Small Enterprise Finance Agency, Ithala Bank & Statistics SA on their focus areas, challenges, successes and role in the economy

Small Business Development

03 September 2014
Chairperson: Ms N Bhengu (ANC)
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Meeting Summary

Three financial agencies working closely with SMMEs and co-operatives made presentations to the Portfolio Committee about their focus areas, challenges and successes in order to provide  information to be relayed to the Department of Small Business Development in its efforts to gain an understanding of these structures and the role they played in the economy.

Statistics South Africa (Stats SA) presented results of a survey on employers and the self-employed who were in the informal sector. The results highlighted that non-VAT registered businesses in South Africa played an important role in job creation and income generation among various groups. The number of persons running non-VAT registered businesses declined from 2,3 million in 2001 to 1,1 million in 2009, and increased to 1,5 million in 2013. The main reason why people started businesses was due to unemployment.   Marketing was identified as the main challenge facing these businesses.

The IThala Development Finance Corporation (IDFC) informed the Committee that the organisation had been repositioned to align its core business activities with the Provincial Growth and Development Strategy, and to become financially sustainable and less reliant on government funding to drive its investment programmes. This was being done in three phases. Its financial and investment performance indicated a turnaround from a R76m loss during the financial year of 2012/13, to a R16m profit in 2013/14.  Non-performing loans had been reduced from 61% in 2012/13, to 20% in 2013/14.

The Small Enterprise Finance Agency (SEFA) said the organisation had three products portfolios.  These were a direct lending channel, a wholesale lending channel, and institutional support. Each portfolio had its own offerings. A total of R822m had been disbursed during the financial year of 2013/14, and 46 407 SMMEs had been funded. These included youth, women, black-owned and rural-based enterprises. For the past two years, SEFA had received an unqualified audit.

Members asked Stats SA how many foreign-owned businesses there were in the informal sector, and whether their research results were used by municipalities, provinces and entities working with co-operatives and SMMEs.  Concerning IThala, they asked how the organisation had managed to turn things around, how much funding it was receiving from the province annually.  They sought clarity on the meaning of terms like ‘approvals’ and ‘advances’.   About SEFA, they commented that its presentation was not up to standard, when compared to those of Stats SA and IThala.  They asked about its relationship with the National Youth Development Agency, and how it was making sure that money given to organisations was used properly.

The Committee also considered the adoption of minutes.  They were not adopted after Members asked for more time to review them, and suggested they should be adopted at a later date.

Meeting report

Outstanding Committee Minutes
The Chairperson tabled the minutes of the 20 August meeting, and asked for a proposer for their adoption.

Mr R Chance (DA) indicated it was the first time he was seeing the minutes. They had not been e-mailed to him in time. He asked for more time to review them, and suggested adoption be deferred to a later date because there was so much on the agenda.

The Chairperson maintained she had received hers the night before the meeting. She asked Members to make sure they had submitted the right e-mail addresses to the Committee Secretary in order to avoid embarrassment.  It was agreed the minutes would be adopted at the next meeting.

Stats SA Presentation
Mr Pali Lehohla, Statistician-General: Statistics South Africa (Stats SA), presented the results of a survey on employers and self-employed who were in the informal sector. The results highlighted that non-VAT registered businesses in South Africa played an important role in job creation and income generation among various groups.

The main reason people started businesses, was due to unemployment.  This was reported by 60,6% of persons who ran non-VAT registered businesses in 2001, and by 69,2% of persons in 2013. This was also compounded by the effects of the global recession.

Non-VAT businesses were predominantly run by black Africans, men, and the less well-educated. In every province, more than 50% of persons running non-VAT businesses had less than a matric education. In 2013, the proportion of the working-age population involved in small businesses was highest in Limpopo (6,3%), followed by Mpumalanga (6,1%) and KwaZulu-Natal (4,7%).

The number of persons running non-VAT registered businesses declined from 2.3 million in 2001, to 1.1 million in 2009 and increased to 1.5 million in 2013. Over 95% of owners had only one business.

