Khula Enterprise Finance Limited: 2011 Strategic Plan, Khula Direct Model plans

Economic Development

29 March 2011
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Khula Enterprise Finance Limited (Khula) briefed the Committee on its Strategic Plan for 2011/12 to 2015/16,and also set out the Operational Plan for the Khula Direct model. Khula offered finance to small and medium enterprises. During the period 2011 to 2015 it would be focusing its funding in those sectors prioritised in the New Growth Path (NGP), namely, agro-processing, minerals and beneficiation, knowledge economy, the green economy, tourism and creative sectors. It aimed to increase funds under its management, in order to increase access to finance by small and medium enterprises (SMEs), to integrate the wholesale business model with Khula Direct, and to improve the functioning and effectiveness of the Credit Indemnity Scheme. The specific targets were set out. It was noted that Khula aimed to approve applications to the value of R235 million, and to disburse R316 million. It aimed to create 7 214 jobs, and to provide over 1 000 investment loans. It would also aim to reduce the costs of doing business, improve management of credit risk. Khula, SAMAF and the small and medium enterprise portfolio of the Industrial Development Corporation would be merging.
The sources of funding were set out. 70% of funding would be directed to black-owned businesses, 30% to youth-owned, and 50% to women-owned businesses, with a concentration also of 45% in rural areas. The efforts to improve the Credit Indemnity Scheme were set out in more detail. An important part of its operations would be on-going product and service reviews over joint ventures and funds. Some of its programmes would be restructured to reflect the change in focus to investment, and it would be promoting its fund manager capabilities.

The plans for roll out and implementation of Khula Direct were described, noting that the activities would take place at head office, regional offices and through field agents. The latter would be visiting communities to assess needs, which would also raise the profile of Khula. Funding had been approved by National Treasury, and many of the positions were already filled, the credit division was created to vet all applications and policies and procedures were in place. A pilot study would be conducted in Pretoria and East London. Direct lending products would be term loans, asset-based finance, working capital and revolving credit.

Members asked how Khula hoped to create a new culture after the merger of the three institutions. They asked about monitoring systems for working capital, and noted that the best system was considered to be cash-based lending. Members pointed to some problems with the figures, which needed to be corrected. Members asked what advantages banks could gain by working with Khula, whether it hoped to create new jobs, where the field officers would be based, and the profile of the Board. They also questioned the criteria for the pilot sites, asked about mentoring of small enterprises and cooperatives, and noted that Khula would be working closely with the Small Enterprise Development Agency. The aims of the improved credit risk management were questioned, and Members asked if Khula knew the overall economic profile of its targeted groups, and would be able to make accurate assessments of the value of its interventions.

Meeting report

Mr Mkhululi Mazibuko, Executive Director: Investments, Khula Enterprise Finance Limited, said that this entity (Khula) would, in the Medium Term Expenditure Framework (MTEF) 2011 to 2014, be focusing its funding on sectors prioritised in the New Growth Path (NGP), such as agro-processing, minerals and beneficiation, knowledge economy, the green economy, tourism and creative sectors. Its key deliverables were to increase funds under its management, in order to increase access to finance by small and medium enterprises (SMEs), to integrate the wholesale business model with Khula Direct, and to improve the functioning and effectiveness of the Credit Indemnity Scheme. It would also conduct on-going product and service reviews so as to improve performance, and increase Khula’s products and services to black, women and young entrepreneurs and those in rural areas. 

Its aimed, in 2011/12 to approve applications up to R235 million and to disburse R316 million. This should create 7 214 jobs. It also aimed to provide 1 031 investment loans to SMEs in specific sectors. Khula further aimed to reduce the cost of doing business, to achieve better management of credit risk and to complete the merger of the finance institutions Khula, SAMAF and Industrial Development Corporation’s Small and Medium Enterprise portfolio.

A large proportion of the SMEs that Khula intended to finance in 2011/2012 would be financed from the Land Reform Empowerment Facility, and 200 SMEs would be financed through Khula Direct. The largest number of jobs to be created would be through the Credit Indemnity Scheme. In terms of financing targets, Mr Mazibuko explained that 70% would go towards black-owned business, 30% to youth-owned business, 50% to women-owned businesses and 45% to business in rural areas. It would improve its Credit Indemnity Scheme. This would be achieved by efforts that would include improving efficiencies by offering a portfolio indemnity product linked to specific SME programmes, reviewing its rules to support changes aimed at improving efficiency and better risk-sharing, increasing the product uptake of the scheme by reviewing contracts, and extending the scheme to other financiers who were not necessarily commercial banks.

