Khula Enterprise Finance Annual Report 2009/10: briefing

Meeting report

The mandate of Khula Enterprise Finance included three key focus areas, namely the promotion of access to finance, financial sustainability and impacting on development. Government faced challenges such as the high unemployment rate, growth rates that were marked by structural imbalances and other constraints such as increases in credit. To address these challenges, government had approved twelve targets. One of the targets was creating decent employment through inclusive economic growth. The Economic Development Department was responsible for this target. Seven outputs were developed which had a bearing on the way Khula went about its business.

Khula was responsible for filling the financing gap faced by primarily black-owned and owner-managed small and medium enterprises (SMEs). These SMEs needed finance of between R10 000 and R3 million, or loans of below R250 000. Khula arranged finance for start-up activities and early expansion. There was a focus on under-served provinces, rural areas and poor communities within the urban areas. There was also a focus on enterprises owned by women.

Khula provided loans to retail financial intermediaries who then lent to SMEs. Khula also provided credit indemnities, joint ventures, funds, mentorship programmes and operating space for small enterprises in its own properties. Khula had offices all over the country. In some places where they were not present they had financing partners.

Khula's operating expenditure for the 2009/10 financial year was R60.2 million, which represented 75% of its operating income. This was an increase over the two preceding financial years. Capital expenditure was R252 355, a significant decrease from R1.0 million in the preceding financial year. Revenue had decreased by 6.8% from the previous financial year. Net profit had declined by 61.7%. The auditors had found no significant weaknesses and Khula had received an unqualified report for six successive years. Generally financial management over the last six years had been good.

Khula had assets in its net loan book of R759 million. It had a property portfolio worth R183 million and cash reserves of R540 million, all of which was committed. Its only significant liability was a shareholders' loan of R663 million. The audit committee had met four times during the financial year.

There had been a marginal decrease in the loan book. Business loans had increased by 28% from the previous year. Funds had increased by 13% and credit indemnity had decreased by 25%. Uptake of credit indemnity had decreased due to the tighter lending policy of the banks. The scheme would be repositioned and customised to reduce administrative burdens. The level of approvals had decreased due to tighter loan policy by commercial banks, the poor economic climate, risk aversion by financing partners and reduced funding by the shareholder.

Khula had extended joint venture funding to 334 end users. Of these 25% were to women and 89% to black entrepreneurs. Facilities of below R250 000 amounted to 42% and projects in the priority provinces were 46% of the facilities. A total of 2 790 jobs had been created. The property portfolio provided development properties to mainly black entrepreneurs. Of the tenants, 53% were Africans and 96% SMEs. The portfolio had increased to R192 million in 2010. Over 6 000 employment opportunities were being provided in these properties.

There were various factors influencing the programme. These included the impact of the global economic crisis, reduced allocation of capital by government, reduced lending through retail finance intermediaries (RFIs), higher bad debt provision, a focus on the target market, better strategic alignment with channel partners, the balance between sustainability and development impact, a move away from grant-dependent RFIs to commercial entities and a lack of financing partners in some provinces.

In order to create an enabling environment, the network and server would be upgraded. The Khula Information Business System would be enhanced. A Client Care / Customer Relationship Management (CRM) module would be implemented. A mentorship customer support services module would be implemented. Portals for financing partners would be developed.

Khula business loans were currently being done by intermediaries. The focus would be to strengthen those RFIs who would grow their outreach, especially to rural areas or who provided niche products in specified areas. Khula would facilitate the collection of the current book.

Strategic priorities included the re-engineering of the wholesale model, the launch of Khula Direct and recapitalisation and cost efficiencies. High performance teams would be developed. Operational efficiency would be increased. The Khula brand would be positioned to increase awareness. Khula would exert an increased influence on SME formulation policy.

Mr Mkhululi Mazibuko, Chief Operating Officer, Khula, said that Khula Direct would be launched in the following financial year. While Khula would continue to concentrate on the provision of wholesale products, Khula Direct would put agents closer to the communities they wished to serve. Pilot programmes would be launched in two provinces in 2011. He then presented a number of success stories of entrepreneurs who had benefited from Khula's assistance. Khula wished to be closer to the SMEs it serviced. It was not just government that had a role to finance small business. Private public partnerships were needed. Khula wanted to create a level of excitement and entrepreneurship.

Mr Ismail Tayob, Chairman of Audit Committee, Khula, said that the audit committee had achieved its role. His committee had done a good job.

Discussion
The Chairperson thanked Khula for a good report. It gave a good picture of their activities.

Mr Z Ntuli (ANC) said that the fear of risk aversion would be corrected by Khula Direct. He asked if Khula would be ignoring its mentorship role by targeting good business propositions. He detected a shift away from the mentorship role.

Mr S Marais (DA) asked if there was any requirement for capitalisation or recapitalisation. Khula had spread its activities through the provinces. He asked what the comparison of involvement in the rural areas was as opposed to the metro areas. There was a huge need for support in the rural areas. He asked how far Khula Direct was from being implemented. The objective must be to have a walk-in facility for easy access.

