Small Enterprise Finance Agency (SEFA) on programme review and proposals

Small Business Development

09 March 2016
Chairperson: Ms N Bhengu (ANC) & Mr X Mabasa (ANC)
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Meeting Summary

Documents awaited: Small Enterprise Finance Agency (SEFA) on programme review and proposals [email]

The CEO reported on the survey conducted by sefa on its products' review. The information was gathered from 13 key informants, interviews with sefa Exco and board members, National Treasury, Seda and IDC (Industrial Development Corporation). More information was gathered from online surveys and telephonic interviews with 158 approved SMMEs, 4 approved cooperatives, 178 disapproved smmes, 3 disapproved cooperatives, 11 distribution channels and 1 commercial bank participating in KCG (Khula Credit Guarantee). One of the key objectives included to review the sefa products offering with respect to their effectiveness, efficiency and relevance, ensuring that they are aligned with the mandate of the DSBD; and recommend on how the products of sefa could be offered more effectively and efficiently and without duplicating products and services that are offered by other agencies under the DSBD.

Members asked about the core business of sefa, the serious negligence of market representation for cooperatives within the mainstream economy; about combining sefa and Seda to offer a one-stop-shop for developing SMMEs and cooperatives; making use of the Post Office as a distribution channel for sefa to enhance accessibility; the Customer Relationship Management programme costs and coordination;  efficiency of sefa and the poor turn-around times; the higher number of non-approved SMMEs compared to those approved and what is sefa doing to change this; setting up sefa offices in rural areas to reach the target market; how to best service the needs of its clients; how does sefa intend to measure efficiency as an important performance indicator, where do these metrics need to be tightened up; the results of the research on effectiveness of intermediaries; if the survey covered street hawkers; the lowest survey ratings on efficiency; historical neglect of cooperatives; high interest rate of loans of development finance institutions.

Meeting report

Small Enterprise Finance Agency (sefa) on the results of its programme review
Mr Thakhani Makhuvha, sefa CEO, said sefa conducted a survey on its products. The information used for the survey was gathered from 13 key informants, in depth interviews with sefa Exco and board members, National Treasury, Seda and IDC. More information was gathered from online surveys and telephonic interviews with 158 approved SMMEs, 4 approved cooperatives, 178 disapproved SMMEs, 3 disapproved cooperatives, 11 distribution channels and 1 commercial bank participating in KCG (Khula Credit Guarantee). The achieved sample size for approved SMMEs was 158 of the population in the database of 1 032, whilst the disapproved SMMEs was 178 of the 1 126 population size in the database. As for cooperatives; the approved achieved sample size was 4, and disapproved cooperatives was three out of population size of six for both approved and disapproved cooperatives. The population sizes used in the survey excluded end users funded through partnerships and intermediaries. The results appear skewed towards SMMEs because sefa has not had many transactions with cooperatives. However, sefa is working on improving the development of cooperatives.

Mr Makhuvha noted that the purpose of the survey was to review sefa products and services and ensure that they are aligned with the mandate of DSBD (Department of Small Business Development); review their effectiveness, efficiency and relevance, and recommend how the products could be offered more effectively and efficiently without duplicating products and services offered by other agencies under DSBD.

The global findings of the survey showed that the alignment of the products and services to the sefa mandate was 65%, meaning 65% of the surveyed interviewees agreed that sefa's products and services are aligned to its mandate; whilst 67% agreed that the products and services are aligned to the mandate of the DSBD. With regards to the participant commercial bank, the bank self-reported that it disagreed that the sefa products and services are aligned to the sefa mandate and on the other hand the bank agreed that sefa's products and services are indeed aligned to the DSBD mandate. He said sefa had no further means of interrogating the assertions made by the bank. The sefa identified products and services that are a duplication of those offered by other agencies under the DSBD, and the desktop research revealed some measure of duplication between the sefa and Seda with regards to non-financial support services. However, 42% of the participants interviewed were unsure about the duplication of services between sefa and Seda, whilst only 12% said yes. Therefore, collaboration with Seda is key and the importance of working with Seda was reinforced by most key informants at both strategic and operational levels. He said a sizeable proportion of respondents indicated complete unawareness of Seda, it may therefore, be in the mutual interest of sefa and Seda to jointly seek to improve their visibility, products and services to the public. Some of the recommendations included continuous up-skilling of the sefa staff; regular skills audit; and redeployment and retraining of legacy personnel, because most respondents from the survey indicated that up-skilling sefa's staff needs to be accentuated to ensure that employees are continually provided opportunities to learn more and keep abreast of developments in the sector.

