Access to funding by small enterprises: Commercial banks and Development Finance Institutions briefing

NCOP Trade and Industry, Economic Development, Small Business Development, Tourism, Employment and Labour

29 May 2012
Chairperson: Mr D Gamede (ANC, KwaZulu Natal)(morning) and Mr F Adams (ANC, Western Cape)(afternoon)
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Meeting Summary

The meeting was arranged to discuss the problems that small and medium enterprises (SMEs) had with accessing finance, which was still seen as the major hindrance to their development and success. A number of Development Finance Institutions (DFIs), business organisations, and the Department of Trade and Industry (dti) offered their insights on the major problems and challenges and some proposals to improve the situation.

At the outset, dti noted that one of the factors that affected SMEs ability to get funding was the fact that many were unable to come up with viable proposals that persuaded the finance institutions of their viability and sustainability, as well as their difficulty in accessing markets, and the hurdles posed by business regulations and legislation. SMEs were seen by the banks as high-risk, with a high chance of failure, and most could offer no collateral security. It was, however, acknowledged that SMEs were a very important sector of the economy, contributing between 34% and 50% of gross domestic product, and contributing substantially (at about 60%) to employment. dti tried to lower the risks for commercial banks to lend to SMEs, by offering security to the banks. It was pointed out that big and small businesses did not grow at the same rate, and the private sector remained skeptical about funding. The government’s direct lending market target, through Khula and other institutions, had included SMEs operating in low economic areas, start-ups and early expansion businesses, bridging and working capital finance, with a preference to black and women owned enterprises. However, dti proposed a direct lending model for other funding, to close the existing gap. There was a need to assess the impact of direct lending, through the new
Small Enterprise Finance Agency (SEFA), and to investigate other alternatives, including the possibility of a credit rating system to mitigate the lending risk, information sharing platforms for the sector, and alternatives to the current credit listing. The raft Financial Sector Charter introduced two new elements of Empowerment Financing and Access to Financial Services, while banks had undertaken to offer a targeted investment of R48 billion towards transformation infrastructure, support for development of black farmers, support for Black SMME financing and access to affordable housing. The private sector needed more footprint in the rural areas.

The Small Enterprise Finance Agency (SEFA) outlined its development from the merger of Khula, SAMAF and IDC. It intended to provide and facilitate access to finance, to survivalist, micro, medium and small enterprises, and its products included 
business loans, funds and joint ventures as well as non-financial support. It also offered  commercial debt-revolving loans, bridging finance, term loans, asset finance, and short-term trade finance. It hoped to partner with stronger financial intermediaries operating in sector specific or niche markets. SEFA would provide finance directly to viable SMMEs that could not attract other private sector funding, and leverage existing and potential partners. It would increase financial literacy in SMEs. It had offices in all nine provinces, and had developed a “one stop shop” concept. 

Development Bank of Southern Africa (DBSA) was a wholly-owned government enterprise and focused on infrastructure development projects in priority sectors. Its new business came about through leads from the private sector, and it would engage with the public sector on project development and finance in the early stages. It had facilitated SME development, although this was not its primary aim. The Jobs Fund operational aspects were described, as well as its work with the Accelerated Schools Infrastructure Delivery Initiative. This had benefited 27 SMMEs in the construction sector and created 796 temporal jobs. Some of the lessons learned were outlined, including the need to find a balance between retaining and growing businesses, and commitment to championing external processes.

The National Empowerment Fund (NEF) aimed to promote and support black economic participation, through funding black-empowered businesses, assisting in business planning, offering mentorship support and early-stage investments. Many SMEs had low bargaining power, some were competing with well-established businesses, and most were undercapitalised with a low asset base. They were often also characterised by lack of accurate and reliable information, lack of business-planning skills and management depth. NEF provided funding between R250 000 and R75 million, and the criteria were outlined. These included a minimum percentage of black ownership or interest, black women empowerment, and black operational and managerial involvement, as well as considerations around commercial viability, geographic area, job creation, community involvement and returns on investment. If had so far approved over R3.7 billion for black businesses including R108 million for seven rural community deals. Over 21.5% of the NEF’s portfolio comprised women-owned businesses. It also offered business planning and mentorships support.

Banking Association South Africa (BASA) pointed out that banks were expected to make a profit, hence could lend only to viable initiatives that were aimed at growth and expansion of the respective sectors. The role of banks included the promotion of capital formation, investment in new and existing enterprises, balanced development of different regions, and influencing economic activity by increasing amounts of money in circulation, through credit creation and adjustments in interest rates. The banks recognised the importance of the SME sector, and set out its initiatives, including cooperation agreements with Khula and participation in forums to address the advocacy gap. The definition of SME varied from bank to bank, and this impacted upon how they approached entities. The various initiatives offered were described, ranging from short-term loans to overdrafts, invoice discounting and equity finance. However, there was a need for a review off the evaluation criteria, the lack of diversity of SMEs had to be address, and the lack of quality business development support should be addressed through grading and accreditation. The interventions proposed and already taken by BASA were described. There was a need to professionalise the sector and create industry standards, although BASA also lobbied to prevent regulation ‘overload’ and supported the creation of an SME Champion. Government should address structural constraints, improve outreach of credit guarantee mechanisms, promote greater engagement and lending by non-bank financial institutions or cooperatives, as well as establish debt and equity markets, improve information access and conduct studies. 