Dr P Rabie (DA) came from the rural areas. It seemed that only people in the towns or in small scale agricultural projects were benefiting. One of the success stories quoted by Mr Mazibuko was of a sugar farmer. He asked if any other types of farmer had also benefited. Guest houses and restaurants were becoming popular small industries in the rural towns. He asked if there was any involvement with the Departments of Tourism and Agriculture. He asked if niche markets had been identified.

Ms D Tsotetsi (ANC) emphasised the problem of unemployment. Many young people were affected. This presentation did not speak to this issue. People were encouraged to apply for small loans, but these applications depended on a business plan. Black people were inclined to ask for smaller loans than what they really needed.

Mr S Ngonyama (COPE) asked about the property portfolio. He was worried that the report did not address the challenge of inequality. This was startling. 41% of the suppliers were black. He asked if it could be assumed that this process was final. Most of the assistance had been given in the Western Cape and KwaZulu-Natal. The low key areas seemed to be attracting the fewest investments. While 85% of beneficiaries were black, the gender breakdown showed that in fact 64% were black males and only 21% black females. The balance between rural and urban areas was also worrisome. He asked if there was any time frame attached to Khula Direct taking off.

Ms S Huang (ANC) did not see anything in the report about the Auditor-General’s audit report. There were thirteen Board members, including executive and non-executive members. Of these, ten had resigned. He asked what was happening with the leadership.

Mr Tayob replied that Khula was set up as a company. It was therefore subject to an external audit rather than an overview by the Auditor-General. Directors served a three-year term, and were deemed to have resigned automatically at the end of this period. The Minister would then set up a new Board.

The Chairperson said that it was clear that Khula wanted to penetrate deeper into the rural areas. In Limpopo people did not know of its existence. Their concentration on the urban areas was indeed worrisome. She asked what was happening in Orpington and the North West. Not everybody could be an entrepreneur. People still wanted to generate an income. There were calls to re-instate the poverty alleviation campaign. People needed money to survive. Khula could not expect everybody to be a businessperson.

The Chairperson said that the bad debt record was alarmingly high. People went into business without any knowledge or passion. The problem was worsened by the lack of entrepreneurship schools. It was a challenge to develop entrepreneurship on a large scale. Guest houses and restaurants represented a chance for a quick turnover of funds. People wanted to get rich quick, but this often led to a lack of quality service. Khula could begin to talk to this. People thought that they were entrepreneurs but they often did not have the required knowledge.

Mr Mazibuko replied that R2.5 billion had been distributed by Khula. In 2002 the loan book had been R34 million and in 2010 it had grown to R640 million. Bad debt had stood at 40% in 2002 but had now declined to 12%. The institution had grown but maintained risk at an acceptable level. Khula Direct would take their activities to a new level. Khula was in the industry of providing a retail bulk service. It was housing some agencies. Khula was staying in the commercial property space. The lack of operating space for SMEs was inhibiting growth.

The Chairperson had seen the outreach plan. It was impressive. She asked if Khula had the capacity to deliver at the required pace. Khula should tell people who they were. The needs of all people could not be addressed.

The Chairperson noted that the audit committee had held four meetings. She asked what the requirement was in this regard. She asked if there was an internal audit unit or if this function was outsourced. If Khula was to make an impact, it must shape up in its ‘direct’ ability to respond to applicants. The property profile did not seem to be growing at a great pace.

Mr Tayob replied that the audit committee was required to meet four times. It had held the required number of meetings. Khula had a small internal audit capability. The members were being groomed. At present the function was outsourced to a company called Orca.

The Chairperson asked what an acceptable growth rate would be. One of the performance challenges was to get the backing of financing partners. She asked if training centres could be vehicles to promote the plans of Khula.

Mr Ngonyama said that it would be helpful to understand the situation at the time that Khula was established. This was one of the oldest such agencies. It should be making an impact. It should have been a model agency by now. It had been a pilot project. The allocation of capital had been reduced by the shareholder. He asked what was meant by targeting the market rather than volume. The Committee needed to know more about the lack of financing partners to assist Khula.

Mr Ngonyama emphasised the need to reach out to the rural areas. The statement in the report lacked substance. There was a question of how to get hold of the people in the rural areas. It seemed that Khula was concentrating on priority areas. He was disappointed with the impact that Khula was making at present. They were not active in the areas they were supposed to be targeting. They should be concentrating on rural areas, Africans and women.

Mr Ngonyama said that property was the area where social inequality really lay. The majority of black workers would never be in a position to own their own property.

Ms Tsotetsi said that Khula was one of the oldest agencies. It should be impacting on a number of people. There should be shared experience and mentorship. Experience was a better teach than lectures. She asked which provinces had been selected for the Khula Direct pilot projects, and why they had been chosen.

Mr Mazibuko replied that the mentorship role would be intensified. Khula must provide mentorship with the loans. A memorandum of understanding had been signed with the relevant sector educational training authority (SETA). The SETA had a bigger footprint. Postbank was a possible partner. Khula would co-ordinate the schools of entrepreneurship.