Most businesses were traders – ranging from 1.6 million in 2001 (69,6%) to 821 000 (54,4%) in 2013. Women featured more prominently in agriculture.

The vast majority of people who started businesses used their own money to do so (over 70%). Among those who used their own money, wage employment was the main source of finance. The majority of those who borrowed money raised their loans from friends and relatives. However, in 2013 there was an increase in the proportion of those who were able to raise loans from commercial banks.

Assistance with marketing was the type of assistance most needed by business operators. The proportion needing this type of assistance rose from 27,4% in 2001, to 40,5% in 2013.  In addition, as many as 21,5% wanted an easing of Government regulations – up from 9,6% in 2001.

Turnover levels and profit margins were relatively small for most non-VAT business operators.

As many as 79,1% of persons running non-VAT businesses did not have a bank account. Over 90% had no credit facilities, no asset finance or mortgage loans for their business operations.  Members were shown graphs and tables to illustrate the breakdown of figures about gender and age, sector and provincial distribution.

IThala Presentation
Ms Yvonne Zwane, Group Chief Executive Officer: IThala, took the Committee through the repositioning strategy of her organization, the IDFC structure, and finances. The repositioning strategy had become the tool that was propelling the organisation forward and doing away with its past deficiencies of financial instability, weak support service which had resulted in the failure of co-operatives and SMMEs, and its inability to initiate its own economic development projects.

The implementation of the repositioning strategy was aimed at ensuring that IThala delivered effectively and efficiently on its mandate in a dynamic and challenging environment, and that it aligned its core business activities with the provincial growth and development strategy.  It had also looked at reclaiming its historical relevance and had positioned itself as the premier development agency in the province and, most importantly, that it became financially sustainable and less reliant on government funding to drive its investment programmes.

The repositioning strategy had three phases over a five-year time horizon. The first phase of 2012/13 focused on remedying loss-making business activities, enhancing human capital, addressing the internal capabilities and capacity needed to build a sustainable business model, and instilling a culture of governance and professionalism.

The second phase of 2013/14 sought to build on the revised business platform. It aimed at expanding existing business operations, enhancing property and business finance credentials, extracting cross-business unit synergies, and deepening business capacity.

The third phase of 2014/15 – 2021/22 would extend the focus of IThala and widen its set of values. This phase would lead large scale developmental projects and identify and target business growth activities. Also, it was envisioned to become the banker of choice for the provincial government and would further expand existing operations and initiate ‘greenfield’ business activities.

Structurally, the organisation had three business units:

- Business Finance
It provided financial and non-financial support to SMMEs and co-operatives. It provided micro-finance, agri-finance, asset finance, structured project finance, and commercial property finance. In terms of financial and investment performance, this unit had made a turnaround from a R76m loss during the 2012/13 period, to a R16m profit in 2013/14.  The book size was about R900m, and non-performing loans had been reduced from 61% in 2012/13, to 20% in 2013/14.

- Properties
This unit provided physical infrastructure to retail, light industrial, heavy industrial and SMME business.  It made a profit of R126m during the financial year of 2013/14. This portfolio was valued at approximately R1.8 billion and yielded around 5% on average per annum.

- IThala Limited

This was a ‘ring-fenced’ institution. It provided financial services to the retail market. During the 2013/14 financial year it had recorded a loss of R68m. The book size was standing at approximately R2.15 billion.

Pertaining to the impact the organisation was having on co-operatives and SMMEs, it had approved loans totaling R814.7m, and advances were standing at R431.5m.  Sectorally, agriculture and manufacturing remained the biggest beneficiaries.

The number of businesses financed was standing at 226.  The number of jobs facilitated was 4 412.
(Graphs and tables illustrating the number of businesses funded, gender and age of beneficiaries, districts and sectors were shown)

SEFA Presentation
Mr Thakhani Makhuvha, Chief Executive Officer: Small Enterprise Finance Agency (SEFA), informed the Committee that SEFA was a two-year-old organisation born out of the merger of two organisations. In its dealings, SEFA was guided by laws such as the Industrial Development Corporations Act, the Companies Act, the Public Finance Management Act (PFMA), the National Credit Act, the Short Term Insurance Act, the Co-operatives Amendment Act and the Financial Intelligence Act.