Business Partners Ltd described itself as a risk financier for SMEs, which sought to enhance their access to finance. Similar constraints were outlined by this entity as already named, but Business Partners said that in addition to offering risk finance and capital, technical assistance, mentorship and consulting services, it also offered business premises exclusively for SMEs, and a wide range of investment services across a number of sectors. Its criteria for assessing business viability were set out, and it noted that it had financed more than 33 000 SMEs, to a value in excess of R12.5 billion, since 1981. Its 2012/13 targets aimed to provide more than R1 billion of risk finance or capital for SMEs, more than 40% to black entrepreneurs and more than 40% to women entrepreneurs.

Business Unity South Africa (BUSA)
called on the DFIs to relax their criteria for funding to afford better access, and criticised the fact that they did not explain to applicants why their applications were rejected, nor assist them in coming up with better proposals. The fact that SMMEs were under represented in all aspects of the economy made it difficult for their challenges to be addressed quickly. BUSA had launched an online platform to give more information and access to SMEs, and urged  The platform would also help to create networks between small businesses and big businesses. He urged government institutions and all other entities to work together closely in order to help in the development of SMMEs in South Africa.

The National African Federation Chamber of Commerce (NAFCOC) said that DFIs should not be trying to make a profit from SMEs because they were essentially working with taxpayers’ money, and instead urged them to take more risks, to increase their footprint in rural areas, and provide more funding. It was recommended that they should make use of the offices of Chiefs and partner with each other. NAFCOC also called for a review of regulatory laws, noting that some had actually hindered small businesses rather than protecting them, and urged that provincial and local bylaws also had to be reviewed.  NAFCOC also cited non-payment by government department on time as a major challenge to the small enterprises. It felt that more focus was needed on the youth and noted its initiatives to ensure that young people were exposed to administrative know-how of large businesses. It urged the creation of a black-owned bank, and was opposed to the grading system, which hindered many SMEs from getting contracts. Another sector needing assistance was the taxi industry. Finally, NAFCOC noted its concerns at large shopping malls opening in townships and killing local small business. It urged that existing entrepreneurs should be assisted so that they could become organised and begin to buy for themselves.

The Foundation for African Business and Consumer Services (FABCOS) noted that micro enterprises had fallen in number over the past three years although small and medium enterprises had grown. There was still an uneven spread, with about 80% found in
Gauteng, Western Cape and KwaZulu Natal. Most business enterprises were started by young people, and their problems, additional to those already described, included high interest rates, insufficient demand for services and high labour costs. FABCOS was concentrating on policy advocacy and trying to change government policies to promote better trading environments. It too recommended the need to review a number of pieces of legislation and policies.

Members questioned exactly how the entities would make funding available, asked what would happen to former clients of Khula, and commented that in most of the DFIs, the turnaround times were very slow. Other problems included the fact that most often, the SMEs were either not apprised properly on the criteria, were not informed why their applications had been turned down and were offered no assistance to improve their business plans or ensure that they could demonstrate viability. Members commented that many enterprises also complained that they simply received no response to their requests. The entities were asked to explain why so few applications succeeded, how the entities avoided fronting, and how sustainable the jobs created were. There were some doubts as to whether the challenges were being addressed, and whether communities were being assisted. Members expressed concerns that none of the entities was offering services in the deep rural areas, and pointed out that politicians were able to access those areas. They agreed that entities should attempt to share offices, to offer a better service to clients, and try to find premises that were easily accessible, like offices of the Chiefs or constituency offices. They also called for a shift in mindset of the banks, pointing out that if this did not happen, the businesses would not succeed and banks would have no clients, although the banks countered that they had to ensure that they did not kill themselves by taking undue risks. 

Meeting report

Access to funding by small and medium sized enterprises (SMEs)
Department of Trade and Industry (dti) briefing
Mr Lionel October, Director General, Department of Trade and Industry, noted that interventions by Development Finance Institutions (DFIs) had been informed by the critical need for low cost financing to be provided to Small and Medium Enterprises (SMEs) in South Africa. The efforts of the Department of Trade and Industry (dti or the Department) were geared towards lowering the risks for commercial banks to lend to SMEs, by offering security to the banks should they lend. There was a particular category of loans that was not presently offered by the private sector to SMEs, so that in the past, small loans to developing SMEs had to be encouraged through Khula Enterprise Finance, with government assistance.

Mr October said the relationship between big businesses and small businesses was not favorable. When big businesses grew they did not take small businesses along with them in the growth, simply because the large ones were getting most of their raw materials from outside the country.

He noted that SMEs posed a high risk of failure, especially in the early stages of their business, so this meant that the funding of SMEs also carried a higher risk. This  made the private sector sceptical and reluctant to make funding available to developing SMEs.

Mr October noted that government’s intention had been to address the market failure as opposed to taking the entire share of the funding market. Government’s direct lending market target comprised:-
- SMEs operating in low economic activity areas
- Start-ups and early expansion businesses
- Primarily bridging and working capital finance (where no tangible security could be offered)
- Primarily black owned and managed enterprises
- Priority was given to women-owned and women-managed enterprises

Mr October said that government envisaged itself as a facilitator of private sector financing to Small, Medium and Micro Enterprises (SMMEs), rather than the primary driver. It relied on the overriding assumption that the commercial banking sector and other financing institutions would be attracted to address the SMME financing needs if they were backed by government guarantees. A large section of micro and small businesses experienced great difficulty in securing finance from commercial banks due perceived risks and lack of collateral. In addition, enterprises operating in areas with low economic activity (such as rural areas) faced even more barriers in accessing finance than those in economically active areas.