Mr Malosi Kekana, Chairperson: Khula, said that he had faced three issues when he had been appointed. He had only been on the Board since April 2010. Products had been put in place without much review. The trade indemnity scheme had been in place since 1996. The reduced uptake of the product was a problem. Khula needed to have more influence on how its own money was utilised. This related to the stakeholders. A first meeting had been held with all the relevant chambers to assess what the problem was. Significant agreements had been made on the way forward. There was a need to collaborate. A steering committee had been formed that included Business Unity South Africa (BUSA) and Small Enterprise Development Agency (SEDA). Mr Andrew Mlangeni would champion the campaign. It was not just about finance.

Mr Kekana said there were three things which had to be corrected. Awareness and training was needed for entrants to the market. Improved support was needed from the various agencies. Finally, improvements were needed to the regulatory environment. For example, in terms of taxation, new entrepreneurs needed to make fourteen different visits to government agencies before they could set up their business. Some resolutions had been taken. A support campaign had to be launched. The establishment of one-stop shops was to be championed. Financial issues could not be solved by banks or government alone. A co-operative effort was needed. This had been applied successfully in Kenya. A steering committee had been formed on which all stakeholders were represented. They now realised their own weaknesses.

Mr Kekana said that the second meeting had been held two weeks previously which included banks and RFIs. The first matter discussed was prices. Banks were taking a liquidity risk by providing finance. Each bank had its own system. Khula had started a process by meeting with Nedbank, ABSA and others. It was a question of how Khula could change its systems to match those of the banks. An avenue for discussion had been opened. A two hour discussion had ensued on why banks declined applications for loans. There was a disjuncture between banks and entrepreneurs.

Mr Kekana said that an information portal was needed. This should contain an example of a business plan. A person would approach a financial institution and obtain a loan. The entrepreneur then operated successfully for a year or two and then felt the need to expand the business operation and went back to the bank. The application for extended finance was treated as an entirely new application. Khula was proposing that a credit bureau should be established. The banks had the intellectual muscle. Education was needed on the tax implications. People would have a record. In 2011, Khula would provide a progress report.

Mr Kekana said that a revolutionary change was needed. There was no ongoing dialogue at present. This was not on indictment on Khula alone but on the country as a whole. The business plan for Khula Direct had been approved in 2008. Cabinet had taken four years to reach that decision. The modelling and design work was complete. The implementation plan would be developed in the new year.

Mr Kekana said that towards the end of the financial year Khula would grow its outreach campaign. It would discuss funding with various organisations. Non-governmental avenues would be pursued. Co-operation was needed. Saving had to be encouraged. Khula would spread its programmes to the provinces. There were problems in some areas. Khula was studying its growth plan. The green economy had to be considered. A rural development strategy was needed. Khula had been in discussion with a stock farmers' body and others. Khula had reached an agreement with the body representing sugar farmers. They could go to other sectors.

Mr Kekana said that Khula would collaborate closer with RFIs. Khula would sift through the different bodies. The intention was to create a walk-through service. A booklet was being produced on access to funding. This would be available soon. It would be distributed far and wide. A call centre would serve as support to clients.

Mr Kekana said the focus was not only on women and the youth, but also on people with disabilities. Khula needed to look at what it could do in poor townships and depressed areas, such as places where mines had been closed. There was a need to set audacious targets. Bad debt was a market-wide problem, not just with Khula. It was a global problem. There was a systematic risk. Government paid slowly. Agreements were not honoured. At the same time government provided opportunities. It was a question of how to control people better. Often people received financing to start their businesses, but were unable to secure follow-up funding at a later stage.  This meant that they were unable to satisfy their long-term obligations.

Mr Tayob said that there was a problem with the set-up of Khula. It was a wholesale financier. Its role was to provide onward loans and not to provide loans to individuals. All information had to go to a third party. Khula Direct would sort out these problems. The present situation was that banks would decline loans and Khula got the bad name. There was a need to find onward lenders in rural areas. Khula Direct would operate with partners such as Telkom, who were represented in all parts of the country.

Mr Marais asked why the CEO was missing. Postbank was addressed in the new Act. It was represented everywhere, even in rural areas. It would follow a different approach to that of a commercial bank.

Mr Ngonyama said that it was a question of creativity. Leadership was needed. Khula must take its products to the people.

The Chairperson said that there was time pressure on the meeting. She congratulated Khula on achieving an unqualified report for the last six years. This was encouraging. There was a need to support the Khula Direct initiative. Capitalisation was needed. This was very important. Khula had to deal with systematic risks. It was also a question of how companies were run. There were risks and challenges. Members could forward the information on the entrepreneurship schools to their constituents.

Mr Kekana promised that Khula would deliver on Khula Direct. It would make more impact in the rural areas, with women, the youth and those with disabilities. Khula would work with Postbank.

The Chairperson reminded the Khula delegation that their commitments were on record.

The meeting was adjourned.