities. Entrepreneurs in the formal sector account for about 12%.
Level of Entrepreneurship
Key conclusions from the various GEM surveys were that:
• South Africa is reliant on only a small number of new firm and established firm
entrepreneurs for the bulk of job creation (Foxcroft et al, 2002).
• To increase economic growth and employment creation, South Africa needs to
enable a higher proportion of start -ups to progress to the stage of new firms (Foxcroft
et al, 2002)
Total Entrepreneurial Activity (TEA) index i.e. the proportion of adults who are owner managers of a start-up, a
new firm or both. (People who are owner managers of both a start up and a new firm are counted only once.)
6
The proportion of people who are owner-managers of a business that has not paid salaries or wages for more
than 3 months
7 The proportion of adults who are owner managers of a business that has paid salaries for between 3 months
and 3 ½ years
5
12
•
•
•
Nearly 70% of new firm entrepreneurs in South Africa are owner-managers of
established businesses as well. This suggests that most new firm entrepreneurs have
experience running an established business (Driver et al, 2001)
The 2001 study also found that necessity entrepreneurship tends to be a response to
poverty. It was argued that while this is important as a means for survival, it is unlikely
to relieve poverty on the scale required in SA or act as a driving force in the
economy.
The key findings of the 2003 GEM report (Orford et al, 2003) were that although
developing countries have a higher total entrepreneurial activity rate; South Africa’s
rates are nearly 50% lower than other developing countries in the GEM. This was
ascribed to the lower entrepreneurial activity rates among young men, and the
lower proportion of young men believing they have the skills to start a business. It was
also found that the environment in large urban areas is more conducive to
entrepreneurship.
In conclusion the 2001 report questioned the view that there is a ready pool of potential
entrepreneurs in SA who simply need technical and financial support to start successful
businesses and that the focus should be education to expand the pool of potential
entrepreneurs. The 2001 report recommended a focus on education as key factor
associated with entrepreneurs progressing beyond the start up phase. The 2002 report
recommended that South Africa needs to work towards encouraging more opportunitytype entrepreneurial activity.
2.2.5 Financing requirements of SMMEs
On the issue of the financing requirements of SMMEs, table 1 above gave a summary of
the types of financing needs of SMMEs. Table 9 below shows the growth phases and
funding cycles of SMEs in the UK.
Table 9: SME Growth phases & funding cycle in the UK
Type of SME
Start-up Phase
Growth Phase
Stable
Traditional,
providing income
for an individual,
family or small
group of
employees.
High potential,
with growth
aspirations
Family, friends,
savings, equity in
residential
property
Asset -backed
finance,
factoring, bank
debt, trade
credit
Often none, but
debt if required
Exit for external
investor
n/a
‘Angel’ finance,
team equity,
some venture
capital
Venture Capital,
Venture Capital;
Either exit via
private
high yield debt
capital markets or
placement of
market, bank
direct access to
equity, assetdebt
competitive
backed finance,
capital markets
some bank debt
Attractive, with
‘Angel’ finance,
Venture Cap,
Corporates, bank Exit typically via
high-tech
venture capital,
corporates,
debt
trade sale
information and
corporates
asset -backed
life sciences IPR
finance
Source: UK Banking Review (cited in Cruishank Report) cited in Falkena, et al 2001
Table 10 below provides an analysis of the growth phase and funding cycle of SMEs in
South Africa. Falkena et al (2001) also estimated that category 1 represented between
25 000 and 55 000 enterprises, while Category 3 represented a category that would
attract venture capitalists and represented between 60 000 to 95 000 – possibly up to 150
13
000. Rough calculations of Category 2 are that it represented about 1 million enterprises
(mainly micro- and very small enterprises) with a potential for double-digit growth rates
over a decade (Falkena et al, 2001). It is further argued that these firms presumably
would be viable and provide sustainable employment if they were sufficiently
capitalised. However this category of enterprises is identified as providing the biggest
financing challenge as entrepreneurs in this category have neither their own or friends/
relatives resources; no possible collateral and no access to traditional debt due to their
fragility and risk of failure (Falkena et al, 2001).
Table 10: SME Growth phases & funding cycle in the South Africa
Type of
SME
Start-up phase
Growth phase
‘Steady state’ and exit
Minority:
Tradition al SME (e.g.
white-owned family
business)
Family, friends,
savings, equity
in residential
property
Asset -backed finance,
factoring,
bank debt, trade
credit
Often none, but debt if
required
High number:
Emerging Enterprise
from previously
disadvantaged
communities
Minority:
High growth
enterprises (high-tech,
life sciences or any
other sector)
Few resources
available –
dependence
on external
funds
Angel finance, team
equity, some venture
capital, corporates
Venture capital,
private equity, asset backed finance, some
bank debt, corporates
High-yield debt
market, bank debt,
corporates. Exit either
via capital markets
or via trade sale
Source: Falkena et al 2001
In terms of the types of products required by SMMEs, Porteous (2002) argues that like a
consumer, a business is likely to have a range of financial service needs, which will vary
over time and by type and scale of business. He highlights the following range of
financial service needs for SMMEs in table 11 below:
Table 11: Financing requirements of South African SMMEs
Needs:
Microsurvivalist8
1. TRANSACTION
ACCOUNT
•
A safe place to
store money
•
Easy access to
money when
required
•
Ability to make 3 rd
party payments
•
A means of
providing external
Store
needed,
but
typically
only
overnight
Informal
Micro—0
employees
Store of
value
needed
Micro—with
employees
Very small : 0
employees
Start to have
payment
needs as
well—to pay
wages, etc
Need all of
these
Formal
Small:
>0
Employees
Need all of
these
Medium
sized
Need all of
these
This is the category of ‘necessity entrepreneurs’ as defined in the UCT GEM, as opposed to the other
categories, even informal, being mainly or only ‘opportunity entrepreneurs.
8
14
Needs:
Microsurvivalist8
Informal
Micro—0
employees
Micro—with
employees
Very small : 0
employees
Formal
Small:
>0
Employees
Medium
sized
financial statements
FUNDING
Capital
•
Own
•
External
Typically
have none
or little of
own
May have
some of own
capital
saved; or
else family
and friends
May have
some of own
capital
saved; or
else family
and friends
Typically
own
capital —
maybe from
bond on
house
Typically
owner
capital
only; but
may
require
expansion
capital to
grow
More likely
to have
external
capital
providers
•
Debt
•
Liquidity facility
•
Working capital
•
Asset finance
Need debt
to finance
stock
Probably
accesses
through
informal
lenders or
formally
employed
family
member
Probably
accesses
through
informal
lenders or
formally
employed
family
member
Liquidity
facility
(overdraft
type) usu.
required
Rest
depends on
type of
business
Liquidity
facility
(overdraft
type) usu.
required
Rest
depends
on type of
business
Liquidity
facility
(overdraft
type) usu.
required
Rest
depends on
type of
business
3.
•
•
•
INSURANCE
Assets
Debtors
Owner/ life
insurance/ medical
Typically no
assets held
for any
term
Very
vulnerable
to sickness
& death of
owner
Few business
assets to
protect
Very
vulnerable to
sickness &
death of
owner
Maybe
assets to
insure, but
unlikely to
take unless
required by
financier
Maybe
office
equipment
to insure—
probably self
insure
Very
vulnerable to
health and
death risk
Equipment
to insure
Still
vulnerable
to health
and death
risk
Equipment
to insure
2.
•
May still be
‘key man’
risks
Source: Porteous, 2002
Porteous (2002) further highlights the importance of the transaction account to the range
of financial services required by SMMEs, as the backbone on which credit needs can be
better assessed and loans disbursed and collected.
Sources of finance
The 2001 GEM report (Driver et al, 2001) found that self-finance from income savings is the
most common source of finance among start-up entrepreneurs, regardless of race,
location, and gender or education level. The majority of recipients of angel finance were
either close family members (37%) or friends and neighbours (35%). 45% of start -up
entrepreneurs reported they would invest their own savings or income in the business. The
second most common source of finance is immediate or extended family. Only 1.1 % of
South African adults provided angel finance for someone else’s businesses over the
period reviewed (compared with an international mean for all GEM countries of 2.9%).
The 2003 GEM report (Orford et al, 2003) found that although lack of financial support is
viewed as the main problem facing entrepreneurs in South Africa, compared to other
GEM developing countries, South Africa does not stand out as having a financial system
reluctant to support entrepreneurs. In general throughout the GEM environment
15
internationally, formal financial institutions appear to provide funding to a small minority
of entrepreneurs. As found in the GEM 2002 (Foxcroft et al), entrepreneurs’ savings and
their ability to access informal investment from friends, family and colleagues appear to
be far more important sources of start-up finance.
Differences between Formal vs. Informal business financing requirements
The 2002 GEM report (Foxcroft et al, 2002) began to make distinctions between the
financing constraints and needs of informal and formal entrepreneurs. Research findings
indicate that lack of finance is a problem to a significantly larger proportion of informal
entrepreneurs. Only 21% of informal businesses have tried to borrow money and of these
only 63% were successful. Informal businesses found it more difficult to obtain finance
from banks or micro-financiers than formal entrepreneurs and were more reliant on
funding from friends and family. Although there some examples of financing initiatives in
South Africa, including community and village banks were identified, it was also found
that there are only a small number of organisations in South Africa that have low default
rates on small business loans and are easily accessible to the informal sector. Formal
businesses which requested R 10,000 were more likely to secure finance from banks.
Overall it was argued that the formal-informal categorisation of entrepreneurs was useful
because it identified businesses with clearly differentiated profiles and can assist with
developing targeted delivery systems and channels of delivery for each category
(Foxcroft et al, 2002). Table 12 below summarises their findings and differences regarding
the constraints faced by formal and informal enterprises.
Table 12: Financial support key issues affecting formal vs. informal entrepreneurs:
Issues
•
Lack of community-based micro-finance infrastructure
•
Finance not available for amounts under R 10,000 and also not accessible due to
lack of collateral, well developed business idea or business plan
•
Banks are not in a position to service this sector profitably
•
High interest rates are charged by micro-lenders
•
There is a lack of awareness and information about Khula and other financial
institutions
•
There is limited availability of micro-loans to rural and women entrepreneurs (e.g.
Khula Start offering R300 – R 3500 loans)
•
Average success rate for applying for finance is 33%. A substantial proportion of
Formal
the remainder does not qualify. Access and availability of finance are therefore
problematic
•
Collateral; is a problem for the bulk of disadvantaged entrepreneurs in the sector
•
Banks are the key service provider to the majority seeking finance
•
The IDC and business partners service a small minority at the upper end of this
market reasonably well
•
The perspective of the experts was that there was a poor relationship between
banks and the entrepreneurial sector
•
The venture capital market caters for a tiny high-potential section of this market
Source: Foxcroft et al, 2002
Informal
Financing requirements of entrepreneurs from disadvantaged communities
The 2002 GEM Report (Foxcroft et al, 2002) focuses specifically on the financial issues
affecting entrepreneurs from disadvantaged communities. The study found that among
businesses operating in townships:
•
Lack of money for running costs or capital items is the most widespread problem
facing them.
16
•
Over half of all formal township businesses in the sample did not report lack of
finance as being a problem.
The financing issues facing disadvantaged SMMEs in urban areas identified included:
• Bank loans were the preferred option for overwhelming majority of entrepreneurs
in the sample. In aggregate over a ¼ (25%) of entrepreneurs seeking finance
were offered finance and took up the offer. 2 out of every 3 entrepreneurs
obtaining finance received a bank loan. In industrialised countries the success
rate is significantly higher, often about 50% in the case of bank loans (no
comparison was provided for developing countries).
• Only 9.3% of entrepreneurs whose loan applications w ere successful had
benefited from Khula’s services. One reason for this is insufficient awareness of
among these entrepreneurs of Khula’s products. Only 54% of entrepreneurs who
made applications to banks said they knew about Khula’s products. From the
entrepreneurs’ perspective there appears to be no coordinated marketing of
financial assistance to small and medium businesses and there is also little
information available on the type of financial products available to the SME
sector and how to apply for these products.
• 52% of applicants who were made offers for finance considered the loan
conditions and options of repayment inadequate, however, 8 out of 10
accepted them, indicating that banks are currently the best available source of
funds for entrepreneurs.
2.2.6 Obstacles to financing SMMEs
Khula has recently identified obstacles faced by entrepreneurs in accessing finance,
particularly from banks:
• Collateral;
• Refusal to use own collateral;
• Own contribution;
• Blacklisting;
• Financial records & Business Plans; and
• High risk entrepreneurs (Mofokeng, 2003).
The 2002 GEM report (Foxcroft et al, 2002) also considered some of the obstacles
preventing unsuccessful candidates from borrowing money for business purposes. These
are summarised in Table 13 below. The report found that lack of collateral is the most
widespread problem, particularly if the entrepreneur is applying for working capital.
Other issues affecting the decision provide finance include blacklisting, and inadequate
financial records. The report concluded that, based on international comparisons, for a
significant proportion of unsuccessful applicants, the failure of the application would not
seem to be entirely unreasonable.
Table 13: Obstacles preventing unsuccessful candidates from borrowing money for
business purposes
Blacklisted
Do not keep adequate financial records
Lack of collateral
Seeking working capital
One or more of the above
High risk 1 or 2 or (3 and 4)
Proportion of unsuccessful applicants who
indicated a problem (%)
12.9
11.7
45.0
28.1
74.9
32.7
17
Source: Foxcroft et al, 2002
Another obstacle to SMMEs accessing finance is the issue of the also considered the issue
of the financial health and administration in black-owned small and medium enterprises
which was considered in the GEM 2003 report (Orford et al, 2003). The study and found
that cash constraints are wide spread among entrepreneurs from disadvantaged
communities with registered businesses. It was found that this could be linked to the
financial administration where the probability of cash flow difficulties being experienced
is was found to significantly decrease in those firms that kept cash books, records of
accounts receivable, records of inventory and practiced active debtor management. It
was also found that implementing these reduced probability of exhausting over draft
facilities, and significantly increased the probability that a firm would succeed in a loan
application for term loan finance.
The GEM 2003 report also argues that additional external finance, in isolation, is unlikely to
resolve the cash flow problems experienced by many of the firms surveyed and that the
primary policy focus on finance providers and financial products does not therefore,
appear to represent and optimal solution to the problem of cash constraints. Rather the
report recommends a focus in improving the administrative and financial management
capabilities of entrepreneurs in this sector as this would not only resolve many of their
cash difficulties, it would also make banks more willing to finance them.
2.3 Key findings and Analysis
Potential Demand for SMME finance
Due to the difficulties experienced in estimating the size and scope of the sector, as
outlined above, it is also very difficult to find an accurate enough estimate of the
demand for SMME financing. However one can conclude based on the estimates that:
• SMMEs make a substantial contribution to employment and the economy and
are expected to play an increasing contribution to the South African economy in
line with international trends.
• A figure of about 3 million is an estimate of the scope of the sector over all, with
SMEs estimated at between 250,000 - 650,000. The micro-enterprise and survivalist
sector is estimated to be at least 2.3 million based on estimates provided by
Lehohla (2003) of non-VAT registered businesses.
Clearly this represents a potential demand for financial services of up to R 3 million
SMMEs, possibly more. However the most significant finding in this section relates to the
inadequacy of the information used to calculate demand in the SMME sector, based on
substantial differences being found in the statistics from different reports on the size of the
SMME sector. It was believed also that there is a strong possibility of undercounting.
Clearly this is an area of concern that needs to be addressed as the lack of an
empirically based indication of the size of demand the sector will hamper effective
servicing of the sector and lead to a lack of focus on the sector as it may be seen as less
substantial in size than it actually is.
Characteristics of the informal sector
In terms of characteristics of the informal sector, it was found that this sector is dominated
by women (61%); it is mainly found in urban areas (57%) and involves mainly the
wholesale/ retail sector. Although only 30.6% of this sector is said to have telephone
services, the majority (63.3%) has electricity. These factors are relevant indicators for the
18
types of products that would be accessible to this market. By far the biggest sources of
finance for starting these businesses was found to be own funds or funds borrowed from
friends and relatives (83%). This indicates that availability of savings services represent an
important strategy for making financial services accessible to this sector.
Entrepreneurship in South Africa
South Africa was found to be significantly lagging in the entrepreneurship stakes,
particularly when compared to developing countries with respect to GEM’s total
entrepreneurial activity index. This was ascribed to the lower success rate of start-ups,
which meant there were fewer new firms established (refer to table 8 above); and the
lower entrepreneurial activity rates among young men, particularly young black men.
The issue of access to finance was turned on its head by the first GEM report (2001), by
questioning the assumption that South Africa has a ready pool of entrepreneurs who
simply need finance to start their businesses. Various other constraints to entrepreneurship
resulted in the recommendation of focusing efforts in the education sphere in terms of
developing and entrepreneurial culture.
Range of financial services requirements
It was found that SMMEs have a range of different types of financial services
requirements depending on the stage in the life cycle and their size category. It is
important to note that the range of financial needs go much further than credit and
include transaction services which form the basis for accessing other financial services.
