The Committee met to discuss how accessible financial institutions were to small business enterprises in the country, and to consider recommendations on how the situation could be improved. The key points which arose from the briefing focused mainly on the bureaucratic red tape that negatively affects small businesses, as well as non-price barriers that deny individuals access to financial services because there are no suitable financial institutions in their area, particularly in many remote rural areas.
The Committee Content Adviser said there had been an exponential growth in the number of financiers for small and medium enterprises (SMEs) in the country. However, these businesses were still struggling financially, although there seemed to be enough funds available. There did not seem to be any funding dedicated towards start-up projects. Access to finance was therefore a priority issue for developing and supporting the SMME sector as an engine for employment creation, poverty alleviation and socio-economic stability at large. The credit gap for SMEs in South Africa was estimated at between R86 billion and R346 billion. The amount of money that gets budgeted for the Small Enterprise Finance Agency (SEFA) on an annual basis, was not nearly enough. Sadly, many small businesses had no option but to seek funding from loan sharks.
Members said that lending models, such as those seen in the province of Limpopo, seemed to be the way forward in ensuring that finance for small businesses was made accessible. In addition to the available development finance institutions, registered corporates should also play their role in financing SMEs. Action was needed to transform and improve the banking sector. It was suggested that the Committee should put forward a recommendation that SEFA and the Small Enterprise Development Agency (SEDA) should be a single organisation and share offices in municipal buildings, so that it was accessible to the people.
Entrepreneurial Finance: Imperative for Growth and Employment
Mr Sibusiso Gumede, Committee Content Advisor, said his briefing was based on the investigation by the Department of Small Business Development (DSB) into the issues of bureaucratic red tape that affect small businesses. These issues involved access to finance, access to markets, business premises, land and office infrastructure, and lastly skills training, development and incubation. Members were welcome to add any areas that they might see as being of interest to small business enterprises. From his viewpoint, the Small Enterprise Development Agency (SEDA) was doing well in facilitating the last areas he had mentioned.
The Department had also looked into sectoral issues affecting small business enterprises. The specified sectors were of interest as they contributed to job creation. These sectors were agriculture and agro-processing, manufacturing, wholesale and retail, the financial sector, construction, infrastructure and maintenance.
Mr Gumede said he would be briefing the Committee on the state of financial access for small businesses, as well as providing information which would be important in decision making when it came to making finance available for entrepreneurs. The Committee would also have to approve plans set by the Department, and undergo its own strategic planning process.
Problems faced by small business enterprises
Access to finances was not only a growing topic in South Africa alone, but also in emerging and developing economies in the rest of the world. Policymakers were concerned that financial intermediation and markets were not being widely spread to the population and economic sectors, thereby negatively impacting economic growth.
Large corporate entities such as Public Investment Corporation (PIC), the Industrial Development Corporation of SA (IDC), the Unemployment Insurance Fund (UIF), the Government Employees Pension Fund (GEPF), the Land Bank and the Development Bank of Southern Africa (DBSA) had not proved beneficial to small business enterprises, although through media communications there were indications that people were obtaining financial assistance from these bodies. Economic sectors such as agriculture and agro-processing were of interest to young women in rural areas and townships, and to smallholder farmers, as they could have a positive impact on income distribution and reducing poverty levels.
Non-price barriers were often very important. For example, the design features of a product may discriminate against potential customers, or they may face barriers to access due to red tape. Some individuals would have no access to financial services because there were no financial institutions in their area, as was the case in many remote rural areas. Others may be excluded because of poorly designed regulations -- for example, documentation requirements on opening an account, such as having a formal address or formal sector employment.
Provinces with a higher gross domestic product (GDP) such as Gauteng, KwaZulu Natal (KZN) and the Western Cape, had a large proportion of small, medium and micro enterprises (SMMEs) with access to formal credit. On the other hand, SMMEs in poorer provinces such as Limpopo, the Eastern Cape and North-West largely relied on informal credit.