Dti had, in 2007, in an attempt to address these challenges, proposed a direct lending model to address issues of accessibility and funding scale. This was to be done through the existing infrastructure of Khula.  Mr October noted that the principle of a direct lending model was intended not to close the lending opportunities from commercial lending, but was based on attempting to close the existing gap and addressing the market failure, particularly in the lower level of the enterprise market

Mr October said that there was need for a continuous provision of mitigation products to SMEs, a need to assess
the impact of direct lending, through the Small Enterprise Finance Agency (SEFA), and a need to investigate the involvement and growth of other lending alternatives, such as venture capital, and angel investments.  There was also a need to investigate the possibility of introducing a credit rating system to mitigate the lending risk, the possible introduction of information sharing platforms for the sector, and a need to find an alternative to the current credit listing.

He noted that the Draft Financial Sector Charter introduced two additional sector-specific elements. These were Empowerment Financing and Access to Financial Services, which were necessary for the overall transformation of South Africa’s economy. There was also an undertaking by the banks, in the Draft Charter, to offer a targeted investment of R48 billion towards transformation infrastructure, support for development of black farmers, support for Black SMME financing and access to affordable housing.

Mr October also highlighted the need for the private sector to have more footprint in the rural areas. The marginalisation of the rural areas by commercial banks and the private sector was negatively affecting development, especially in rural areas in South Africa, since the reluctance of banks to open branches there forced the people in those areas to travel far, into the towns, to do business.

The Chairperson noted that the SMMEs were the biggest contributors to this country’s development, and it was therefore important to hear suggestions as to how they could be assisted. He questioned the source of the problem in the development of SMMEs. He also noted that a lot of money was leaving the country. He thought that an amnesty on blacklisting of bad debt could help to improve and change the lives of many.

Small Enterprise Finance Agency (SEFA) role in Assisting Small, Micro and Medium Enterprises (SMMEs) to Access Finance
Mr Willie Fourie, Interim Chief Executive Officer, Small Enterprise Finance Agency, noted that the Agency (SEFA) was still in its infancy. He noted that SEFA came into existence through the
merger of Khula, the South African Micro Finance Apex Fund (SAMAF) and the Industrial Development Corporation (IDC). The small business funding portfolio was initially mentioned in the New Growth Path and later announced by the President in the State of the Nation Address in February 2011. The SEFA was officially established and launched in April 2012.

Mr Fourie said SEFA was responding to the challenge of access to finance for start-up and expansion by small businesses. SEFA would do this by providing and facilitating access to finance for sustainable small business, and ultimately would contribute to economic development and employment creation. SEFA services were targeted to Survivalist, Micro, Small and Medium Enterprises (SMMEs) in South Africa. The products and services offered by SEFA included business loans, funds and joint ventures (JVs) as well as non-financial support such as assistance with capacity building, post-loan support and institutional indemnities. SEFA also offered commercial debt-revolving loans, bridging finance, term loans, asset finance, and short-term trade finance

He noted that SEFA was
looking to partner with stronger financial intermediaries operating in sector specific or niche markets. SEFA sought intermediaries who shared its developmental objectives and would offer limited interest rates to end-beneficiaries. It intended to build a network of stronger intermediaries through targeted capacity building interventions aimed at creating sustainable SMMEs, as well as to leverage SEFA systems and processes to build the branch network.

Mr Fourie emphasised the fact that SEFA would provide finance directly to viable SMMEs that could not attract other private sector funding. It would also leverage infrastructure of existing and potential partners such as IDC, the Small Enterprise Development Agency (SEDA), Post Bank and provincial economic development institutions. SEFA would promote financial literacy amongst SMMEs through various partnerships, provide post loan support to funded SMMEs and
use a flexible approach to traditional credit scoring methods  of cash flow bases and viability of the business.

SEFA was located in all the nine provinces and would increase its footprint by opening branches in all the districts in the respective provinces where it was operating. In order to be efficient as well as effective, a “one stop shop” concept had been developed, where Branch Offices and/or Satellite Offices would be established on the premises of sister organisations, other DFIs, local government agencies or other local development agencies.

Up to March 2012, SEFA’s disbursements had been mainly concentrated in Gauteng followed by Western Cape and Eastern Cape.  

The Chairperson commented on the concentration of the SEFA disbursements on the three major provinces, noted that this was not a fair situation, and urged SEFA to consider disbursing funds more equitably. The issues of accessibility and costs to some of the rural areas should not be a problem.  He advised the private sector to take lessons from politicians, who found few problems getting to such areas, especially during election times.

Development Bank of Southern Africa: Role in Facilitating SMME Development
Ms Sinazo Sibisi, Group Executive: Strategy, Development Bank of Southern Africa, briefed the Committee on the role that this Development Bank (DBSA) was playing in facilitating SMME development.

DBSA was one of the DFIs in South Africa that was wholly owned by the Government. DBSA was part of the “family” of five DFIs, with the others being the Industrial Development Corporation (IDC), Land Bank, DBSA Infrastructure Development, Khula and National Housing Finance Corporation (NHFC). The Investment Banking Division’s focus was on originating infrastructure development projects within priority sectors, which were intended to expedite infrastructure delivery, as well as to support the economic growth required to stimulate employment and alleviate poverty.

Ms Sibisi noted that DBSA’s new business originated from a team of seasoned investment professionals, who would obtain leads from the private sector. It would also do upfront engagement with the public sector in order to assist with early stages of project development and financing. Although assistance to SMMEs was not a direct mandate of DBSA, it nonetheless facilitated SMME development through, amongst others, its Development Fund, Jobs Fund, Accelerated School Infrastructure Development Initiative (ASIDI) and the Rural Economic Development Initiative (REDI).

