Small Enterprise Finance Agency funding model and use of intermediaries briefing

Economic Development

24 February 2015
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Small Enterprise Finance Agency (SEFA) briefed the Committee on its funding model and the use of intermediaries in its operations. The Committee was reminded that SEFA grew from the merger of other financial institutions set up between 2005 and 2012, and was essentially intended to target survivalist and medium enterprises (SMEs) to whom it would offer finance by way of a loan backed with a credit guarantee facility, to enable the businesses to access other funding from the commercial banks. Its funding was provided at very competitive rates. In 2011, a survey conducted by National Credit Regulator revealed that 90.94% of registered SMEs did not receive funding from the formal financial sector, and 84.7% Survivalist and Micro Enterprises(SMEs) did not receive it from the informal sector, so there was clearly a wide financial gap. SEFA intended to create partnerships with various institutions that shared the same developmental mandate or agenda, and continued to work on innovative products. In each year, it would target reaching 45% women enterprises, 30% youth enterprises and 45% rural communities, and 2% for people with disabilities. The business focus areas were quite wide-ranging from technology through tourism to farming and agro-processing. It also managed funds on behalf of the Department of Rural Development and Land Reform, for purchase of land and tractors, and financed those in construction. It had regional offices in the provinces. It was working with intermediaries, trying to ensure that all were delivering on government's objectives whilst still being able to make reasonable profit. Comparative interest rates were set out. In the future, SEFA would look to expand its direct lending loan book by building strategic alliances with Chambers of Commerce, enhancing investment officers’ due diligence capacity, building capacity of regional offices and enabling decentralisation and building of a technology platform to extend direct lending loans, and would increase its support to cooperative financial institutions and building relationships with other community organisations. A significant challenge was the need to address legislation preventing lending above a certain figure.

The Committee asked SEFA questions about its annual disbursement of funds to people living with disability, how SEFA’s policy was compatible with government policy and if SEFA cooperated and collaborated with other financial institutions and how it approached them. The Committee also questioned the suitability of the Brazilian funding model in South African context and developmental plan and how this model would assist agriculture and agro-processing and reach far rural communities. It noted improvements from the last presentation but suggested that a more substantial workshop was needed. 

Meeting report

Chairperson's opening remarks
The Chairperson apologised that this meeting, originally scheduled for the previous week, had had to be postponed for reasons beyond the control of the Committee. Despite the postponement, the programme scheduled would be followed from here onwards. She noted that the Small Enterprise Finance Agency (SEFA) had been asked to brief the Committee on its funding model and the use of intermediaries.

Small Enterprise Finance Agency (SEFA): Funding model and the use of intermediaries
Dr Sizeka Magwentshu-Rensberg, Board Chairperson, SEFA, noted that this presentation would incorporate a lot of comments and suggestions from the previous meetings. She noted her firm belief that SEFA was doing much to benefit the target group for its operations, namely survivalist and the micro enterprises of South Africa. She outlined the presentation in several thematic areas, which were expanded upon by other members of the team also.

Financial gaps and the operation of SEFA
Mr Thakhani Makhuvha, Chief Executive Officer of SEFA, said that a survey conducted by National Credit Regulator (NCR) in 2011 revealed that 90.94% of registered Survivalist and Micro Enterprises(SMEs) in the formal financial institutions did not receive funds after successful application, and that 84.7% of the registered SMEs in the informal financial institutions also did not receive funds after a successful application. This created a wide financial gap. SEFA was specifically set up, as an agent of government, to close this gap. SEFA provided funds to its clients in the form of a loan and also provided an insurance package in terms of a credit guaranteed facility to assist SMEs to access funding from commercial banks , financial and non-financial  institutions. The purpose behind the credit guarantee was that should there be any challenge with regard to the loan, SEFA would indemnify the financial institution in question. SEFA intended to create partnerships with various institutions that shared the same developmental mandate or agenda so that they supported and provided funds to SMEs. SEFA continued to come up with strategies to develop a number of innovations to meet the SMEs' needs. SEFA as an institution focused also on ensuring that any financial gaps that had been identified were met. For instance, 45% of disbursement in every year would go to businesses that were owned and operated by women, 30% to youth and 45% to rural communities respectively. Sefa also set aside 2% of its annual disbursement to people living with disability to realise their business ideas.

Business focus areas
SEFA provided funding across a number of sectors based on its mandate. These included entrepreneurs participating in Information Technology and Communication (ITC), tourism and those operating franchises on a retail basis. SEFA also provided for SMEs' needs in the manufacturing in small scale, agro-processing and larger agriculture sectors. It also managed funds on behalf of the Department of Rural Development and Land Reform (DRDLR), to  assist the beneficiaries in terms of mechanisation and would provide funds to buy land and to buy equipment for onward lending to other farm activities.  SEFA also provided funds to SMEs working in the construction space, especially those drilling bore holes, constructing schools and clinics. Funding was also extended to those participating in the mining space, waste management, renewable and solar panels.

As part of its attempt to operate in a wider radius to reach the entire target group, SEFA had regional offices in all the provinces to address the needs of its clients directly, and provide credit guarantee schemes to some registered financial institutions. It also operated through some intermediaries including Joint Ventures, Retail Finance intermediaries and others.