Background to the study
Mr Gumede said that there had been an exponential growth in the number of financiers for small and medium enterprises (SMEs) in the country. However, these businesses were still struggling financially, although there seemed to be enough funds available. Currently, he was not aware of any funding dedicated towards start-up projects. Access to finance was therefore a priority issue for developing and supporting the SMME sector as an engine for employment creation, poverty alleviation and socio-economic stability at large. Findings indicate that SMEs funders and finance seekers estimate that the credit gap for SMEs in South Africa was between R86 billion and R346 billion.
When looking into the amount of money required by the economy versus the amount of money that gets budgeted for the Small Enterprise Finance Agency (SEFA) on an annual basis, it was not nearly enough. With the poor being unable to access credit from formal financial sectors, they were being left behind with no access to financial services. Mr Gumede remarked that the work done by the Small Enterprise Foundation (SEF) based in Limpopo should be looked into by the Portfolio Committee and SEFA as there might be lessons which could be gained.
Financial sector composition in South Africa
Mr Gumede said four sub-sectors – banks, insurers, pension funds and mutual funds – dominate the South African financial services sector, and described how they differed from one another. These distinctions were important, as there were micro-lenders that provide credit to individuals and small business enterprises, but in return they charged exorbitant interest. He suggested that the Department should consider strengthening its relationship with entities registered under the South African Reserve Bank.
There were 7 420 financial entities which were regulated by the Financial Sector Conduct Authority and the National Credit Regulator. Sadly, these included loan sharks and therefore could not be relied upon. The interest that was charged both to individuals and small business enterprises by these credit providers exceeded the 27% per annum permitted under the National Credit Act, and could go beyond the 40% mark. However, most struggling small enterprises resorted to these entities because of the requirements of the commercial banks and other financial providers such as development finance institutions (DFIs), the SEFA and the KwaZulu-Natal (KZN) Ithala Bank.
While SA’s finance sector had come to dominate the economy over the last two decades, accounting for 23% of total GDP compared to 15% in 1995, the financial sector was not contributing much to economic growth. Reserve Bank figures showed that despite steadily rising personal debt levels, 34.5% of total bank credit in 2018 went to households. Less than 1% went to construction. Investment in fixed capital had dropped to 13% of GDP in 2018, from 19% in 2010. Banks had moved away from their traditional function of lending to the ‘real’ economy -- such as construction and manufacturing -- to lending to households in an “exploitative and discriminatory” manner, according to the study. The increase in household credit was not good for both consumers and an ailing economy.
Role of development finance institutions
Mr Gumede explained the role of development finance institutions (DFIs), and how they differed from commercial banks. The key challenges faced by DFIs arose from objectives which were focused on development and less on performance and profitability. South Africa had several DFIs, some incorporated as state-owned companies (SOCs), which finance enterprises in line with their mandate, while others were not sector specific.
Challenges aligned with DFIs were difficult to quantify, as they were not measured in monetary terms and their efficiency was lacking in making the available services easily accessible to clients. Unlike commercial banks, whose objectives could be simply expressed and measured in monetary terms like profitability and shareholder value, DFIs had political mandates, with often soft or qualitative objectives which were by nature difficult to measure. Assessing their relative success or failure in accomplishing their mandate was therefore difficult. Fragmentation of the DFIs, where the mandate was not clearly understood, was not sustainable. There were problems when funding products were located in different DFIs, situated in different offices, away from each other and communities/small businesses and co-operatives they were meant to service.
Other challenges were that in spite of the referral system among different DFIs and some government departments, financial services were cumbersome and frustrating; DFIs did not guide their clients properly to enable them to manage their finances efficiently so that they could meet the set requirements -- instead they punish their clients for lack of business acumen and financial skills; product offerings that did not speak or address funding requirements for small enterprises; and DFIs sourcing their equity capital from the government, or benefiting from government guarantees.
All DFIs receive their allocation from fiscus, and based on their performance, the question may be asked, were they still relevant? At what expense to the taxpayer? Should onr instead not prioritise partnerships with private sector capital?
