KHULA and South African Micro-Finance Apex Fund (SAMAF) on their 2011/12 Annual Reports

Meeting report

The Chairperson advised the meeting that he was standing in for Ms EM Coleman (ANC), who was attending a summit in China.

Khula Presentation
Mr Saul Levin, Chief Director: Small Enterprise Finance Agency (Sefa), introduced part of the delegation. He said the Economic Development Department (EDD) had merged Khula and the South African Micro-Finance Apex Fund (SAMAF) to create the Small Enterprise Finance Agency (Sefa). The performance of Khula and Samaf had been adequate, and that of Samaf had improved. They were hopeful that Sefa’s performance would be better.

Mr Thakani Makhauha (CEO, Sefa) introduced his team.

Mr Willie Fouriee (former Acting CEO, Sefa) said that 2011/12 had been a difficult year for Khula due to a lot of changes and uncertainty around the merger. The performance had not been bad under the circumstances.

Khula’s mission was to provide finance, mentorship services and small business premises to small and medium enterprises (SMEs) through a network of partnerships, to encourage the sustainable development of SMEs while ensuring that Khula remained financially viable. Its vision was to be the development finance partner of first choice in the field of SME development. Their products and services included business loans, credit indemnities, joint ventures with the private and public sector to finance SMEs, direct lending, mentorship programmes, and properties that were located mostly in disadvantaged areas and provided operating spaces for small entrepreneurs at discounted rates.

Their financing partners included Shoprite, which financed OK stores in Western Cape. Their Joint Venture and Funds portfolio included the Anglo American-Khula Mining Fund of R200m, of which Khula contributed 50%, to support junior mining projects. This and the Khula Akwandze Fund, to aid small-scale sugar cane growers and contractors with an off-take agreement with TSB Sugar, were their most successful funds.

Khula’s highlights included the launch of the Khula Direct Pilot. They had also managed to increase their collection rate by 34% during the period under review.  They were very pleased with the level of commitment and high quality outputs from work streams in preparation for the merger.  Khula had also received an unqualified audit report.

Levels of loan approvals had been lower than targeted, in part due to stricter lending criteria by commercial banks and a poor economic climate.  Loans to Retail Financial Intermediaries (RFI’s) had decreased by 22%, funds by 8% and credit indemnity by 35%.  In the entity’s property portfolios, industrial parks had been earmarked for retention for upgrading, in order to stimulate and grow entrepreneurs in these areas. The returns would include employment creation.  Factors that had affected their performance included the negative impact of the economic crisis on SMEs, reduced lending through Khula’s intermediaries, and a low interest environment affecting revenue streams.

Financial Performance
Mr Andile Ramavhunga (CFO, Sefa) stated that Khula’s revenue had decreased by 8.9%, as the lower volume of disbursements had had an adverse impact on the loan-related fees and interest earned. Total assets, however, had increased by 4% due to an increase in the value of investment properties. Operating expenditure had been well contained in response to constrained income-generating activities.  Uncommitted cash of R403.7m had resulted in an increase in investment income.  Efforts to increase loans and investment had been unsuccessful, due to low interest rates.

From 1 April 2012, Samaf and Khula had been merged to form Sefa, which had become a wholly-owned subsidiary of the Industrial Development Corporation (IDC).  Sefa incorporated small business activities previously housed in the IDC.   Former Khula and Samaf staff had been absorbed into the new Sefa structure in terms of the transfer agreement and matching and placing framework negotiated in the EDD bargaining chamber.

Discussion
Mr X Mabasa (ANC) congratulated the entity on receiving an unqualified audit report. He asked what aspects Sefa would take forward or discard, if it was to learn from the history of Khula.  He commented that Khula did not have a good reputation with the people at the grassroots who were its intended beneficiaries, and suggested this was an opportunity for Sefa to create acceptability for itself.  Referring to the Anglo-American and Khula mining fund, he asked whether there were other funds that had been formed along those lines.  How was this fund constituted, and what did it do?  To what extent was Khula capitalized at the launch?

Mr S Ngonyama (COPE) asked why targets for job creation were not cited in the presentation.  R400 million had been reported as being uncommitted – why was there such a large amount of money that had not gone where it was intended? On a macroeconomic level and in terms of rural and urban areas, where were the property portfolios located?  He asked for clarification on the term “carrying value,” and for more details on the business hub being established in Braamfontein.