Development stages of SEFA and its activities
Dr Sizeka Magwentshu-Rensberg continued the presentation, setting out the key policy decisions behind facilitating access to finance. SEFA went through a series of developmental stages from 1995, when the idea of having separate initiatives for small business were first conceived. There had been several institutions formed - Khula Enterprise Finance Ltd in 1996, South African Micro Apex Fund (SAMAF) in 2005, the concept of the National Growth Path (NGP) in 2010, and Khula Direct Pilot in 2011. Finally the institutions were merged to create the Small Enterprise Finance Agency (SEFA) in 2012 to better serve the financial needs of its target groups.

Lessons learned from past experiences
Dr Magwentshu-Rensberg disclosed that most financial institutions were charging a very high interest rate, making funds inaccessible to SMEs and thereby contributing directly to small business failures, and directly defeating the government's goal of making funds accessible through subsidy. Moreover, not all intermediaries were effective in delivering on the government's development objective in the provision of access to funds. This created a tension between the profit and sustainability objectives of intermediaries and the provision of affordable pricing of loans to end users. This meant that if there should be sustainable funds to SMEs, then there must be some profit making orientation to take care of administrative costs. She further stated that the role of intermediaries was very important since they were closer to the small business and therefore could be more effective in providing the support required. During the first year of SEFA, attention had been given to human resources and policy and system development.

Lending activities/ Loan pricing of SEFA
She continued that annually, SEFA disburses R50 000 to R5 million worth of funding, at an interest rate of 12.45%  to 17.55%, to its clients. Other institutions such as cooperative finance Institutions, micro finance institutions, retail finance Institutions and joint ventures, by comparison, were, respectively, lending at an annual interest rate of 35% to 90%, 52% to 102%, 14.5% to 30% and 10% to 13%.

SEFA's future strategic direction in facilitating access to finance for SMEs
For the future, SEFA would seek to expand its direct lending loan book by building strategic alliances with Chambers of Commerce, enhancing investment officers’ due diligence capacity, building capacity of regional offices and enabling decentralisation and building of a technology platform to extend direct lending loans. SEFA would also seek to enhance support to cooperative financial institutions, especially those located in rural and peri-urban institution. Special focus would be given to building relationships with other community organisations, through traditional authorities, churches, women’s groups and other groupings, to extend loans and business support. SEFA would also partner with large corporates on its enterprise development initiatives and supply chain, and would also use other strategies through its pilot initiatives.

SEFA's main challenge was the legislation that prevented some financial institution from lending above 15% of their capital and suggested that this requirement needed to be revisited.

Mr S Marais,(DA) asked why only 2% of the annual disbursement of SEFA was allocated to people living with disability. He argued that disability was not to be seen as "inability" and disabled people were equally productive as others who had no disabilities.

Mr Marais asked how the SEFA policy was similar to the government's policy and did SEFA cooperate and collaborate with other financial institutions? He asked how it would approach other Development Finance Institutions (DFIs).

Dr Magwentshu-Rensberg said the 2% allocation to the disabled was a figure that was reflective of the current experience, and reminded the Committee that SEFA was only three years old and still building. SEFA had plans to improving this allocation and extend larger coverage. She noted that SEFA's activities were informed by government policy, but it was also responsible for giving feed back to the government, based on its experience of how the policy was working in practice. With regard to the cooperation and collaboration with other DFIs, she confirmed that SEFA was a subsidiary of the larger DFIs in the country and so this cooperation and collaboration was almost automatic. The Industrial Development Corporation (IDC) had supported SEFA with its own people and resources and SEFA would continue to draw from other experiences as it developed its own policy.

Mr S Tlenane (ANC) commended SEFA for its funding model and the simplicity attached to its operations and offices during the committee visit to its office. He suggested, however, that SEFA needed to have overall regulatory mechanisms over those institutions that it supported, in terms of funding, to ensure that the desired goal and objectives were realised. He further agreed that the legislation that stipulated that some financial institutions should not lend more that 15% of their capital / funds did indeed need to be revisited.

The Chairperson commended the SEFA for the improvement that had been shown in this presentation. She expressed concern about the Brazilian model, which was developed for households and farmers for food security purposes and income generation. She wondered if it was correct for it to be adopted by SEFA, asking how suitable it was in a South African context, given the fewer numbers of farmers, and whether it in any way conflicted with the development plan of the country. She also noted the comment that SEFA was using supplier credit from Brazil, mentioned in relation to the fresh produce markets in South Africa, and asked where those 18 fresh produce markets in South Africa were. She also noted the statement that one of the government programmes was on agriculture and agro-processing. She asked how this model would assist in these areas and also reach far-flung rural communities.

Dr Magwentshu-Rensberg indicated that the adoption of the Brazilian funding model was based on the management’s experience in Brazil, and they firmly believed, after an assessment, that this model would fit well within the South African context. SEFA had an annual report in which success stories were outlined, which would answer most of the questions, and she confirmed that this would shortly be able to be made available to the Committee.

The Chairperson concluded that the two and half hours of this session was not sufficient, and so SEFA would be invited to a workshop to throw more light on the topics and give details on their packages and offerings, to enable the Committee to make comparison of what had been done already, and the possible tangible outputs.

The meeting was adjourned.

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