Small Enterprise Finance Agency on its 2014 Strategic Plan

Economic Development

29 July 2014
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Portfolio Committees on Economic Development and Small Business Development met jointly, to hear a briefing by the Small Enterprise Finance Agency (SEFA) on its Strategic and Corporate Plan for 2014 to 2018. The Chairperson, in her opening remarks, stressed the importance of SEFA in funding and developing the Small, Medium and Micro Enterprises (SMMEs) which had proven so effective in driving the economy in other countries, and wanted SEFA to state specifically what it had learnt from benchmarking with other countries. She also pointed out that the Portfolio Committee on Economic Development in the Fourth Parliament had made various observations and recommendations to SEFA, which should be addressed. SEFA did give some statistics on the contribution of SMMEs to job creation and the number of SMMEs in Brazil, but was later criticised for not having specifically addressed the issues raised by the Chairperson, who asked that more details must be provided later.

SEFA was a development finance institution, established in 2012, with the mandate to provide access to finance to SMMEs. It was a wholly owned subsidiary of the Industrial Development Corporation (IDC). Whilst it operated in the same markets as IDC, SEFA concentrated on providing funding between R500 and R5 million, by way of direct lending, wholesale financing via retail financial intermediaries, wholesale micro finance loans via micro finance institutions, and support and lending to co-operatives, and support to financial services co-operatives. It aimed to increase and expand the demand for goods and services produced by small businesses, give more effective support, ensure active participation of SMMEs in the industrial development programmes, reduce regulatory burdens for SMMEs and co-ops, re-establish the Marketing Boards and Export Villages, and particularly focus on development of youth and women-owned enterprises. It operated through regional, branch, cooperative, intermediary and partnership and specialist fund offices. Other organisations offered non-financial support. SEFA would lend to citizens and permanent residents of South Africa, and legally registered entities, including sole traders with a fixed physical address, and the criteria and requirements were described. It differed from other financial agencies, in that it provided a moratorium of up to twelve months on repayment, took on riskier loans that showed a high developmental impact, would address start-up financing, and could fund those with adverse credit records. Its lending decisions took into account the long term sustainability potential rather than security. The targets in the previous and current years, for approvals, disbursements, number of businesses funded and jobs to be created were described, as also a breakdown into more specific targets for youth, women, the disabled, black women owners, and small loans under R250 000.

Some Members were quite critical of the presentation, although others appreciated the information provided. The Chairperson enquired whether, and how, SEFA’s present model differed from the past, and made the point that the continued use of retail finance intermediaries did not demonstrate enough commitment to address the previous Committee’s concerns, particularly since that Committee had asked for specific reports on failed intermediaries. One Member asserted that they actually suppressed the emergence and growth of SMMEs in the country. Members asked if certain sectors – including the IT sector – would be covered. They questioned why disbursements represented 60% of funds approved, and asked for more explanation on job creation, since the numbers on business support and jobs did not correlate. SEFA was asked to produce explicit data to the Committee on the strategic background of the loans, the number of loans given, the amount loaned and the impact of those loans, and suggested that tracking was needed over a number of years subsequent to loans, to ascertain sustainability. They questioned why women had not been included in the delegation and why there were so few on the board. Other questions related to whether SEFA had expressly considered the models being used by successful, often foreign-owned businesses, as opposed to those granted loans whose businesses failed, why so many businesses remained in the same hands despite the changes in the country, and the likely impact of the minimum wage on SMMEs. The SEFA was encouraged to attend workshops of the Portfolio Committee on Small Business Development, and would be asked to present a review of the corporate plan, the review on the intermediaries and the industrial strategy approach to the Committees, sitting jointly, in another three months time.   

Meeting report

Chairperson’s opening remarks
The Chairperson commended Members on their effort put into the past two weeks “marathon of events” at Parliament.