Mr Gumede put forward the following recommendations to the Committee:
- The Portfolio Committee should call together a financial sector symposium (FSS) where stakeholders would present their services and product offerings, with a focus on dismantling barriers to accessing capital and red tape, measures to overcome onerous application requisites and improving application turnaround times.
- The Committee should urgently engage other portfolio committees and the Standing Committee on Finance to discuss the issue of cession of income, cession of contract and invoice discounting.
- To minimise the waiting time for applicants, there should be steps towards the development of an automated credit model.
- The Committee should invite the Department to provide a briefing on initiatives that may be in the pipeline in order to ensure alignment with state priorities.
The Chairperson commented that it was in the Committee’s best interest to understand the challenges faced by government so that decisive decisions could be made, and changes implemented. The biggest concern was the high unemployment rate and stagnant economy. These issues should be projected not only towards the Minister of Small Business Development, but were also a responsibility of the Committee. She commented that the major challenge was accessing funds, and those who wanted to establish their businesses had been left frustrated.
Mr M Hendricks (AL Jama-ah) said that after listening to the analysis, he was hopeful. The lending model that was being rolled out by the Small Enterprise Foundation (SEF) in Limpopo seemed to be the way forward, and was related to the success seen in the lending model implemented in Bangladesh. This same model was adopted in Indonesia, but Indonesia had introduced a peer pressure system and wanted to recover the money lent to SMEs. The repayment profile in both countries showed a 99% repayment of loans. He said the Committee should support the Limpopo initiative and find means to roll it out. Models which had worked needed to be looked into.
Mr H Kruger (DA) said there were two issues that needed to be dealt with when it came to small business financing. These were the red tape and SEFA’s footprint, which mostly affected those in the rural areas. Through his work in rural Limpopo, he had come to realise that entrepreneurs did not know what SEFA was. The Committee needed to put forward a recommendation that SEFA and SEDA be a single organisation and share offices in municipal buildings so that it was accessible to the people.
Ms K Tlhomelang (ANC) commented that the presentation had been an eye opener. She was impressed that the Committee had been urged to call on all financial sectors, where all relevant stakeholders could participate. She agreed that SEFA could not do the work alone, and said the Committee should encourage the Department to work with other regulated banking institutions.
Mr F Jacobs (ANC) pointed out that South Africa was poor in terms of the distribution of its resources, and the financial sector remained untransformed. What stood out for him was the fact that the country had more personal debt than the finance which accounted for productive use. He supported the recommendation that there needed to be a symposium, but recalled a financial services campaign in 2007, and commented that the same unresolved problems remained. He therefore suggested that timeframes be put in place to make certain that the necessary work was done. He added that the South African Bank Association should account to South Africans through Parliament on what actions had been taken to transform and improve the financial sector. He agreed with Mr Hendricks on the village bank practice in Limpopo, and said that the model could work. However, the Committee would need to lobby their colleagues in the Finance Portfolio Committee, and encourage the Minister to be the champion political leader around funding. South Africa had advanced technology that was not being used for the benefit of the people, so it was important to have timeframes in order to hold people accountable.
The Chairperson reminded the Members of the purpose of the briefing. The responsibility of the Committee was to check on the Department’s progress in achieving its objectives, while aiming to address the challenges and opportunities presented. Departments should come together and look at the recommendations put forward, to see how these issues could be tackled. The Department was trying to realign SEFA and SEDA, but this was going to be a process. The burden should be made easier for the vulnerable SMEs on the ground. She agreed on the recommendations and the proposed summit.
Considerations of Committee minutes
The minutes of 9 October and 16 October were adopted.
Referring to the resolutions made at the meeting on 16 October, Mr Kruger said he had proposed that Members should deliberate on the suggestion of making the Ombudsman Bill a Committee Bill, in order to solve the problems faced by small business enterprises in South Africa. He recalled that there were no Committee Members who had disagreed with his proposal, but this was not reflected as part of the resolutions in the supplied documents.
The Chairperson said there had been a mix up with the documents supplied, and Mr Gumede indicated that the specific minutes Mr Kruger was referring to were still to be supplied. Mr Kruger withdrew his comment.
The meeting was adjourned.