There are also a range of sources of finance. Self-finan cing and borrowing from friends
and family represented the most common source of finance for start -ups. While
perceptions may differ, the GEM report has found that South Africa’s formal financial
institutions do not differ from their international counterparts in terms of the proportion of
entrepreneurs financed by them.
It was also found that financing requirements of the informal sector need to be
distinguished.
Obstacles and constraints on the demand side
While specific obstacles to financing black entrepreneurs in townships were identified,
the GEM report also concluded that banks were not unreasonable in turning down these
finance applications as they were a result of the lack generally accepted requirements
for accessing finance such as a lack of collateral, blacklisting, lack of adequate financial
records. The improvement of the skills of these entrepreneurs in the area of financial
administration was recommended as one response to this problem.
3. Historical background to SMME Finance Sector in So uth Africa
Table 14 below provides a chronology of key legislation, policies and institutions that
affect SMME finance in South Africa from the early 1990s to 2004. The most significant
pieces of legislation which set out the current environment for SMME finance are
discussed in more detail below.
3.1 National Small Business Strategy (1995)
Initiatives over the last 10 years in the development of SMMEs in South Africa began in
1995 with the White Paper on National Strategy for the Development and Promotion of
19
Small Business in South Africa. The preparatory phase for the White paper apparently
began before the 1994 elections based on ANC economic planning and some foreign
support groups (Ntsika, 1999). The White Paper was presented at The Presidential Small
Business Conference in Durban in March 1995. The broad goals of the Strategy were: to
• Improve access to finance
• Expand access to business information and advice
• Strengthen access to training
• Improve the business infrastructure
• Improve access to markets and public procurement for SMMEs; and
• Expand the capacity of business organisations to support member SMMEs
Table 14: Summary of key legislation, policy and strategy affecting SMME finance - early
1990s-2004
Year
1992
1993
1994
1995
1996
1998
Legislation/ policy development
The 1992 Usury Act exemption by a Government Notice (No. 3451 of 31.12.1992) was in recognition
that cost -effective microlending is only possible at higher interest rates. The bulk of MFIs have since
then invoked this exemption and are subject to no limitations on interest rates Staschen, 1999
The Mutual Banks Act provided a legal framework for mutual banks which legalized the activity of
informal ‘common bond’ type entities such as ROSCAs (called stokvels in SA) and credit unions.
According to Staschen, 1999, a large gap had occurred in the South African financial system
where these entities and the banks regulated under the Banks Act. The Act was thus introduced to
close the gap and give the South African financial system greater depth. Staschen (1999) provides
an analysis of the difference between Mutual Banks and Equity banks.
The 1994 Banks Act Exemption provided further exemptions from the Banks Act which exempted
MFIs designated as common-bond institutions from the Banks Act, thus enabling them to take up
deposit business, without being registered as banks. This applied to institutions such as
cooperatives, stokvels and employees' savings clubs. The exemption' also enabled these
institutions to take deposits as a non-bank by applying for exemption from the Banks Act. The
Exemption also required that these entities have membership in an umbrella organization in order
to apply these exemptions. Staschen (1999) provides further analysis of how this provide indirect
and self-regulation of these entities.
White Paper On National Strategy For The Development And Promotion Of Small Business In South
Africa proposed the development of a National Small Business Act, a Transaction and
Procurement Act and a Small Business Finance Act. The latter was intended to include steps to
encourage:
•
existing financial institutions to become more active in the SMME-market segments,
•
the facilitation of deposit-taking by lender-NGOs,
•
the recognition of certain non-conventional collateral types, and
•
The widening of scope for more specialised lending and investment institutions focusing
primarily on SMME needs. (South Africa, 1995).
The Strategy also proposed the streamlining of regulatory conditions.
National Small Business Act, (Act No. 102 Of 1996)
Formation of Khula, Ntsika and NSBC in terms of the Small Business Act
Strauss Commission (Commission of Inquiry into the Provision of Rural Financial Services).
Considered demand in the rural financial sector, at least in qualitative terms, described the
financial services of the different financial institutions and made extensive recommendations
based on this. The recommended measures were aimed primarily at improving access to financial
services in rural areas, where there was a lack of supply.
National Empowerment Fund (NEF) Act was set up mainly to establishing legislative instruments for
the promotion and facilitation of ownership of income generating assets by historically
disadvantaged persons through a Trust. The Act also provided for the sale of shares in State
Owned Commercial Enterprises at a discount to the trust or by the trust to the beneficiaries. The
NEF Corporation was also set up through the Act and the NEF has been set up as a pre-eminent
funder of black empowerment initiatives.
20
Year
Legislation/ policy development
Preferential Procurement Act. The Department of Public Works initiated an affirmative
procurement programme in 1996. It is designed to benefit SMMEs owned by Historically or
Previously Disadvantaged Individuals (HDIs/ PDIs i.e. black people, women, disabled etc). SMMEs
tendering for government are weighted in terms of their empowerment of HDIs/PDIs. According to
Roussos and Ferrand (1999) the initial targets set by the procurement programme was that 30% of
all government procurement should be through the S MME sector. However this target has not
been met because SMMEs have been unable to tender for these projects due to issues including
access to finance.
The 1998 Banks Act Exemption (Government Notice 18741 of 10 March 1998) exempted village
banks from the Banks Act requiring them be registered as a cooperative, operate in a clearly
demarcated unbanked area and have a business arrangement with a bank. As with commonbond institutions, the maximum permissible deposit is R 10 million. The task of supervision is entrusted
to the Registrar of Co-operatives.
1999 The revised Usury Act Exemption notice provided for the creation of regulatory bodies for microfinance with the power to supervise and regulate under the exemption. The Card and PIN
collection methodology was outlawed.
2000 Withdrawal of payroll deduction facilities for civil servants on unsecured loans (and insurance
policies) affecting the microlending industry
Launch of the MFRC’s National Loans Register which records details of the micro-loans supplied by
registered lenders. The Register made it possible for a registered lender to enquire about a
prospective borrower's lending commitments and thus to form an opinion of his/her repayment
capacity. Since 1 July 2002 it is mandatory for registered lenders to submit information to the
Register and to do enquiries before lending. The MFRC also implemented 'truth in lending'
disclosure requirements to protect the borrower, a one-page summary of the loan agreement
containing the crucial elements of the loan.
2001 Release of the Black Economic Empowerment Commission report. The BEE Commission was
mandated to evaluate the direction, pace and results of BEE initiatives in South Africa
2003 Strategy for Broad Based Economic Empowerment represented the first efforts by government to
ensure the transformation of the distribution of wealth, income and skills in the South African
economy is dealt with comprehensively.
The Financial Sector Charter was developed as an industry negotiated commitment to achieving
the objectives of the Broad Based Economic Empowerment Act. Specific commitments related to
access to finance and small business development were made by formal financial institutions
2004 Broad Based Economic Empowerment Act. The Act empowers the Minister of Trade and Industry to
legislate on various aspects of Broad-based Black Economic Empowerment. It also defines Broadbased Black Economic Empowerment to incorporate small business development
Sources: Staschen, 1999; South Africa 1995, 1996, and 1998; Porteous, 2003a; Roussos and Ferrand,
1999; Schoombee, 2003
3.2 The National Small Business Act (1996)
The Act passed in 1996 established the National Small Business Council and Ntsika
Enterprise Promotion Agency. Khula Enterprise Finance Limited was formed through a
separate initiative of the Department of Trade and Industry (DTI)9. The National Small
Business Council (NSBC) was set up in 1995 and was intended to represent and promote
the interests of small business, and advise all spheres of government on social and
economic policy that promotes the development of small business. It was however
closed after allegations of mismanagement in 1997/98. Ntsika is considered briefly below
as it was seen to be the other necessary side of the coin from Khula in terms small
business development.
9
Khula will be considered in detail as a case study in section 4 below
21
Ntsika10 was set up in 1996 to essentially facilitate provision of non-financial support and
business development for SMMEs. Ntsika currently has various programmes focused on
supporting SMME service providers including:
•
•
•
•
•
•
Developing a network of business development Service Providers including Local
Business Service Centres (LBSCs);
Mentorship programmes for SMMEs
Facilitating and coordinating access to technology
Supporting and developing Tender Advice Centres (TACs)
Trade and Industrial Development Programme.
Enhancing the skills of small business Trainers
Ntsika repositioned itself in 2003 in an attempt to address its negative public image,
shifting its focus to market development and business linkages (Wadula, 2003a). It
intended to do this by helping develop small and medium-sized enterprise suppliers,
design programmes, conduct research and provide information on how to serve the
service providers for small business.
3.3 Black Economic Empowerment Act
The government released the “Strategy Document for Broad-Based Empowerment” in
March 2003 and promulgated the Broad-Based Black Empowerment Act (No 53 of 2003)
in January 2004 as the first integrated and comprehensive effort by government to
ensure the transformation of the distribution of wealth, income and skills in the South
African economy. Some of the strategies identified in the current policies and legislation
were based on the findings of the BEE Commission (2001). The BEE policy and legislation
outlines various instruments including Codes of Good Practice, partnerships with the
private sector and the development of Charters outlining commitments of private sector
companies to transform in line with the objectives of BEE. Various Charters are in place
including the Financial Sector which will be an important instrument through which
commitments related to access to financial services, enterprise financing, and consumer
education can be accessed from financial institutions and also monitored.
3.3.1 Financial Sector Charter
The Financial Sector Charter represents one of the first collective and comprehensive
initiatives by the financial sector to deal with transformation of the sector. Commitments
of the Charter that are particularly significant for SMME finance include:
•
•
•
•
10
Commitments to enterprise development including measurable financial support.
The financial sector support for third tier financial institutions.
Commitments to sustainably increasing access to financial services across the
scope of transaction, savings, credit and insurance products. Particular
commitment is made to providing credit for micro-enterprise development.
Financial commitment to consumer education include programmes that are
aimed at empowering consumers with knowledge to enable them to make more
informed decisions about their finances and lifestyles (Financial sector Chart
2003).
Information sourced mainly from the website: www.nepa.org.za unless otherwise referenced
22
3.4 Current Developments in the Legislative/ Policy Arena
Recent media reports indicate that there is a proposed amendment to the Small Business
Act (Wadula, 2003b and 2004). The amendment, which has reportedly been tabled in
parliament (Ensor, 2003) has apparently come about due concern from the government
that the current small business legislation, which has been in place for eight years, has
had minimal impact in developing the SMME sector (Wadula 2002). This was seen to be
an acknowledgement by government that the small business development agencies
(Ntsika and Khula) had not delivered to expectations. The reviewed strategy is intended
to also realign DTI’s enterprise organization institutional framework to enhance its
assistance to small business. Amendments to the Act are also aimed at removing
regulatory constraints and improving the small business sector's access to finance and
markets (Wadula, 2004). Additionally the amendment is intended to allow for the
creation of an advocacy body for small business and to address the overlapping
mandates of Ntsika and DTI (Ensor, 2003). The advocacy body is expected to take over
the role of the National Small Business Council (Ensor, 2003). No further reports could be
found regarding the progress of this legislation.
Other developments that have been documented and reported include the possibility
of establishing an advisory body for small business, an annual small business review and
the holding of a regional rotating annual summit were the critical issues can be
considered by the DTI (Wadula, 2004).
Another significant current initiative is the establishment of a National Apex Fund which is
expected to take over some of the role of Khula in the lower end of the market. This is
discussed in some detail in section 4.7 below.
3.5 Key Findings and Analysis
Legislation related to Small Business Development
It is not clear what the direction of the government will be in terms of new legislation on
small business development, although significant developments such as the Small
Business Act Amendment need to be monitored closely. The formation of the new
National Apex Fund (discussed in detail in section 4.7 below) is likely to have great
impact in the micro-finance sector and is a potential area of involvement for anyone
interested in the lower end of the SMME finance market.
The Financial Sector Charter
On the BEE side, the major significance of the Financial Sector Charter is the opportunity
it presents as a framework through which the formal financial sector can be engaged on
issues related to SMME finance. Commitments to consumer education, increasing access
to financial services and enterprise development can therefore be used to initiate a
dialogue with banks and the insurance industry with regard to SMME finance.
Procurement
The potential for government procurement in growing the scope of the SMME sector has
long been recognised but has been hampered by SMMEs’ access to finance after
having secured contracts. The 2002 GEM report (Foxcroft et al, 2003) recommended that
the government contract more institutions to accept government contracts as collateral
for loans – where the loan is underwritten by the government department offering the
23
contract. This should be considered as a possible strategy which Khula could facilitate,
perhaps through its guarantee scheme.
4. State Initiated Institutions involved in SMME financing
Several state initiated institutions exist which provide financial services to SMMEs. Each of
these is briefly covered below, highlighting their focus within the range of SMME funding.
Khula is the only government institutions set up by government to specifically facilitate
access to financial services for a range of SMMEs and given its potential importance in
the sector, a detailed case study of Khula is provided in section 4.7 below.
4.1 National Empowerment Fund (NEF)11
The National Empowerment Fund was created by the National Empowerment Fund Act
of 1998. It was eventually established in 2001 as part of the DTI’s group of development
finance agencies. It has a BEE focus in that its aim is to promote economic participation
of historically disadvantaged persons (HDPs) and has a mandate to facilitate successful
and sustainable black economic empowerment through finance and investment
activities. According to its website, the NEF has three main product offerings:
• Private Equity, which provides acquisition and enterprise finance in the form of
equity, quasi-equity and debt, to support empowerment focusing on transactions
requiring funding between R 25 million and R200 million. Typically, it will focus on
medium to large and mature companies with a profit history.
• Venture Capital, which provides seed, early stage, start-up, expansion and
acquisition capital to entrepreneurs in the form of debt, equity and quasi-equity.
This division offers funding of between R200 000 and R40 million per transaction.
• Investment Services are also offered which focus on design and packaging of
mass empowerment products, which seek to address participation of HDPs in
financial markets. This division’s emphasis is on the development of mass
empowerment investment and savings products supported by targeted
programmes of investor education. Investor education programmes intended to
create investor awareness, thereby encouraging the development of a
competitive and effective equities, and investment market inclusive of all South
Africans are also provided.
NEF is therefore placed to an important role in financing in the upper end of the market
for SMME finance although it does overlap to a certain extent with Khula’s (see section
4.7) and IDC’s (see section 4.2) role. It has also been widely criticized for having been
slow to take off and has been branded by black entrepreneurs as “another white
elephant set up to benefit only a few blacks” (Wadula 2003d). It has also been in the
past criticised for not being able to carry out its mandate due to being notably underfunded and not having capacity (Wadula 2003d and 2003f). Furthermore NEF has been
hit by uncertainty over its mandate in comparison to the role of other Development
Finance Institutions (DFIs) such as Khula and IDC resulting with the DTI withdrawing its
funding at one stage (Wadula, 2003e and 2003f). The potential impact of NEF based on
this analysis would therefore be seriously limited although it is an important aspect of the
11
Information sourced mainly from the website: www.nefcorporation.co.za unless otherwise referenced
24
financing equation for SMEs. Its investor education programmes should also be
investigated as they are an important part of the SMME finance equation.
4.2 Industrial Development Corporation (IDC)12
IDC is the most established of the development financiers and offers a large variety of
products aimed at the upper end of the market of medium sized businesses requiring a
minimum financing requirement of R 1million. Entrepreneurs must also generally make a
meaningful financing contribution of at least 33 % or between 10 -20 % for HDPs.
According to its website, IDC’s products range from bridging finance and sector based
schemes in the Manufacturing, Tourism, Ago-industries, Techno-industries, and
Entrepreneurial Mining & Jewellery. They also offer products for exporters and importers.
IDC has also in recent years been one of the leading empowerment financing institutions
with a scheme focusing on emerging industrialists/entrepreneurs who wish to acquire a
stake in formal businesses. IDC also overlaps with Khula’s functions by offering wholesale
finance for Intermediaries looking for wholesale funding to lend on to individual
entrepreneurs.
4.3 Land Bank13
The Land Bank has a range of products for agricultural entrepreneurs including loan
equity and venture finance targeting a wide range of clients from start-ups, established
commercial farmers, agri-businesses and micro-enterprises. Land Bank also has a focus
on promoting black economic empowerment within the primary agriculture and agribusiness sectors.
Farmers are provided with various products including mortgage loans, instalment sale
finance, medium and short term loans, a large livestock product and a social discount
product. The latter provides incentives for existing and new clients to initiate
development projects with previously disadvantaged communities resident on their
farms or in surrounding rural communities. This can include worker housing, training,
education, ownership projects and retirement planning.
Finance is also provided to companies and cooperatives in the form of mortgage loans,
medium and short term loans, deposits (corporate clients only) and guarantees.
Development projects also have mortgage loans, instalment sale finance, working
capital, medium and short term loans, establishment loans, and micro finance. This is
dealt with in detail below.
