Accessing Finance from Khula Enterprise: briefing

Meeting Summary

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Meeting report


1 April 2003

Rev P Moatshe (ANC) [North-West]

Document handed out:
Khula Presentation

The presentation by Khula focused on general and key strategic objectives, its three primary financial assistance products, its growth strategies and key performance indicators targets.

In the discussion that followed Members raised the following concerns with Khula's operations. How many South Africans per province have benefited from Khula's services? Khula's plans to increase its services in the rural areas and whether it plans to take over the industrial development corporations in the former homelands. The Committee also questioned Khula on its plans to address the oppressive blacklisting practice of certain creditors.

Information Session on Khula Enterprise Finance
Mr Moeketsi Mofokeng, Khula Manager: Corporate Communication, conducted the presentation, which outlines Khula's general external and key strategic objectives, the three primary vehicles through which it offers finance, the problems faced by entrepreneurs, Khula's growth strategies and its key performance indicators. He made the additional comments to the following slides in the presentation:

How does Khula assist?
The "RFI's" here refer to Retail Finance Intermediaries, and these provide loans to businessmen at lower interest rates than those charged by the larger banks. The "MCO's" refer to Micro-Credit Outlets which target primarily the rural areas, and only approximately 5% of these are aimed at the urban areas.

The "JV" refers to those Joint Ventures engaged with the business sector in a business opportunity with the intention that Khula will assist the business to stand on its own two feet. Ultimately the emerging business will then buy out Khula's investment in the venture. These investments range from about R500 000 to R3m, and are aimed at a period of not more than seven years. A good example would be the recent JV with Anglo American which involved an investment of R40 million and, although this is clearly not enough capital for any mining business, those funds were used to conduct mining research which the banks do not necessarily finance.

The business is usually required to invest at least 10% of the JV capital, and this investment is important for the following two reasons. Firstly, experience has shown that any JV's in which the business itself is not required to invest usually does not survive, because the business does not really have a vested interest in ensuring the success of the venture. Secondly, when the business's startup capital is not wholly funded by a business partner, it allows that venture to commence with less debt than if it had been so wholly funded.

The "Land Reform Credit Facility" (LRCF) targets primarily the eco-tourism sectors in South Africa, and is aimed at those projects that give a portion of the land to the workers to develop on their own.

Loans Representation in SA
The total number of RFI's operating within South Africa have decreased, with the intention being that a small number of good RFI's should instead be focused on and assisted to branch out into new RFI's.

It has to be remembered that the "Loans" have to be divided into two separate processes. The first is the Pre-Loan process where the business seeks assistance for a business project. Khula would then evaluate the proposal and assign a mentor to it to develop a sound business plan. Khula would also pay up to 75% of the consultant's costs. The business would then submit this business plan to the banks to gain financing.

The second stage is when the business now actually has to begin its startup process. Khula provides a mentor to that business project for a period of three months at no cost to the business. They would then monitor and assess the skills of that business, would recommend any form of training needed and even link that business with the right kind of people that would take the business venture forward. Once this three month period has elapsed, that business could also negotiate with Khula to provide additional assistance at a nominal cost to the business.

Segmentation of Khula Portfolio
"Survivalist" here refers to those small businesses that are really struggling, and these people would stop selling their vegetables on street corners, for example, if they were given proper jobs by granting them the R300 - R1 000 loan needed to start their own small business. It is precisely for such people that the RFI's are targeted.

The "Sizabantu" category would be those persons who would use Khula's Credit Guarantee facility, because their problem is that they do not have the startup capital needed to get their business of the ground.

Key Performance Indicators Targets - Credit Guarantees
The "TTGF" refers to Khula's Technology Transfer Guarantee Fund.

Dr E Conroy (NNP) [Gauteng] noted that Mr Mofokeng had mentioned in his presentation that Khula would, via its RFI facility, offer a loan to the SMME and charge interest on this loan. Would this not result in the SMME having to pay double interest, because it also has to repay the interest on the loan from the bank?

Mr Mofokeng responded that it has to be remembered that there are two distinct ways in which an SMME can get funding. First, to get it via Khula, and the second is to get it directly from the bank via a loan. In the second instance Khula would act as surety for the loan, and thus the SMME would not have to pay double interest.