Mr H Kruger (DA) sought clarity about sefa's core business. Secondly, he asked why is the cooperative market not adequately represented in sefa's service delivery to the SMME and cooperative market. Thirdly, he said when sefa did the survey, did they explain the mandate of the DSBD to the interviewed participants, because it seems like nobody understands the DSBD mandate. He pointed to slide 9 of the presentation and  expressed his concern that there is only a few group of people who understand the mandate, and as it appears on the slide, the participants were asked if their businesses are aligned to the sefa or the DSBD mandate. If the Post Office can get their act together as it seems that they are in the right direction, it is not a bad idea for sefa to use the Post Office as a distribution channel. He asked whether the time is right to consider combining sefa and Seda and offer a one-stop shop to SMMEs and cooperatives. Lastly, with regards to the CRM (Customer Relationship Management) programme, he asked if it was run by independent consultants and if so, how much was the cost to run the programme.

Rev K Meshoe (ACDP) said one of the survey recommendations stated that the Post Bank should be used and some discouragement was reflected with regards to the use of commercial banks because it was stated they are unfriendly to SMMEs. He asked why the Post Bank was not considered from the beginning, was that due to its inefficiency or were there other reasons that led to not making use of the Post Bank. The response to the recommendations about making use of the Post Bank, was rather than reducing or eliminating the use of commercial banks altogether, it is recommended that broadening the relationship with commercial banks is a way forward. What is the motivation behind this recommendation, because he does not agree with it? With regards to efficiency and effectiveness, there are a number of things that have been suggested. Among them is poor turn-around times, how do they compare with commercial banks when it comes to the turn-around times given the attributes listed in the presentation, and also how does sefa interest rates compare to the commercial banks? On the administration fee, how long does it take to accept or reject an application submitted by an SMME or a cooperative? He submitted that the rate of efficiency is very low, what are the main causes for that, is it because of unskilled staff or some other unclear reasons, and what is being done by sefa to eliminate that?

Mr T Mulaudzi (EFF) referred to the achieved sample sizes, that reflected a population of approved SMMEs as 1 032 and non-approved SMMEs as 1 126, which is higher than the approved SMMEs. He asked what is going to be done to help decrease the number of unapproved SMMEs. He pointed to page 12, with regards to rural communities and people with disabilities and as reflected in the presentation they fall under the target market. However, there are no sefa offices in the rural communities, so how is sefa going to achieve this with its offices situated in town far from those areas. This already creates a barrier to accessibility because people do not always have the money to travel to town.

Mr N Capa (ANC) pointed out on page 29 the opinion of the commercial bank. He asked if there is a possibility that the opinion of the commercial bank is subjective, especially if perhaps the bank feels as though their ground is being threatened by sefa. On slide 30, the 55% distribution channels who believe that sefa products are delivered to SMMEs and cooperatives through means that utilise resources efficiently seems too little, something needs to be done to increase that number to 100% on efficiency. On slide 37, it reflects that there is an apparent overlap of work being done between sefa and Seda. Perhaps it might be better for the two to be consolidated. He asked if there is any sign of fronting, as with big businesses using small businesses as a front to obtain government benefits. With regards to research, sefa considered making use of the agricultural council, because it would be useful for research purposes on cooperatives. Lastly, he asked if sefa has considered linking its products on the activities, a link between production and marketing. He believes that this will assist in eliminating the conception about the backlogs regarding cooperatives. What is being done to ensure that at some point an SMME will stop operating small and grow into a stable and growing business in the mainstream economy?