Ms S van der Merwe (ANC) said she was very confused by the presentation in general because of the technical financial figures. She just wanted to know if the entity was providing funds to SMEs, and to what extent.  Some of the slides looked very impressive due to the large amounts of money being disbursed, but on a scale of one to ten, what was the progress of the entity?  What was their objective for the future, particularly in one year’s time?  She wanted further explanation on the intermediaries, and asked that the entity simplify its presentation in future.

Mr M Hlengwa (IFP) pointed out that only 104 SMEs had been financed , against a target of 980, and commented that this was a very big margin for unmet targets.   He expressed concern that the development of women did not seem to be getting the necessary attention. What approach was being used to promote funding for women?  How did the entity plan to transfer the experiences of Khula to Sefa, to ensure that targets were achievable? How would they measure those targets?  What challenges would prevent Sefa from reaching its targets?

The Chairperson was very critical of the entity. He remarked that Khula seemed to be proud of its collection of funds, yet its mandate was to get value for money in terms of helping the people to whom money was lent.  The delegation had spoken about reduced lending as if it were hampering them, yet they had a surplus. Why were they complaining about reduced lending while at the same time boasting that they had money in their reserves? They had been acting like they needed more money when this was not the case. What had they been planning to do with the additional money?  He asked them for a breakdown of lending in the rural provinces.  How did they link their regional offices with Khula directly, as opposed to linking through intermediaries?  The Auditor General (AG) had found that their strategic planning was not compatible with their targets. What had they done about this?

Samaf Presentation
Mr Loni Mamatela (former Acting CEO; Samaf) said that Samaf’s mandate was to create work opportunities and sustainable livelihoods through the facilitation and provision of affordable access to finance by micro and survivalist businesses. It was also required to act as a catalyst in the development of a micro-finance industry in South Africa.  A number of Samaf’s highlights for 2011/12 included disbursements of R58.3m made to financial institutions (FI’s) in respect of loans and grants. The number of borrowers had increased by 53%, from 40 726 to 62 549.   68% of loans by the FI to end users were in rural communities.  Instalment repayment by the FIs averaged 95%.   Samaf had received an unqualified audit report.  Capacity building had decreased by 32%, because they were reaping the fruits of investments from previous years, which had reduced spending during the current year. On-lending per province was highest in Limpopo, with R22m.  There had been no lending or capacity building in the Northern Cape or Free State.   Samaf had a net surplus of R57m in 2012.   Material losses worth R 3 693 745 had been incurred as a result of the write off of loans provided to FIs, and material impairments of R2 899 287 had been incurred on loans provided to FIs.

Discussion on Khula
Mr Hlengwa remarked that Khula seemed to have slowed down after learning they would be incorporated with Samaf.   He was very concerned about this.

Mr Fouriee stated that if he were to rate their performance on a scale of one to ten, he would give them a “one”, because a lot more still needed to be done.  Lessons they had learnt included the need to have direct lending. In addition, they realized that they could not service the entire country’s SMEs from nine regional offices. They needed to work with other organizations to spread the company’s footprint. They needed to influence interest rates that the intermediaries charged and create stronger management. A merger always had hiccups.  They were not where they wanted it to be in terms of direct lending and training of staff.

He responded that Khula had not slowed down.  They had not had enough capital during the first six months of the year under review. They had implemented strong initiatives towards risk lending to intermediaries. The reason for the under-performance was mainly that their team had spent more time working on the merger. All their beneficiaries had received mentorship.  Some intermediaries had also provided mentorship.

He assured Members that the development of women was a priority. There had been a lot of micro-finance lending to women, but bigger businesses had been a challenge.

They planned to decrease their dependence on intermediaries. On collections versus sustainability, he stated that their focus had to be on financing sustainable businesses.  The Sefa business plan supported offices in rural areas.

Mr Ramavhunga stated that “carrying value” was the cost, less depreciation.

Mr Ngonyama remarked that the specificity of the stated target was suspicious.

Mr Fouriee clarified that the figure was a calculated value.

The Chairperson asked why their job creation target was only 4 062 for the whole country, yet their department had the mandate to create employment.

Mr Ngonyama expressed his disappointment with Khula.  There had been no value for money in setting up Khula.  If they had created only 4 062 jobs at a time when South Africa was experiencing such high unemployment, then there had been no point in setting up the entity.   The entity’s responsibility was to ensure that they built infrastructure in rural areas. He was displeased at the lack of relevant details in the presentation and was concerned that if Members were called upon to answer pertinent questions in Parliament, they would not have enough information to provide answers.  How many people were involved in the mentorship program? Why were there no figures reported on the Johannesburg project?  Another problem was the fact that Khula focused on initiating programs in developed areas like Johannesburg, instead of in rural areas. What was the target on credit indemnities? He asked for details on the relationship between Shoprite, OK Bazaars and the entity.