She gave a brief overview of some of the SMEs who had been assisted to date, naming Malamanana Bricks and Baphalaborwa, who were assisted with their registration as cooperatives, access to training and assistance with project management. Transido Business Centre Mthatha was assisted in carrying out negotiations with Eastern Cape Development Corporation for upgrade of the centre, and facilitation of funding of R33 million from Neighborhood Development Partnership Grant for re-development and project management support

She highlighted the key operational aspects of the Jobs Fund scoped and completed, which included the Application Capturing System, Eligibility Assessment Tools and Policies and Procedures documents. About 2 651 applications were received from the first call for proposals. The Enterprise Development window attracted the most applications, at 51%, followed by Work Seekers, Infrastructure and Institutional Capacity Building, at 23%, 17% and 9% respectively. She said that about 186 238 jobs would be created by the first round of approved projects.

The Accelerated Schools Infrastructure Delivery Initiative (ASIDI) aimed to:
- eliminate backlogs in schools infrastructure
- upgrade the standard of schools to meet the optimum functionality levels prescribed by Norms and Standards for Schools Infrastructure
- eradicate inadequate, unsafe and poor physical infrastructure by properly utilising allocated funds. She pointed out that there were 395 unsafe schools in Eastern Cape
- benefit over 12 300 learners from the first 49 schools under construction.

Ms Sibisi highlighted some of the DBSA’s achievements to date. This included the detailed planning and preparation of the initial 49 schools, which had been completed, the appointment of 16 construction companies in January 2012 for the building of the 49 schools in Mthatha, Libode and Lusikisiki districts, and ongoing construction of 49 schools sites. The programme was expected to have been completed by  31 August 2012. She added that at the end of the financial period, 27 SMMEs had benefited from the construction activities and over 796 temporal jobs had been created for the local communities.

The DBSA had learnt some lessons from the projects, which included the importance of taking a long term view and focusing on planning, when working with a large and diverse multi-stakeholder partnership approach. There should be a  balance between retaining and growing businesses, and commitment to championing external processes.

National Empowerment Fund’s Presentation
Mr Setlakalane Molepo, Division Executive: SME and Rural Development, National Empowerment Fund, apologised for the absence of Ms Philisiwe Buthelezi, the Chief Executive Officer of the National Empowerment Fund (NEF).

Mr K Sinclair (COPE, Northern Cape) said that greater respect should be shown to the NCOP, and felt that no accounting officer should be allowed to given an apology, but must attend.

The Chairperson also expressed his concern over the absence of the CEO, but however asked Mr Sinclair to accept the apology. The Committee would send a letter to express the Committee’s position.

Mr Molepo said that the mandate of the NEF was to promote and support black economic participation, through funding black-empowered businesses, assisting in business planning, offering mentorship support and early early-stage investments

The NEF sought to address the problems of lack of access to finance, lack of access to markets, lack of specific industry-knowledge and/or management experience, and limited or nil equity contribution. He pointed out that SMEs faced problems of low bargaining power with suppliers and customers, some had to compete with well-established businesses and that they were often undercapitalised and had a low asset base. SMEs were also characterised by lack of accurate and reliable information, and lack of business-planning skills, and lack of management depth. Many were small and multifunctional, and often lacked a broad range of business-management skills.

Mr Molepo said that NEF had funded SMMEs in varying amounts. It would offer R250 000 to R10 million for starting a new business, for start-up capital, expansion and equity acquisition. For rural and community development, or funds for agro-processing, tourism and beneficiation and manufacturing NEF had offered sums ranging from R1 million to R75 million.

He noted that each application had to meet certain funding criteria before it was approved. Some of the criteria included minimum percentage of black ownership or interest, black women empowerment, an black managerial and operational involvement. The NEF also took into consideration the commercial viability of the business, job creation, specific product criteria, geographic location of the business (with preference to those in rural, urban or disadvantaged areas), community involvement, compliance with all the relevant laws and regulations, return on investment and the possibility of co-funding with another public or private sector institution.

He said that NEF had approved over R3.7 billion for black businesses and more than R2.7 billion had been disbursed. Out of the total amount, R108 million was approved for seven rural community deals. He noted that over 21.5% of the NEF’s portfolio comprised women-owned businesses.

Mr Molepo highlighted the fact that apart from offering funding, NEF also assisted SMMEs with business planning and ongoing mentorship support, which he said was simple to use, free to the public, had a step by step question and answer process, and helped with financial projections.

Mr Molepo gave some statistics of SMEs globally and highlighted that about 30% of start-ups failed in the first two years and that less than 50% survived beyond four years.

He then outlined some of the projects that NEF had supported, naming the Sales Hire Company that specialised in the hire of builder’s equipment and other related tools and the My Store, a convenience store that aimed at empowering entrepreneurs, creating employment and developing skills of individuals from within the informal market of South Africa. A franchisor had developed a container store model and offered this as a business opportunity within the informal market, to meet the basic needs of the surrounding community.

Mr Molepo indicated that NEF was offering financial assistance to all blacks who had viable business ideas and a business plan that showed financial projections.

Discussion
Mr K Sinclair (COPE, Northern Cape) urged the various entities to note that the biggest problem in South Africa was poverty and unemployment. Access to finance was the major challenge, for ordinary citizens and entrepreneurs. He questioned the plans that the various organisations had in order to make the funds available to the marginalised groups. He asked what SEFA intended to do with former Khula clientele and how they would be involved in the new initiatives. He raised concerns over the productivity of the NEF staff, and said that there was a need for action to be taken, since the turnaround time was incredibly slow. He questioned the DBSA criteria for the approval of applications for the jobs funds. He said that more than 2000 applications were sent and only 26 were approved, whilst the reasons for the plans not meeting the criteria were not clear enough for the SMEs to realise what was lacking in their proposals. He commented that he also thought that the absence of the Chief Executive Officers of entities was a serious matter that had to be seriously considered.