Dr Conroy asked whether it would not be more prudent for the SMME's to seek a loan directly from the bank itself, and not to involve Khula.

Mr Mofokeng replied that most of these SMME's show high risk, and banks do not invest in such ventures. The RFI's and MCO's thus fit in adequately here as banks are generally also interested primarily in loans above R50 000, and are not generally interested in the R300 - R1 000 or R5 000 loans.

Dr Conroy noted Mr Mofokeng's reference to the example of funding being granted to projects in which wine farmers give a portion of the land to the developed by the workers. He asked whether funds will also be granted to ancillary projects necessary here, such as the provision of water for those crops.

Mr Mofokeng responded that this is exactly what is being done in those projects. In fact, such a project has been funded at the Goede Hoop Estate here in the Western Cape, and the funds did not go directly into the hands of the entrepreneur.

Mr V Windvoel (ANC) [Mpumalanga] asked Mr Mofokeng to indicate how many people falling below the poverty line have in fact been assisted by Khula's facilities. This is important because in his constituency there are very few satellite centres, and people do not know how to access funds or these centres themselves.

Mr Mofokeng replied to these two questions by stating that Khula's Annual Report released at that the end of 2002 indicates that approximately 700 000 South Africans have benefited. Khula is thus using a model that is working. The Annual Report also indicates that, for every loan facilitated by Khula, seven to eight jobs are created from the RFI's, and in terms of MCO's the assumption is that approximately four a half jobs are created. As far as the Credit Guarantee facility is concerned, about twelve jobs are created. The LRCF is easy to quantify because each project clearly indicates the number of employees involved, but it does depend on the business plan.

Emphasis is being placed on strengthening the business itself first so that jobs can be created at a later stage in its development, rather than first focusing on the creation of jobs. Khula has officially helped create a total of 970 000 jobs as at the end of April 2002, and a study conducted by UNISA in 2001 indicated that during that year 1,5 million South Africans benefited both directly and indirectly from Khula projects.

With regard to the visibility of Khula centres, Mr Mofokeng acknowledged that perhaps the Khula centres are not that visible to members of the community. However, the rolling out of the mentorship programme will establish offices in the major cities. Approximately eight will be rolled out soon and such centres will also be rolled out in the rural areas. The industrial offices in the former homelands are being handed over to Khula's own offices, in partnership with local communities.

Mr R Nyakane (UDM) [Limpopo] stated that the loans facilitated by Khula will be accessed primarily by the historically disadvantaged, or those who require loans of R300 and slightly above. Yet it appears that Khula is merely providing "day-to-day" outreach in those communities, and is not operating in terms of an actual project targeting specific areas or issues. How then can this be quantified?

Mr Mofokeng explained that Khula does engage with entrepreneurs and does put the banks in contact with the SMME, but it is also currently looking at using community radio stations and community media to function more extensively. Some of these projects are currently underway. Mr Mofokeng stated that over the next few weeks he will be interacting with the Minister of Education and the SABC on a programme that will be increasing the reach of Khula. It will be aired on ten different radio stations

Khula has identified some institutions that are a problem because they could be better regulated if Khula exercises total control over them. It would also then be able to display those as government organisations. This would allow them to be held more accountable. The MCO's are currently a problem because the staff are almost volunteers, because the work they do is not their "bread and butter work" and they are not capacitated to run these schemes along business lines. All efforts are made to provide training and assist with the IT infrastructure for those outlets, and Khula does monitor them closely. RFI's have reported a R25 million loss because they introduced property but were not closely monitored. Khula has now set out standards for those bodies to follow.

Mr A Van Niekerk (NNP) [Northern Cape] referred to the statement made by Mr Mofokeng during his presentation that, with regard to Khula's Credit Guarantee Facility, that the banks would be approached by Khula. Is this the only way in which finance for SMME's is acquired? Could the SMME not approach Khula and ask whether, if a feasible business plan is adopted, Khula would provide a guarantee? Is Khula involved in other land redistribution schemes, as well as other related projects?

