Small Enterprise Finance Agency internal audit outcomes and litigation matters

Small Business Development

13 September 2017
Chairperson: Ms N Bhengu
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Meeting Summary

The Committee received presentations from three small enterprises, headed by black women, who had experienced some challenges because of their interactions with the Small Enterprise Finance Agency (SEFA), and claimed that approaching the Committee was an option of last resort because they were all doing very badly as a result of SEFA’s actions.

The Committee Chairperson outlined the importance of small, medium and micro enterprises (SMMEs) in the country’s economic development, and implored SEFA to play a proper role in assisting their growth. As a development finance institution (DFI), they were supposed to come up with innovative mechanisms of funding which differed from what commercial banks were accustomed to doing. In response, SEFA admitted that there had been some inconsistencies in the transactions concerning the three companies involved, and said they would carry out an internal process to rectify the problems.

CAPX Finance Invoice Discounting described the activities of the company, and was presented as an example of how SEFA could be a positive partner in ensuring the development of SMMEs. The company claimed to have created 1 224 jobs over the last four years.

The main agenda item was the presentation of the forensic audit report carried out by SEFA in relation to four cooperative projects in Limpopo and Mpumalanga. The report indicated that there had been fraud, forgery and possible collusion between the technical partner and staff of SEFA. It was believed that the technical partner had misappropriated upwards of R5.9 million as a result of their dealings. The report provided a range of recommendations, including pursuing charges against all persons and parties involved, as well as reviewing the legal terms of the agreement with the various partners.

Meeting report

The Chairperson circulated a letter which had been sent to her by the Minister of Small Business Development, Ms Lindiwe Zulu, to the Committee Members.

She thanked the Small Enterprise Finance Agency (SEFA) for taking the initiative to start an investigation after the Committee made that recommendation. It also had not wasted time to respond to the Committee when they approached them, which demonstrated that if such collaboration was pursued, a lot of issues could be resolved. If more entities behaved like the SEFA board, there would be better governance in the public -- even the Department of Small Business Development (DSBD) had not acted in such a way.

The deliberations for the day were meant to be solutions-oriented and focused on creating an environment of development, because small, medium and micro enterprises (SMMEs) were supposed to be the biggest vehicle of job creation. When SMMEs were being funded, it was being done with the aim of reducing state welfare and increasing self-reliance. Development finance institutions (DFIs) like SEFA had a different set of goals from commercial banks, and they should take note of this when they were developing and implementing policies.

Apologies were recorded for a number of Members, while the Minister would be absent because she had to attend a cabinet meeting. The SEFA Director General’s absence was also acknowledged. On the absence of the DG, the Chairperson said the DG was an accounting officer and had to attend meetings and prioritise Parliamentary engagements, especially in the case of the presentation of a forensic report. The DSBD had been charged with creating nine million jobs and must ensure that they provided proper services.

Mr H Kruger (DA) asked whether deliberations about the IKAT project could be added to the agenda. The Rev K Meshoe (ACDP) wanted to know whether the Minister’s letter would be discussed during the session.

Razoscan S.A: Presentation

Ms Mendiswa Mzamane, Chief Executive Officer (CEO): Razoscan SA, said that her company was involved in fruit exports to the United Arab Emirates, which was supposed to serve as a foreign exchange earner.  Her project had been supported by First National Bank (FNB), and Razoscan had applied to obtain a loan from SEFA. This had initially been denied due to a poor business and financial plan, but the second application was accepted. However, SEFA had not attended the viewing of the fruit session, and as a result the partner in the fruit deal had bowed out.

Ms Mzamame then explained how SEFA had not been forthright in relation to providing the funding, and she approached the Mail & Guardian newspaper to investigate, as well and Mr R Chance, DA Member of the Committee, who had stated that SEFA might have been reluctant because of the low profit margin from her company. Subsequently, SEFA had acknowledged that they had made errors in relation to the transaction, and the loan was approved. However, FNB and SEFA were in conflict and the former was against releasing funds to the supplier.

Ms Mzamane said the supplier had written a fraudulent letter to SEFA, and the supplier had stolen the fruit. Despite the discrepancies, SEFA had initiated a debt collection process against her company and this was what had prompted her to seek advice from Parliament.