Mr R Chance (DA) asked who conducted the survey and whether it was done internally or by an external service provider. Surveys tend to be a bit self-fulfilling if they are not 100% objective. Any relevance of the survey rests in the questions being asked and the quality of these questions, so if you do not ask the right questions, you will not get the right answers that will assist in increasing the efficiency and effectiveness of the organisation. If the survey was conducted by an external service provider, how much did it cost? He said sefa claims that the survey was effectively focusing on its clients but in actual fact it appears that it was focused on sefa, because it is addressing the product review of sefa. He suggested that perhaps if the survey was done the other way around the questions would be different. For instance; how does sefa best service the needs of its clients, is the focus solely on effectively providing finance, effectively providing non-financial support, mentorship, training and building steady relationships with clients? He believed that this would provide some insight on how sefa may support the supply chain of SMMEs and cooperatives, Perhaps the reason sefa failed to do that is because it has adopted a silo mentality. He asked for clarity about the grants because they appear as non-financial aid on the presentation. Is sefa just giving these grants out without expecting repayment. With regards to collection, it was mentioned in the survey that about 58% of direct loans are not repaid. He expressed his concern about the perception of the shareholder about this matter. The survey population reflects about 1000 SMMEs, however, he recalls that last year sefa had lent out money to over 15 000 SMMEs through micro-lenders and so he asked for an explanation for this discrepancy. How does sefa intend to measure efficiency as an important performance indicator, what metrics or standards have been set up to measure efficiency, and where do these metrics or standards need to be tightened up? How many of the rejected clients receive finance elsewhere? This goes back to the questions asked on the survey which appear to be focused on sefa, not the clients. The recommendation on the survey stated that sefa is going to minimise its relationship with commercial banks as distribution partners, however, on the same page it says that a partnership with banks needs to be improved, so what is it going to be? If sefa only had a conversation with one bank, how is that comprehensive enough for the survey? With regards to partnering up with the Post Bank, ideally this is good, however, realistically the Post Bank is very inefficient. How does sefa remotely see the Post Bank to be helpful in providing access and support for these services efficiently and effectively. He suggested that a conversation as soon as possible with Mark Barnes, CEO of the Postal Services, would be a step in the right direction to see whether he would agree to this. He noted the process followed by sefa in the acceptance or rejection of applications, and asked whether sefa regards itself as a truly developmental organisation for SMMEs and cooperatives. He recalled the letter that sefa issued rejecting three cooperatives who applied for finance through co-holdings for R4 million. Although in the letter sefa stated compelling reasons why the applications were not approved, sefa came across as very unfriendly and seemingly to have adopted the unfriendly approach of commercial banks. Finally, he asked for more about the property portfolio industrial parks.

Mr X Mabasa (ANC) asked for more clarity on slide 5 on the approved and unapproved SMMEs. What were the results of the research on effectiveness of intermediaries – was it part of what was researched? He asked if the research or survey covered the hawkers, particularly those that sell at train stations, hospitals, taxi ranks and on the side of roads. On slide 13, he asked for an explanation of the diagram again. When sefa offers loans or grants, does it take into account that cooperatives consist of a number of people versus SMMEs that consist of a sole trader and whether they are treated in a similar manner when dealing with them. On slide 29, the first bullet on bankable, trust- and credit-worthiness, he asked for clarity on that, where commercial banks generally do not consider SMMEs and cooperatives as bankable and creditworthy. To what degree are the microlenders a role player – is there role increasing or reducing and what about the effectiveness of micro lenders. With the street hawkers, are there figures available on their borrowing and getting assistance from sefa?

Mr T Khoza (ANC) asked in terms of efficiency what was the percentage of the lowest rating. With regards to feedback on slide 32, how was the client supposed to know if their application was successful or not. On slide 40, has sefa started profiling its target markets or is it something that will be done in the future.

Mr S Bekwa (ANC) said the Post Office seems to have the problems in its structures, so how are they going to be able to work effectively with sefa. He suggested that sefa extend its offices in the rural areas by making use of the local chiefs' offices which are situated within the rural communities so that people can save money and time rather than travelling to town to access sefa's offices.