Ms E van Lingen (DA, Eastern Cape), questioned the funding criteria of DBSA, and questioned how this entity would ensure that people could know what its objectives were, in order to be able to apply properly for funding. She also wondered how the banking sector was going to avoid fronting in the JVs. She wondered how sustainable were the jobs which DBSA had talked about, and asked for details on the number and the type of the jobs that would be created.

Ms M Dikgale (ANC, Limpopo) questioned DBSA's overwhelming response in some areas while in other areas it appeared to have delayed.

The Chairperson expressed his concern over the turnaround time in all the entities, and called for them to attend to matters more quickly. He added that the turnaround strategies seemed not to be working. He urged the various entities to target outcomes in each and every financial year. The Chairperson thought that the lending products looked good on paper, but he was not impressed with the criteria.

The Chairperson was also concerned about the report from NEF, saying that it did not specifically appear to have targeted the challenges. The My Store initiative had been referred to often, but he did not see its successes on the ground. Most of the franchises tended to benefit individuals, rather than communities. He urged NEF to increase its footprint in the rural areas. He referred to the example of Malawi which relocated its capital to Lilongwe from Blantyre, after independence. He reiterated that DFIs should not complain about lack of infrastructure and poor roads, but take a lesson from politicians who managed to get to all remote areas.  People in the rural areas still travelled a long distance to get financial services.

Mr Lawrence Mavundla, President, NAFCOC, questioned the DBSA’s building schools project, and said that the policies and structures, particularly the selective grading system, were in fact locking out black constructors. He requested that the policies needed to be reviewed. He also thought that the dti’s Local Development Officers were “useless”, and were merely providing directions to other places, not real help. He suggested that SEFA and DBSA could ask those people to become their representatives. He urged the financial institutions to cooperate, particularly in rural areas, to cut costs and be more conveniently located for entrepreneurs. He suggested that they try to make use of the offices of the Amakhosi in the rural areas, at no cost.

Mr Hanns Bohle, Chairperson of Small Business Development, Business Unity South Africa, urged the government institutions to cooperate with other financial institutions. He said that government was not willing to engage with the business systems around the country, although businesses were willing to engage with government.

The Chairperson questioned IDC on the success of the transport initiative that it had announced in 2008.
He also asked NEF to comment on the need for consultants who would close the gap between NEF and SMMEs.

Mr Molepo said that NEF allocated mentors to all the projects that it approved, because NEF had realised that pouring money in would not ensure that there was sustainability beyond the first set of funding. NEF had not just concentrated in one area in Limpopo, but it did have other programmes running in other areas. He said that the government of Limpopo was providing medication and feed free of charge to the broiler projects in that area.

Mr Molepo, NEF,  gave more detail on the NEF projects. He said that in Muleji, NEF had a project called “Milk for Life”, where one household had a cow or two, for milk, and a buyer would come to collect the milk from these small dairy farmers at specific points. NEF had R50 million set aside for Engen Franchises and had drawn R45 million of that; a number of Engen, BP and Sasol franchises were approved, including those owned by blacks. The My Store to which the Chairperson referred was being run initially as a pilot project. It had now been approved for roll it out to other provinces with the franchise. NEF would not fund any project before it saw that it was capacitated, and if there was need for mentorship, then NEF would provide that.

Ms Sibisi, DBSA, said that DBSA had set up social plans in communities and they would ensure that it provided security services and that communities were meaningfully involved in the businesses.

The Chairperson noted that, in respect of all these projects, there was not supposed to be a focus on blacks having shares alone, but black control of the projects, since shares without control amounted to nothing.

Mr Molepo said that when approving funding, it was vital for any entrepreneur who had been blacklisted for previous debt to disclose this, so that the person could be assisted. NEF would not turn down a business simply  on the basis that the owner was blacklisted, as long as there was enough to prove that in other respects the business was viable.

Mr Shakael Meer, Executive: Corporate Strategy, IDC, said that IDC had successfully launched a scheme that provided funding through one of the commercial banks. The implementation was mixed. IDC funded about 600 buses and trucks through the scheme. There were some challenges with implementation of the programme, and some small entrepreneurs were affected by the recession, although the majority were still viable.

Mr Willie Fourie, SEFA, said that SEFA would continue to do business with the old Khula clientele. On the issue of the turn around strategy, he said SEFA would try to simplify processes wherever possible, and would make use of technology to speed up things. SEFA tried to avoid fronting by spending time with the entrepreneur to find out about the viability of the business and the real beneficiaries, before funding was made available. He, like NEF, said that full disclosure was vital, when dealing with blacklisted entrepreneurs.

Ms Sibisi noted that the DBSA, in order to try to create sustainable jobs, would look for initiatives that could run for a long time, and would provide jobs also in the long term, before providing funding to any individual. She noted that she would need to consult with others in the DBSA before giving a full answer on applications that were turned down, and the criteria behind this, but promised to convey the concerns of the Committee back to the organisation.

Ms Sibisi then answered questioned on the school building programme, noting that there was a need to ensure that the right people, with the capacity at the right time, were given the opportunity and not just to look at enterprise development. DBSA looked at the contractor's capacity to deliver before giving out a contract.

Ms Sibisi responded to Mr Hanns Bohle's question on government's engagement, saying that there was a need to map a way forward and make things right so that all players could start working together. In relation to turnaround times, she said that DBSA was in a process of a major strategic organisational review, to ensure that it actually met its performance targets.

Mr Tshepo Ntsimane, Advisor to the Chief Executive Officer, DBSA, said that DBSA had a monitoring and evaluation system in place, with a team of monitoring and valuation experts who made sure that the entrepreneurs met the set criteria.