Mr Mazibuko noted that Khula would be engaging in on-going product and service reviews over joint ventures and funds. It would build capacity would be built to manage funds internally. It would also position itself as a preferred SME fund manager for both public and private sector organisations.

The name of the “Operations Division” of Khula now had been changed to the “Investment Division”, to reflect the activities of this division more accurately. Certain products and programmes would be restructured in order to address specific needs within the market, and this would include the credit indemnity scheme.

Khula Direct briefing
Mr Malose Kekana, Chairperson, Khula Enterprise Finance, then spoke about the roll out and implementation of Khula Direct. There were three major levels of activity, based at head office, regional offices and agents. The job of field officers was to be present in communities so as to assess needs, and facilitate the submission of applications. Funding had been approved by National Treasury, a head of the retail division for Khula had been recruited and a credit division had been created, in order to vet all applications. In addition, a credit manager with over 20 years’ experience had been secured, call centre and field staff had been recruited, and an IT system for lending was in place and fully functional. Two branches had been identified to conduct the pilot project, in Pretoria and East London. The lending process policies and procedures had been drawn up, and the collections capacity was in place. Khula Direct’s direct lending products were term loans, asset-based finance, working capital and revolving credit.

In order for Khula Direct to achieve its strategic priorities, it had to take into consideration the pending merger of Khula, SAMAF and the small and medium enterprises funding of the Industrial Development Corporation (IDC). It also had to ensure that there was alignment with the New Growth Path. 

Discussion
Dr P Rabie (DA) asked how Khula hoped to successfully create a new culture after the merger. He asked if there was any monitoring system over how working capital would be spent, and he wondered if there had been any studies into the number of businesses that failed to prosper as a result of the improper use of working capital.

Mr Kekana answered that although Khula would attempt to create a new culture, and that efforts towards this would be started immediately, it would be quite a challenge. He pointed out that Khula Direct would be operating mainly at a product level. Part of the change management here would be to try to create a unitary culture. Although there would be a number of systems in place to monitor, Khula stressed that the best system would be a cash-based lending system.  

Dr S Marais (DA) asked whether the figures in the Khula budget overview were correct, as they did not appear to tally.

The Chief Operations Officer, Khula Enterprise Finance Limited, apologised for any apparent mistakes in relation to these figures, and said that they would be corrected.

Dr Marais asked what benefits there would be for banks in possibly using Khula funding.

Mr Kekana said that Khula’s intention was that banks would work with it and utilise Khula to better manage their risks.  

Dr Marais asked if the number of jobs that Khula hoped to create were new jobs.

Mr Mazibuko added that most of the jobs it aimed to create were new ones.

Ms D Tsotetsi (ANC) asked whether the field officers of Khula Direct would be using offices.

Mr Kekana answered that, although there would be an office and manager for field workers, it was best for these workers not to be restricted to an office setting, but to be out in the field.

Ms Tsotetsi asked for the profile of Khula’s board members.

Mr Kekana answered that all of the board members were well-experienced, competent and had proven track records in their fields of expertise.

Ms Tsotetsi asked about the criteria used for identifying the sites for the two pilot projects.

Mr Kekana noted that the Pretoria site was identified because the Head Office of Khula Direct would be in Pretoria. East London was chosen in order that Khula could gauge how effective would be far-flung offices.

Mr X Mabasa (ANC) asked what was being done around mentoring SMEs and cooperatives.

Mr Mazibuko answered that Khula would be working closely with the Small Enterprise Development Agency (SEDA).

Mr Z Ntuli (ANC) asked whether improved credit risk management would result in an increase in the number of clients.

Mr Kekana answered that this issue had to do with the attrition rate. Many people did not currently know about the services of Khula. It was clear that Khula had to work on building relationships. The appointment of the field officers would go a long way towards addressing this challenge.

The Chairperson asked whether Khula knew the overall economic profile of its targeted groups and areas, to enable it to identify and assess the difference that it was making through its interventions.  She also enquired about the implications of providing credit indemnity to SMEs.

Mr Kekana answered that baselines on the credit indemnity this were set by the Department of Trade and Industry. Khula would, however, conduct a study around what these baselines should ideally be.

The meeting was adjourned.

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