The Chairperson referred to the higher number of unapproved applications. This relates to the question of feedback to the clients in informing them the reasons for non-approval of their applications. With regards to sefa and Seda and the DSBD being mandated to develop and not just provide the financial support, sefa provides financial support whilst Seda provides non-financial support. So for applications that are not approved, they should still be processed further because this is a developmental platform not a commercial bank. Who provides the support to ensure that the unapproved applications between sefa, Seda and the DSBD are eventually approved with the support granted? Any application that has been received must be adequately processed and if there are weaknesses which make the application unapproved, that application needs to go back to the system that will offer support services to ensure that with careful consideration and support, the application is approved. Secondly, how do you facilitate the improvement of working with applications to make the mandate work as opposed to the commercial bank approach? Did sefa in the tender documents specify that the company tendering to do this assessment should demonstrate its understanding of cooperatives and how they differ from SMMEs? Lastly, in the assessment process of the three rejected applications was there an expert in cooperatives? And was there also a person from DSBD who understands the model that is being piloted in the Ugie District Municipality through the Co-Operative Worker Association (COWA) assisting the cooperatives who sat in the adjudicating team because the response of DSBD on the COWA model is different from that of sefa as well as Ugie District Municipality.

Ms Edith Vries, DSBD Director-General, spoke about the higher interest rates charged and the friendliness of sefa. Most of the funds provided by DSBD are grants, and those that are provided by sefa and IDC (Industrial Development Corporation) and NEF (National Empowerment Fund) are loans. Due to the relationship that government has with development finance institutions (DFIs), they are required to be sustainable. The effectiveness of DFIs is judged by the way in which it is able to remain financially sustainable, therefore, they charge an interest rate but, as it was pointed out, they do not charge a developmental interest rate. So now who has to absorb the risk because DFIs do not have the resources to absorb the risk of charging developmental interest rates? Perhaps, the fault lies within the DFI or the system or the way in which DFIs are funded; also the way that Treasury and government as a whole approach DFIs. There was a review on DFIs a couple of years ago, and about the recapitalisation of them. She expressed her interest to know whether the Committee has engaged with a DFI. She said the DSBD looked at Seda's programme review, and it is very clear that the DSBD has to conclude with speed its work on the review of the Small Business Act and the definitions of small businesses and so the DSBD needs to take leadership on that, because the Department, sefa and Seda have a different set of definitions on what a small business is. In its third quarterly report, sefa stated that 99% of the enterprises it financed are from the micro-enterprise or the informal sector – so it seems as though there is a mixed understanding across the agencies as well as DSBD. What are the criteria for how these small businesses are defined: is it turnover, the value of assets, employment, the life span and so forth? The opinion makers around SMMEs, particularly StatsSA, have an income based variable for defining small businesses. Therefore, DSBD needs to take leadership in the SMME sector on how these types of businesses are perceived and defined.

The Chairperson responded that there is a lack of understanding of the role of government. The role of government is to provide services and develop communities. However, the manner in which a lot of government departments are structured focus more on providing services as opposed to developing communities. The feature of community development only begins to come up strongly in the NDP document, so in providing service delivery the community also has a role to play in ensuring that government does have a revenue base because government depends on rates and taxes to obtain revenue. The system cannot neglect the community development aspect, which makes communities self-sufficient and self-reliant to then be able to pay for service delivery from government. This in turn helps government to have a welfare state and a developmental state to cater for both the poor and the rich. Therefore, there is a need to create a balance to reduce the number of those on welfare. If that is not understood then South Africa will continue facing the problem of inequality and government will spend more of its revenue on welfare and development will slacken. Government revenue comes from the very same communities that the government has to provide services to. If the systems in place are not aimed at reducing welfare by focusing on developmental platforms, the country will never be a developmental state. The DSBD is put at the centre in ensuring that it facilitates a situation where small businesses on the welfare side of the state are developed to a level where they are self-sufficient and reliant and then able to afford to pay for services and join the developmental side of the state. Sefa is not a commercial bank that is giving out loans for the purpose of gaining interest and having a big balance sheet, but its role is to reduce the number of people sitting on the welfare side of the state. Government should provide a guarantee to cooperatives that are unable to repay the loans. For as long as in the assessments those cooperatives provide employment for people who were not otherwise employed, this reduces the burden of government to provide welfare services. The state then writes off that loan because the state has benefited through that intervention. Although the cooperative is unable to repay the loan, it has absorbed some of the burden of the state.

Mr Makhuvha said the core business of sefa is to be the leading catalyst for the development of sustainable SMMEs and cooperatives through the provision of finance. Therefore, the core of sefa is to provide finance.