Micro Finance
Land Bank provides micro finance to resource-poor individuals and farmers. The loans
can range from R250 to R18 000. They can be used by anyone who plans to engage in
any legal income generating activity whether in farming or not. No security is required for
micro finance loans. This loan is extremely flexible. A bank account is required and a
fixed monthly interest rate of 2% is calculated.
12
13
Information sourced mainly from the website: www.idc.co.za unless otherwise referenced
Information sourced mainly from the website: www.landbank.co.za unless otherwise referenced
25
The Land Bank established this micro-financing scheme called Step-Up in 1998 to address
a widespread need for micro financing, particularly in rural areas (Sukazi, 2003). The
scheme is an incremental scheme which enables people with no security - including
developing farmers as well as small business owners in general - to borrow an initial
amount of R250 which if re-paid increases periodically up to a maximum of R18 000. By
this time the borrower would have been expected to build up a credit record with the
Land Bank - and become "bankable".
The accumulative value of the Step-Up loan book stood at R365-million in 2003 with
about 130 000 people having taken out loans since April 1998 and the repayment rate
being 91% (Sukazi, 2003a). Most of these people have established a track record that
qualifies them for the Land Bank's high to medium -risk categories. The Land Bank also
offers capacity building to potential Step-Up clients in the form of a free course in
business and financial management. The bank also provides incentives to commercial
farmers who are empowering either their workers or their emerging counterparts.
The potential impact and relevance of the Land Bank scheme in the micro-finance
market has not been widely documented. It is probably the largest single micro-financer
in terms of the client base for the lower end of the market and more needs to be learnt
about its potential role and impact in the sector.
4.4 Post Bank 14
The Post Bank has increasingly been seen as a significant vehicle to extend financial
services to the poor, particularly the rural poor, since 1996 when it was identified by the
Strauss Commission as potentially playing a leading role in savings mobilization and
transfer facilities (Staschen 1999). Strauss further argued for the maintenance or extension
of the branch network as a ’society entitlement’ and therefore recommended state
assistance to uneconomic branch offices as well (Staschen, 1999).
Post Bank offers savings facilities through its over 2000 post offices across the country. Post
Bank is thus drawing unbanked South Africans into the banking system (Sukazi, 2003).
Most of the growth occurred during the past 4-5 years. Post Bank is the largest outreach
of any single financial institution in South Africa. Coetzee (1997, cited in Staschen, 1999)
estimated that by 1997 the Post Bank had 2,400,000 savings accounts in its portfolio, 80
per cent of which with a credit balance of under R 500. Due to extremely high costs,
however, it had not yet managed to reach break-even point at that time.
Criticisms made of the Post Bank by the Strauss Commission was that low interest on
credit and hence negative real interest in deposit-taking was used as implicit cross
subsidisation for other its business (Strauss 1996b: 14f, cited in Staschen, 1999). Other
criticisms were that the Post Bank did not participate in the inter-bank market of the
commercial banks, offered only relatively few products and its branch network density
differed greatly by province (ibid.: 55ff, cited in Staschen, 1999).
It has also been reported on the Post Bank website that the government has decided to
restructure Post bank to create a commercially viable institution that caters for the
financial needs of the "unbanked" part of our population, especially in the rural areas of
the country. This restructuring is intended to include the introduction of an expanded
14
Information sourced mainly from the website: www.sapo.co.za/postbank unless otherwise referenced
26
product range such as insurance and other financial services through the wide network
of the South African Post Office. Additionally Post bank in restructuring Post Bank may
form strategic partnerships with other institutions, as part of the plan to diversify its
products. The NFHC has reportedly already done this.
Staschen (1999) concludes that the great hopes attached to the Post Bank have not
been met although it would be of interest for other financial institutions to use the
infrastructure, since setting up their own structure is very costly.
4.5 Business Partners15
Business Partners Limited is a specialist investment group, and describes itself as the only
investment group providing debt and equity investment, mentorship and property
management services for formal small and medium enterprises (SMEs) in South Africa
with the exception of on-lending activities, farming operations and non-profit
organisations (Business Partners website). Business Partners Ltd was established as the
Small Business Development Corporation in 1981 and re-launched as Business Partners
after a change in strategic direction in 1998. Government remains a shareholder
together with other shareholders including corporate bodies, banks, insurance
companies and individuals. During the 2002/2003 financial year, Business Partners
invested R400 million into 496 entrepreneurial businesses and plans to increase this to
R500 million in the 2003/2004 financial year.
Although it does not specifically target enterprises owned by previously-disadvantaged
individuals, of its 496 investments made during the 2002/2003 financial year, 150 were
made in businesses owned and run by such individuals (both male and female).
Business Partners also provides a range of independent added-value services including
property broking, property management, mentorship, consulting and counselling
services. Business Partners invests up to R15 million in viable small and medium enterprises.
Applications for Investment financing of below R250 000 are usually not considered while
the average investment is between R500 000 and R7 million. Business Partners’
investments are structured using equity, shareholders’ loan accounts, royalties and term
loans or any combination of these. Clearly Business Partner’s focus is in the small and
medium size of the market.
4.6 Umsobomvu Youth Fund (UYF)16
The fund was founded in January 2001 to facilitate the creation of jobs and skills
development among the youth. The UYF provides Business Advisory Services through its
Voucher scheme and finance through partnerships with various service providers such as
Nations Trust, Nicro Enterprise Finance, FNB/Momentum, and Business Partners. The types
of funds vary from micro finance to loan or equity finance up to R 5 million17. The fund has
reportedly (Bu siness report 2004) initiated South Africa's first public-private partnership in
venture capital and private equity, conducted the first comprehensive research project
Information sourced mainly from the website: www.businesspartners.co.za unless otherwise referenced
Information sourced mainly from the website: www.uyf.org.za unless otherwise referenced
17 Information sourced from UYF consultant Mark Burke of ITSD Consulting
15
16
27
on youth in co -operatives in this country and has become the leading provider of microfinance to youth in the country.
4.7 Khula Enterprise Finance Limited (Khula)
Khula was set up through a Department of Trade and industry initiative as a wholesaler
with the mandate to create and develop SMMEs by making loan and equity capital,
available particularly to previously disadvantaged SMMEs (Khula 1998 Annual report).
Khula does this through the medium of Retail Financial Intermediaries (RFIs) and Banks, by
providing guarantees to the banking sector. The rationale for wholesaling as opposed to
direct retailing was to establish an appropriate mechanism for leveraging private capital
for SMME finance (Tati, undated). Khula operates as a private company with the
government as the sole shareholder and has its own board of directors. Khula started
operations in August 1996 with a government grant of R 162, 388,000. This was
subsequently increased to R 300m. In addition it has over the years received grants and
loans from a number of foreign sources.
4.7.1 Products
Khula’s products include:
Loans
This product provides debt financing, seed loans and capacity building to RFIs. Loan sizes
of RFIs range from R100-R 2million. Average loan size amongst all RFIs in 2001 was
approximately R 29 323. Business loans to RFIs are interest-bearing (although lower than
the prime lending rate of banks) and are intended to be “on-lended” to SMMEs. Seed
loans are intended to cover the operational shortfall of emerging/start -up RFIs and are
non-interest bearing. Additionally, capitalization is provided as non-interest bearing debt
to emerging/start-up RFIs for on-lending to SMMEs. Capacity building can also be
provided to RFIs to assist with training, management, and systems for emerging/start-up
RFIs. Khula currently has 11 RFIs spread across all provinces except Northwest Province
(List sourced from Khula, see Appendix 2) although one RFI was reportedly opened in the
2002/2003 financial year and then subsequently sold to African Bank (Khula 2003). Loan
sizes generally range from as little as 500 up to 150,000 although Ithala Bank pushes this
up (up to R 2million). RFIs use both individual and group based lending methodologies.
According to Khula’s minimum criteria, an eligible RFI should have an average
repayment rate of 85%; have 50 active clients, an operational self sufficiency ratio of
20%, a cost per rand lent of R1.00 and 25 clients per loan officer (Tati, undated). It is not
clear whether this is still applied.
In its 2003 Annual report Khula reported that it in the past 3 years it had placed emphasis
on the quality of the book. It apparently had managed to exceed the approval targets
and performed reasonably well in terms of draw downs. Performance of RFIs is outlined in
table 15 below:
Table 15: Performance of RFIs since inception
RFI programme
Total facilities approved
Impact and Outreach Indicators from
inception to March 2003
R 549,1 m
28
RFI programme
Total facilities disbursed
No. of RFIs
No. of loans disbursed by RFIs to their clients
Rand value of business loan bad debt write off
Males
Females
Black
White
Urban
Rural
First time borrowers
Manufacturing
Retail, service and small contractors
Job creation estimates
Source: Khula, 2003
Impact and Outreach Indicators from
inception to March 2003
R 419,7m
32 now 16
165,880
R 39.7m
30%
70%
96%
4%
70%
30%
55%
21%
79%
719,606
KhulaStart
Khula Start is Khula’s entry-level programme targeted mainly at the micro/survivalist
sectors. The product utilises group-lending methodology with loans being made
available to groups of rural women in the survivalist and/or micro enterprises. These loans
are provided through a broad range of intermediary organizations called Micro Credit
Organizations (MCOs). The loans are between R 300-R3500 and are primarily made to
first-time borrowers who need small amounts of money to maintain their dependants
through survivalist economic activities (Ntsika, 2002, and Khula website).
In 2001 there were 22 MCOs servicing about 16,000 clients (Khula 2001). Black women
represented the vast majority at 97%. This had gone down to 17 by the 2002/2003
financial year (Khula, 2003). The programme was reviewed in 2001 and the following
were revealed as serious deficiencies:
• Operational procedures are not always followed leading to a lack of group
cohesion and the loss of the power of group peer pressure to re-pay loans;
• Loans were being approved for enterprises that were not always viable because
loan officers had failed to carry out thorough appraisal prior to approval; and
• Record keeping for management information systems were frequently deficient
This resulted in a portfolio review with stricter criteria and monitoring of the MCOs.
The current performance of the portfolio is outlined in table 16 below:
Table 16: Performance of the KhulaStart Programme
KhulaStart/ MCO programme
No. of MCOs established
No. of KhulaStart lending
Facilities disbursed for on-lending
Facilities disbursed for operating expenses to MCOs
Capacity building grants for MCOs
Total facilities Approved & Disbursed
No of loans granted by MCOs
Males
Females
Black
Impact and Outreach Indicators from
inception to March 2003
22
17
R6,7m
R14.3m
R7.1m
R28.1m
46,293
13%
87%
100%
29
KhulaStart/ MCO programme
Impact and Outreach Indicators from
inception to March 2003
0%
5%
95%
88,882
White
Urban
Rural
Job creation estimates
Source: Khula 2003
Private Equity Funds
Khula also provides funds for private equity funds that cover an under-serviced sector of
the markets, that of those with transaction values of between R250 000 and R5 million. A
significant highlight was the launch in 2003 of the AngloKhula Mining Fund (Khula 2003).
The performance of the Equity Fund Programme is outlined below:
Table17: Performance of Khula’s Regional Equity Funds
Regional Equity Funds
No. of approved deals
Rand value deals
Rand Value of bad debts
Males
Females
Black
Urban
Rural
Job creation estimat es
Impact and Outreach Indicators from inception to March 2003
11
R18.0m
0
91%
9%
91%
82%
18%
535
Source: Khula 2003
Credit Guarantee Scheme
The Scheme provides guarantees to banks for loans to SMEs where there is insufficient or
lack of security. ABSA and Standard Bank have been the major performers under the
Scheme with both banks writing over 70% of total applications (Ntsika, 2001, Khula 2001).
There are three other guarantee products: Institutional Guarantees, Portfolio Guarantees,
and Individual Guarantees. Loan sizes being advanced to SME clients are said to range
between R 50,000-R 1,000,000. On average the scheme was reported to pay 1% of the
amounts committed for claims. In addition, Khula currently and has in the past
warehoused specialized donor-funded guarantee schemes such as:
• The DANIDA Business-to-Business Programme.
• The Technology Transfer Guarantee Fund
• The Rehabilitation Fund – A Kwa-Zulu Natal initiative to assist entrepreneurs who
suffered financial loss as a result of political violence in KZN.
• The Land Reform Credit Facility
Table 18: Performance of Khula Credit Guarantee Scheme
Credit Guarantee Programme
Total authorised Guarantees
Total committed Guarantees
No. of participating banks
No. of guarantees authorised
No of guarantees committed
Males
Females
Black (was 10% during SBDC Scheme)
Impact and Outreach Indicators from inception to
March 2003
R 920,4m
R 344.m
13
5617
1707
58%
42%
47%
30
Urban
Rural
Claims Paid
Job creation estimates
Source: Khula 2003
85%
15%
R47,3m 18
67,404
Khula has continuously struggled with this programme. In order to try and increase
uptake of banks within this programme Khula set up a dedicated business development
unit in their Marketing Division to liaise with banks on a constant basis (Khula 2003).
Additionally the training of bank staff was intensified and meetings with senior
management were conducted (Khula 2003).
The performance of the Specialised Credit Guarantee Programmes, Danida Business to
Business Programme has been described as slow due to difficulties in matchmaking
between Danish and South African companies (Khula 2003). Khula also reported that it
has struggled to find new clients for the Portfolio Schemes and had to withdraw its
facilities due to non-payment of fees (Khula 2003).
Thuso Mentorship Programme
This programme is intended to provide capacity building to SME s in terms of pre-loan
support (i.e. business plan development and advisory service) and post-loan assistance
(i.e. rescue services and “after care” or mentoring) to small and medium entrepreneurs
applying for commercial bank loans. The scheme was set up to stimulate and increase
commercial banks’ use of the Khula Credit Guarantee Scheme. The scheme was
expanded to cover RFIs over the 2001 financial year. The performance of the scheme is
outlined below:
Table 19: Performance of the Thuso Mentorship Scheme
Thuso Mentorship Programme
No. of business plans approved
R value of approved business plans
No. of post-loan mentoring visits
Males
Females
Males
Urban
Rural
Job creation estimates
Source: Khula, 2003
Impact and Outreach Indicators from inception to
March 2003
330
R 75,3m
1019
72%
28%
84%
16%
85%
3,724
Khula therefore segments its market as follows:
• Small enterprises (upper end) – Equity Funds
• Small enterprises (lower end) – Credit Guarantees
• Very small enterprises - RFIs / KhulaStarts/Portfolio Guarantees/ Sizabantu
• Micro enterprises and Survivalists - KhulaStarts/ RFIs (Mofokeng, 2003).
4.7.2 Findings of the Khula impact assessment
R 17.1 or 36% of this was during the 2002/2003 Financial as a result of a high amount of bad debt as Standard
Bank consolidated its portfolio
18
31
Khula commissioned an Impact Assessment Study of all its programmes in 2001. The study
conducted by the Bureau for Market Research considered the impact of Khula with
respect to:
•
•
•
•
•
•
•
Job creation
Gender breakdown
Rural Urban Break downs
Income and wealth effect
Household Support
Average loan sizes
Financing of new vs. existing businesses
Detailed findings are attached as Appendix 3 below. The key findings were as follows:
• Most of the businesses financed through Khula intermediaries are in the retail
sector (particularly with respect to the KhulaStart, RFIs and the Guarantees.
• Regional equity funds have the highest proportion of manufacturing enterprises
• In terms of loan features this indicated that the vast majority of loan beneficiaries
relied only on a Khula supported loan only
• In terms of employment features average number of employees varied from 1.92
in KhulaStart to 12.01 for the Credit Guarantee scheme
• The gross number of jobs created by Khula supported businesses since inception
was 787,697. This figure included employment by existing and defunct businesses.
The number of jobs created by new businesses was estimated at 521,307
representing 66% of the total employment.
• At least 1.5 million people are said to have benefited in one way or another
financially from Khula supported businesses since Khula’s inception in March 1996
4.7.3 Critical analysis of Khula’s role in the sector
Although part of the problem Khula faces is that it suffers from poor public perception
and understanding of its role, the most common misperception being that Khula is a
retail institution, Tati, (undated); most would agree it has not managed to achieve the
high impact that was expected at its set up. This is partly because of issues related to
limited institutional capacity and experience to effectively engage and service the small
business sector (Tati, (undated) both within Khula and within intermediaries. Discussions
on other reasons for Khula’s failure to meet expectation are outlined below.
Disappointing uptake of the Guarantee Scheme by Banks
Khula and the government’s expectations regarding the role of guarantees in providing
an incentive to lenders to supply micro enterprises with loans have not been met. The
2002 GEM report (Foxcroft et al, 2002) found that Khula’s guarantee scheme was
regarded to be a good idea in principle, but was believed to have been poorly
implemented and ineffectively marketed. It was further argued that Khula should
consider the possibility of offering loan guarantees to accredited micro-finance
institutions.