Mr Thakadu Makgene, Secretary General, FABCOS, commented that there was need to change the whole model and focus on enterprise development. He said that there was need to make sure that entrepreneurs were able to sustain themselves and to create partnerships as chambers, and assist SMEs. He also supported the idea of co-location of premises, so that entrepreneurs could access all the services they needed at one place, and this would enable the entities to share information and experience as well.

The Chairperson supported the idea of co-location. He pointed out that constituency offices could offer space, and it would be a good idea for the bodies, especially those with similar mandates, to co-locate in those offices.

Mr Sipho Zikode, Deputy Director General, dti, agreed that lack of financing was a major problem. He said dti was developing a regional development plan to capacitate the officials of government, making use of the available resources. Dti was also trying to address turnaround times, both in respect of financial support and non financial support.

Mr Sinclair said there was a need for banks to prioritise funding small businesses, as the SMEs were having problems in getting access to money.

The Chairperson said that many people were also complaining that they were simply not getting responses from the DFIs. He said that the reason why he had asked Members to bring the rejected applications from their constituencies was so that DFIs could appreciate  the magnitude of the matter and be able to see, more easily, the problems around turnaround times.

Mr Sam Ndzunga, Western Cape Provincial Secretary, FABCOS, urged the DFIs to take action and not just to make presentations.

Mr F Adams (ANC, Western Cape) noted that as soon as the DFIs got back to their offices they tended to forget what had been said, and carry on as usual, until invited again to appear before Parliament. He urged all the entities to be more serious and to take action. Members were representing various constituencies where the entities had made promises, and they should follow up on those and been seen doing the work in those constituencies.

The Chairperson said that the Members would visit the various organisations and see if there were improvements.

Mr F Adams (ANC, Western Cape) took the Chair in the second half of the meeting.

Banking Association South Africa (BASA) presentation
Mr Cas Coovadia, Managing Director, Banking Association South Africa, presented the concerns of the banking sector in financing the SMEs and the recommendations that this sector had made, in order to assist SMEs development. He said that commercial banks operated to provide lending facilities, but they were expected to make a profit as well. As a result, they could only provide the necessary lending to viable initiatives that were aimed at growth and expansion of the respective sectors. He described the role of banks in economic development as including the promotion of capital formation, investment in new and existing enterprises, balanced development of different regions, and influencing economic activity by increasing amounts of money in circulation, through credit creation and adjustments in interest rates

The banks were increasingly focusing on SME lending because they recognised that SMEs were the backbone of many successful developed and emerging economies like Japan, China, Germany and Korea. SMEs currently
contributed 34% of GDP and about 60% employment in South Africa came from the SMMEs sector.

Mr Coovadia explained the Banking Association (BASA) initiatives in the SME field. BASA had a cooperation agreement with KHULA, to address non-financial support issues. It also participated in a forum with  SEDA, SME Credit Bureau and Financial Literacy, that would include DFIs, to address the advocacy gap.

Mr Coovadia then returned to his point that whilst banks provided funding for economic development they also had to make a profit. This meant that they must fund viable businesses and must satisfy themselves of the SMEs’ ability to run a business, and capability to repay the loan. He also noted that the definition of SMEs impacted on how banks approach the entity. The definition varied from bank to bank, and this could be based on assets, number of employees, and / or annual turnover. Those SMEs with insufficient assets, low capitalisation or lack of collateral were more vulnerable to market conditions, and were considered as a high risk to funders.

Mr Coovadia said that the role of commercial banks in providing funding for small enterprises ranged from creation or participation in SME finance investment funds, to the creation of special units for financing SMEs within the banks. The services provided by commercial banks included offering short-term loans (compatible with business and income patterns), or repeated loans (where full repayment of one loan brought access to another). They also offered overdraft facilities, factoring and invoice discounting and equity finance

A survey conducted on hurdles to SME financing had identified a number of factors, which included the need for a review of the evaluation criteria for SMEs, lack of diversity by SMEs, the complex application process, and lack of quality business development
support, through grading and accreditation. Further details were outlined in the attached document.

BASA had proposed a number of interventions to address these, including reviewing of guarantee funds, the ability to call on collateral, reviewing the credit assessment tool or approach, developing SME specialists, designating an SME champion, reconstituting credit committees, minimising approval turn-around time, and providing mentoring and developing  “real” SME products.

BASA had also recommended the establishment of accreditation and grading of business development support (BDS). It was suggested that a panel of experts be created, and that and industry-wide BDS standards be created. There was a need for professionalising the sector, and developing a generic SME financial literacy course. This should include developing online, open-source and interactive learning, and training needs assessments. BASA had
identified inhibiting regulations and laws, and promoted “one-stop” reporting on SME statistics. BASA also lobbied to prevent regulation ‘overload’ and supported the creation of an SME Ministry or SME Champion.

Mr Coovadia also noted that the main issues that were affecting the growth of the SME sector, according to a survey, were crime and corruption, followed by fear of failure, whereas labour regulations were cited quite low in the equation, at only 5%. BASA recommended that government address structural constraints, improve outreach of credit guarantee mechanisms, promote greater engagement and lending by non-bank financial institutions or cooperatives. It also recommended that government establish debts and equity markets as sources of funding for SMEs, improve information access to SMEs and conduct studies and publish information on SMEs. Other recommendations were more fully addressed in the attached document.

Mr Coovadia stressed that banks remained cautious about lending to the sector as experience showed many SMEs failed in the early stages. He said that there was need to diversify funding. There was a lack of information about potential borrowers and concern about skill of potential entrepreneurs. However, the BASA had partnered with KHULA, public sector institutions and multilateral organisations, to address key concerns.