SEFA had three portfolios of products:

- Direct Lending Channel.  These were business loans that were issued to enterprising co-operatives and were priced as per a direct lending pricing model. Mentorship services were provided to co-operatives which received business loans.  It offered such services as working capital facilities, asset finance, term loans, revolving loans, bridging loans and short-term trade finance.  Loans ranged from R50 to R5m.

- Wholesale Lending Channel.   These were loans offered through financial savings co-operatives to on-lend to members. It offered the following financial products: business loans, micro-finance, credit guarantee schemes and the Land Reform Empowerment Fund. Funding ranged from R500 to R5m.

- Institutional Support.   These were services offered to finance savings co-operatives as grants, to subsidise costs and acquire assets. Services included technical support, institutional strengthening and rental property (commercial and industrial).

A sum of R822m had enabled SEFA to offer loans to 46 407 SMMEs and co-operatives; 10 291 youth enterprises had received loans to the value of R157m; 36 729 rural based enterprises had received a total funding of R429m; 43 643 black-owned enterprises had been funded to the value of R599m; and 44 302 women-owned enterprises had received R362m in funding support.

SEFA had forged partnership with the following organisations:

- Tourism Enterprise Partner.  This was aimed at boosting and sustaining SMMEs in the tourism sector;
- SEFA/Tongaat Hulett Sugar Facility.  This provided funding to small scale farmers of sugar-cane in KwaZulu-Natal;
- SEFA/BAW (Beijing Auto Works) facility.  This was meant for funding the taxi business
- Land Reform Empowerment facility.   This gives support to land reform beneficiaries.

Micro finance intermediaries of SEFA are in eight provinces, with the exception of the Northern Cape. Retail finance intermediaries operated only in the Western Cape, Gauteng and Free State.  SMME loans ranged from R500 to R50 000.  SEFA also boasted of having nine specialised funds which were mainly in Gauteng, with one in KwaZulu-Natal.

(Graphs and tables were shown to illustrate black businesses funded per channel; funding for rural areas per province; wome- owned initiatives funded per channel; and youth businesses funded per channel)


Stats SA Presentation
Mr Chance wanted to know how the survey had been conducted, and what the number of foreign-owned businesses was.

Mr Lehohla indicated that data was collected through household surveys. Persons who were running businesses in 2001 and 2005 had been identified, and then a follow-up had been done on those identified. Those who ran non-VAT businesses had been asked detailed questions about their business operations.

No analysis has been done on foreign-owned businesses, but research indicated the majority of the businesses were foreign owned, while 8% were owned by locals.   He added that National Treasury had asked Stats SA to also look at the VAT-registered businesses.

Mr X Mabasa (ANC) enquired if the 70% figure of unemployment was catered for in the non-VAT businesses, and wanted to know the extent to which municipalities, provinces, co-operatives and SMMEs utilised the statistics available from Stats SA.

Mr Lehohla explained the 70% figure was in the informal sector. The main issue there was unemployment, hence people decided to run their own businesses.  According to the survey results, they indicated they would like to stay in the informal sector because of income, though they did have aspirations to move up. The lifestyle of those who had moved up had been observed, and it would need to be streamlined longitudinally.

Concerning the use of statistics, he said interaction across state entities was presenting an important picture of what needed to be done. One thing to look at was through regional signs. Stats SA needed more of this interaction, but it had to be cross-cutting so as to help the state to plan policy objectives thoroughly. He gave the example of Human Settlements, saying it needed to articulate densification. It was an expensive exercise, because it involved water, bricks, mortar and electricity. That was why the interaction needed to be cross-cutting.

IThala Presentation
Mr Chance wanted to find out what IThala had done to stop its financial bleeding, and asked how long the loans were, and the interest rate charged.

Ms Zwane said they had had to build capacity and technical skills within the organisation. This meant recruiting skilled people to analyse the transactions. They had had to make sure the filters were working and that money was used on viable projects.   They now had project managers who visited sites to ensure work was happening.  As a result, IThala had received a clean audit for the 2013/14 financial-year, but with an emphasis of matter.