Schoombee (2000) argues that Khula's portfolio guarantees have not been successful in
providing additionality i.e. additional credit and/or credit supplied on less onerous
conditions. He argues however that this should be compared with international evidence
from both developed and developing countries that shows that there is very little
evidence of additionality found in dozens of such schemes. It has also further been found
that issuing guarantees is costly and funds seldom succeed in rapidly generating a large
32
enough volume of business to lower the unit cost to acceptable levels. He further gives
the example of Western Europe which has some of oldest and largest schemes in the
world which are still subsidy-dependent due to low volumes of operations and high
operating costs (Schoombee, 2000). Additionally it has been found that no guarantee
funds to date has succeeded in pricing its guarantees to at least preserve its capital
base (Schoombee, 2000). It has also been argued that bankers will tend to select highrisk loans resulting in a low quality loan portfolio for the fund, which is very costly
(Schoombee, 2000), although one would argue this is exactly what the fund is set up to
do.
Schoombee (2000) concludes that the Khula scheme should continue given recent
increased uptake, but that international experience should temper expectations on
additionality and profitability. He also proposes the use of Khula’s capacity building grant
funds or subsidized funding to re-train staff in banks and to encourage new or novel ways
to serve micro entrepreneurs (Schoombee 2000).
Problems with institutional capacity of RFIs
In the 1999/2000 financial year widespread collapse of RFIs occurred which were
ascribed to poor governance, inefficient management information systems,
mismanagement and fraud. This came as “shock” to Khula management as these were
RFIs that were perceived to be sound (Khula, 2000). Khula argued that its checks and
balances and reporting mechanisms were being rigidly enforced but were clearly
inadequate for the scale of mismanagement and fraud that was taking placed (Khula,
2000). As a result of these collapses, for the first time in its history losses of R 25, 855, 819
were reported for financial year. Bad debt written off was close to R 24 million as
compared to less than R 3 million in the previous year was reported by the Chairman in
the Annual Report (Khula, 2000). Steps were taken to ensure that this situation did not
occur again. These included improving governance, the appointment of specialist risk
managers, regular audits of RFIs by specialist professionals and other financial
management control systems (Khula, 2000). As a result of these interventions no RFIs
collapses were reported during the next financial year (see table 20 below). Legal action
in both criminal and civil courts was also taken. The collapse of major RFIs (Ikusasa and
the Start Up Fund) were seen by Khula to have serious repercussions for the sector,
especially with regard to the attitudes of traditional lenders towards advancing credit in
this market (Khula, 2000).
Table 20: Business Loans: Bad
Budget
Actual
1999/2000
1999/2000
R5.8m
R28.1m 19
Source: Khula 2002
Debt Write-offs:
Budget
2000/2001
R31.6m
1999 t0 2001/2002
Actual
Budget
2000/2001
2001/2002
R11.6m
R6.6m
Actual
2001/2002
R0m
On the positive side, in 2000 Khula prevented the loss of the loan book from another RFI
by incorporating it into a new company with a new board of directors and
management. The loan book and clients of Get Ahead Financial Services and Rural
Finance Facility were incorporated into Marang Financial Services which is now one of
Khula’s largest and best performing RFIs with over 20,000 clients.
This figure differs from the close to R 24 million quoted from the Chairman’s report in the paragraph above. It
could not be clarified at the time of completing the report where the discrepancy came from.
19
33
During the 2001 financial year a consolidation plan was put in placed focusing on the
introduction of risk management reviews, organisational development, and preparation
of marketing st rategy and review of debt portfolio. In retrospect Khula management
acknowledged that it had been naïve to assume RFIs could mature within 5 years. A shift
in policy was taken which involved reducing the number of new RFIs each year to 2-3 to
ensure that Khula was able to give them the guidance they needed to grow in a
controlled and profitable manner.
Criticisms and limitations of its impact assessment methodologies
The job creation figures resulted in some controversy when they were reported at the
Annual 2002 report launch as there was potential double counting and not all
employment was as a result of the Khula intervention. BMR did acknowledge and note
these limitations in their study however (Khula and BMR, 2001). For instance, employment
was calculated based on the average number of employment per firm per loan and
could be double counted if the person received more than one loan during the period
under review. Given the short terms of micro -loans (as little as 4 months in some cases)
this is obviously likely to occur extensively. Additionally new jobs created may not be
sustainable, particularly with SMMEs that fail. Another factor in over-counting may be the
fact that the jobs had already existed at the time that the enterprise received the loan
and therefore was not created because of Khula funding.
Khula’s role in facilitating access to micro-finance
There are currently arguments in favour of segmenting the market for micro-finance
between those who are seeking finance for entrepreneurial activity and those who are
the poorest of the poor requiring finance for various reasons among which an economic
activity may only play a small role. For instance Baumann (2001 and BRCS, 2004) argues
that whilst there is no doubt that Khula-supported MFIs are important, they are not easily
able to reach the large majority of South African households that live on the very fringes
of the formal economy, or as dependent recipients of cash transfers from it. He further
argues that the imposition by Khula’s orthodox “sustainability approach may actually
prevent innovation in MFIs and hamper the development of products that can
effectively target this market. He therefore argues for policy exploration of alternative
uses for, and models of, microfinance outside of the Khula orthodoxy, that is, microfinance that targets survivalist households who cannot use microcredit as defined in the
orthodox SMME model, and who may constitute the majority of South Africa’s
economically marginalised population.
The debate around the mandate and role of Khula in microfinance provision has been
highlighted by van de Ruit (2001) who outlines how the high failure rate of the Khula
supported entities both in terms of poverty outreach and financial sustainability, have led
donors to review their role and is leading some donors to abandon funding directed
toward the poorer end of the market and beginning to show a greater interest in the
small and medium enterprise sector. Van de Ruit (2001), like Baumann (2001) and BRCS,
(2004) further highlights the concern that the sustainability paradigm forces NGOs onto a
commercial track, thus moving them away from the poverty alleviation agenda further.
He also believes that the state is unlikely to cross subsidise these innovations from the
more profitable and sustainable programme components and that experience reflects
that the market is unlikely to provide pro-poor financial services and that subsidies seem
to be an inevitable component of the strategy. He concludes that in practice, microcredit is more relevant to the moderately poor than to the destitute and that the
34
challenge for donors, NGOs and state actors supporting the pro -poor agenda is to
design and implement programmes which meet the financial needs of both the
entrepreneurial and non-entrepreneurial poor.
Clearly within these debates there needs to be a clearer mandate for Khula in which to
operate. Whilst Khula’s mandate has clearly been linked to the entrepreneurial poor,
being the main provider of wholesale finance to MFIs, and while departments such as
the Social Development Department do not have their own microfinance initiatives, the
DTI and Khula are going to continue to be put under pressure to deal with the micro finance needs of the non-entrepreneurial poor.
Retailing vs. wholesaling
The issue of whether or not Khula should be a retailer was first raised by Khula in its 2001
annual report given the reasoning why the issue came under consideration in the first
place. Khula’s Chairman indicated that while the banking sector is particularly well
developed, it has been designed to serve only one segment of the overall market. He
also indicated that because basic banking principles and practices were not
comprehensively focused on SMME financing the volume of banks in the sector was still
far from adequate. This had lead to calls for Khula to be come active as a retailer. The
Chairperson’s view was that Khula should not compete with the retail sector, but should
use its products and capital to provide them with the support Banks need to reach out
into the wider community. However he also concluded that should the rate at which
commercial banks committed themselves to SMME financing accelerate, Khula would
have to re-examine its role.
The issue of whether or not to retail has been taken quite seriously by Khula
management. In 2003 Khula invited tenders for research into the feasibility of extending
its mandate to retailing of its financial services products directly to customers in, in line
with DTI’s initiative to review the mandates of all its developmental DFIs (Wadula, 2003a).
Khula’s CEO at the time was reported as saying that the decision to consider retailing
was motivated by the fact that despite being in the market for seven years, retail finance
institutions had not had the desired effect on small business development (Wadula,
2003a). However these plans were put on hold after the feasibility study concluded that it
would be too costly (Wadula, 2003d).
This will continue to be a debate for Khula unless it becomes an effective wholesaler.
Anicap Venture Partners (2003) argue that government may be more effective if it
additionally offered retail support, instead of strictly wholesale support to HDI SMEs.
Ignorance about Khula’s role and mandate
While it should be acknowledged that Khula’s operational model may have been
difficult to communicate to its target market, it is also clear that Khula’s communication
efforts have not been effective. The GEM 2002 report (Foxcroft et al, 2003) reported
widespread ignorance about Khula while among those aware of Khula; there is
disappointment about its impact and performance. It was recommended that Khula
reprioritise, recapitalise and specialise in the provision of finance to a particular sector of
the small business market.
4.7.4 Khula’s Future Role?
AVP (2003) argues for the DTI to encourage the formation of PPPs by adopting more
accommodating partnership structures. It is argued that these would create incentives
35
and facilitating structures that invite their driving private sector-led initiatives. This is based
on the analysis that the government is relatively new, its capacity is limited, support
programmes tend to be driven from the national level and it is still developing better
ways to partner with collaborators outside government. AVP further argues that a recent
DTI task force coordinated by ECI recognized several of these same problems and
suggested that perhaps the best solution to SME financial support ought to centre
around the state adopting a “financial market systems approach”. Current initiatives
could therefore be structured along these lines.
The National Apex Fund
At a workshop hosted by the WDB and Marang Financial Services (WDBT Research,
Documentation and Policy Development Unit 2003) which was one of the initial
discussions on the Apex with micro -finance practitioners the following recommendations
were raised:
•
•
•
A focus on “poverty outreach” as opposed to financial sustainability.
Khula supported the formation and implementation of the National Apex Fund
and recommended that the National Apex Fund initiative provide a clear
distinction between the pro-poor MFIs and commercialized MFIs and that the
Apex Fund should only target the micro credit institutions that are poverty
focused MFIs.
The need for the formation of an association of MFIs
It has also been reported in the media that government intends setting up this new
agency to focus on supporting institutions that lend to microenterprises and survivalist
businesses (Wadula, 2002). This was seen to be an admission by government of its failure
in the microfinance sector of the market. This initiative would take over the
microfinancing elements of Khula, and would also support the operations of village
banks. It would also, it is argued, address Khula’s difficulty in hav ing to serve a broad
spectrum of needs from survivalists or micro to medium sized companies. This new
agency or Apex Fund has reportedly received a lukewarm response from the small
business sector with practitioners viewing it as another bureaucratic instrument to
camouflage funding assistance for small business (Wadula, 2004a).
BRCS (2004) raise concern about the shifting focus of the concept behind the Apex
Fund; it was initially expected to deal with a broad range of micro-finance needs and
programmes and has now been more narrowly defined within the Khula/ DTI mandate to
focus on micro-enterprise linked finance. The concern raised here is around the lack of
government support for broader pro-poor micro-finance programmes which are not
exclusively focused on micro-enterprises. This will continue to be an issue as long as DTI
remains the only department concerned with micro-finance.
Coordinating efforts
AVP (2003) argue that integrating development assistance programmes, especially at
the lower end of the SME spectrum, may be well informed. They recommend the setting
up of an Integrated Financial Institution (IFI), which would bring together an institution to
deal with both Black Economic Empowerment and SME needs such as venture, private
equity, guarantee and incentives (currently housed under NEF, Khula and TEO
respectively).
36
Some of the questions raised by stakeholders interviewed by AVP (2003) regarding the IFI
and whether this is a viable option relate to its location within government and whether it
would make a significant contribution to the efforts already made by Khula and the NEF
Corporation. It was also suggested that perhaps a private sector led apex structure
would be a more valuable option for the DTI to consider at this point. Possible publicprivate partnerships were suggested around this model. It was also argued that more
stakeholders should be involved and suggested that this model may not work without
also considering new banking sector solutions devised around better SME identification
processes.
4.8 Key Findings and Conclusions
This section highlighted the scale of government involvement across the spectrum of
SMME financing. The following issues can be highlighted:
•
•
•
•
•
•
•
The effectiveness of the National Empowerment Fund needs to be upscaled
given its mandate in the SME sector of the market, particularly with regard to
types of business not specifically covered by IDC and Business Partners.
The Land Bank’s Step-Up scheme’s impact in the micro-finance sector needs to
be further investigated as it appears to be the largest single provider of microfinance services in the sector.
The re-structuring of the Post Bank presents potential opportunities for institutions
involved in micro -finance to for strategic partnerships.
The current slight uncertainty about the role of Khula given (a) the change of
leadership with the new CEO, b) talk about potential change of mandate by DTI
and c) the removal of its micro-finance loan portfolio with the new Apex provides
opportunities to engage about its potential role. The spectrum of possibilities
include continuing with the remaining portfolio and focusing improvements and
growth of the equity and guarantee funds and potentially retailing and
becoming a SMME finance provider. Khula’s experiences in the micro-finance
sector will also form a useful basis for the new Apex and need to be carefully
documented.
The possibility of initiating a non-enterprise-linked micro-finance fund should be
considered potentially through the Department of Social Development. Given
the New Apex Fund’s location within DTI, it is likely to face the same pressure as
Khula did from “Pro-poor” micro-finance practitioners.
That being said, another area where work needs to be done, and another issue
which affected Khula was conceptualisations related to sustainability frameworks
of microfinance providers. The pressure to fall into the same trap needs to be
tempered by learning from the experience and maturity of micro-financiers such
as the Land Bank, SEF and Marang Financial Services (see section 6.1.1 below).
The partnership between government and the private sector also needs to be
configured outside of the Guarantee Scheme. More innovative approaches to
partnerships with institutions like Khula and (possibly the new Apex) need to be
investigated. This could also be within the model of wholesaling of funds for SMME
finance. Potential private sector partners outside of the banking sector are
commercial micro-lenders (see section 5.5 below) and venture capital funds (see
section 5.3 below).
37
5. Private sector programmes for SMME finance
Private sector programmes are considered below including:
•
•
•
•
The Banking Sector
Venture Capital and Equity Funds
Insurance Products
Commercial Microlenders
5.1 Banking sector involvement in the lower end o f the market
Since the promulgation of legislation affecting SMME development Commercial banks
have been criticized as not having been involved enough in SMME financing, especially
among businesses run by PDIs. This section looks at the involvement of banks in the lower
(microfinance) and upper end (SME financing) of the market respectively.
Schoombee (2000 and 2003) provides a useful categorisation of strategies that have
evolved internationally for banks to get involved in serving very small to micro enterprises
in a sustainable manner, two of which involve banks emulating the way in which informal
financial intermediaries solve the high risk, high cost and low return problems banks are
confronted with when serving these enterprises. These strategies include setting up from
scratch, a bank dedicated to providing basic banking services to the “unbanked”;
creating a separate division within an existing bank to serve this market; and linking
banks with informal financial institutions (Schoombee, 2003). Additionally there have
been international examples of MFIs transforming into fully-fledged banks although South
Africa’s microfinance industry is probably too young for this to occur. Each strategy is
outlined below and together with experience in South Africa.
5.1.1 Specialised Banks to exclusively service the poor
According to Schoombee (2000), the first strategy involves the establishment of
specialised banks that serve the poor exclusively, using the innovative forms of collateral
used by informal lenders where there is commitment to save, because future borrowing
depends on members' past savings record and the use of social networks as an incentive
to repay loans. He gives the example of the Community Bank established in the mid
1990s in terms of the Mutual Banks Act with support from Absa, Nedcor, Standard Bank
and the Development Bank of Southern Africa. Community Bank was set up to
encourage an alternative approach to supplying banking services for the poor.
However, the Community Bank failed, and he attributes this to not so much the failure of
the model itself, but the rather, the too rapid opening up of new branches - 16 in less
than two years - and the high establishment costs associated with it, which resulted in
liquidity problems.
The failure of Community Bank is likely to deter the private sector from engaging in this
strategy and internationally it has been found that large scale private sector
participation in this type of strategy has been limited (Schoombee 2003). Although it has
been a successful strategy globally, it has been more successful where NGO MFIs have
upgraded to banks. This is largely due to the labour intensiveness of micro-finance and
the time taken to develop staff and the resulting delay in achieving profitability.
Schoombee (2003) therefore recommends Public-Private Partnerships which have
worked better internationally which consist of a commercially oriented donor institution,
38
and a private investment company specialising in micro-finance which has experience in
and knowledge of micro-finance and appropriately experienced and trained staff. He
again argues for state involvement as current legislation (namely the Banks Act of 1990
and Mutual Banks Act of 1993) is seen not to be conducive to the establishment of small,
dedicated banks due mainly to the high minimum capital requirement.
Although not specifically mentioned by Schoombee, the experience of Teba Bank20 as a
recently established example of a bank set up to provide appropriate, affordable and
quality micro-financial services needs to be further investigated. Teba Bank provides enduser savings and credit products as well as corporate paymaster solutions. Teba Bank
uses its experience in the mining industry and rural network to develop products in line
with their target market low-income employees and their dependants in the rural areas,
the un-banked and the informally employed. Products include savings accounts, fixed
deposits, home loans, funeral insurance and micro-loans up to R 10,000. The microloans
are operated as a joint venture between Teba Bank and Mineworker Credit Guarantee
(MCG).