She noted that the Small Enterprise Finance Agency (SEFA) would be presenting its plans for the coming year, and the five-year term, and said that it would also be giving feedback on issues raised by the Fourth Parliament. The Portfolio Committee on Economic Development believed that Small, Medium and Micro Enterprises (SMMEs) could assist in addressing some of the country’s economic challenges. Members would be familiar with the New Growth Plan (NGP). She briefly described how the Portfolio Committee on Economic Development in the Fourth Parliament had contributed immensely to the consolidation of the multi-faceted three funding entities that had formerly existed for the SMME sector, into the new SEFA.  The aim of the consolidation was to improve access to resources, and efficiency. The Legacy Report of the Fourth Parliament had set out observations and recommendations made to SEFA. A few initiatives of the Committee in the Fourth Parliament, such as road shows, were mentioned, during which the Committee had direct engagements with SMMEs and cooperatives, and had heard their concerns particularly about access to SEFA for those in rural communities, which had led to the Committee requesting that SEFA review its approach on intermediaries, and encourage more direct lending. SEFA should report back to this Committee. She also added that other countries that had SMME models were also used as a benchmark, particularly Brazil, from whom several lessons were learned, but she requested that SEFA highlight the salient lessons, and how they could best be translated into the South Africa context.

The Chairperson noted that SEFA and the Small Enterprise Development Agency (SEDA) had signed a Memorandum of Understanding (MoU) and wanted to know future plans for this. She also asked for an indication of the Khula Direct pilot programme.

Small Enterprise Finance Agency
Mr Thakhani Makhuvha, Chief Executive Officer, Small Enterprise Finance Agency, noted that the presentation would cover the activities of SEFA in the 2012/13 financial year and the SEFA Corporate Plan between 2014 – 2018. He would try to address the issues raised by the Chairperson in her opening remarks.

Mr Makhuvha noted that he had visited Brazil for a weeklong study, to benchmark what that country was doing on financing of SMMEs. During this study tour, organised by the Association of African Development Finance Institutions (AADFI), he had visited several organisations, including the Brazilian Development Bank (BNDES). SMMEs contributed significantly to job creation, as seen by the fact that 70% of registered jobs in Brazil were made up from SMMEs, and 99% of enterprises in Brazil were small and medium. Brazil was obviously far ahead in providing access to finance and supporting small businesses. A notable initiative of the BNDES was that small businesses in Brazil could use their BNDES card at some wholesale stores, to purchase goods and services using the BNDES card without having to pay upfront, as BNDES would act as a guarantor for them.

Mr Makhuvha gave a brief description of SEFA. It was a development finance institution (DFI) that was established in 2012 with a mandate to provide access to finance to SMMEs. It was a wholly owned subsidiary of the Industrial Development Corporation (IDC). It provided funding ranging from R500 to R5 million through:
- direct lending (R50 000 – R5 million)
- wholesale SMME financing (R50 000 – R3m) via retail financial intermediaries (RFIs)
- wholesale micro finance loans via micro finance institutions (MFIs), ranging from R500 - R50 000

SEFA also offered dedicated targeted support and lending to co-operative enterprises, and support to Financial Services Co-operatives.

The main focus areas of SEFA were summarised as :
- to increase and expand the demand for goods and services produced by small businesses
- to continue to enhance efficiencies on support measures provided to SMMEs and co-operatives
- to ensure active participation of SMMEs in the industrial development programmes
- to reduce the regulatory burden facing SMMEs and Cooperatives (Co-ops)
- to re-establish the Marketing Boards and Export Villages to facilitate linkages (both domestic and international) between suppliers and consumers
- to assist with sector prioritisation, and promotion of SMMEs’ and Co-ops’ growth and development
- to upscale and fast-track the development of youth and women-owned enterprises.

Internally, SEFA aimed to improve its value proposition as the primary provider of financial support to SMMEs, in collaboration with other national agencies with small business activities, such as the IDC, National Empowerment Fund (NEF), Land Bank and the Development Bank of South Africa (DBSA). This would help to address market failure. It also aimed to increase the uptake of its products and services to improve access to finance for small businesses.

