Briefing by Khula Enterprise Finance Ltd on the Khula Direct Model

Economic Development

21 July 2010
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Committee met with representatives of Khula Enterprise Finance Ltd on the Khula Direct Model. The purpose of Khula Direct was to provide funding directly to viable small, medium and micro enterprises that could not otherwise attract funding. The model provided for regional offices to be expanded and for field staff to be placed in small business and home-based offices.

Khula planned to address the under-serviced segments such as women, the youth, peri-urban and rural areas and environmentally friendly projects. Although Khula would be providing products ranging from R10,000 to R3 million, its main emphasis would on businesses that needed between R50,000 and R500,000.  Applicants for financing were hampered by a perception of high risk, such as a lack of cash resources and assets, little knowledge of the industries in which they were functioning, no experience in running a business, no contracts from customers and bad credit records. Khula Direct would assess the risk and adjust the product to suit the relevant level of risk. It would also have a much higher risk appetite than commercial financiers.

Khula Direct would provide support to clients through business support (such as mentors and consultants), training, workshops and research. Khula’s overriding outcome was contributing towards a reduction in poverty. To date, the achievements included conducting local and international research, product design, distribution channel design, engagement with relevant stakeholders and designing a credit management framework. The creation of a blueprint around procedures, policies, job descriptions and technical specifications for the building of an operational environment was in progress. The total capital it required totalled R1.6 billion.

Members asked questions concerning the assistance provided to SMME’s in business plan development, the projected risk allowance, making allowance for “sweat equity”, the reasons for the delay in implementing Khula Direct, the poor synchronisation between Government Departments, whether the funding available was adequate, the turnaround times for applications, the monopolisation by bigger players, the primary motivation of Khula and whether other international models were considered.

The Chairperson said that one issue which needed to be looked into was the lack of knowledge around enterprise development locally. The Committee would like Khula’s assistance with its up-coming outreach programme. The Committee requested copies of with Khula’s business plan.


Meeting report

Briefing by Khula Enterprise Finance Ltd
Mr Setlakalane Molepo, Managing Director, Khula Enterprises presented the briefing to the Committee (see attached document).

The purpose of Khula Direct was to provide funding directly to viable small, medium and micro enterprises (SMME’s) that could not otherwise attract any funding. There was currently a gap in the SMME sector for the provision of funding. As the Direct model was expanded, the regional offices of Khula would become a network of on-the-ground branches. In addition, field staff would be placed at small business and home-based offices.

In terms of the Khula Direct business model, the wholesale model saw lending via other credit providers (such as banks, joint ventures and third party-managed funds) supporting SMMEs.  The retail model saw direct lending to the SMME market and was an attempt to address the limitations of the wholesale model.

In terms of its demographic profile, Khula would accommodate a broad risk profile, specifically addressing under-serviced segments such as women, the youth, peri-urban and rural areas as well as environmentally friendly projects.

According to the 2009 Finmark Trust Report, around 525,000 businesses needed less than R50,000. Although Khula would be providing products ranging from R10,000 to R3 million, the main emphasis would be in the R50,000 to R500,000 range.

In terms of the challenges faced by SMMEs, although there appeared to be a high demand for as well as a surprisingly high supply of finance available, these were poorly matched. Factors which led to the applicants being perceived as high risk included the fact that many had no cash resources to contribute to the business, no tangible assets, very little knowledge of the industries in which they were functioning, no experience in running a business, no contracts from customers and bad credit records. Khula Direct would assess the risk and adjust the product to suit the relevant level of risk. It would also have a much higher risk appetite than commercial financiers.

Khula Direct would support its clients through business support (mentors, consultants), training, workshops and research. Though this service would not be free, it would be subsidised.

In terms of its outcomes, Khula Direct was looking at increasing the number of sustainable SMMEs, decreasing the number of SMMEs in perceived high-risk categories, increasing the number of jobs created, contributing to under-serviced regions and improving the sustainability of retail lending businesses. The overriding outcome, however, was contributing towards a reduction in poverty.

In relation to the progress made to date, since Cabinet gave approval to extend the Khula mandate to include direct lending, the project had undertaken local and international research, product design, distribution channel design, engaged with relevant stakeholders and designed a credit management framework. Currently in detailed design phase was the creation of a blueprint around procedures, policies, job descriptions and technical specifications for the building of an operational environment. The total capital required was R1.6 billion.

Discussion
Mr N Singh (IFP) asked whether Khula was looking into assisting SMMEs with business plan development. He asked what the projected risk allowance was and if “sweat equity” was considered to be a contribution towards deposits.

Mr Molepo answered that, through mentorship, Khula provided both pre- and post-investment support. When providing lower-level loans, the recoverability levels were higher. Regionalising its efforts would, however, help towards addressing this issue. “Sweat equity” could be looked as a possibility.

Mr Z Nthuli (ANC) asked what problems had arisen subsequent to the Cabinet approval given in 2008, which had led to the delay in the implementation of Khula Direct.

Mr Molepo explained that the delay had been as a result of the need to develop the business plan. Since then, many accomplishments had been achieved by Khula.

Mr S Huang (ANC) asked how all the regions in the country could be reached with only R1.6 billion.

Mr M Kekana, Chairperson, Khula Enterprise Finance replied that the decision was taken to use the current 11 offices more effectively and not necessarily wait for major funding from the National Treasury.

The Chairperson asked how Khula co-operated with the Small Enterprise Development Agency (SED and related to the various parastatals involved in enterprise development. He asked what the turnaround period was with regard to the processing of applications. He asked what was being done to address the monopolisation of industries by bigger players.

Mr Molepo answered that, as part of its growth objectives, Khula was looking into the issue of acquisitions. SEDA should be part of Khula in order to provide non-financial support to SMME’s.

Mr Kekana advised that co-operation on all levels was essential and would be looked into. Although there were outside factors which affected the turnaround times of applications, one of Khula’s key deliverables was ensuring that all applications were processed expeditiously.

Mr Mkhululi Mazibuko, Chief Operating Officer, Khula Enterprise Finance explained that turnaround times were between two and three months for the wholesale model. Average turnaround times, where Khula had a relationship with the relevant bank, were currently three days. Once lending was done directly though Khula, there would be greater control over turnaround times.

Mr Molepo advised that Khula was currently looking into involving big businesses in the development of SMME’s in order to address the issue of monopolisation.

The Chairperson requested that the Committee was provided with a copy of Khula’s business plan.

Mr Nthuli asked whether Khula’s focus was on development or was profit-driven.

Mr Molepo answered that, although its main focus was on ensuring the development of sustainable SMEs, Khula also had to ensure its own sustainability. Profit was however not a driving factor.

Mr P Rabie (DA) asked whether there were any international models which could be considered as well.

Mr Molepo answered that examples in Brazil, which were proven successful, were investigated.

Mr Kekana remarked that more emphasis should be placed on gleaning information from local sources (such as local banks) as opposed to continually looking towards international examples.

The Chairperson said that one issue which needed to be looked into further was the lack of knowledge around enterprise development locally. The Committee would like Khula’s assistance with its up-coming outreach programme.

The meeting was adjourned.


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