Mr Kruger asked why there only four cooperatives because it seems as though the focus is not on developing cooperatives or they are being neglected.

Mr Makhuvha said the slide which reflects the number of cooperatives showcases the number of cooperatives that participated in the survey. Sefa provides finance to cooperatives through cooperative financial services where they are given a line of credit and in turn they give credit to the cooperatives. With regards to the participation in the survey, sefa was very limited in terms accessibility to cooperatives. sefa has not done very much within the area of cooperatives and the organisation has acknowledged the backlog since its inception. The agency has not developed fully in providing adequate service for the development of cooperatives. The cooperative development activities were initially going to be transferred to the Cooperative Development Agency but as the years went by that transfer did not occur and sefa was then forced to continue but this anticipation of transfer created shortcomings in focus and allocation of sufficient resources to develop cooperatives. However, at the moment sefa is working on rebuilding and servicing more cooperatives

The Chairperson lamented the fact that sefa stopped channeling sufficient resources into developing cooperatives because of the anticipation that cooperatives were going to be absorbed by the Cooperatives Development Agency, which sefa is mandated to provide.

Rev Meshoe asked about the population size of the cooperatives that are in the sefa database (slide 5) because both approved and unapproved cooperatives are in the population database and the population number is the same, however, the achieved sample sizes are different.

The Chairperson asked the Deputy Director-General if the Department and its entities understand the mixed economy of SA and the three pillars that drive the economy which include the private sector, government and cooperatives. Statistics reveal that through sefa's database there are thousands of cooperatives in the country but the mortality rate of those cooperatives is 88%. Yet three pillars drive the mixed economy of SA and the cooperatives represent the community in the economy. So has that been understood by the DSBD or is DSBD only coming to terms in understanding the vitality and pivotal role of cooperatives now? The challenges of poverty and unemployment would be mitigated by cooperatives. So since the inception of cooperatives what has DSBD been doing in the past, present and future to ensure that the substantial efforts are committed to improve the vitality of cooperatives to address unemployment and poverty.

The DDG replied that in the past, in terms of priorities within the DTI, cooperatives were the least rated. The new strategy on cooperatives was then established in 2005 so the Department and perhaps the system as a whole is still learning about the importance, role and the potential impact of cooperatives in the economy. Even in the strategic plan, cooperatives are being prioritised and the funding of cooperatives structure has changed. Now the Department is looking at funding cooperatives in a cluster form and sustainability will then be fostered.

Mr Capa said cooperatives have not been given priority from the onset whilst under the DTI. It is unfortunate that sefa now has to answer to these questions. Therefore, he believes that its not sefa's responsibility to answer for the mistakes of the DTI. Since the report has surfaced and exposed these shortcomings and sefa has identified that these shortcomings be rectified. So now the Committee needs to issue instructions about how the new paradigm and structures indicated in the strategic plan. However, the fact that cooperatives are not included in the name of DSBD goes to show that the understanding of the importance of cooperatives is not prevalent. So the negligence in prioritising cooperatives needs to be rectified at the higher level first, and in that way it will trickle down to the agencies mandated by the Department to develop cooperatives.

Mr Bekwa referred to the three rejected cooperatives and asked what is now going to happen because the Department is presenting its strategic plan next week but the prioritization of cooperatives is neglected.

Mr Mulaudzi noted that cooperatives are not mentioned in the Department's name. This goes to show that cooperatives are on the periphery and something needs to be done to correct this as many entities within the economy undermine the importance and prioritization of cooperatives. He asked the DDG about the process of changing the name to include cooperatives, because all the agencies reflect in their statistics that cooperatives are marginalised. The DDG says that the Department is still learning. It has been three years since the inception of DSBD and that marginalisation needs to change.

The Chairperson asked about the requirements for the company awarded the survey tender. Did the tender documents specify that the company needed to assess the programmes inherited from the DTI in terms of the new mandate on the needs of cooperatives and SMMEs? Therefore, the company would include people who have an understanding of cooperatives development in the context of community development. The cooperative is not the end product but a tool and the system used to develop the community economically. Was it specified that someone with expertise was to play a key role in conducting the assessment?