Mr Makhuvha highlighted the governance structure, the Board members and the management structure. He explained the Group Assets and Liabilities, the Consolidated Entities, the Consolidated Investment Subsidiaries, and listed entities that were Associates or in Joint Ventures with SEFA (see attached presentation for details).

In 2014, SEFA’s total assets amounted to R2.227 billion, compared to R2.179 billion in the previous year. In 2012/13, it had made approvals worth R439.6 million, its disbursements were R198 m, the number of jobs created was 19 853 and the number of SMMEs financed was 28 362.

Mr Makhuvha again emphasised that SEFA’s target market was survivalist, micro, small and medium businesses, as defined in Schedule 1 of the National Small Business Act of 1996. It focused on businesses offering services (including retailing, wholesaling and tourism), manufacturing (including agro-processing); agriculture (specifically land reform beneficiaries and micro-farming activities); construction (small construction contractors) and mining (specifically small miners). Survivalist and micro-enterprises were given loans of between R500 and R50 000. Small enterprises qualified for loans between R50 000 and R1 million. Medium enterprises were given loans between R1 million and R5 million.

There were nine SEFA Regional Offices, three SEFA Branch Offices, ten Cooperative Offices, 16 Micro-Finance Intermediaries, six RFIs, three Partnerships and eight Specialised Funds in the country. The spread by province was set out (see presentation).

The types of financial support offered by SEFA were business loans/on-lending funds, institutional strengthening to financial co-operatives and mentoring to co-operatives funded through direct lending. Non-financial support was not directly offered by SEFA, but by some other organisations, such as the

Companies and Intellectual Property Commission (CIPC), which was responsible for registration of co-operatives; the Co-operative Bank Development Agency (CBDA), which was responsible for regulating and supervising financial co-operatives including co-operatives banks, and the Small Enterprise Development Agency (SEDA) which was responsible for business support and training of co-operatives.

Direct lending consisted of business loans up to R5 million, to all types of co-operatives except financial co-operatives. Wholesale lending took the form of on-lending loans to financial co-operatives (FC), subject to a 15% cap on external credit, but the FC may apply for exemption from the CBDA supervisor. A R500 000 capacity-grant was provided to start-up financial co-operatives to acquire systems, equipment, software and training. Stipends or salaries, office furniture and rentals were not covered under the scheme.

SEFA was involved with South African citizens and permanent residents who owned enterprises or legally registered entities, including sole traders with a fixed physical address, applicants with the required contractual capacity and businesses operating within RSA. The enterprise, to qualify for funding, must be compliant with generally accepted corporate governance practices appropriate to the client’s legal status. It must also have a written proposal or business plan that met the requirements of SEFA’s loan application criteria, must demonstrate the character and ability to repay the loan, must provide personal and/or credit references (if available). The majority shareholder must be owner or manager of the business. Where available, the client must provide relevant securities or collateral and businesses must have a valid tax clearance certificate.

Mr Makhuvha explained that SEFA differed from other financial agencies in the following respects:
- it provided a capital and / or interest moratorium of up to 12 months to repay.
- it had a high appetite for risk, provided there was potential for high development impact
- it financed start up businesses and SMMEs that were high risk
- it addressed the financing gap for loans below R500 000
- it provided pre and post loan business support
- it would provide funding to entrepreneurs with adverse credit records, provided they could demonstrate active remedy of their indebtedness
- its lending was not solely based on security backing, but on long term sustainability potential
- it had a specific focus on youth owned businesses.

Mr Makhuvha tabled slides (see attached presentation) setting out the documents required when applying for a SEFA loan, the pricing methodology and model, SEFA’s distribution channels and its risk management strategies.

