Small Enterprise Finance Agency on its 2012/13 Annual Report

Meeting report

Briefing by the Small Enterprise Finance Agency (SEFA) on its 2012/2013 Annual Report

The Small Enterprise Finance Agency (SEFA) briefed the Committee on its 2012/2013 Annual Report. The briefing was done by Mr Thakani Makhuvha, SEFA Chief Executive Officer and Ms Leonie Van Lelyveld, SEFA Chief Risk Officer and Acting Chief Financial Officer.

Product Portfolio Performance

SEFA’s target market in providing finance was micro-enterprises which covered loans from R500 to R50 000, small enterprises with loans from R50 000 to R1m and medium enterprises with loans from R1 miliion to R5 million. The Khula Direct Pilot Project which preceded the SEFA business model was presented to the Committee. SEFA’s loan product mix covered direct lending, wholesale financing, capacity building and putting delivery channels in place. The entire spectrum covered loans from as little as R500 to R5 million.  SEFA’s support to co-operative enterprises was both financial which could be loans or grants as well as non-financial which involved mentoring businesses and providing business support.

Ms Van Lelyveld gave a breakdown of approvals and disbursements of loans per province. In the Gauteng Province, the total approvals amounted to R207.3 million whereas actual disbursements made in the province only amounted to R51.6 million. The proportions were relatively better for the Eastern Cape. Total approvals amounted to R9.3 million and total disbursements amounted to R6.5 million.

Performance against Targets and Developmental Impact

Ms Van Lelyveld provided the Committee with figures on the developmental impact of SEFA’s Loan Product Portfolio. A total of 28 362 Small Medium Enterprises (SMEs) were financed and a total of 19 853 jobs had been created. Impact indicators were measured in terms of actual amounts against targeted amounts. The target for disbursement to youth owned facilities was set at 30% but the actual figure achieved was 16.5%. The target set for disbursement to black-owned businesses was set at 70%. This target was surpassed with the actual percentage acheived being 78.1%. The Committee was also provided with comparative figures measuring SEFA’s performance against it predecessors like Khula Finance in terms of loan products.

Outreach and Stakeholder Participation

SEFA had embarked on road-shows covering all nine provinces. Enquiries could be made online via SEFA’s website as well as through its call centre. Building the SEFA brand and stakeholder awareness remained an on-going priority. SEFA had also entered into strategic partnerships with the National Youth Development Agency (NYDA), Industrial Development Corporation (IDC), Small Enterprise Development Agency (SEDA) and the South African Institute of Chartered Accountants (SAICA) as well as with provincial development corporations via Memorandums of Understanding.

Real life examples of SEFA’s success stories were displayed to the Committee.

In terms of human capital management within the agency, black representation constituted 92% of SEFA staff and female representation was at 69%.

Financial Performance

Ms Van Lelsyveld presented a breakdown of SEFA’s financial performance. She stated that SEFA had achieved an unqualified audit report from auditors KPMG. SEFA’s income was mainly derived from property rentals, dividends and interest earned on loans. Amongst its expenses were premises rentals, personnel, and equipment and investment property expenses.

Mr Makhuvha concluded by remarking that in mapping the way forward, SEFA had plans to improve organisational efficiencies like turnaround times and its balance sheet. It also planned to strengthen its human capital management, improve investment in target programme initiatives, enhance co-operatives and invest in strategic partnerships. 

Discussion

Ms E van Lingen (DA, Eastern Cape) noted that it was difficult for Members to comment on the briefing documents when the Committee only received the documents the very morning of the meeting. She referred to the provincial analysis figures presented to the Committee on approvals and disbursements and expressed concern about the variance between the approvals and disbursements for each province. For example, Gauteng Province had approvals amounting to R207.3 million whereas disbursements actually made only amounted to R51.6 million. The same could be said for the Northern Cape Province. Approvals amounted to R7.4 million but disbursements only amounted to R700 000. What was the reason for the variance and what were the implications? She referred to the development impact indicators of SEFA relating to disbursements to youth owned businesses and stated that the target had been set at 30% but the actual figure achieved was only 16.5%. On outreach and stakeholder participation, she asked how much funding had been provided by provincial and municipal development agencies. She also asked how SEFA intended to improve turnaround times and to address the issue of youth finance not being bankable.