5.1.2 Banks setting up specialised divisions/ programmes exclusively to serve the poor.
All four of the big four banking groups in South Africa have apparently created divisions
to serve the unbanked in the economy (Schoombee, 2000) although he makes a
distinction between those that aim to serve salaried low income individuals, and those
that aim to provide loans to micro entrepreneurs. The most significant example of the
former is the Standard Bank's E Plan. Significantly he does note also that while all four
banking groups were involved in the first category, there has been much less interest in
the second aim. He also further notes that although South African banks are prepared to
provide low -income clients with deposit and withdrawal services, very little has been
done by them to accede to the large demand for credit facilities and the growth in the
formal moneylender industry in the last number of years is testament to this.
He argues though that the majority of these loans are required to refinance existing
consumer debt, which business banks would not normally undertake in any case.
Examples are outlined below.
Standard Bank's Business Growth Plan, was introduced as a pilot project in 4 black
townships in April 1993, granted loans between R1 000 and R6 000 to micro entrepreneurs
without requiring conventional forms of collateral. Although Standard succeeded in
keeping bad debts below 4 per cent of the portfolio, in part by adopting some proven
informal procedures, the project was terminated at the end of 1996 for the following
major reasons:
•
High level of operating costs (due to relatively high South African wage rates,
and security costs for staff operating in areas with a high incidence of violence);
• the unwillingness to charge full-cost and consequently very high interest rates,
because of concern for the image that could be created of a powerful bank
charging excessive rates to their poor clients; and the low loan level at which the
Usury Act became applicable.
According to Falkena et al, following the success of E Plan, the Standard Bank started
extending the concept to include small loans (originally, less than R500) relying on the
utilisation of past account balance information (electronically available within the bank)
20
Information sourced from the Teba Bank website
39
as a credit check. While it was found that a restrictive consequence of such practice is
that it gives a strong preference to long-term clients’ over start-ups and ‘external firms’, it
has managed to develop a large portfolio indicate a significant outreach (Falkena,
2001).
Another example of this is the Sizanani/ Sizabantu scheme set up by the Banking Council
in 1998 in conjunction with the four big banks to supply loans ranging from R10 000 to R50
000 to micro entrepreneurs. The scheme was based on the analysis made by the Banking
Council that the major problem banks face when trying to engage micro enterprises is
the lack of viable enterprises due in most part to a lack of managerial skills (Schoombee,
2000). The Scheme therefore included mentoring as a crucial element in supplying loans
to micro enterprises. Sizanani Advisory Services (a not-for-profit company) was set up by
interest free loans contributed by the four big banking groups and a grant received from
the WK Kellogg Foundation to provide mentors to help entrepreneurs in drawing up their
business plans and to assist in supervising the business for a maximum of two years.
Interest rates on the loans provided by the banks were levied at the banks' prime
overdraft rate plus 6 per cent per annum; three years is the maximum repayment period.
On the other hand the Sizabantu Guarantee Company, financed through Khula, was set
up to provide participating banks with loan-loss guarantees up to 95 per cent of the
value of a loan for a period of two years. Sizabantu was discontinued in 2002 following
advice that it would have to be set up as an insurance company and Khula has since
then been providing indemnities of 90%. Schoombee (2003) argues that this initiative has
not shown that this strategy works in South Africa as by June 2003 only 239 loans to the
value of R 8.4million had been approved. There has also been low levels of uptake as the
mentors have been found to introduce only 10% of the applicants who meet the
minimum requirements of the banks, due to poor credit records, lack of experience and
commitment, and non-viable business plans. Loans in arrears have also been high
growing reaching 33% in June 2001 although this has apparently improved currently at
12.8% for new loans since then (Schoombee, 2003).
So what are the reasons for this strategy not having worked as well as it should? The
following reasons are highlighted by Schoombee (2003):
•
•
•
The lack of technical assistance from those experienced in serving this market;
Lack of appropriate service delivery and proper training of mentors, loan
applicants and loan recipients; and
No operational champion.
Schoombee (2003) therefore recommends Public-Private Partnerships which have
worked better internationally which consist of a commercially oriented donor institution,
and a private investment company specialising in micro-finance which has experience in
and knowledge of micro-finance and appropriately experienced and trained staff. He
again argues for state involvement as current legislation (namely the Banks Act of 1990
and Mutual Banks Act of 1993) is seen not to be conducive to the establishment of small,
dedicated banks due mainly to the high minimum capital requirement.
5.1.3 Linkage Banking
An example of this type of strategy is FNB’s People Benefit Scheme which linked the bank
to informal financial intermediaries, in this instance to stokvels Loans in the range R1 500
to R20 000 were also linked to borrower savings. Savings were used for both screening
and for collateral purposes. However the scheme was operational for approximately 5
40
years and was shelved in 1997, due to a lack of demand for loans as members mainly
used the scheme for savings purposes while the intention was as a credit programme.
Possible reasons for its failure to attract credit seeking clients, identified by Schoombee
(2000) is the absence of the non-governmental organisation (NGO) that could identify
and train prospective borrowers as is commonly done in linkage schemes.
Schoombee (2003) further identifies the linkage bank requirement for village banks as
another example of the linkage bank strategy. In the case of village banks a regulatory
requirements is that members' savings and payment for shares are deposited in the
linked bank and may serve as collateral for a loan from the linked bank to the village
bank, subsequently to be retailed to individual members by a loan committee. Lending
through village banks has been of a small scale (Schoombee, 2000 and Dallimore, 2003)
possibly due to the collapse of the umbrella bodies under which they are regulated.
Falkena et al (2001) identified this issue as a major weakness of sub-Saharan African
countries, compared to their counterparts in emerging Asian countries, where banks
provide refinancing and saving facilities to informal lenders. This was found to be barely
the case in Africa generally, resulting in market fragmentation and inefficiencies. They
identified the current formalisation of the micro-lending industry, as a potential
opportunity for strengthening of ties between bank and non-bank intermediaries. This
issue needs to be investigated further in terms of the actual demand for this.
The Linkage Bank strategy has been found to have some limitations internationally as not
all banks find it profitable, as in many cases there is no NGO involved to establish and the
banks have finance the establishment and training of new self-help groups (SHGs)
themselves (Schoombee, 2003). He concludes that it may no longer be the preferred
strategy for the big four banks due to the absence of an NGO that can establish and
train SHGs following the demise of FSA and Finasol. He further highlights the uncertainty of
the effectiveness of SHGs in urban areas and the limited demand for lending as potential
concerns. He recommends the involvement of the state and donors to subsidise the
support, training and advice link banks offer to FSCs.
5.1.4 Banks role in providing Savings and Transaction services for SMMEs
Another role for banks in facilitating access to finance for SMME is in providing savings
and transaction services particularly for micro and survivalist enterprises. For instance, it
has been found that in rural areas, there is more demand for savings products than
lending products (Coetzee 1997: 4, cited in Falkena, 2001). This is significant as it has
been found that start-ups rely largely on savings to start and operate their businesses. For
instance 93.3% and 73.3% of small start -ups in Limpopo and KwaZulu-Natal resorted to
private savings respectively (Coetzee 1997, cited in Staschen 1999).
A study done by Moyo, Musona, Mbhele, and Coetzee (2002), entitled: The use and
impact of savings services among low Income People in South Africa, commissioned by
Micro Save Africa, studies how low income people save using a sample of urban and
rural low income people in the KwaZulu-Natal province. The study pays particular
attention on how low income people use different savings services/ systems and the
impact of those savings facilities on their household budgets/lives. The study also draws
important lessons for MFIs and Banks seeking to develop poor-responsive savings services
using Ithala Bank as a case study. The study found:
41
•
•
•
•
Low income people use various forms of savings to manage their household and
business budgets and these financial services enable them to acquire physical
assets for establishing or expanding businesses.
Of the thirty-five savings products identified (of which 17 were Ithala products),
among the most often mentioned are:
o short-term loans from omashonisa (informal sector moneylenders),
o cash saving (through stokvels - Accumulating savings and Credit
Associations or ASCAs),
o targeted saving (through Ithala) and
o funeral schemes or burial societies
Only half of the twelve most often mentioned, were Ithala products while the rest
were from the informal sector. The researchers concluded that informal sector
competition is significant and that the informal sector appears to have a
competitive advantage in terms of offering flexible financial services.
There was a multiplicity of informal financial mechanisms which suggested the
existence of needs that are not adequately met by the semi-formal or formal
financial sectors. This was seen to be a market opportunity for banking institutions
like Ithala.
Recommendations were made that banking (formal) institutions develop mutually
beneficial relationship/ linkages with the informal sector for instance to mobilise savings
from the low income people. The study made recommendations regarding the
possibility of Ithala Bank incorporating some informal sector features into the existing and
future products and linking informal saving systems into semi-formal or formal sector
financial service operations.
5.1.5 Key Findings and Analysis
Key findings and recommendations for section 5.1 are as follows:
Developing entrepreneurial and microfinance skills in the banking sector.
The 2001 GEM report (Driver et al) argues that commercial banks are not geared to
financing entrepreneurs due to the fact that they developed in an economy dominated
by large corporations. This has meant that they do not have the skills set for assessing
start-ups and small enterprises and their assessment and decision making is not
individualized to the specific entrepreneurs being dealt with. Skills related to this area
need to be developed by banks as this is a barrier towards their involvement in the
sector.
Pursuing Linkage strategies with village banks and cooperatives involved in providing
informal financial services to the poor.
Linkage Banking will continue to be the main strategy through which banks will be most
required to facilitate access to financial services for the micro-enterprise / survivalist
market, particularly in rural areas. Banks should also monitor developments regarding the
new Apex Fund proposed by DTI as this may provide a vehicle through which NGOs
involved in establishing and training cooperatives may gain access to capacity building
funds. Successful Linkage banking would also serve to alleviate some of the pressure from
banks to directly provide financial services to this market.
42
Providing best practice case studies and research on small bank establishment in the
sector.
Experiences, particularly with Community Bank’s failure have been greatly highlighted
making the idea of setting up a specialised small bank a bad one. However other
models that are currently operational such as Teba Bank and African Bank could be
studied in terms of their impact and experience operating in the “small bank” sphere.
Research and perhaps even experienced-based staff exchanges with commercial
banks in this area is therefore important.
Further promoting the provision of saving facilities for the lower end of the market for
formal and informal institutions.
This is an important issue given the role that savings (whether own or friends/ relatives)
have played in Start-ups. However reasons for the limited the take up of lending based
on savings products needs to be investigated. This strategy is also dependent on the
issue of village bank regulation and coordination also which is considered in section 6.2
below.
5.2 Banks involvement in SME lending
The Task Group of the Policy Board for Financial Services and Regulation (Falkena et al,
2001) found that although it is generally accepted that most SMEs lack sufficient equity
finance, it is not certain whether there is a similar lack of debt finance for SMEs. For
example, the Task Group found no indication that the quantum of debt finance
available to SMEs that have a turnover of more than R2 million is insufficient that although
there is a presumption that such debt finance might be skewed towards too-short
maturities, there is still a need to produce evidence on this. However the Task Group
argues that since the credit-risk profile of SMEs may be too high, banks can risk only a
relatively small percentage of their depositors’ money in SMEs.
Their findings were that the problem is not so much the availability of debt finance, but
inefficiencies in terms of product range, the cost of debt finance and the service
provided to SMEs. The reasons for these inefficiencies relate mainly to competitive
factors, to barriers to the entry of potential new providers of financial services and to
SMEs’ need for non-financial services. Importantly, given the focus on credit, they further
argue that there needs to be a recognition that, for SMEs, access to debt cannot be
separated from the broader topic of access to banking services.
5.2.1 Products provided by Banks
Falkena et al, 2001 identify the following products which are available to SMEs from
Banks:
•
•
•
Business owner’s access to credit through their access to personal finance in the
banking sector and micro-lending industries. They argue that nearly all micro - and
small enterprises, and even the majority of medium-sized enterprises, have to
access debt finance in the names of the owners (i.e. in their personal capacities).
Direct financing of SMEs on the capital markets where an SME looking for debt
finance can either approach ultimate investors indirectly, through a financial
intermediary (usually a bank, but also, say, an insurer).
Bank products specifically geared for SME financing such as:
43
o
o
o
o
o
Bank-overdraft facilities.
Bank loans.
Factoring and invoice discounting.
Asset finance (including commercial mortgages).
Equity finance.
They further argue that the issue of appropriate non-financial support remains critical as
long as there remains the problem of emerging small entrepreneurs not separating their
personal finances from those related to their business. This issue was dealt with extensively
in section 2 above.
5.2.2 Reporting on scale of SMME activity
The Task Group found that it is difficult to report about commercial banks’ involvement
and experience in providing finance to SMEs, as they tended to be fairly discreet about
their practices in this regard. The following table provides some estimates on SME
financing by banks.
Table 20: Very rough estimate
Standard
Bank
SME Clients
360,000
Borrowers
226,800
Non133,200
Borrowers
Total Book22
R5 bn
Average loan R39, 039
size
Market share
34%
of the main Bank’s SME books
Nedbank
ABSA
FNB 21
Total
N/a
N/a
N/a
170,00
N/a
N/a
N/a
N/a
N/a
370,000
R5-8bn
N/a
R3-7bn
R47, 058
R2-4 bn
N/a
R20bn
R54, 000
33%
20%
100%
Source: Presentations to the Parliament Portfolio Committee for Trade and Industry on the role of
banks in financing SMMEs (June, 2000) and South African Banking Council – (figures computed by
MFRC), cited in Falkena et al, 2001.
The following issues were identified based on the table:
•
•
•
•
The R20 billion in SME banks exposure approximates to 5 per cent of total bank
exposure (excluding mortgages and credit cards), while Khula Guarantee’s
exposure to commercial banks is approximately R168 million which is only 0,8 per
cent of aggregate commercial bank SME exposure.
The 370,000 SME borrowers represent between 16 percent and 40 per cent of the
estimated number of SMMEs in the country depending on statistics use.
Although these statistics show an average loan size of R54 000, it is believed that,
of the 370,000 borrowers, only 18 per cent (i.e. some 66,600) borrow above
R50,000.
In terms of loan usage (by overall SME loan exposure), approximately:
o 61 per cent of the amount comes from instalment sale finance;
o 27 per cent is (short-term) overdraft facilities;
Figures for FNB are pure guestimates. FNB, according to South African Banking Council,
was not required to present to the Committee (Falkena, 2001)
22 This is the most hazardous of all guesses as nearly all commercial banks have various definitions of what
constitutes an SME (Falkena 2001).
21
44
o
o
11 per cent comes from term/revolving loan facilities;
1 per cent is other forms of financing (factoring, discounting finance, etc.).
Standard Bank is seen to be the leader with Nedbank estimated to be the second
(Falkena et al, 2001).
5.2.3 Risk Assessment
The Task group also found that there is little evidence that methods for risk assessment
and credit decision are adequate, and a lot of research is required to improve
knowledge in this important regard. Credit providers (Porteous, 2002) also identify the
lack of credible, easily available information about SMMEs which can speed up the
origination process by allowing better application and behavioural scoring as a problem
in providing credit to SMMEs. The report by Porteous (2002) also indicated that the
industry is committed to sharing information on SMME performance with reputable credit
bureaux and authorities.
5.2.4 Collateral
The issue of collateral and the lack of easily available collateral replacements are also of
importance to commercial finance institutions. In relation to this, the performance of SME
loans is also an issue. According to Falkena et al 2001 loans among the major banks
average roughly as follows: non-performing loans 18 per cent; bad debt 4 per cent
5.2.5 Customer Service Issues
The 2001 GEM report (Driver et al) found that financial institutions were not able to
interact effectively with entrepreneurs. On the other hand the report found that South
African entrepreneurs and would be entrepr eneurs are often ill-equipped to develop a
business concept and present it confidently. They may also be intimidated by financial
institutions, especially if they are not confident about their language and numeracy skills.
The GEM 2002 report (Foxcroft et al, 2002) considered the issue of communication
between banks and entrepreneurs further and found that the majority of entrepreneurs
in the sample expressed dissatisfaction with the process of applying for finance. The
problem appeared to centre on the quality of communication and the level of
understanding of their businesses by bank officials; this finding is not affected by whether
or not their application was a success. Entrepreneurs indicated that banks did not
understand the difficulties they faced in their businesses and implied that the negative
sentiment toward the approach to customer relationship management adopted by
financial institutions is widespread among disadvantaged SME entrepreneurs, regardless
of whether they obtained finance. It was also argued that there needs to be a greater
understanding among entrepreneurs of how the financial sector operates and a greater
understanding among financial institutions of the needs and challenges of
entrepreneurs.
5.2.7 Regulatory Issues
The inability to price for risks and costs adequately under the present Usury Act limitation
for loans above R10 000 was identified by credit providers (Porteous, 2002) as on of the
key barriers to provider loans over R 10,000. It was further recommended that the Usury
45
Act be repealed so that it would not to apply on all business related loans because it
prohibits larger more reputable credit providers from being able to price for risk of credit.