Mr Makhuvha said that the specific 2014/15 Strategic Focus would be to increase access and provision of finance to SMMEs through a national footprint, and continue to contribute to job creation. It set out how it would achieve its direct lending through partnerships, expand access to Micro Enterprise finance, establish stronger partnerships with RFIs in SMME wholesale finance, and increase utilisation of the guarantee indemnity scheme by commercial banks. It wished to improve and maintain its own turnaround times for approvals. In the 2014/15 year, it aimed to approve R974 million of loans, make disbursements of R800 million, finance 37 758 SMMEs and create 57 225 jobs. It also aimed to split its disbursements so that Youth owned businesses received 30%, Rural provinces received 45%, Women received 45%, People with disabilities received 2%, Black-owned businesses accounted for 70% and facilities less than R250 000 accounted for 40%.

Mr Makhuvha indicated that corporate targets and disbursements were also contained on another slide. Finally, he noted that the income statement, financial projections and the targets for developmental impact were also noted.

The Chairperson asked why there were no women in the SEFA delegation.

Mr Makhuvha apologised for not including a female member in the delegation. SEFA did have women executives, but they were not available. There were three women on the Board of Directors. He would pass this observation to the IDC. He also promised that more capable women would be brought into the helm of affairs at SEFA.

The Chairperson wanted to know how SEFA’s model would differ from the previous model.

Mr P Atkinson (DA) appreciated the quality of the presentation. He wanted to know whether SEFA was purely a loan advancing institution, or whether it was also involved in equity investment. He had observed that the final slide on financial projections referred to “equity investments and bad debt provision”.

Mr Atkinson noted that the IT sector was not mentioned as included in the target sectors. He pointed out that one of the most successful funds in the world was the Singapore Fund, which gave finance to the IT sector, and pointed out that this was a sector where little start-up capital would normally be required.  

Mr S Tleane (ANC) appreciated the work being carried out by SEFA, and its important objective to create wealth and eliminate poverty and inequality in the country. He observed that the huge gap between the approvals and disbursements in the previous reports had been lessened, and asked how this was done.

Mr Tleane noted that the government had said that co-ops provided the opportunity to attend to a number of priorities at the same time, and suggested that more involvement of co-ops could produce better results. SEFA earlier stated that it was more interested in giving out smaller loans to more people, than in giving out larger loans to less people. However, he thought that this posed its own challenge in getting returns from small amounts. Larger amounts would likely yield greater results.

Mr Tleane asked if SEFA could make any provision for mining; if so, then the largest amount that it currently offered, of R5 million, would not suffice.

Rev K Meshoe (ACDP) inquired about the interest rates for loans, and whether there was any cap. He also wanted to know the repayment period for the beneficiaries.

Rev Meshoe questioned why disbursements were 60% lower than the amounts approved on slide 10.

Rev Meshoe suggested that SEFA should realise that nonperforming loans and bad debts from beneficiaries may not necessarily impact negatively on SEFA, or mean that it was not effectively carrying out its monitoring duties.

Mr R Chance (DA) appreciated the illuminating presentation. He observed that the average loan given out in year 2011/12 was around R2 400 while the average loan for 2012/13 was R7 000, and this was projected to rise to R21 000 at the end of the period. He asked what prompted the increase. He asked SEFA also to give explicit data to the Committee that spelt out the strategic background of the loans, the number of loans given, the amount loaned and the impact of those loans – the latter was particularly important as the presentation had not illustrated what impact the loans had made.

Mr Chance asked what SEFA had done to track the performances of beneficiaries in the reporting period, and whether it tracked not only in year one but also in the subsequent years, as this would display whether businesses funded were sustainable.

Mr Chance was worried about slide 26, which projected the financing of 80 431 SMMEs and 118 566 jobs for 2018/19. This suggested that for every SMME financed, half a job would be created, which seemed to suggest that SEFA was acting as a “social grant institution”. If SEFA was indeed developing business, there should be a multiplier effect with greater impact on job creation.