Mr Mofokeng replied that this is really a government policy issue and the LRCF is run by both the Land Bank and the European Union (EU), but it is currently positioned within Khula because it does speed up the financing of business projects. At an inter-governmental level this can be done via the Departments of Agriculture, Land Affairs and Trade and Industry, who could be tasked with finding an institution that would be best suited to home these programmes. The problem is that Khula has so many programmes but the communication with the public regarding the accessing of these programmes is not what it should be.

Mr Windvoel asked Mr Mofokeng to provide Members with a list of all the RFI's currently in operation in the Republic, especially the provincial breakdown of their locations.

Mr Mofokeng responded that this is available in the Khula booklet, and can be provided to Members.

Mr N Raju (DP) [KwaZulu-Natal] requested Khula to provide statistics on the small businesses that have benefited, because he is aware of a university graduate who cannot find employment and has thus decided to start her own business. Where can she go to find the
R5 000 she needs to start this venture, because the banks will not finance it?

Mr Mofokeng replied that this problem would fall within the RFI category. A viable business plan would have to be provided which indicates how the loan would be repaid and she would have to contact one of the RFI's provided on the list. It would be problematic for her to approach the banks for finance because they are reluctant to provide startup capital for such a venture. Instead Khula should be approached and it will assign someone to deal with the project, and the end result is that the business plan would then be ready to be presented to a bank who would then provide the financing.

Mr Raju contended that there are businesses out there that are fairly successful but their office premises are located in a back alley, and they want to move to the prime location at the front of the building. How would they be able to acquire the R20 000 needed for this, because Khula has to help these "pokey" businesses?

Mr Mofokeng responded that the same principles applied in the previous scenario would be relevant here as well. The problem in this scenario is that it deals with owned premises which means that it is not registered with the Receiver of Revenue, and is thus informal premises. Banks do not grant loans if the business premises is not registered, and therefore those businessmen need to register the premises and employ independent auditors and so forth. In these cases the banks argue that granting a loan to such applicants would negatively affect the other creditors, and perhaps this Committee could propose means in which the banks can come to the assistance of such persons.

Mr S Phohlela (ANC) stated that in the former homelands there were development corporations that changed the fate of small businesses. These small businesses are now indebted to those development corporations because of the high interest rates charged. How will Khula ensure that these development corporations are not duplicated, as they have to be brought over to Khula? What is Khula's thinking on actually taking over all the assets of these development corporations, so that relief can be brought to those in the former homelands who are still suffering under the debt of the apartheid system?

Mr Mofokeng replied that these development corporations report to the provincial government structures, and no longer fall under the national structures. He is not sure how the property that is taken over by Khula would be dealt with, and Khula has even informed them it does not agree with its practices. Khula does not actually enjoy a relationship with those development corporations, because they do have a completely different structure.

Dr Conroy sought clarity on the period over which the loan would be granted, over land, for example.

Mr Mofokeng responded that this depends. In the case of the bank actually attaching the assets of the business in order to settle the debt, it is Khula's Credit Guarantee policy to pay the difference between the total amount owed to the bank and the amount that the bank has salvaged.

Mr R Nogumla (ANC) [Eastern Cape] referred to the maximum limit of financing provided by RFI's, but stated that the client him/herself cannot know how fast the business will develop and it could expand beyond the RFI cut-off point. Would Khula then submit a recommendation to the bank that it grants a larger loan to that businessman?

Mr Mofokeng responded that the expectation is that a small business will accumulate funds as it develops and grows over time, and when it reaches the point where it has the necessary skills as well to expand it can then approach the bank for a further loan. Mr Mofokeng stated that he was not saying that the blanket rule is that banks do not grant loans to small businesses, but rather that this is generally not done.

Mr Windvoel recommended that Khula not take over the development corporations offices in the former homelands, but that Members of Parliament themselves assist the process by increasing awareness of Khula and its services in their own constituencies. Furthermore, he asked whether Khula has planned any roadshows for 2003 to increase public awareness about the services it offers?

Mr Mofokeng replied that this could be attempted but it has to be remembered that Khula currently consists of only 50 persons, 25 of whom are support staff, and not all are authorised to speak on behalf of Khula. The net result is that only about twenty can effectively be used to cover the whole of South Africa. The Free State has about five Local Business Centres that are trained in Khula products, and are provided with material that they can give to the community.