Risk Financing for SMEs: Business Partners Ltd presentation
Mr Christo Botes, Executive Director, Business Partners Ltd, briefed the Committee about his organisation’s initiatives in promoting SMME development. Business Partners was described as a risk financier for SMEs, which sought to enhancing their access to finance.

Mr Botes said that there were a number of solutions designed to meet the risk finance needs of SMEs. Some had more desirable and sustainable outcomes and impacts than others. There were currently about 1.5 million SMMEs in South Africa, of which about one million were micro businesses with less than five employees. The SMMEs contributed about 30% to 50% of South Africa’s Gross Domestic Product (GDP), while 60% of South Africa’s total labour force was employed by the SMME sector. He noted that 65% of all new jobs were created by SMMEs.

Mr Botes highlighted lack of collateral, lack of owner’s equity, high appraisal or due diligence costs and high investment, finance and technical assistance costs as some of the main challenges faced by SMMEs when accessing finance. Business Partners offered risk finance and capital, technical assistance, mentorship and consulting services. They also offered business premises exclusively for SMEs, available from 22 offices spread over all nine provinces in South Africa, as well as in other African countries. Business Partners had an investment range between R500 000 and R30 million for investors, in the sectors of manufacturing, retailing, services, franchises, contracts, property, tourism and marine. The types of investments included take-overs, MBOs, expansions of working capital or equipment, start-ups and real estate.

Business Partners funded SMMEs on the basis of business viability, which was assessed on their cash-flow, as well as entrepreneurship and availability of technical skills and management skills. Other criteria taken into account included integrity entrepreneurship, whether or not financial management systems were in place or were to be installed with the risk funding, and a fair return for the risk taken.

Business Partners had a track record of having financed more than 33 000 SMEs, to a value in excess of R12.5 billion, since 1981. It had also facilitated in excess of 540 000 jobs since 1981, and had grown its initial R178 million share capital to R3 billion of share equity in 2012. The current portfolio comprised of more than 2 800 SME investments and more than 1 750 tenants. The 2012/13 targets were pegged at providing more than R1 billion of risk finance or capital for SMEs, more than 40% to black entrepreneurs and more than 40% to women entrepreneurs.

Business Unity South Africa (BUSA) presentation
Mr Hanns Bohle, Chairperson of Small Business Development, Business Unity South Africa, presented to the Committee the initiatives of Business Unity South Africa (BUSA) in promoting and supporting SMME development in South Africa. Most of the initiatives had already been outlined by some of the earlier presenters. However, he wished to deal with major concerns affecting SMMEs.

Mr Bohle said that funding for SMMEs was supposed to be accessible and sustainable, but SMEs had many challenges accessing funding because of lack of collateral. He called for DFIs to consider relaxing their criteria for funding, so as to afford SMEs access to funding. Many DFIs were not taking time to explain to applicants why their applications were rejected, and why they did not meet the requirements or criteria for funding. In addition to giving a proper explanation, the DFIs should be helping SMEs to come up with proposals which would be acceptable.

He also noted that SMMEs were under represented in all aspects of the economy. This made it difficult for their challenges to be addressed quickly.

BUSA had launched an online platform to give more information and access to SMEs. The platform would also help to create networks between small businesses and big businesses. He urged government institutions and all other entities to work together closely in order to help in the development of SMMEs in South Africa.

National African Federation Chamber of Commerce (NAFCOC) presentation
Mr Lawrence Mavundla, President, National African Federation Chamber of Commerce (NAFCOC), agreed with Mr Bohle that the problem of poor representation of SMEs was one of the main issues affecting their development. He said that some of the SMEs were well trained, but that alone was not enough for their development. He too said that there was a need for them to get easier access to funding.

Mr Mavundla said that DFIs should not be concentrating on making a substantial profit from SMEs, because they were essentially working with taxpayers’ money. He thought they should be more risks and providing more funding to SMEs. He also urged the DFIs to increase their footprint in the rural areas, rather than concentrating on towns. He suggested that the DFIs could minimise their costs by making use of the offices of the Chiefs and partnering with each other, opening up suites of joint offices.

Mr Mavundla said that some of the regulatory laws needed to be reviewed. Some of these laws were intended to protect and promote SMEs, but that they had in fact not succeeded in their aims. The legislation, for instance, that was aimed at preventing abuse of micro-lenders had in fact suppressed and prevented small businesses from accessing finance.

Mr Mavundla also asked that government departments must ensure that they paid SMEs on time, since late payment of their invoices was one of the major problems that most SMEs were facing.

Mr Mavundla also recommended the review of some legislation at provincial level. The bylaws of some cities, in KwaZulu Natal and Western Cape, were effectively ending up in harassment of locals who were attempting to sell on the street, in taverns, or doing business in the township. He was also concerned for the future of small business owners like spaza shops or small vendors.

Mr Mavundla said that there was also need to focus on the youth specifically, not just entrepreneurs overall. Very little was being done to empower the youth. NAFCOC was working on a programme in which every Chief Executive Officer would be asked to make a meaningful contribution by ensuring that there was at least one youth in his office gaining administration experience in the running of large corporations. These youth did not have to attract huge salaries as the experience was more important. Many more skilled young people were needed, and the country could not afford to wait for them to emerge, but must actively nurture them, and also assist them in starting their own businesses.

Mr Mavundla believed that there was a need for establishment of a black owned Bank in South Africa. He said NAFCOC had already started doing that and was moving in the right direction, by setting up a funding mechanism that would be sustainable. NAFCOC itself was increasing its footprint in rural areas and would join with dti when establishing local business Chambers.

Mr Mavundla said that the grading system for contracting must be scrapped. SMEs must also be considered when awarding contracts, as long as they had the capacity to do the work.