Mr X Mabasa (ANC) asked what the percentage of benefits actually reached the beneficiaries, and what percentage was consumed by the intermediaries. He also needed to know the percentage of benefits or resources reaching people with disabilities or their organisations. Finally, he enquired how many municipalities had been reached by SEFA, and how many were still unreached.

Mr M Mbatha (EFF) probed SEFA on the real cost of borrowing. He observed that funding for SEFA emanated in the first instance from National Treasury, was then transferred to Department of Economic Development, then passed to IDC, who finally passed it to SEFA. This was too protracted, and he believed it would have implications for the transaction between SEFA and the beneficiary, and hinder the loan repayment structure. He questioned if there was not an easier method, pointing out that this initiative aimed to help the poor, yet often the poor were treated as if they were the problem, with little understanding of their conditions. He wondered if, instead of giving loans, the giving of grants might have positively impact on the presently harsh repayment structure imposed on the beneficiaries.

Ms N Bhengu (ANC), Chairperson of the Portfolio Committee on Small Businesses Development, reiterated the Chairperson’s concerns that there were no women in the delegation, and only three on the Board of Directors.

Ms Bhengu asked whether SEFA honestly sought to address poverty issues and eliminate unemployment in the country, saying that if this really was the aim, she would expect to see a different funding model. She asked how the model created a value chain that would make SMMEs and cooperatives grow. She asked if the SEFA footprint was based on market needs or intermediaries, or was the result of an attempt to eradicate poverty areas.

The Chairperson was worried about the SEFA investments, and said that the presentation did not answer the concerns raised by the previous Committee. For instance, the Khayelitsha women tailors, who had received loans at 44% interest, had not been addressed. She expressed the view that the RFIs would actually continue to suppress the emergence and growth of SMMEs. The Committee had previously requested that SEFA review the position of the intermediaries, but instead of a review, SEFA appeared to have increased them. This went contrary to its aim to grow SMMEs. This was one of the reasons that she had asked that SEFA must tell the Committee what real lessons it had learned from its collaboration with Brazil on SMMEs.

The Chairperson asked how many jobs were created in the target sectors. She wanted some examples of businesses that have been funded and how they were performing. She asked SEFA also to explain what had been done about the ineffective RFIs that were earlier cited to SEFA – one in KwaZulu Natal, four in the Western Cape and one in Gauteng. These issues must be sorted out.

Mr Makhuvha gave an overall answer that covered questions raised. He noted that SEFA gave loan financing by direct lending, except where the joint ventures were involved, in which case equity financing may be introduced. SEFA provided funding in all sectors, and it had already identified IT as a potential, particularly since SEFA intended to finance more young people. The risks of funding cooperatives were more highly mitigated than when funding Micro finance businesses. He conceded that many activities had not taken place on cooperatives to date, but said that SEFA had later initiated a robust engagement with role players in this sector, so as to drive this specific goal. Collaboration with the Association of Cooperatives had been intensified, to better review cooperatives’ activities. In regard to the mining sector, organisations in joint ventures with SEFA could assist in reaching a higher amount than R5 million. However, he said that SEFA was careful not to compete in the IDC space, as IDC was strongly involved in the mining sector. SEFA generally referred high capacity funding to IDC.

Mr Makhuvha confirmed that there was ongoing collaboration with SEDA. SEDA looked for ways to assist clients with non-financial support, whereas SEFA aimed to give clients funding. He had recently been nominated to serve on the SEDA Board, and he would be able to drive the agenda of SEFA there.

Mr Makhuvha answered questions on the finance provided, and said that SEFA was not always offering cheaper rates than the banks. It was, on average, pricing at prime +3, and prime +5 on direct lending. The cap would not be more than prime +7. Pricing must be appropriately assessed to ensure the sustainability of SEFA. He reminded the Committee that most beneficiaries being funded by SEFA had already had their applications to banks rejected. The loans were repayable over five years, but there was a moratorium of 12 months.