Mr Nyakane expressed his serious concern with the severe blacklisting practice used by credit providers. They blacklist debtors indefinitely, even for failing to settle as small a debt as R250 that has been outstanding since 1980. The result is that this blacklisted status prevents the debtor from accessing other funds that can be used to settle that debt, and unfortunately becomes locked in a cycle of indebtedness. It is proposed that where Khula enjoys a partnership with the commercial banks, it provides a guarantee for that small debt so that it can be settled. The debtor cannot be made to suffer indefinitely because s/he is a victim of the oppressive credit practices of the previous regime.

Mr Van Niekerk added that this matter has to be evaluated in greater depth because this blacklisting practice was not only rife during the times of oppression, but is still practiced today.

Mr Mofokeng suggested that the current problems with blacklisting are being experienced because some creditors are taking advantage of the system, but there are processes that have to be followed before someone is blacklisted. This has to addressed by government, and can be tackled by increasing awareness of Khula services and the legislation aimed at protecting consumers from such practices.

Mr Mofokeng stated that he does not agree with Mr Nyakane that Khula has to provide a guarantee for the settling of the R250 debt because a bank-customer relationship is built on trust. If the customer does not disclose to the bank when seeking a loan that the customer has been blacklisted the bank will find out about this, and will blacklist the person for failing to settle the subsequent debt with the bank "without even asking". If they are not able to repay even a R250 loan, how can they expect a bank to extend them a loan of R5 000 or R50 000 to start a business? Khula urges people to take responsibility for their past and disclose such information, but indicate that they are willing to move on and grow.

Mr Nyakane sought clarity on who exactly defines and decides when a business plan is "viable".

Mr Mofokeng responded that Khula depends entirely on the bank's assessment of the business plan, because it has the expertise needed to determine the viability of an enterprise. The business plan is however evaluated via Khula's mentorship programme because it will not initially be "convincing enough" for the banks, and for this reason the mentorship programme employs experienced persons who know what banks look for in a business plan.

Mr Van Niekerk contended that the problem with the current Department of Trade and Industry is that "only whets the appetite" but does not empower Members of Parliament to actually tackle the problem presented. Parliament has a total of 450 agents that can be used to address the problem and there are even more in the provincial legislatures and councils, yet the Department of Trade and Industry still argues that it does not have the necessary capacity to tackle the issues. Members of Parliament have to be empowered to deal with the problems because they work in the communities.

Mr Mofokeng replied that perhaps this should be finalised at some level.

Rev M Chabaku (ANC) [Free State] stated that one of the primary problems in establishing successful small businesses in communities is that the members of those communities do not earn enough money to buy the products offered, and there is thus no demand from the community. Thus they cannot start their own businesses because they do not have enough funds, but members of the community also cannot buy the products from the small businesses because they do not earn enough money. This also gives rise to the practice of counterfeit or "pirate" goods, which essentially cripples the businessman. This problem has to be resolved.

Mr Mofokeng responded that there is a moral obligation on government via the Department of Trade and Industry to ensure that those people "who use their brain to build their brands" are protected, and those who benefit unfairly from the hard work of others have to be brought to justice.

The fact of the matter is that Khula is most active in Gauteng, Western Cape and KwaZulu-Natal respectively, and least active in Limpopo and the Eastern Cape. Experience has shown that the viability of the enterprise depends on the economic activity in the area, and the difficulty experienced by Khula especially in the rural areas is that members of the community do not have the money to buy the commodities offered. A further problem is the lack of infrastructure in those rural communities, and without roads the businessman will not be able to take the product to where the demand is.

Mr Windvoel asked Mr Mofokeng to indicate the extent to which Khula has assisted in addressing the pockets of poverty in South Africa.

Mr Mofokeng replied that 87% of those that have benefited from the RFI's are the historically disadvantaged, and 70% of those are women. Perhaps Khula is not the only solution to the problem of poverty alleviation and job creation, and government should perhaps become more involved. The Khula model may not be totally appropriate for all those seeking assistance.

In conclusion, the Chair agreed that perhaps Khula is not sufficient to change the patterns of disadvantage in society. Perhaps there is an over-expectation placed on Khula to resolve this problem. The general feeling of Members is an expectation that Khula should make more happen on the ground, especially in the very remote areas.

The meeting was adjourned.


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