Big Discount Supermarket: Presentation

Ms Mathapelo Patel said her husband had been the main applicant for funding from SEFA to start a grocery store, but SEFA had advised her to be the main applicant, because she would stand a better chance as a woman. She had also been counselled by SEFA to quit her job so she would not have other responsibilities. The application had been made in 2016 and was not finalised until 2017.

Ms Patel said she and her husband were advised to move to Bethlehem, Free State, from their smaller locality while the application was pending. However, in July 2017, the application was rejected after she and her husband had put in a lot of money. No explanation was provided by SEFA for not granting the funds, and now she was out of money her creditors were threatening to auction her goods.

At this stage Ms Patel broke down in tears, and her presentation was concluded.

Mampotla Trading Enterprise: Presentation

Ms Dora Masoa, CEO: Mampotla Trading Enterprise, had a contract to construct 129 reconstruction and development programme (RDP) houses and secured funding from SEFA in 2014. Ms Masoa had already laid the foundation for construction, but had not been paid by the Department, and while waiting, her supplies and material were stolen from the construction sites. By January 2016, her creditors were asking for repayment but SEFA had not followed through with their financial obligation.

Ms Masoa said that sheriffs had been harassing her, her company had collapsed and she could not even pay tax to the SA Revenue Service (SARS) because she had not received the funding SEFA had promised. She therefore wanted the Committee to look into the matter.


The Chairperson said that important issues were being raised, and because of the impact of SMMEs on development, the agencies and the Department must guide them properly. There should be a clear identification of who was responsible for what in these organisations, and counselling should be provided to assist the companies which had been affected by these sort of issues. The slow response of the Department to these matters was reflected in their inability to establish the National Small Business Advisory Council, which could have helped in such matters.

Mr X Mabasa (ANC) apologised to the three women, and wanted clarity on how the developmental aspects of SEFA, the Small Enterprise Development Agency (SEDA) and the DSBD were used to assist clients. He also wanted to know how SEFA would solve these three specific cases.

Mr Chance apologized to the women for the delay they had faced in being able to tell their stories. He highlighted that there seemed to be issues with the loan granting process, as well as how they were managed. He suggested there was a systemic problem, because 60% of the loans were impaired, and he wanted to know if it was a cash flow problem because customers were not being paid. There was need for more accountability, because SMME’s and taxpayers were affected by these problems.

Mr Kruger said SEFA was using bullying tactics and wasting taxpayers’ money because they, along with SEDA and the DSBD, were not helping poor people. It gave the indication that the government did not care about small businesses, even though they were important. He said the DBSD was like a patient with a cancer that could not be healed.

Ms N Mthembu (ANC) was unhappy that the Accounting Officer of SEFA was not present. She wanted to know if SEFA had a standard application process, asking why an applicant had been told to relocate to Bethlehem when the government was trying to promote rural development.

The Rev Meshoe explained that they always heard such heart-breaking stories while on oversight visits, and its painted a picture that SEFA officials were cruel and heartless. SMME owners were treated badly and as a result, the DSDB and SEFA should show more compassion when they were dealing with the SMME owners.

Mr T Mulaudzi (EFF) appreciated the courage of the three women, and said that SEFA was a drop in the ocean of the problems faced by SMMEs, and that SEFA and the DSDB would cause a national crisis. He suggested that SEFA was acting like a private bank and was totally uncommitted towards helping SMMEs. He blamed the poor performance of the DSDB and its agencies on cadre deployment, saying he believed that “a bunch of hooligans and losers” had been sent to run this sector.

The Chairperson said the agenda had been carefully laid out in order to make SEFA look at the bigger picture. The selection of aggrieved female entrepreneurs was also strategic, and he told SEFA to take note of all that had been said.

Ms Mzamane was of the opinion SEFA should not have the chance to audit themselves, and that the Auditor General and the Portfolio Committee should be the only ones tasked with such a function.

Ms Masoa hoped a solution would be found, because she was frustrated and this was her last hope.

Ms Patel also expressed her hope that the Portfolio Committee would resolve the matter.

The Chairperson appreciated the board of SEFA for quickly responding to their worries and for coming to give their perspective after the presentation of queries by the various SMMEs.  She reminded SEFA that this Committee was the one focused on promoting development, and asked it to take a developmental approach in future. She suggested that the funding model for SMMEs and co-operatives needed to be reviewed. Moreover, there had to be a broader debate about how well the DBSD and its affiliated structures functioned.