She further made reference to strategic partnerships which SEFA had with organisations like the NYDA and asked how much SEFA had invested in these partnerships. She said if the figures were not readily available, she would appreciate if a written response to the questions could be forwarded to her.

Mr Makhuvha apologised for the presentation and documents being handed out to Members just a few moments to the meeting. He said SEFA had received short notice about having to brief the Committee.

He said the approvals should be mirrored by disbursements. The reality was that often disbursements lagged behind approvals. One of the major impediments of disbursements was the meeting of standard conditions. Another impediment was the delays in the standardisation of legal agreements.

He conceded that targeting the youth was always a challenge. The issue was often about the readiness and quality of business plans submitted. Having said this, SEFA had designed many initiatives aimed at the youth.

There was collaboration with the NYDA. SEFA did not provide funding to provincial development corporations. SEFA received assistance from them but the funding was provided by SEFA. The intention was for SEFA to go down to municipal levels as well. More information on the collaboration of SEFA with the NYDA and the Eastern Cape Development Corporation (ECDC) could be forwarded to the Committee.

Ms B Abrahams (DA, Gauteng) asked about the mentorship which SEFA provided to small businesses and for how long it was done. She was glad that attention was being given to youth and women but asked what was being done about disabled persons. SEFA had provided the Committee with examples of some of its success stories. One of such success stories was of a fresh produce seller. What was the secret to its success given that fresh produce was highly perishable?

She asked whether SEFA also provided financial and business training. It was common for small businesses not to receive training after they had been financed. She further asked what the overall qualifying criterion for SEFA was in order to access grant financing.

Mr Makhuvha, referring to mentorship, agreed that it was important to assist small businesses. He pointed out that there was a Memorandum of Understanding (MOU) with SAICA to assist small businesses which had received SEFA funding. There was also engagement with the small businesses at the pre-investment stage. Collaboration with the SEDA was also being intensified. SEDA provided grants to incubators.

He said in going forward, SEFA intended to set a target of 2% for disbursements to persons with disabilities.

With regards to the success of the fresh produce seller, he noted that at the outset the business had acquired equipment which ensured that the produce remained fresh.

He elaborated on the qualifying criteria for SEFA loans. Applicants had to be a South African citizen and be able to repay the loan. The business should be able to be sustainable over a long period of time. A sole proprietorship was the preferred business type for SEFA. He emphasised that SEFA did not only provide funding on the premise of having to provide security. SEFA took equipment as security where it funded a plant and equipment. In other words SEFA remained the owner of the plant and equipment until the loan was paid up. Another criterion was that the business had to demonstrate cash flows in the future. SEFA also provided businesses with a cushion period for repayments and each case was decided on its own merits. For example, if the loan was provided on the 4 February 2014, repayments would only be required to be made from the 5 February 2015. Adverse credit records did not disqualify a person from obtaining a SEFA loan. It was also advisable for the business to provide a business plan of some sort to SEFA. Even with all the criteria, SEFA still did a due diligence.

SEFA had a partnership with SAICA to assist with training and business support. Collaboration with SEDA was in the pipeline to assist youth in applying for funding.

Ms V Keketsi (ANC, North West) pointed out that persons in urban areas could apply for SEFA financing online but what about persons in rural areas. She said SEFA was falling short on meeting its target in relation to youth. What was SEFA’s plan to address the issue?

During the presentation of one of the success stories, mention was made of a personal home which had been renovated from SEFA funding. Was this appropriate?

If SEFA had nine regional offices, where was the regional office in the North West Province? If a farmer wished to apply for a personal loan from SEFA, she asked what the interest rate would be in the short and long term.

Mr Makhuvha responded that renovations to personal homes were possible where it was necessary because business was being conducted from such premises.

He said a business loan could be given to a small scale farmer. The interest rate charged on loans differed as it depended on the risk involved. Interest rates however had to be reasonable.