On the issue of loans, she indicated most of the loans were short term – less than a yea r-- but there were those which had a five-year tenure.  The maximum per transaction was R50m.  With regard to interest charged, she said there were two funds. The first one was capitalised by the provincial government. For co-operatives, it was 2% to 5% on a fixed rate, not escalating.  For SMMEs, it was a 5% to 7% fixed rate, not escalating.  

Mr T Mulaudzi (EFF) asked how much IThala was receiving from the provincial government, and if it was possible for the organisation to spread its capacity to other provinces.

Ms Zwane said the organisation was receiving an annual grant of R150m from the province. They had been invited by the Eastern Cape for an information sharing session regarding the cooperatives, but a date had not yet been confirmed.

Mr S Bekwa (ANC) asked if IThala still provided funding for the Sisonke District.

Ms Zwane confirmed that it did.

Mr T Ramokhoase (ANC) wanted clarification on the terms ‘advances’ and ‘approvals’. He asked if ‘advances’ meant people had reduced their loans, or something else.

Ms Zwane explained that ‘approvals’ referred to when applications for loans were received and were approved according to the terms and conditions set by the Credit Committee. ‘Advances’ referred to when the money was actually taken out and used.

She said the Committee needed to be educated about the co-operative model.  They already had stokvels, but the only difference was that they took the money out at the end of the year and use it, instead of investing it for entrepreneurial purposes.  IThala did not have a good knowledge of co-operatives in the past.  Many people had come for money, taken it, and disappeared without paying it back.

SEFA Presentation
Mr Chance commented that the figures presented in the presentation focused on activities, rather than on output and input. SEFA needed a split business strategy, where one element would focus on high business growth and the other on support activities.  He asked what the relationship was between SEFA and the National Youth Development Agency (NYDA) was, because the latter received loans and was a feeder to the former.

Mr Makhuvha replied that there was collaboration between the two entities. They used information which they received from the NYDA.  Each and every application received was still assessed by the credit team of SEFA.

Ms N November (ANC) enquired if SEFA had monitors or mechanisms in place to ensure that money given to businesses was properly used. She also asked if they had a programme for the disabled.

Mr Makhuvha said they had a post-investment unit which visited their clients to see how they were performing and executing the projects funded.   They had put in place a mentor to ensure that some SMMEs and co-operatives were incubated.

He said a programme for the disabled still remained a challenge, but they were currently looking to link up with organizations for the disabled in order to target this sector.

Mr Mabasa wanted to know if SEFA had a database of SMMEs and co-operatives so that when road shows were done, the Committee could have figures of people who attended and could do follow-ups.

Mr Makhuvha indicated they had a database.  Recently they had visited Kimberly to target the youth, and a follow-up was being carried out to see if they understood what SEFA was all about and the services on offer.

Mr Ramokhoase commented that the presentation of SEFA contained a lot pictures, but few details. It helped the Committee in no way.  It said nothing about what the Committee wanted to know about the organisation. It had parts missing, and raised concern about money given to SEFA.

Mr Makhuvha objected, saying the presentation had been tailor-made to suit the invitation from the Committee. It had addressed all the things the Committee wanted to know.

The Chairperson intervened, saying the main point was the quality of the presentation. There was no uniformity between the screen presentation and the hard copy. The hard copy had many empty sheets. She said that the information SEFA had shared with the Joint Committee had not been included in the presentation, and the quality of the presentation was not up to standard.  She told SEFA to send the Committee a revised presentation.

The Chairperson also commented that IThala and SEFA had no marketing plans in their menu, although Stats SA had indicated that marketing was the major challenge facing the SMMEs and co-operatives.  She concluded that IThala and SEFA were allocating fewer funds to co-operatives, though they needed more money than SMMEs.  The government had budgeted a lot for infrastructure development and she saw no reason why co-operatives could not come together and buy raw materials -- in that way, they would be able to compete with the big companies.

The meeting was adjourned.


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