5.2.8 Role of the state
Credit providers (Porteous, 2002) have recommended various initiatives related to
government to aid the transition from informal to formal such as assessing the impact on
all new legislation to ensure that the costs and complexities of registration for SMMEs are
not increased by new legislation; strengthening SMME lobby groups; proposing a
national audit of legislation affecting/ constraining small business (an update on the
Ntsika report of 1999) with government committed to review the results.
5.2.9 Key findings and Analysis
Falkena et al (2001) makes the following findings and recommendations on banks’
involvement with SME debt financing:
• While banks were found not the sole actors able to provide debt finance to SMEs,
their potential to affect the volume and quality of SME finance by going beyond
the direct granting of SME loan. This can be done through their particular
refinancing capacities, by providing a back-up line to non-bank financial
intermediaries, for example, or to business owners in their individual quality.
• Changes may be required in the regulatory environment to give impetus to such
developments to lessen the divide between banks and non-bank lenders
particularly the emerging ‘middle class’ of formal, registered and better administered small lenders.
• There is a need for better research and better disclosure on the exact extent of
banks involvement as it is argued that banks are getting more involved but are
not reporting it adequately.
• The costs of administering loans and granting borrowers the necessary business
support were seen to still be a “massive challenge” and more efficient and
innovative mentorship schemes were recommended to overcome this challenge.
Additionally the following issues were identified:
•
•
The need to address the mutual misunderstanding of each others requirements
between bank staff and SMEs.
It was proposed that government conduct another regulatory review of
legislation that impacts SMMEs.
5.3 Venture Capital and Private Equity Funds
A study by ECI (2001) found that although South Africa has quite a developed venture
capital market, very few institutions concentrate on the micro and small segment of the
SMME finance market. Only 3 out of these were found to provide minimum investment in
the range R500-R10000, 1 in the R10,001 -R100,000 range, 7 in the R100,001-R250,000
range, 6 in the R250,001-R500,000, 23 in the R500,001-R5 million range and the rest above
R 5 million (ECI, 2001). The criteria used by Venture Capital funds are further highlighted in
the ECI report. However the lack of entrepreneurial and management skills is likely to limit
SMMEs in the lower part of the market from accessing these resources. The report further
notes that there has been recent expansion of funds to provide equity for SMMEs.
46
However the following recommendations were made regarding improving the use of
private equity among SMMEs:
•
•
•
Focusing on those areas where more information is available first including firms
working with SMMEs and facilitating transactions and opportunities;
Identifying how information constraints can be alleviated over the longer term;
and
Identifying opportunities and support for the formation of funds that are willing
to make smaller investments (ECI, 2001).
In relation to the last point, it is also important to note that credit providers (Porteous
2002) have also indicated a willingness to supporting the feasibility investigation into
other types of financing vehicles which can (i) mobilize venture capital at the
appropriate level required (i.e. below R5m); and (ii) syndicate funding to spread risk and
leverage available guarantees to the maximum extent. This was to be focused on
encouraging local provision of venture capital to support start-ups. It was therefore
proposed that there be the creation of a new small investment fund class with tax
benefits but that a ceiling on size be further investigated to stimulate the flow of local risk
taking capital to local entrepreneurs (Porteous, 2002).
Alternative Stock Exchange
The DTI, 1998 Discussion Document: Towards a New Strategy for Small Business Financing23
identified The Stock exchange as a potential source of capital for SMEs and the expanding
of the number of SMEs listed on the Johannesburg Stock Exchange was further identified as
a potential strategy for increasing access to finance for SMMEs. The Alternative Stock
Exchange (Alt-X) was set up last year in line with this and it is still too soon assess its impact.
5.3.1 Key Findings and Recommendations
The main recommendation emanating from this section was the identification and the
assessment of the feasibility of venture capital funds focusing on the lower end of the
market below R5 million. This was to be focus on investigating the potential to encourage
local provision of venture capital to support start -ups. Additionally the potential for tax
benefits woul d also be investigated.
5.4 Insurance Industry
The insurance industry has not been under as much pressure as the banking industry to
provide services to the SMME sector. However, with the increasing spread of the HIV/
AIDS pandemic and the risks that will be by SMMEs, this is going to become an increasing
priority. Furthermore, ECI Africa (2003a) noted that this is significant to the micro finance
sector because of the associated costs incurred by a household affected by HIV/AIDS. If
micro-finance programmes are affected by HIV/AIDS they may collapse further
decreasing the available avenues SMMEs have to access finance. ECI Africa (2003a)
further recommended that there should be further consideration of insurance as a risk
mitigation strategy for households affected by HIV/ AIDS. This should also be considered
for SMMEs, particularly those at the lower end of the market not able to access formal
insurance products.
23
Not to be quoted as government policy
47
A study by Bester et al (2003) on: Making insurance markets work for the poor in South
Africa - scoping study, provides insights into the informal insurance market as playing a
very important role in the risk mitigation strategies of lower-income households. These
should be taken into account in developing strategies for SMME financing. It was also
found that due to the informal nature of most of these insurance organisations, services
are not always defined and products often overlap, straddling the division between
insurance, savings and credit (Bester etc al 2003) highlighting the role these institutions
could play in providing financing for micro-enterprises. Most of these institutions are burial
societies which in South Africa have an estimated 8 million members and these members
contribute in excess of R10 billion every year. Due to the nature of insurance industry,
most of these institutions operate with a “link” insurance company. The formal insurance
industry thus also has a role to play in SMME finance. Bester et al (2003) recommends that
burial societies may benefit from appropriate linkages with formal institutions may help
burial societies to manage their risks better. However the absence of a clear regulatory
framework for assistance business that also covers informal insurers is identified as a
problem as it complicates the management of risks in this sector.
Credit providers (Porteous (2002) agreed that further research is required in the area of
insurance products for SMMEs, terms of access to short term insurance for assets in
certain areas, which is a pre-condition of forms of asset-based finance.
5.4.1 Key Findings and Recommendations
The insurance industry’s role in the provision of services to the SMME sector has long been
ignored. Given the risks associated with SMMEs generally and the increased risks related
to HIV/ AIDS, this needs to become a priority. The framework of engagement with the
Insurance industry is provided by the Financial Sector Charter and should revolve around
how insurance companies can better service the sector and increasing their interaction
with informal providers.
5.5 Commercial Micro-lenders and their role (or potential role) in SMME financing
The commercial micro-lending in South Africa as distinct from micro-finance for
enterprise development has long been ignored or regarded in negative terms by those
interested in micro-finance for enterprise development, as it is seen to be a consumer
credit driven sector. This has largely been because it has been dominated by consumer
loans to salaried workers and with little evidence of pro-poor focus; and consequently
not really forming part of global micro-finance.
5.5.1 Historical Analysis
Porteous (2003a) provides a historical analysis of the developments of the micro-finance
sector and the reasons why it has developed differently, to be dominated by
commercial lenders. A summary is provided below as it important to understanding why
the sector has not been as active in the SMME market. Porteous (2003a) outlines the
growth and formalization micro-lenders which began serving those outside of the
traditional bank credit system and largely functioning outside the law (Usury Act of 1968).
Bank card and pin and salary deductions based lending began during the early nineties
by commercial lenders and resulted in the commercial growth of the sector. The 1992
Usury Act exemption effectively legalised their operations. This together with the success
of some of the commercial pioneers attracted further entrants to the market. This in turn
48
led to in the late 1990s the growing SA retail banking sector’s involvement in the sector.
There was large growth in the sector mostly occurring in the cash loans, or short term,
end of the market, where small one branch lenders predominated. There was no state
support given to this sector; as it was perceived in negative terms due to high rates
charged (averaging 30% per month) and the retention of card and PIN as a practice
subject to abuse.
The over-saturation of the market largely based on salaried employees not able to
access formal bank credit and the implementation of new regulations for micro-lending
(revised Usury Act Exemption notice of 1999 resulted in large scale fall-out in the sector.
Most significantly, the new exemption notice provided for the creation of Micro - Finance
Regulatory Council which had the power to supervise and regulate under the
exemption. Card and PIN collection methodology was outlawed. Finally in 2000 the
government withdrew payroll deduction facilities for civil servants on unsecured loans
(and insurance policies). Banking industry collapses due to micro-credit exposures also
occurred during this period.
5.5.2 Current status and potential role in SMME financing
Micro-lenders in terms of their sheer numbers represent a much larger pot from which
SMMEs could potentially gain access to financial services. As can be seen in table 21
below, they represent the largest chunk of micro-lenders in terms of volume at over 65%
and represent almost half the outstanding portfolio in loans.
Table 21: Microloan sector by institutional type
Institutional type
Motivation
Number
Registered
Banks
For profit
8
Retailer & cash
For profit
1263
lenders
Trust
Unknown
61
NGOs (section 21 &
Not for profit
21
cooperation)
% of new
volume
30.6
65.1
% outstanding
portfolio
49.2
48.6
1.5%
2.8
0.2%
1.8
Source: MFRC Quarterly Statistics cited in Porteous 2003a.
However in terms of use of loans only 2-4% of loans are reportedly used for business
purposes although apparently this may be under reported as the Micro Lenders
Association MLA estimates that 10-15% of loans made by its cash lenders members are
for business/ entrepreneurial activity ECI (2003). The study also recommended further
research on this issue. As this study was broadly on the use of loans and specifically
investigating the use of loans in for business/ enterprise purposes it would also be useful
and interesting to do detailed research specifically on the issue of factors that would
enhance SMME lending among commercial micro-lenders.
5.2.3 Key findings and Analysis
So why hasn’t there been a greater proportion of micro-lending funds used by SMMEs?
There has not been much analysis of this, although the reasons are probably similar to
those for why commercial banks do not lend to this market. The reason also lies in their
methodology, which relies mainly on proof of employment. The lack of innovation in the
industry has also been noted as a concern by Porteous (2003a).
49
6. Non-commercial or community-based financiers of SMMEs
6.1 The Non-profit micro-finance Sector
6.1.1 Status of Microfinance in South Africa: Overview of its overall impact and factors
that have influenced this
A 1999 study of microfinance in South Africa (Roussos and Ferrand, 1999) found that the
supply of microenterprise in South Africa falls far short of the demand across all areas of
the sector, and that this remains a significant constraint to the development of
enterprise. The study identified the major constraint being the lack of retail capacity and
a lack of private sector investment. According to Baumann (2003), SA’s MFIs straddle the
formal and informal sectors, and are mainly rural. An issue of concern is that South
Africa’s educational system at all levels is unprepared to produce the kind of skills and
aptitudes needed by MFIs. Baumann (2003) conducted a study of 4 MFIs and compared
their performance against benchmarking standards set in the Micro Banking Bulletin. A
summary of this study is provided to shows the potential and capacity of SA’s best MFIs to
sustainably provide credit to survivalists and the micro-enterprise sector. The study
considered Small Enterprise Foundation (SEF), Marang Financial Services (Marang), Finca
and Beehive.
In terms of size and focusing on MFIs that are traditionally focused on credit for income
generations, Marang Financial Services is the largest MFI with about 21,000 clients.
Marang has grown significantly over the last two years. SEF has also grown significantly
and now has over 20,000 clients (see table 22 below). Both the experiences of Marang
and SEF are interesting to note.
Although relatively new, Marang grew out of the collapse of the Get Ahead Foundation
and Rural Finance Facility, and used the experience, infrastructure and personnel of the
two organisations, and thus has a longer institutional history. SEF also has a long
institutional history. Both MFIs reportedly have high rate of women borrowers (95% for
Marang and 98% for SEF) (Baumann, 2003).
A comparison with international standards found the following:
• In terms of scale, SA’s MFIs are at the bottom of the scale in terms of av erage
clients and the number of offices serving them. They also have a much lower
absolute portfolio on average than all other categories of MFIs except their
African peer group.
• In terms of outreach, average loan balance per client for the SA MFI is on the low
end of the scale, but score well in terms % of women clients.
• Expenses are significantly higher in South Africa with regard to total expenses /
operating expenses and non-staff administrative expenses as a percentage of
total assets, financial expense and personnel expense.
• SA also performs badly with respect to efficiency measures such as personnel
expense as a % of loan portfolio which is 6 times the global average, 3.5 times the
African figure, and 2.5 times the African peer groups norms. However SA MFIs
were found to pay relatively low salaries in terms of the local economy.
• In terms of productivity SA’s MFIs perform poorly with respect to borrowers per
staff member, but are less top heavy in terms of ratio of loan officers to total
personnel (Baumann, 2003).
Roussos and Ferrand (1999) make a distinction between
50
•
•
•
•
Mature sustainable organisations with more that 20,000 clients;
Developing organisations with clients between 5000 and 20000;
Emerging organisations with clients between 1000 and 5000 clients; and
Start-up organisations with less than 1000 clients.
At the time of the study only the Start-Up fund (now collapsed) and the Land Bank’s
Step -up fund had reached these targets. This is a useful categorisation for targeting
capacity building assistance.
51
Table 22: Statistics for the Developmental Microfinance Sector
Institution
ACAT KZN
Savings
2002
150 000
2003
270 000
Beehive EDC
n/a
n/a
FINCA KZN
4 950 000
n/a
Homeless People’s
2 572 791
2 860 000
Federation
Kuyasa Fund
1 600 000
3 500 000
Marang Financial Services 2 894 000
4 196 300
Poor People’s Movement
0
200 000
SA Youth Federation
0
17 147
SACCOL
17 500 000
20,000,000
Small Enterprise
2 170 000
3 010 000
Foundation
Women’s Development
n/a
Banking
TOTAL
31 856 791
35 453 447
Source: Bay Research and Consultancy Services cc, 2004
Principal Outstanding
2002
2003
88 257
298 800
Clients / members
2002
2003
475
1 105
Branches / groups
2002
2003
95
221
652 311
1 100 000
2,000,000
2 300 000
1,000,000
1 500 000
3 623
2 500
68 789
6 094
778
44 165
3
290
800
3
133
1 270
1 700 000
8 529 994
n/a
n/a
14,000,000
8 350 000
5 00 000
14,000,000
n/a
n/a
16,000,000
15 600 000
5 603
14 470
0
0
7 900
13 387
4 620
21 000
7 000
8 290
8 000
20 048
250
12
0
0
28
300
400
19
70
250
27
550
300 000
930 000
1 500
2 500
1
1
36 720 562
56628 800
118 247
123 6 00
1 529
2 544
52
6.1.2 Factors influencing the performance of MFIs in South Africa
The analysis above puts into question whether SA MFIs are geared towards productively
and sustainably service the micro-enterprise market. Some of the obstacles preventing
them achieving this include:
• Distances and mobility due to the geographic distribution of the population in
rural areas. This in turn relates to limited penetration levels which can be achieved
per village due to the low population concentration and limited economic
opportunity.
• Greater need for client training input resulting in loan officers being more
productive as they have to spend more time on this.
• Skills levels and attitudes to work of staff
• Labour relations issues
• Limited MFI management experience in SA
• Under-management
• Comparatively low salary levels of loan officers
• Lack of appropriate capacity support for NGOs
Table1 in Appendix 4 also provides the range of institutions providing development
microfinancial services.
A case study of closure of Provident South Africa (PSA) (see Appendix 5 below) which
became one of largest MFIs in South Africa with over 34,000 clients raises many of these
issues, particularly the issue of management and field capacity. Although they based on
tried and tested model from the UK PSA also struggled with issues related to acclimatising
to the South African environment which made their controls ineffective.
6.1.3 Current debates regarding the segmentation of microfinance market
There have been and are continuing debates related to the lack of clarity related to the
role of microfinance in South Africa. For instance Baumann (2001) argues for recognition
of two views on the role of micro finance:
•
•
one implicitly assuming an SMME microcredit focus, that is to provide sustainable
microfinance facilities to the poor to facilitate income generation or reduce the
costs of poverty; or
Another with a social mobilisation focus; that is to use microfinance to develop,
mobilise, and leverage hidden social assets in resource-poor communities to
address poverty and vulnerability.
For this reason he believes state-sponsored SMME microenterprise/ microfinance
programmes are not a solution to the financial service needs of the so-called
‘unbankable’ households which exist within the ‘informal economy’, as SMME
microcredit policy is a subset of growth and employment policy, and is not directly
oriented to poverty relief or social development. On the other hand he also argues that
the commercial microcredit industry is also largely unsuitable to poverty relief, both in
that it caters for the employed and/or those with formal bank accounts, and that it is not
developmentally oriented.
He further argues that most attempts to provide ‘traditional’ microfinance services to
economically marginalised households in South Africa will fail – in the sense of reaching
53
the poorest of the poor effectively – without elements of subsidisation, cross-subsidisation,
and/or voluntarism on the part of the implementing agencies. The “hegemonic” Khulastyle microcredit orthodoxy South African paradigm of ‘SMME microfinance’, with its
attendant foci on ‘sustainability’ and ‘professionalism’ is therefore criticised for obscuring
the social ben efits of alternative forms of microfinance, both lending and saving, as well
as the developmental opportunity costs of not exploring these options.