Mr Makhuvha replied that the terms of reference did not include in detail characteristics about the perception of cooperatives. The terms of reference included the mandate of both the sefa and the DSBD, and not as far as the hawkers. With cooperatives it focused on the financial institutions not the clients (cooperatives themselves). The six cooperatives in the database (that are approved and rejected) are the cooperative financial institutions not the actual cooperatives themselves and the micro lenders that service the hawkers, so that was the limitation of the survey at the level of end users. The SMMEs that were approved and rejected on slide five reflects those that sefa directly lends money to and the branch network of clients that are funded by sefa, the cooperatives through distribution channels relate to partnerships and the level of the underlined entities. For example sefa has a relationship with Anglo Zimele where both sefa and Anglo Zimele contributed R100 million each to fund small miners, and the survey also did not include those small businesses. However, sefa is going to embark on conducting regular surveys in order to reach out to all of its clients and partnerships. With regards to the Post Office, sefa did not make use of it due to the challenges that the Post Office is currently facing. It is without a doubt that it would have been a profitable partnership given the accessibility of the Post Office to communities, including rural areas. Sefa has identified utilising Local Economic Development (LEDs) units in local and district municipalities to be more accessible to its customer base. The CRM programme is an internal system sefa has developed to assess how sefa can improve customer services.

On the use of the commercial banks, the service provided indicated that clients get intimidated by using the bank so why does sefa believe that this is a proper channel to utilise? sefa is of the view that in order to scale up its services due to the high demand of its services, it needs to utilise the networks that are already available like the LEDs, Seda and so forth. For sefa to be able to scale up its activities, collaboration with other financial institutions will help sefa deliver its mandate and ensure that funding is made available. sefa's programme is underpinned by partnerships with banks, and the programme has been around for a while now. There were times when it was booming in 2008/09 and the banks felt that the take up was very low, and they thought that it was a guarantee and lent to each and every client and if the clients default they can just go to sefa and seek indemnification. But this did not come to be the case because the banks had to prove that they were not negligent with the funding they provided to small businesses. There has to be a court judgment that states that the client defaulted in payment before approaching sefa to seek indemnity. As a result, banks were reluctant. However, banks are currently eager to work with sefa now and utilise the facilities that are being made available. By so doing it helps sefa, because it is not a cash-transaction relationship but rather an indemnity or guarantee relationship where the banks will provide the clients with cash and sefa offers a guarantee that in the event the client defaults in payment, sefa will then come forward. However, that payment default has to be proven from the point of view of the court judgment.

With regards to turn-around times in comparison to commercial banks, Mr Makhuvha said the turn-around times are long. The set time is ten working days, but sefa is currently averaging about 20 - 26 working days on abridged loans for a number of reasons. Even if it is a bridging loan they still have to assess the validity of the debt, the validity of contracts, legitimate tax certificate and registration number which are looked into by auditors to eliminate fictitious contracts and invoices by some clients, to ensure sustainability. With regards to term loans, the set turn-around times is 30 working days, however, they are not met, so it is often about 36 - 40 working days on average. This is due to the nature of the businesses that sefa funds as they have high risks, so a thorough exercise needs to be done, because in most cases it is the business profile that drags out the turn-around times. Basically, there is so much more that goes into assessing businesses before granting them loans, and in most cases applications are not rejected they are referred back especially in cases where some clients submit incomplete documentation, so the process drags which consequently affects the turn-around times. On the wholesale transactions, the turn-around times is 50 working days. Usually these type of transactions are concluded with big and well established companies and the turn-around times are within the set target of 50 working days.

Mr Makhuvha said the survey indicated that the interest rates are high for development finance institutions but they should not be necessarily lower than the interest rate charged by commercial banks because the risk is very high. The clients that sefa funds are high risk in nature, there is no collateral debt and deposits, but you find that if similar clients approach a bank, the bank would require certain contributions. Sefa takes a higher level of risk on a debt instrument to the extent that it turns into a form of equity instrument, because some of the clients either have bad credit records or cannot obtain funding from a commercial bank. As a result of that, sefa needs to compensate for the risk. However, sefa has formed an approach called developmental impact on the pricing model that looks at the nature of the business, if the business is owned by a black person(s) or youth, if it is situated in the rural area and if it is owned by people with disability and then run the model based on risk which will provide a specific percentage on risk, thereafter, offer the client an incentive or a discount on prices for development. On average, the price is prime rate plus 4% or 5% of which it is already a discounted price because if the price was determined on risk then it would be 22%. Sefa receives a small grant portion from the fiscus which is then used to facilitate the discounts, and going forward the R921 million that sefa will receive from IDC will be utilised over the next five years, so interest rates charged must be within the law, however, also be able to sustain the institution in order to continue lending to SMMEs and cooperatives.