Mr Fouriee replied that expansion of the portfolio was not part of their mandate, which was to maintain it. Participants in the Johannesburg program were still in training.  The pilot program was in Johannesburg, but it would be expanded if successful.

Mr Ramavhunga said that they had established a new programme to improve the setting of targets. They had also conducted workshops, and collaborated to come up with a simpler method of reporting.

Discussion on Samaf
Mr Ngonyama expressed concern that there were disproportional activities in the different provinces.  For instance, Free State did not have any commercial activity reported, compared to Limpopo, which reported 50% activity. This was cause for a thorough inspection.

Mr Mabasa asked whether Samaf ever visited communities at grassroots level to experience the poverty which existed?  He appealed to them to ensure that anything that was not of value, was not transferred to Sefa.

The Chairperson said more details on the intermediaries were needed.   What was the entity’s target market? The entity wanted to be independent of intermediaries, yet they lacked capacity to function without them.  One could not have a government that promoted intermediaries which charged poor people high interest rates.  What had the entity found out through self-assessment?  It was unfortunate that Sefa had not tabled its strategic plan.

Mr Mamatela said they were trying hard to make progress in the Northern Cape.  Additional staff could not be employed, owing to the merger. It was hard to defend why Samaf had a surplus, but asked Members to bear in mind that they had improved from previous years. They had experienced challenges with the model, in that they could not provide funding directly to individuals. They had to establish institutions by getting people from Financial Services Co-operatives (FSCs). These institutions had been mobilized from the ground in Limpopo. for instance. He defended intermediaries based on success stories, but stated that Sefa would focus on direct lending.  The question about interest rates had been asked the previous year and they had submitted a written response.  The interest rate that intermediaries were allowed to charge, was 60% per annum. This figure was not what commercial banks would charge, but lower than the National Credit Regulator maximum. He stated that Sefa would come up with a better model.

Mr Thakhani Makhuvha, CEO: Sefa, said Sefa would be a complete paradigm shift. On the issue of exploitation of end consumers, he stated that discussions had been held before Sefa was established, and a memorandum of understanding had been created that would not allow intermediaries to charge exorbitant interest rates.

Mr Mabasa said that Members were anxious because of past experience.  Despite all its improvements, Samaf  had not done poor people justice. The Committee wanted to help them succeed.  Funds needed to be made accessible to the people and the entity needed to endure that all repayments were made.

The Chairperson stated that if the entity’s target was to reach out to grassroots hawkers, why had they not found people to reach out to their target beneficiaries like the model in Brazil, which members had seen during their study tour? In Brazil, people would cycle to the grassroots venues to mentor the beneficiaries.

Mr Ngonyama explained to the delegation that Members were lamenting because they actually interacted with the people at the grassroots level on a daily basis, and listened to their complaints. He cited the success of the Grameen Bank model for credit lending that had been used in many countries, as an example to emulate.


Mr Levin cautioned members about using the Grameen model as a standard. This model was hardly one to emulate, as it charged interest rates of over 100%.  It would not help poor people. The way to help poor people get out of poverty was to promote entrepreneurship. They were aware that high interest rates were not helping the people on the ground, but at the same time, the government needed a model that helped the intermediaries to be sustainable. The government needed a subsidiary model through Sefa.

Mr Mamatela stated that he came from an impoverished background, so he related to the people at the grassroots level as well. He assured members that the Samaf team was passionate about achieving their goals. He personally drove to Lesotho to get local people from there to come to South Africa to implement their models in South Africa, due to their success rates.

Closing remarks
Ms Van der Merwe said that Members’ questions had been unfair because they were asking the entity about the future, yet the brief was about the present. However, these questions would be useful in future.  The growing and sustaining of small businesses had not been given adequate support. For example, these programmes might be enough for an older woman who was a vegetable seller, but the same would not apply to a young vegetable seller who aspired to grow his/her business into a supermarket, for example. There was a need to help people grow to the next level.  There was no need to hire new field workers to provide mentorship, as the society was already full of field workers. Existing field workers should be capacitated to function as mentors. She added that Sefa needed to create a website.

The meeting was adjourned.