He also criticises the SMME microcredit paradigm for its tendency to focus on a
quantitative approach using an income approach to poverty, as opposed to the more
holistic sustainable livelihoods/asset vulnerability approach implicit in alternative
microfinance. This also results in inadequate assessment of need for alternative
microfinance systems, and lack of innovation and experimentation as a result of their
evaluation criteria.
6.1.4 Key Findings and Analysis
While Baumann’s argument is geared at moving the South African micro-finance
environment (as supported by the state) away from a focus exclusively on micro-credit
for micro-enterprises, he also does provide some important lessons for micro-finance for
micro-enterprise development. Most important are the role of the state and the limited
understanding that has occurred thus far on factors that have led to the collapse of
many RFIs and Khula’s resulting under-performance. Porteous (2003a) has called this the
impatience of ‘patient’ capital, whether from donors or state funded apexes, which
have lead to low tolerance for the slow, painstaking business of institution building. His
analysis points to a longer term focus and longer lead times towards sustainability.
Another key area in terms the micro-finance sector relates to lack of effective and
coordinated capacity building efforts in the sector. Past efforts have been fragmented
and ineffective and have been based on international best practice models, without
sufficiently taking into account the realities in the South African environment. Local
experiences with Pro -poor micro-finance (see Appendix 4) need to be incorporated in
capacity building efforts.
6.2 Village Banking in South Africa
South has had a wide array of “Third tier”24 member-based structures providing financial
services to their members including “stokvels”, and burial societies which follow the
rotating savings and credit associations and the more formal savings and credit
cooperatives (ECI Africa, 2003). Additionally there are the registered financial service
associations, sometimes categorized as mutual banks. Exemptions in banking regulations
are used as a means to regulate and allow the existence of this sector. The sector has
been characterized by largely uncoordinated approaches to support and expansion
(ECI Africa, 2003). The sector has been seen as a potential vehicle to augment existing
microfinance initiatives for microenterprise and local economic development. There
appears to be a large demand for member-based financial institutions with an estimated
potential of at least 1,500 formal member-based financial institutions in the rural and
urban areas in South Africa.
24
Most of the findings in this section are based on a study by ECI Africa
54
Dallimore (2003) also found that in terms of their market, Village Banks tend to target
poorer households that cannot afford traditional banking services but who wish to use
formal financial services. Dallimore also further found that business use came low on the
list of items that respondents were saving for.
Two of the organisations set up to coordinate the sector, Financial Services Association
(FSA) and FINASOL collapsed resulting in “disillusionment and uncertainty” about the
about these types of institutions. Schoombee (2003) argues that this was a result of their
dependence on donor and government funding which was later withdrawn. Although a
number of Financial services Cooperative (FSCs) operating under both FSA and FINASOL
also collapsed, there are a number still remaining that have continued to operate
independently on the communities’ own initiative.
FSCs have been found not to be as effective in lending as they are in savings. This has
been partly because savings, and not loans, were emphasised by both FSA and FinaSol
(Schoombee, 2003). Both institutions required FSCs to save for a certain period of time
and allowed a loan based on the proportion of savings, using this as a form of collateral.
Howev er given the amount of savings that was mobilised, Schoombee (2003) argues that
lending did not reach its potential. For instance FINASOL had savings totalling R5,3 million
in the middle of 2002, which would have enabled them lending of R3,71 million
according to their own policies (Schoombee, 2003).
Some key lessons from the research done by ECI (2003) that should be noted should this
be considered as a vehicle to financing microenterprises:
• The development of a member-based financial sector will require substantial
financial commitment, skills and resources.
• Support organizations are essential in the establishment and development of
membership-based financial institutions.
• Almost all member-based financial institutions are linked to commercial banks in
some way; none of them, except the conventional stokvels, can operate without
• Effective external regulation is required to ensure legitimacy, stability, growth and
continued investment.
Various proposals were made in the ECI report with regard to legislation and regulations
including the development of new legislation for membership-based financial institutions
and the amendment of the existing Mutual Banks Act be amended. Criteria for
registration are also proposed encouraging a phased approach to development in a
manner that allows the gradual addition of services and responsibilities over time.
Support organisations were found to be essential in the establishment and development
of membership-based financial institutions (ECI 2000). Proposals on support are based on
an incremental approach including external finance which is needed to establish a
support service of this nature to membership-based financial institutions. Support would
also have to focus on systems that allow these institutions to management
microenterprise loans effectively. ECI (2000) also found that the sustainability of memberbased financial institutions is dependent on proper support with capacity building during
the establishment process.
The role of commercial banks in facilitating the establishment of these institutions was
also found to be crucial as almost all member-based financial institutions are linked to
commercial banks in some way (ECI (2000).
55
Government also plays a crucial role. Self-regulation has been found to be unsuccessful,
partly because of capacity and funding problems, but mainly due to a conflict of
interests and the lack of oversight by the Registrar of Banks in that the self-regulatory
bodies were left to their own devices (ECI, 2000). It was also found that the same
institution providing both functions of support and regulation (as was the case with the
FSA) is not advisable as this results in conflicting objectives The government also has a
role to play in capacity building in the sector. The DTI’s new apex initiative may revive
interest in the sector as it may be a channel for the revival of coordinating structures for
village banks and for village banks to gain access to capacity building funds (WDBT
Research, Documentation and Policy Development Unit, 2003, and Bay Research and
Consultancy services, 2004).
New legislation for membership-based financial institutions was proposed including the
amendment of the existing Mutual Banks Act allowing institutions to develop a
continuum from informal to formal (ECI 2000). It was also recommended that a Registrar
dedicated to membership-based banks be appointed.
6.2.1 Key findings and analysis
Village Banking in South Africa has had a chequered experience in South Africa, due
largely to two factors:
•
•
The issue of regulation with respect to both the legal and coordination/
supervision issues;
Financial Support for the establishment and capacity building for the “umbrella”
bodies.
Attention needs to be focused on both these issues. Additionally, the issue of the use and
take up of loans products that can be used by SMMEs needs to be investigated within
village banks, although this may have been a factor of the “umbrella” bodies’ failure or
eminent failure.
7. Summary of key findings and recommendations
A summary of key findings and recommendations is made below:
7.1 Defining more accurately the potential demand for SMME finance
In terms of the size of the sector and demand for SMME finance the key finding was that
there are no systematic studies on the demand for financial services in the SMME market
broadly. In terms of the potential demand for finance it was found that SMEs make
significant contributions to both job creation and the economy and represent a potential
demand of at least R 3 million businesses, possibly more. There are various and differing
definitions of the term “SMME” within South Africa which confuses policy making and
product development. The development of an “SMME classification matrix” as well as a
SMME focused study to provide a regular profile on needs for and usage of financial
services among SMMEs, similar to the Finscope study commissioned by FinMark Trust is
therefore recommended. This would regularly provide a more detailed picture of the
SMME market in terms of its size, scope and characteristics, which could then be linked to
the potential demand for finance within that specific market segment. This would then
give an indication of which market segments provide substantial demand to develop
56
specific products for, and would assist financial institutions in decisions around product
development.
Another area of concern highlighted related to Statistics South Africa’s data collection
classifications for information on SMMEs. The main issue is that Statistics South Africa’s
definitions for SMMEs do not always coincide with those used by DTI. This results in
inconsistency and difficulty in analysing data. It also hampers effective policy making,
benchmarking and the measurement of impact of the sector on the economy. It is
recommended that there be a review of the definitions or classification of SMMEs used
by Statistics South Africa to ensure they coincide with DTI’s classifications.
Micro-enterprises have commonly been treated as one group with consistent needs and
constraints. However it was found that this category needs to be segmented further in
terms of financial services requirements as there is a difference between microenterprises, which are potentially viable business or have the potential to grow, and
survivalist activities. Another way to look at this would be to differentiate between
opportunity and necessity entrepreneurship as defined by the GEM. The importance of
savings products and services also needs to be highlighted with respect to starting new
businesses as it was found that the biggest sources of finance for starting businesses are
own funds or funds borrowed from friends and relatives.
It is commonly believed that the major constraint with respect to access to financial
services for SMMEs is related to the supply side. However, on the demand side it was
found that South Africa lags behind significantly in entrepreneurship in comparison with
international trends. This is related to both the lack of an entrepreneurial culture and a
lack of skills necessary to operate successful enterprises. For instance, the absence of
financial administration skills particularly among businesses run by PDIs was identified as a
serious constraint to gaining access to financial services from formal financial institutions.
Based on this finding it can be seen that efforts focused on the supply side will not be
effective unless they address the absence of an entrepreneurial culture. It is therefore
recommended that more initiatives focused on developing entrepreneurial culture in
both schools and tertiary institutions be developed. Investigating whether commitments
to consumer education within the Financial Services Charter could be used for this
purpose should be a priority.
A wide range of financial services requirements were identified and it was found that this
goes further than just credit and includes transaction services which become the basis
for accessing other financial services. Therefore simply accessing a bank account can
be an important basis for accessing other services down the line. This also becomes
important in drawing informal sector businesses into the mainstream economy.
7.2 Opportunities presented by recent legislative / policy processes
New developments that present fresh opportunities for improving the accessibility of
finance for SMMEs include the Financial Sector Charter and the proposed amendments
to the Small Business Act. The Financial Sector Charter provides a framework through
which role-players and stakeholders in the sector can engage formal financial sector
institutions on their commitments related to SMME finance. The proposed amendments to
the Small Business Act also provide opportunity to redefine the SMME sector and target
more effectively. Government’s procurement programme could be made more
effective by developing specific products for SMMEs that have been awarded contracts,
using the contract to provide a guarantee for those with a lack of collateral. This could
57
also be applied to SMMEs that have been awarded contracts by private sector
companies in line with BEE targets.
7.3 Role of Government Institutions
Various government initiated institutions other than Khula currently do and can
potentially provide financial services to SMMEs. Key issues identified were around the
need to improve the role of National Empowerment Fund as a venture capital provider in
the SME market. On the lower end of the market, the experience and involvement of
the Land Bank and Post Bank need to be further emphasised in terms of their potential to
provide the full scale of services to micro-enterprises and survivalist activities.
The uncertainty regarding the future role of Khula and possible mandate change is an
opportunity as it provides scope to influence the debate related to its future focus given
the imminent removal of the micro-finance portfolio. One key recommendation is that
Khula’s institutional memory and lessons learnt need to be acknowledged and absorbed
by those involved in setting up the new National Apex Fund. For instance, there needs to
be re-think about the conceptualisation of sustainability that was used by Khula as it has
tended to limit innovation and hinder the development of solid MFIs.
The need to develop broader micro-finance programmes outside of the DTI mandate
was also identified potentially through the Department of Social Development.
It was also recommended that government consider other types of partnerships with the
private sector beyond the current partnerships with banks in the Khula Guarantee model.
Other potential private sector partners could include commercial micro-lenders and
venture capital funds.
It was proposed that government conduct another regulatory review of legislation that
impacts SMMEs.
7.4 Role of the Private Sector
With respect to Banks, on the micro-finance side various approaches that have been
used internationally and locally for banks to get involved in this market were identified
and evaluated. Based on this, it was recommended that banks:
• Develop entrepreneurial and microfinance skills within their staff and
management to better equip them to deal with and understand the financial
needs of SMMEs. Consumer education was also identified as a priority. This was
based on the need to address the mutual misunderstanding of each other’s
requirements between bank staff and SMMEs.
• Pursue or continue to pursue linkage strategies with village banks and
cooperatives involved in providing informal financial services to the poor.
• Further promote the provision of savings facilities for the lower end of the market
for formal and informal institutions.
It was also recommended that best practice case studies and research on small bank
establishment in the sector be developed to overcome negative perceptions regarding
the role of small banks.
It was found that banks play a vital role in the SMME financing sector, simply by providing
bank accounts to business owners in their individual capacity, which can then be used
58
as a basis to access other financial services from non-banking institutions such as village
banks, MFIs and commercial micro-lenders.
The need for better research and disclosure on the exact extent of banks involvement in
the sector was identified.
In terms of Venture Capital and Private Equity Funds the main recommendation was the
assessment of the feasibility of venture capital funds focusing on the lower end of the
market below R5 million.
The role of the insurance industry is crucial in the provision of services to the SMME sector
to deal with risks faced by SMMEs, particularly risks associated with HIV/ AIDS. The
insurance industry also has a role to play with respect to supporting the informal
insurance industry. The Financial Sector Charter again provides an opportunity to
engage the insurance industry on this issue.
Commercial micro-lenders have played a relatively limited role in SMME finance and
there has been little innovation in this area. Perhaps through government support or
other forms of subsidized funding, product innovation could be encouraged as
commercial microlenders represent a potentially large supply base for SMME finance.
7.5 Role of Non -commercial providers
In the cases of village banks, MFIs and mutual banks, both the state and private sector
play a vital role in ensuring the success of this sector as highlighted above. The state
plays a role particularly with regard to providing appropriate enabling legislation,
supporting capacity building and in subsidising operations during the slow, painstaking
business of institution building. The private sector can also play a facilitative role,
particularly with regard to making accessible transaction services and providing
insurance services.
59
Appendices
Appendix 1 - Table 1: Definitions of SMME by sector
Sector or subsector
in accordance with
the Standard
Industrial
Classification
Agriculture
Mining and
Quarrying
Manufacturing
Electricity, Gas and
Water
Construction
Retail, Motor Trade
and repair service
Whole sale trade,
commercial agents
and allied services
Catering
accommodation
and other trade
Transport storage
and
communications
Finance and
Business services
Community, social
and personal
services
Size or class
Total full equivalent
of paid employees
Total turnover
Less than
Less than
Total gross asset
value (fixed
property excluded)
Less than
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
100
50
10
5
200
50
20
5
200
50
20
5
200
50
20
5
200
50
20
5
R 4m
R 2m
R 0.4m
R 0.15m
R 30m
R 7.5m
R 3m
R 0.15m
R 40m
R 10m
R 4m
R 0.15m
R 40m
R 10m
R 4m
R 0.15m
R 20m
R 5m
R 2m
R 0.15m
R 4m
R 2m
R 0.4m
R 0.1m
R 18m
R 4.5m
R 1.8m
R 0.1m
R 15m
R 3.75m
R 1.5m
R 0.1m
R 15m
R 3.75m
R 1.5m
R 0.1m
R 4m
R 1m
R 0.4m
R 0.1m
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
Medium
Small
Very small
Micro
100
50
10
5
100
50
10
5
100
50
10
5
100
50
10
5
100
50
10
5
100
50
10
5
R 30m
R 15m
R 3m
R 0.15m
R 50m
R 25m
R 5m
R 0.15m
R 10m
R 5m
R 1m
R 0.15
R 20m
R 10m
R 2m
R 0.15m
R 20m
R 10m
R 2m
R 0.15m
R 10m
R 5m
R 1m
R 0.15m
R 5m
R 2.5m
R 0.5m
R 0.1m
R 8m
R 4m
R 0.5m
R 0.1m
R 2m
R 1m
R 0.2m
R 0.1m
R 5m
R 2.5m
R 0.5m
R 0.1m
R 4m
R 2m
R 0.4m
R 0.1m
R 5m
R 2.5m
R 0.5m
R 0.1m
1
Appendix 2 - Table 1: Khula RFIs
NAME OF RFI
TELEPHONE NUMBER
CRITERIA
GAUTENG PROVINCE
Nicro Enterprise Finance (NEF)
LOAN
AMOUNTS
(011) 339- 3177/8
Individuals including ex-offenders
Basani Business Development
Services
Sankofa Financial Services
(011) 333 – 3831 and
(011) 336 – 0047
(011) 331 – 1902
Individuals with existing businesses for more
than 6 months. No working capital provided.