SEFA Response

Mr Thakani Makhuvha, CEO of SEFA, said if clients missed payments, the agency engaged with them and tried to reschedule or restructure the debt payment. If this could not be done, a letter of demand was sent to the client and if within 14 days they did not respond, an issuance of summons was done and eventually judgment might occur.

Owners had to demonstrate 100% commitment to their businesses, but the call for Ms Patel to resign had been uncalled for. The Razoscan matter could not be stopped from court litigation, because it could result in penalties and counter charges. With regard to Mampotla Trading Enterprises, SEFA would look into the internal processes and see how they could rectify the matter.

Mr Makhuvha said he would talk to the Head of Department in the Free State. It was inappropriate for a SEFA official to tell a person to move in order to be eligible for funding, andhe would launch an investigation into how this had occurred.

Ms Kate Moloto, Chairperson: Audit and Risk Committee, SEFA, said they were members of a new board who had taken up their positions only in February. There were clearly people who had been misplaced at SEFA, and there had not been foresight concerning the support provided to clients. She said the SEFA operational budget had been reduced over the past three years, and she hoped that a decision-making system could be put in place to allow a better response to such issues in future.

The Chairperson said no mention had been made of whether a moratorium for the court case would be requested.

Ms Hlonela Lupuwana-Pemba, Chairperson of SEFA, said the entity had not become involved in litigation matters yet.


Mr Mabasa wanted to know how many cases belong to the same category as the ones which had been presented, and whether the three cases had directly affected SEFA’s position.

Mr Kruger said knowledge management was key for organisational success. This could be achieved through learning, and he wanted to know if the departments were “learning,” because it seemed they were not. There was no knowledge base from which they could take decisions. He believed there was a crisis in the small business development domain, and it should be solved in order to permit economic growth.

Mr Chance said the Committee had an opportunity to review the way SEFA and SEDA funded and supported SMMEs. He was of the opinion that as a developmental organisation, SEFA had to take a fundamental look at how they did their work. He commented that it was rare that there was agreement across political lines about the failure of a department, and there should be consequences in this regard.

Ms Mthembu asked when the board had identified the problems, and why they had not been addressed. It seemed the board was not “hands on” or proactive.

Mr Mulaudzi was disappointed with SEFA’s response, and said the presentation had been a lie. He inquired why different interest rates existed for clients, and whether SEFA had a monitoring and evaluation tool for projects. He was also of the opinion SEFA only reacted when their customers were failing. The high mortality rate of co-operatives was still happening because they focused mainly on SMMEs, and this was hindering poverty alleviation efforts.

The Rev Meshoe said SEFA claimed to always help SMMEs, but they could not help Mampotla Trading Enterprises when they had been approached. He asked if the SMME owners had been provided with mentors who could make them aware of the challenges they might face.

Ms Lupuwana-Pemba said the three cases had made an impact and SEFA would cover all the areas of mitigation. To her, the extra time would allow them to better understand the situation they were dealing with. A data system, rather than a management system, was being put in place.

Mr Makhuvha the interest rate depended on the risk of the client, and preferential rates were provided to women, youth and the disabled. When SEFA was started in 2012, there had been a “cradle to the grave” approach, in which the loan officer was the same person who collected the loan, but from April 2016 a new approach had been adopted. He agreed that SEFA’s lending portfolio was favoured towards SMMEs, and that a new model to support co-operatives should be developed.

Rev Meshoe wondered why mentoring had not been provided when Mampotla Trading Enterprise was facing problems.

Mr Makhuvha responded that mentorship had been instituted when the issue started.

The Chairperson was of the opinion that finance, training and other services were not integrated, and this influenced how SEFA responded to non-payment. She observed that the Department and agencies did not talk to each other and gave the example of the Ms Patel, who had been told to spend money when the grants were not available. She said that according to the Minister, there was not going to be a moratorium on the legal proceedings, and she hoped to engage with SEFA on this matter. She reiterated that SEFA was a specialist in development finance, but was not coming up with innovative solutions. In this regard, the Committee was representing SMMEs, and SEFA needed to address these issues as soon as possible so the country could go forward.