Another problem was that the taxi industry should be given the passenger subsidy that was given to big transport operators by government, in order to help the taxi industry to grow and become a serious business sector. He expressed concern, and asked that government take action to prevent the influx of shopping centres in the townships, which were killing traditional businesses in the areas. More had to be done to actively protect these businesses. Existing entrepreneurs should be assisted so that they could become organised and begin to buy for themselves. NAFCOC, in the Free State, had supported a number of local traders and helped them to come together. 600 jobs were created and a turnover of about R40 million was being generated per month. He added that the solution to a country’s problem was not a one-man issue but was everyone’s business.

Foundation for African Business and Consumer Services (FABCOS) presentation
Mr Thakadu Makgene, Secretary General, Foundation for African Business and Consumer Services, briefed the Committee on some of the challenges that were faced by SMMEs and the model that this Foundation (FABCOS) had adopted to try and assist them. He pointed out that the
number of micro enterprises had dropped by 5.6% over the three years from 2004 to 2007, whilst small and medium enterprises grew significantly over the same period. Very small enterprises grew by 48% in number, small enterprises doubled in number, while medium enterprises grew three times over. He noted the uneven spread of SMMEs around the country, saying that about 80% of all SMMEs were to be found in Gauteng, Western Cape and KwaZulu Natal.

Mr Makgene said that in a survey conducted, it was noted that most business ventures were being started by young people (See document for details). Another study into factors limiting business performance, apart of shortage of capital, had isolated problems as high interest rates by lenders, insufficient demand of products or services, business demand and high labour costs.

FABCOS had decided to focus on access to finance for SMMES, access to business opportunities and markets, policy advocacy, business support services and skills development and training. FABCOS was also providing meaningful interventions in changing government policy to promote a better trading environment. Finally, he noted the need to review credit regulations, the Finance Charter, the Public Procurement models and Broad Based Black Economic Empowerment (BBBEE), to improve outreach and partnerships, and also rework the Lending Models

Discussion
Mr Sinclair urged BASA to consider addressing the problems affecting the people, and not to just focus on making profits. He said there was a need to address poverty and unemployment in South Africa. He said that whilst it was good to make a profit when doing business, he feared that South Africa was heading for the disasters apparently in North Africa. He urged all banks to try to address the problems and actively support SMEs. Banks should be coming up with different solutions, and he believed that partnerships provided the key. He also urged that the economy in the rural areas had to be grown.

Mr Gamede called for a shift in mindset, saying that it must be remembered that the money held in banks was the people’s money. He shared Mr Sinclair’s concerns that banks had to change and focus on entrepreneur development, even at the expense of losing some of their profit, although he recognised that making a profit was essential to their survival. Banks should, in particular, not merely turn down applications from SMEs if they did not show viability, but should assist them in drawing plans that would demonstrate their viability. He asked the banks to treat all people equally, regardless of status. He questioned the position of government and the banks in terms of the grading, and urged them to sit together to come up with a viable solution that did offer a variety of approaches. If the banks did not assist the SMEs, this would result in more poverty and unemployment, and in the next 20 years there would then be no banks.

Mr Gamede advised Business Partners to have more footprint in rural areas and townships. He questioned how BUSA and NAFCOC were sponsoring new large business ventures to open in townships, and pointed out that this could result in shutting other local businesses down. He asked how these entities engaged with traditional SMEs to ensure that they would not suffer when these big businesses opened.

Ms Dikgale asked BASA to explain the plans that it had in place to address the problems highlighted in its report. She also aired her sentiments on the need for entities to co-locate and to make use of the traditional tribal offices.

Mr Coovadia said that BASA acknowledged the need to develop the country through supporting SMMEs. However, he noted that unless banks exercised some degree of caution when doing so, they would have no business in twenty years time. He agreed that government and the banks should work together to solve the problems, and said that if government tried to impose unreasonable conditions on banks, then this would lead to the closure of the banking sector. Workable solutions were needed, and partnerships must be developed that were effective.

Mr Coovadia said that there was need to address the problem of footprints in a smart way. He said that instead of opening up new banks in the rural areas, it was possible for banks to partner with financial institutions in those areas. BASA had already made a lot of interventions to address most of the problems that had been outlined. He therefore advised government and the banks not to point fingers at each other but instead to come together and make plans on how to make things work.

Mr Isaac Lakhi, Representative, First National Bank, noted that his bank had 612 branches in the country, of which 189 were in the rural areas. He noted that opening new branches was not the only way to do business. First National Bank (FNB) had a lot of ATMs countrywide, and offered cell phone banking, through which transfers or payments could be done anywhere in the rural areas, as long as there was network reception. In response to the questions around the viability of business plans, he pointed out that many SMEs were attempting to enter already-saturated markets, where there was not enough competitive advantage. He advised SMEs to come up with more innovative technology. He also noted that consumer education was done by FNB.

Ms Dikgale said that people in some of the remote rural areas did not know anything about ATMs, and that in most rural areas there were no ATMs to be found.

The Chairperson urged Members to report any incorrect advertising by banks, as also their failure to deliver on what they were promising. He asked about the case brought against FNB by ABSA Bank, and asked if there was not room for more flexibility in approach.

Mr Lakhi said that he would be willing to visit the areas where there were allegedly problems with the ATMS of his bank. He would discuss the matter that the Chairperson had raised outside of the meeting.

Mr Christo Botes, Business Partners, also responded to the question of having more footprint in the rural areas, and said that Business Partners had networks in the rural parts, and did engage with existing and potential clients there. Business Partners had engaged with dti, DBSA and SEFA and many other organisations. Business Partners was intent on taking services to the people.

The meeting was adjourned.

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