Individuals who own spazas or small shops –
for purchasing at METRO wholesalers only
R 750 – R 10
000
R 6 000 – R100
000
R 5 000 – R 50
000
Khethani Business Finance
Khethani Business Finance
(011) 781 – 7224
(011) 832 – 3222
Marang Financial Services
Marang Financial Services
Artpac Lending Services
(012) 320 – 1745
(012) 804 – 0248/0819
Speed code *13
(016) 422 – 2003
Speed code *16
(011) 838 – 5137/3895/3730
WESTERN CAPE
Khethani Business Finance
(021) 683 – 7656
Nicro Enterprise Finance
Nicro Enterprise Finance (NEF)
Marang Financial Services
EASTERN CAPE
Business Finance Promotion
Agency
Marang Financial Services
Marang Financial Services
Head office
Individuals with existing businesses for more
than 2 years
Head office
Solidarity Groups
Solidarity Groups
Construction and related industries
R 6 000 – R150
000
R 500 – R 3
000
R 500 – R 3
000
R1 000 –R100
000
R6 000 – R150
000
(021) 462- 0017
(021) 374 – 9521
Individuals with existing businesses for more
than 2 years
Head Office
Individuals including ex-offenders
(041) 487 –0190
Individuals with existing businesses
(039) 737 – 4974
Speed code *11
(039) 255-0685
Speed code *02
Solidarity Groups
R5 000 – R100
000
R 500 – R 3
000
R 500 – R 3
000
Solidarity Groups
R 750 – R10
000
LOCATION
Braamfontein
Johannesbur
g
Johannesbur
g
Randburg
Johannesbur
g
Pretoria
Mamelodi/Sil
verton
Vereeniging/
Evaton
Johannesbur
g
Claremont
Cape Town
Mitchell’s
Plain
Port Elizabeth
Matatiele
Mount Frere
2
NAME OF RFI
TELEPHONE NUMBER
CRITERIA
Marang Financial Services
(047) 532 – 3929
Speed code *15
(039) 253- 1804
Speed code *45
Solidarity Groups
(013) 755 – 1807
speed code *07
(013) 737 –6723
(082)674 –9476
speed code *01
(013) 790 - 1763
speed code *05
(017) 883 –1934
speed code *17
(013) 235 –1695
(013) 656 –0840
Marang Financial Services
MPUMALANGA
Marang Financial Services
Marang Financial Services
Marang Financial Services
Marang Financial Services
Marang Financial Services
Beehive Entrepreneurial
Development Centre
Beehive Entrepreneurial
Development Centre
Beehive Entrepreneurial
Development Centre
LIMPOPO PROVINCE
Small Enterprise Foundation
(SEF)
Marang Financial Services
Marang Financial Services
Marang Financial Services
Marang Financial Services
NORTHERN CAPE
Remmogo Business Finance
LOAN
AMOUNTS
LOCATION
R 500 - R 3
000
R 500 – R 3
000
Umtata
Solidarity Groups
R 500 – R 3 000
Nelspruit
Solidarity groups
Solidarity Groups
R 500 - R3 000
R 500 – R 3 000
Solidarity Groups
R 500 – R 3 000
Solidarity Groups
R 500 – R 3 000
Hazyview
Bushbuckridg
e
Komatipoort/
Malelane
Elukwatini
Individuals and Groups
Lydenburg
Individuals and Groups
R 800 – R10
000
R 800 –R10 000
072 632- 6041
Individuals and Groups
R 800 – R10 000
Carolina
(015) 307- 5837/5418
Solidarity groups
R 500 – R10 000
Tzaneen
(013) 262 - 3242
Speed code *52
(015) 291 - 4830
Speed code *10
(013) 795- 5343
Speed code *00
(015) 307- 5753
Speed code *14
Solidarity groups
R 500 – R 3 000
Groblersdaal
Solidarity groups
R 500 – R 3 000
Pietersburg
Solidarity groups
R 500 –R 3 000
Acornhoek
Solidarity groups
R 500- R 3 000
Tzaneen
(053) 831- 6013/4
Individuals with existing business
R6 000 – R150
000
Kimberley
Solidarity Groups
Lusikisiki
Witbank
FREE STATE
3
NAME OF RFI
TELEPHONE NUMBER
CRITERIA
Remmogo Business Finance
(051) 448- 6279/6285
Individuals with existing businesses
KWAZULU NATAL
Ithala Development Finance
Corporation
(031) 907- 8784
Khethani Business Finance
(031) 261-6657
Marang Financial Services
Marang Financial Services
(031) 301 – 2295
speed code *03
(033) 701 – 1486
speed code *73
(033)394 – 1655
speed code *09
(035) 792 - 1756
Marang Financial Services
(035) 831 -0800
Marang Financial Services
Marang Financial Services
LOAN
AMOUNTS
LOCATION
R6 000 –R150
000
Bloemfontein
Individuals
Up to R2 000
000
Umlazi
Individuals with existing businesses for more
than 2 years
Solidarity groups
R6 000 – R150
000
R 500 – R 3
000
R 500 - R 3
000
R 500 – R 3
000
R 500 – R 3
000
R 500 - R 3
000
Durban
Solidarity groups
Solidarity groups
Solidarity groups
Solidarity groups
Durban
Underberg
Pietermaritzb
urg
Empangeni
Nongoma
4
Appendix 3 - Findings of the Khula Impact Assessment Study
TABLE 1: TOTAL NUMBER OF BENEFICIARIES AND SECTORIAL DISTRIBUTION OF RESPONDENTS, 1996 TO 31 MARCH 2001
Tot al number of beneficiaries
Number of respondents
Economic sector of beneficiaries
Retail
Wholesale
Construction
Manufacturing
Catering
Motor vehicle repairs
Agriculture
Personal services
Art and culture (handcraft)
Repairs and household goods
Cleaning services
Crèches and after-school centres
Security
Information services
Transport services
Bookkeeping
Accommodation
Other
Total
KhulaStart
RFI
11 875
566
%
59,9
0,5
0,5
21,4
2,1
0,7
7,1
4,6
1,6
0,7
0,2
0,7
0,0
0,0
0,0
0,0
0,0
0,0
100,0
89354
407
%
46,4
2,7
4,2
16,2
7,9
3,7
0,5
9,3
1,0
1,0
1,0
1,5
0,5
1,0
2,5
0,0
0,0
0,7
100,0
Credit
Guarantee
Scheme
Individuals
1 420
232
%
34,5
4,3
6,9
14,7
9,5
6,9
0,0
8,2
2,2
0,4
1,7
2,2
0,9
3,4
1,7
0,4
0,4
1,3
100,0
Credit
Guarantee
Scheme
Portfolios
762
56
%
73,2
0,0
0,0
3,6
12,5
0,0
0,0
7,1
1,8
1,8
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
100,0
Thuso
Mentorship
Scheme
Regional
Equity
Funds
677
181
%
35,9
8,2
3,9
12,1
4,4
1,7
1,7
13,8
4,9
0,0
0,6
0,6
2,2
1,7
4,4
1,1
0,0
1,1
100,0
282
30
%
6,7
0,0
6,7
20,0
3,3
0,0
0,0
10,0
13,3
0,0
0,0
0,0
0,0
16,7
13,3
6,7
1,7
3,3
100,0
5
TABLE 2: LOAN FEATURES
Percentage of beneficiaries with only
a Khula supported loan
Average Loan size
% of beneficiaries assisted to secure a loan
Source of assistance
Khula mentorship
Non-governmental organization
Friend/ Family/ colleague
Other
Application of loan
Start -up of business
Extend business
Consolidate credit
Continuation/ maintenance of business
Other
KhulaStart
RFI
Credit
Guarantee
Scheme
Portfolios
96,4
Thuso
Mentorship
Scheme
Regional
Equity
Funds
95,1
Credit
Guarantee
Scheme
Individuals
95,3
97,7
-
-
1 127,62
19,1
109 973,24*
29,7
252 288,64
15,1
12 239,29
10,7
193 916,53
-
2 404 800,00
3,3
44,4
26,9
25,9
2,8
37,2
28,1
28,1
6,6
28,6
14,3
2,9
54,3
16,7
0,0
83,3
100,0
-
-
30,2
69,1
0,9
0,0
0,2
52,6
41,8
2,2
2,9
0,5
67,0
23,7
2,2
5,4
3,6
26,8
17,9
0,0
32,1
25,0
-
56,7
36,7
0,0
0,0
6,6
%
R
%
%
%
%
%
%
%
%
%
%
*SINCE SIZES OF RFI LOANS VARY SUBSTANTIALLY AND THE SAMPLE MAY BE 11.3 %, THE AVERAGE LOAN SIZE CAN BE AS LOW AS R85 667.
6
*GROSS JOBS CREATED, MAINTAINED AND LEVERAGED
FROM MARCH1996 T0 MARCH 2001
TABLE 3: EMPLOYMENT FEATURES
Average employment size
Male
Female
Total
Full-time
Part -time
Total
Estimated total employment*
Male
Female
Total
Full-time
Part -time
Total
New jobs created by Khula loans
1.92
KhulaStart
RFI
Credit
Guarantee
Scheme
Individuals
Credit
Guarantee
Scheme
Portfolios
Total
0,34
1,58
4,90
3,44
8,17
3,84
1,95
1,50
-
1,85
0,07
1,92
8,34
7,19
1,15
8,34
4 038
18 763
22 801
21 968
833
22 801
15 489
437 835
307 378
745 213
642 455
102 758
745 213
109 505
12,01
10,68
1,33
12,01
3,45
2,98
0,47
3,45
11 601
5 453
17 054
2 629
17 054
2 271
358
2 629
12 847
-
1 486
1 143
15 166
1 888
-
721
454 960
332 732
787 697
681 860
105 837
787 697
521 307
7
Appendix 4 - Table 1: SA Development Microfinance Sector
Institution
Location
Type
ACAT KZN
KZN
Micro credit and
business
development
services
Beehive EDC
Mpumalanga
FINCA KZN
KwaZulu –
Natal, Eastern
Cape
Cape Town
Kuyasa Fund
Individual
savings
facilitate
d
Yes
Selfmanaged
group
savings
Yes
Loans
from
Group
Savings
No
MFO loans for
nonmicroenterprise
loans
No
MFO
microe
nterpris
e loans
Yes
Poverty Profile
Targeting
strategy
Origin
Generally
poorest in
community in
community
Christian
rural
developme
nt NGO
Microenterprise
MFO and business
services centre
No
Yes
Housing
microloans
Yes
Claims to reach
very poor
Microenterprise
MFO
Yes
No
Yes but
only for
some
clients
No
Participator
y wealth
ranking to
identify
poorest
Ad hoc
No
Yes
Claims to reach
very poor
Ad hoc
Hybrid housing
microloans /
micro saving
Yes
Yes but not
centralised
No
Housing
microloans
No
Very poor to
poor women in
urban
townships
around Cape
Town who have
not yet
received
housing
subsidies and
who are
members of
independent
savings groups
Community
selfselection
FINCA
Internation
al Affiliate
NGO
programm
e evolved
to standalone
Business
developme
nt centre
8
Marang
Financial
Services
Gauteng,
Mpumalanga,
Free State,
Eastern Cape,
KZN
Microenterprise
MFO
No
No
No
No
Yes
Unemployed
households in a
given area with
microenterprise
Geographi
cal
targeting
Poor People’s
Movement
Western Cape
Savings and
credit network
No
Yes
Yes
No
No
Community
selection
SA Youth
Federation
National
Savings and
credit network
No
Yes
Yes
No
No
Mixed including
street dwellers,
farm workers
Varied
SACCOL
National
Support and
statutory umbrella
for SACCOs
No
Yes
Yes
Only at start -up
for SACCO
running costs
No
Small Enterprise
Foundation
Limpopo rural
Microenterprise
MFO
Yes
No
No (but
patching
used
within
loan
groups)
No
Yes
Homeless
National
Savings and
No
Yes
Yes
Housing and land
No
Average
member
income around
R1 200
To programs
roughly equal in
size. One works
with existing
poor
entrepreneurs.
The second
targets those
below 50% of
the poverty
line. Most are
women in rural
villages in exhomelands who
have
householdbased micro
enterprises.
Very poor to
Created to
absorb Get
Ahead
Financial
Services
and Rural
Finance
Facility
Church
welfare
project
Offshoot of
SAHPF
Community
selfselection
Geographi
cal
Statutory
umbrella
for SACCOs
Conscious
Strategy of
poverty
wealth
ranking
when new
branches
formed
Start -up
initiative
Community
Homeless
9
People’s
Federation
Women’s
Development
Banking
credit network
No
No
No
No
Yes
poor women
(85%) in urban
informational
settlements and
recentlydeveloped
townships
around major
cities and towns
Unknown
selfselection
people’s
movement
Community
selfselection
Start -up
initiative
10
Appendix 5: Case Study on: Provident South Africa
Source: Cadogan, 2002
Background
Provident South Africa (PSA) closed its operations entirely in December 2001 due to the
following actors. The key reasons were:
• Lack of UK investor support
• Lack of available suitably qualified staff
• Higher than anticipated levels of fraud from staff and agents
The case study provides important lessons regarding the application of models that have
succeeded elsewhere in the South African context.
The Provident Financial Model
Provident Financial (PF) has been in the credit business for 120 years with a head office in
the United Kingdom. The international division had five branches in Poland, Czech
Republic, Slovakia and Hungary and South Africa (now closed). Following a successful
report on the viability of market entry to SA, Provident South Africa (PSA) was established
in April 1998 as a pilot project. Targets were set to achieve annual objectives and
measure performance on a weekly basis. The basis of these targets was to achieve break
even in 3 years.
The model is based on the Home Credit (HC) model, a well established, financial service,
which has its origins back in the 19th Century. This service is provided to customers in their
home (hen ce the term, Home Credit) and mainly serves people, who wish to borrow
relatively small sums on a fixed-term basis. It is a “friendly service” with an agent of the
company calling at customers' homes each week, to collect repayments. The model
works because of the relationships developed between customers and because agents
have weekly agent/customer contact which establishes a regular repayment pattern.
Small, personal, unsecured short term loans are offered to lower income groups.
Having completed this investigation into the development of the home credit in the
South African market the conclusions were overwhelmingly in favour of entering that
market. This was based on the strength and depth of community spirit found in rural South
Africa, and the desperate need for access to credit experienced by previously
disadvantaged people to assist them to make a living.
The following products were offered in South Africa:
Designation
Lending Methodology
Loan Size
Interest
Repayment Frequency
Collateral
Repayment Period
Savings
Product 1
Individual
lending
R700-1, 500
14.5%
per
month
Weekly
None
14 weeks
None
Product 2
Product 3
Indiv idual Lending
Individual Lending
R1600 – R3, 000
R3000 – R7, 500
9.5% per month
7.5 % per month
Weekly
None
23 weeks
None
Weekly
None
33 weeks
None
11
Growth of Provident SA
Provident SA experienced phenomenal growth where at the beginning of 2000 Provident
SA had 11,000 active customers supported by 250 self-employed agents and 36 full-time
staff. Twelve months later, in January 2001, PSA had over 34,000 active customers, 620
self-employed agents and 113 employed staff.
PSA had the ability and the systems to expand access to its potential target market. The
uptake of its existing financial products by the clients was a powerful indication of the
need and was reflected in the growth of PSA during the period of its operation. SA’s
growth was reflected in its move from being a small operation, to being in a position to
serve over 60% of the Limpopo Province and to be rated as a leading micro-finance
organisation in the Province.
However, whilst customer targets were met, by the end 2001 when PSA did not achieve
the year’s operational and financial targets and PSA conducted a critical review of its
situation and identified the following problems that had threatened the business’ viability:
•
•
•
poor collection performance,
unacceptable levels of bad debt, and
fraud.
These problems impacted on the overall profitability of the operation. The analysis further
revealed that the current market situation could not be improved to the extent where
the business in its current form or structure would become viable, and given this the
business had to close down. Provident therefore decided to dispose of its interest in the
South African micro -finance business.
Problems experienced
Problems related to personnel issues, field operations, marketing, and so-called sociocultural issues. Personnel and field operations issues were most significant. Personnel issues
included the lack of quality staff in the Limpopo Province; the lack of commitment and
accountability; and the lack of application of control systems. Field operations problems
related to the rate of expansion, which was found to be too great for the quality of staff
in place; ineffective and inadequate measures for bad debt recovery process; and a
high incidence fraud levels among agents and staff which increased as PSA expanded.
The slow response of the police and justice system also exacerbated this problem.
Marketing issues included the inadequate “South Africanisation” of the UK model and
inadequate customer motivation and loyalty. Rates of lapsed customers remained high
throughout the time PSA operated. Little motivation or loyalty for customers to remain as
clients with PSA and agents were also not motivated to retain customers they had
recruited. Socio-cultural issues according to Cadogan were the lack of repayment and
savings culture in most sections of the South African community and particularly in the
rural areas.
Various interventions were attempted as outlined by Cadogan (2002) including
shortening of the maturity period of loans to help improve the quality of business and
improve cash flow; the tightening of lending and field operations criteria, the removal of
poor performing agents; improvements to recruitment and training methods and the
introduction of post office banking to stop fraud and the temptation to steal by taking
12
more cash out of the system. However these were not enough to assure shareholders
that there would be a turn around or were too little too late.
Lessons learnt:
Some of the other lessons learnt relate to the application of a model that has been
successful in one context to another context. Some of the issues which need to be taken
into account include: differences in consumer behaviour, environmental threats and
opportunities in the market, and cultural differences. He concludes that to be effective in
international marketing the most important requirement is to undertake thorough market
analysis before and after entering the market.
He concludes that remaining challenges to MFIs in South Africa include:
• Effective Staff, agents and customers
• Social – cultural behaviour change
• Effective Fraud Prevention
• Leadership and investors paradigm shift
• Effective outreach decentralisation
• The impact of the justice system and police service on industry fraud
• Recruitment of experience, responsible and committed staff and agents
In the light of above, it can be concluded that the most critical success factors that
determine the operational and financial sustainability still remains controversial and
debatable. This implies that each MFI has its own unique critical success factors that may
need continuous monitoring and refinement.
13
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