Mr Makhuvha said that mentoring by SEFA was effective, after it had intensified its post-investment monitoring. The South African Institute of Chartered Accountants (SAICA) also assisted in monitoring the clients.

He noted that SEFA provided loans both directly to the SMMEs, and through the intermediaries to the end users. SEFA reported to the IDC and the Department of Economic Development, quarterly. He hoped to present a better report at the end of the financial year.

Ms Bhengu emphatically reiterated that the funding model of SEFA did not in any way speak to the three crucial issues facing the country - poverty, unemployment and inequality. A model that involved intermediaries did not seek to achieve those goals, particularly when considering that the intermediaries added their interest rates on the loans given to the beneficiaries, demonstrating no desire to improve SMMEs and cooperatives in the country.

Ms S Nkomo (IFP) proposed that the figures of the women assisted should be produced. In addition, closer consideration was needed of the number of women in the country, relative to the services that they received.

Mr M Lekota (COPE) queried why most businesses in South Africa were still owned by the original business owners, or represented offshoots of the bigger enterprises from the white areas, long after the demise of apartheid. He wondered if SEFA had investigated what Somalian business-owners were doing to ensure that their businesses thrived, and why those being assisted with loans were not thriving. He also asked if SEFA had investigated the impact of the minimum wage on start-up SMMEs, and what interventions were needed by government. He said that the capitalist mechanism needed more investigation.

Mr Tleane emphasised that the core business of the Government was economic transformation, and radical transfer of wealth and power from the minority to the majority. He asked if the IDC and SEFA were operating as separate entities, and how IDC and SEFA were planning to create jobs and wealth for South Africans. SEFA must be more concerned about recreating the country, not merely lending money to people and taking action against them if they did not repay.

The Chairperson said it seemed SEFA was averse to taking risks, rather than spending funds to produce and sustain development. SEFA could not afford to maintain the status quo. The Committee expected SEFA to acknowledge where it had difficulties and to confirm whether it would be answering the concerns raised. She insisted that the issue of intermediaries should be looked into.

Ms Bhengu wanted to know if and when SEFA would be reporting to the Portfolio Committee on Small Business Development, pointing out that strategic planning workshops were being proposed to help configure the SMMEs. The input, plans and reviews of SEFA would be needed to be filtered through these processes.

The Chairperson answered that this point was not yet settled. SEFA would continue, as a subsidiary of IDC, to be overseen by the Portfolio Committee on Economic Development, but this did not prevent SEFA staff from attending the workshops being organised by the Portfolio Committee on Small Business Development.

The Chairperson noted, in answer to questions on board membership, that t was the prerogative of the Minister to appoint the Board members, and the number of women on the Board was not SEFA’s decision.

Mr Makhuvha appreciated the observations and concerns raised by the Members. He promised that the concerns raised would be revisited and reviewed. SEFA would later be asking for Members’ assistance on the cooperatives. SEFA would review its approach on cooperatives, including the funding approach. He added that the grant received from the government was a shareholder loan used to cushion the pricing to the beneficiaries, to train staff and collaborate with the IDC on initiatives such as road shows and awareness. The sectors considered by SEFA were virtually the same as those considered by the IDC, with the main difference being that the IDC operated on a larger scale. Cognisance had been taken on priority areas, and SEFA would be working on that. He confirmed that SEFA would be looking in more depth at the models used by Somali and Pakistani owners, particularly on bulk-buying. Finally, he noted that awareness of SEFA had to be boosted, as it was obvious that many people were still uninformed about SEFA and what it stood for. It did carry out roadshows in the rural areas, and it had an online website to accept applications from people in the metropolitan areas.

The Chairperson proposed that SEFA present the Reviewed Corporate Plan, the Reviewed Intermediary Strategy and Industrial Strategy Approach to the Committees, sitting jointly. She asked when they would be available.

Mr Makhuvha said that that the reports would be ready in three months time.  

The meeting was adjourned.


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