One of the challenges about the skills base which continues to be built within the institution, is the constraint of financial resources. When the merger took place it was decided that staff must also move to sefa, However the skills needed at sefa are not aligned with those of the previous institution. The previous institution focused more on wholesale lending which deals specifically with big companies, as result of that the skills shortage has been a challenge. However, necessary skills that were needed were obtained but the legacy staff has been kept and trained appropriately to fit into sefa's business. So efficiency at sefa is affected by a combination of the shortage of skills and sufficient staff required; over time we will be able to continue to improve in terms of offering.

The target market says sefa must provide funding based on the disbursements to businesses that are owned by black people and 70% of the funding is going to black businesses as defined in the Constitution, and 45% of the funding has to go to businesses situated in the rural areas, 30%of the funding must be offered to businesses that are owned by young people, 45% funding is offered to businesses that are owned and managed by women regardless of the category.

Rev Meshoe asked if the women owned and managed businesses are inclusive of black people since it is already stated that 70% of the funding is to be offered to black people.

Mr Makhuvha replied that the women or youth can be black or white, and the people with disabilities can also be either black or white. With regards to rejected clients (reflected on slide 5), that refers to clients whose applications have gone through the approval committee process. sefa receives a lot of enquiries, some of them are new applications for funding and others are just enquires that are not ready to go through the process of funding, and those that go through the process of funding are normally less than the number of enquiries that do not qualify to go through the approval committee. Therefore, the reason why the number of rejected applications is more than approved applications is due to the manner in which sefa conducts the process of its enquiries and this also applies to other DFIs. Some of them that are not approved are usually mainly because the nature of the business model is unsustainable.

Rev Meshoe said would not it be helpful to separate applications of that are financial in nature from those that are non-financial, because now it seems as though the rejected applications were all financial in nature whereas the majority of them could have just been enquiries.

Mr Makhuvha said the number of rejected enquiries were at application stage, the not-approved SMMEs went through a due diligence process and were then presented to the committee for approval. The enquiries are not included in the number of the rejected SMMEs reflected in presentation. It is not uncommon to have clients that are not approved than those that are approved, about 30% of the applications get approval and this is because of the many other reasons that need to be taken into account particularly the sustainability of the business or its model.

Sefa does not have much presence in rural areas themselves but there are offices in rural provinces, However, sefa is working on having offices in the rural areas and the use of the Post Office that is already existing in those areas is under consideration.

Ordinarily clients that sefa funds do not get funding from banks and in most cases banks require collateral or some contribution that needs to be made by the owner. Banks do not see some of the SMMEs and cooperatives bankable and creditworthy, particularly because some of the SMMEs and cooperatives are inherently high risk. This is where the role of sefa comes in and takes on the high level risk that ordinarily a commercial bank would not take. Sefa needs to improve the turn-around times and accelerate the process of engaging with them.

The management is currently intensifying the relationship between Seda and sefa to be able to share what is expected from sefa's side and make an input to the board. Now they are incorporating a technical team at various levels of the organisations so that the staff can interact, so this relationship is more narrowly intensified. There is no possibility of fronting, so far sefa has not come across a big of a situation where a big business takes advantage of a small business to acquire funding from sefa through that small business. The research team is quite small but they would be able to tap into researchable work. As sefa interacts with other stakeholders in the private sector, the organisation is moving towards a steady development for small businesses, and the value chain initiatives come out of those collaborations. With regards to the migration of SMMEs into big businesses, national gazelles have been identified that are driven through Seda as one of the significant pipelines which has been more inclined from a race point of view, where sefa can be able to participate in terms of funding and where these gazelles can really grow into black industries amongst others. The hawkers are encouraged to not remain in the same place, but focus on migrating into micro or small businesses to foster growth.