He said that SEFA had a website where applications for loans could be made online. For those who did not have access to internet there was also the normal manual procedure to apply for a loan at SEFA branches in the provinces.

SEFA’s branch office in the North West Province was in Rustenberg. In Gauteng the office was in Tswane, in Limpopo Province it was in Polokwane, in the Northern Cape it was in Kimberley, in the Free State it was in Mangaung, in the Western Cape it was in Cape Town, in the Eastern Cape it was in East London and Port Elizabeth, in Kwazulu-Natal it was in Durban and in Mpumalanga it was in Nelspruit.

Mr B Mnguni (ANC, Free State) asked that if SEFA gave loans to small businesses, how was it expected that these small businesses needed to provide collateral security. He asked how many businesses had made loans in the amount of R5m and how successful were these businesses. Did SEFA only provide loans to businesses that were able to provide business plans?

Mr K Sinclair (COPE, Northern Cape) referred to page 98 of the SEFA Annual Report which covered loans and advances. He noted that a differentiation was made between a group and a company in the Annual Report. He asked for clarity. He asked what SEFA classified as impairments and how they intended to resolve them. Still referring to the Annual Report, he pointed out that there was substantial investment in en-commandite partnerships. What was it all about?

Ms Van Lelyveld replied that specific indicators for impairments were being developed by SEFA. If there was impairment then at that point the collection process did not stop. Legal action would be taken to recoup monies lent.

An en-commandite partnership was a vehicle used to fund.

The Chairperson commented that the feedback he was getting from youngsters was that it was depressing to approach financing places like SEFA. He asked what the plan was to make SEFA more attractive to people out there.

Mr Sinclair said that there seemed to be a problem with approvals and disbursements. If the mandate of SEFA was to assist small businesses there would be serious problems if persons had to wait for monies to be released.  In the Northern Cape, the disbursement figure was less than 10% even if loans had been approved. He pointed out that the same provinces, that is, Gauteng, Western Cape and Kwazulu-Natal still got the lion’s share of allocations. He spoke about impairments and stated that impairments seemed to be a risk to what SEFA wished to achieve. The Committee needed a report on the en-commandite partnership as the loan amounts seemed huge.  

Mr Makhuvha replied that the point was taken on approvals and disbursements. It was however process driven. SEFA was mindful of the problems associated with approvals and disbursements but was continuously up-scaling its employees.

He was aware that efforts were concentrated in the metros but as SEFA grew it would cut across all provinces. There were a number of challenges which needed to be addressed.

SEFA would provide the Committee with details on the en-commandite partnership.

Ms Van Lelyveld agreed that the biggest risk was when you lent money and could not get it back. In 2013 SEFA had established a post investment mentoring function and a collection function. There was also a function to assist businesses who struggled to turn around their businesses.

Ms van Lingen referred to one of SEFA’s success stories, a co-operative by the name Flash which had received grant funding and had over 9000 members. The vendor apparently sold electricity as well as vegetables. She asked whether the board members of Flash made money off it.  She also asked whether the R2m received was a capacity building grant and referred to page 114 of the Annual Report and asked for an explanation.

She stated that SEFA received a great deal of income from property investments. She asked for details about the properties. What was the maintenance costs attached to the properties?

Mr Makhuvha replied that SEFA had inherited a portfolio of properties dating back 20 years. Many of the properties had been owned by the then Small Business Development Corporation (SBDC). The properties were scattered all over South Africa. They were thus legacy properties. Some of them were doing well as rental income earners whereas others were not. Some of the properties needed to be sold as they were not viable to keep. Others needed to be refurbished.

He said co-operatives had various activities. They also had their own governance. They had to support their members.

Ms Keketsi spoke about the assets of SEFA and noted that there was investment in joint ventures. She asked why the value of unlisted shares was at zero. She asked whether Non-Governmental Organisations (NGOs) could also apply for funding from SEFA.

Mr Makhuvha replied that some of the intermediaries were NGOs. However the bulk of SEFA’s operations were with profit organisations.

The Chairperson said that he hoped that SEFA would be able to find a mechanism to assist people who did not have previous business experience.

The meeting was adjourned.