CAPX Finance Invoice Discounting: Presentation

Mr Hendrik Rossouw, CEO: CAPX Finance Invoice Discounting, provided a background about his company. It had been started in 1999 and aced as an institution which offered financial products which commercial banks did not have. His company had received R30 million in funding from SEFA. Some of the products offered included secured loans, factoring, merchant cash advances, credit facilities and invoice discounting.

Some his challenges were the ability to operate in only three provinces, but he said his company had created 1 224 jobs over the last four years. He described how the process of discount invoicing worked, and explained that it allowed SMMEs to free up capital and often saved them from crumbling. He had not received SEFA funding since 2014, and had applied for a further R20 million. He gave case examples of successful initiatives in which his company had intervened.


Mr Chance asked who was paying for the service and whether the SMME had increased the price. He asked why Treasury had been reluctant to make changes to the law.

The Rev Meshoe questioned if the government could pay directly into an account for which a negative response was provided. He wanted to find out what this meant, and whether SMMEs sold their invoices to his company at a loss.

Mr Mulaudzi asked how the company financed SMMEs and how much interest was paid after a discount was provided. Did blacklisted and insolvent people form part of his client base? Was his company registered with the Financial Services Board (FSB)? He asked what the R20 million loan was meant for.

Mr Kruger highlighted that ABSA Bank had done something similar to this about 10 years ago, and there was definitely space for small businesses to operate in this domain.

Mr Chance asked what their interest rates were, and whether higher risk customers were charged higher rates.

Mr Roussow said the ultimate consumer paid for the service. He did not know why Treasury had not changed the law, but it might be related to fears surrounding fraud. The government had a policy of only paying the supplier. He acknowledged that his company was not registered with the FSB because they did not provide financial advice. The R20 million was meant to provide for growth so that they could take on new clients.

Forensic Audit Report: SEFA Presentation

Mr Curatius Ramodipa, Head of Internal Audit, SEFA, provided a background about the project.

SEFA had approved R20 million for four chicken co-operatives -- two in Limpopo and two in Mpumalanga – so that chicken houses could be constructed. However, there had been findings of fraud, forgery and possible collusion between the technical partner and the suppliers. The technical partner had received R4 240 818 from August 2016 to January 31 2017, without giving any money to the cooperatives. As a result, the project had not been operational and therefore it had been important to find out what had gone wrong, because SEFA had been caught off guard.

According to the report, significant deficiencies had been noticed, as the technical partner, Super Grand, had siphoned upwards of R5 900 000 as a result of various malpractices. It was believed that there had been involvement of SEFA staff.

Some of the suggestions to remedy this scenario included pressing charges against those who were alleged to have been involved, and that a review of the legal agreements in relation to this transaction should be pursued.


Mr Mulaudzi thanked SEFA for the comprehensive report, but was concerned because all of this had happened under their noses until the Committee had pointed it out. He believed this was just the tip of the iceberg, and that those who had run away must be pursued. The report indicated the Department was not serious about the matter, and even at present in the Committee, only one ANC member was still at the meeting. He urged the board to go deeper with their investigations. As a result, the project had not been operational and therefore it was important to find out what had gone wrong, because SEFA had been caught off guard.

Mr Kruger agreed that this was just the tip of the iceberg, and the board should investigate more. He said he would take them to the Maloto organisation, where there was an allegation of R20 million being misappropriated.

Mr Chance requested that the forensic report be made available to the Committee for the sake of transparency. He asked why the matter had been treated as a wholesale arrangement and not direct loan. It seemed this had been a deliberate attempt to defraud SEFA. It demonstrated how vulnerable clients were, and SEFA had to engage. He asked whether charges had been laid, and at which station, so that the process could be traced.

Ms Mthembu was happy the Committee was not “witch hunting,” but there needed to be more done to uncover corruption to ensure the public had faith in government.

Ms Lupuwana-Pemba said she appreciated the Committee for providing direction. SEFA did not underestimate the extent of the problem. Charges would be laid against those who had left. There was more than met the eye because of the degree of negligence, and by December all transactions should have been investigated.

Mr Ramodipa said the case had been lodged at the Centurion police station, and a case number would be provided.

The Chairperson thanked SEFA for the way in which they had responded and how they met up with the short timeframes. If the Department had that kind of response urgency, they would be more effective. She was disappointed that senior members were absent, and it was a paradox that they were available for less important issues.

The meeting was adjourned. 

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