The survey was conducted by an external service provider which went through the proper tender process and was managed by the procurement department. The service provider had qualified personnel to conduct the survey, and the amount it cost sefa was just under R500 000.

The grant that was offered by sefa is a grant in kind which is encompassed by a mentor to assist the grantee. Now that has been made a condition in order to mitigate the high impairment that sefa has particularly on the direct lending side – to assign a mentor to every client that have been given a grant to receive the necessary support that the grantee needs.

Sefa interacts with banks from time to time and some of them attend the enterprise initiatives and development, however, there is a need for more collaboration. With regards to the rejected applications of the three cooperatives, Mr Makhuvha said he has engaged with the client and furnished the client with reasons why their application was rejected but they will continue to engage. Based on the lessons learned in the past sefa was not comfortable with the way in which the client was conducting its business, therefore, reasons that were submitted to the client in sefa's view are legitimate and adequate to have arrived at the conclusion to reject the application.

The properties are currently being revamped in Sebokeng and Orlando West. sefa has collaborated with the DTI and Gauteng government and both have offered to refurbish the properties for sefa without compensation. With some properties there are historical issues involved specifically those that were supposed to be sold to the members many years ago, and it was indicated to them that the matter is being taken to the board and is currently being looked into internally and a sefa a model is being developed of how to dispose those properties to the members appropriately.

One of the limitations of the survey is that it did not look into the effectiveness of the intermediaries, but this is one of the areas that sefa will ensure is covered in the next survey and will receive due priority. The diagram on slide 13 showcases the products that sefa offers, direct lending provides funding from R50 000 to R5 million and this is done through branches and a programme called Structured Financing Solutions where they structure these transactions and the funding still goes through the sefa Loan Book. With Wholesale lending this is the part where sefa provides funding through intermediaries. The private companies which act as intermediaries for sefa are mandated by sefa to do so; they borrow money from sefa, and lend that money to SMMEs and cooperatives. They help sefa reach places that the organisation would not otherwise have the means to do so, for example a small enterprise foundation in Tzaneen and others who have a lot of footprint and accessibility to the customers. This model continuously proves to be working effectively for sefa. Direct lending will never produce scale in terms of the numbers sefa is currently producing, and no matter how many offices sefa may have, even in the most remote areas. Hence, Structured Finance Solutions where sefa is partnering with other institutions, for instance the Food Produce Market; there is huge market there where through the credit guarantee facility, sefa can leverage the granting of indemnity to clients that got a line of credit and the most important thing for most clients is the access to credit.

The 55% rating on efficiency is very low, this is one area that sefa needs to really focus on because the office receives quite a number of complaints and these complaints relate to turn-around times and customer service, hence, the establishment of CRM (Customer Relationship Management) that has been implemented to assist in handling effectively all these complaints. With regards to the clients whose applications have been rejected, sefa is currently building a Lessons Learned Portal, each and every representative has been instructed to ensure that they develop lessons learned after every meeting or on a particular application and use that data to foster improvement, and how sefa can be able to assist clients efficiently. This will also help improve on delaying to give feedback to clients.

The issue around profiling, the model is not 'one-size-fits-all' type of model, clients need to be profiled deeper in terms of what they are doing and the logistics of the nature of their business.

Mr Makhuvha said sefa is certainly going to do more in assisting clients whose applications have been rejected, particularly in the areas where they need improvement and non-financial support. And sefa will work closely with Seda to ensure that further assistance with non-financial support is received by rejected applicants. The scarce skills in the organisation is currently being addressed, and fixed-term contracts will be offered to personnel who possess the skills sefa needs to develop cooperatives.

Mr Chance asked from where is the R921 million coming that sefa is due to receive to utilise over the next five years?

Mr Makhuvha replied that when sefa was started back in 2012 it signed an agreement with the IDC, the predecessor of sefa, which had money and investments which were to be transferred to sefa to ensure that the mandate is carried forward. So the money which is due from IDC, has not been utilised yet and it will be reflected as a shareholder loan in sefa's statement of financial position.

The meeting was adjourned.

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