Finance for SMMEs: the Role of Banks

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE; ECONOMIC AFFAIRS SELECT COMMITTEE: JOINT MEETING
14 June 2000
HEARINGS ON FINANCING OF SMMES: THE ROLE OF BANKS AND TAKING THE SMME STRATEGY FORWARD.

 

Diakonia Council of Churches
South African Reserve Bank
National African Federated Chamber Of Commerce And Industry (NAFCOC)
Khula Enterprise Finance
Department of Trade and Industry
[submissions awaited; e-mail [email protected] if required]

SUMMARY
Lack of access to finance is a major matter of concern in the promotion of particularly black-owned SMMEs. The need for economic empowerment, the high failure rate of SMMEs, the proposed scrapping of the collateral requirement in relation to micro enterprises, the need for the development of managerial skills and other training for small business entrepreneurs was discussed.

Whilst most parties felt that community re-investment legislation which would force banks to lend to certain sectors such as SMMEs was not viable, it was clear that banks had to play a more meaningful role especially in financing micro enterprises. Immediate solutions to financing problems could be in venture capital mechanisms, financing through the micro financing industry, the lowering of interest rates for SMMEs through subsidisation or other forms and through village finance service co-operatives.

A more long- term solution involved the challenge of restructuring and reforming the whole financial sector in a variety of ways. One of these was the possibility of the emergence of bonds through securitisation and of SMME money market funds. The advantages and disadvantages of financing SMMEs by means of bank loans or alternatively by means of investments through securities markets were discussed.

With regard to banks' reception of previously disadvantaged persons seeking finance for SMMEs, there appeared to be a relationship problem involving such issues as perceived discriminatory practices and transformation problems. A new mindset needed to develop in the entire banking industry about how one dealt with people and how issues and problems were handled.

MINUTES
Diakonia Council of Churches
Ms Nomabelu Mvambo-Dandala, Deputy Director General of the Diakonia Council of Churches, noted her organisation's concern for economic justice. In four years its Economic Empowerment Programme has trained 1500 trainees, half of whom are women, in life skills, small business skills and technical skills which include management, electrical installation, carpentry, upholstery, woodwork, catering and sales.

One prominent reason for the failure of persons to succeed in small business was the refusal of the banking sector to assist many potentially successful projects. The reason for many being turned away from banks was because of lack of collateral, despite there being some viable small business ideas.

With the current state of poverty, small, medium and micro business enterprises are crucial to the economic survival of millions of South Africans. One of the Diakonia Council of Churches recommendations was that the collateral requirement be entirely removed for loans below a certain level. International research had shown that survivalist business people, particularly women, tended to pay back loans almost religiously.

They made the following five recommendations: That the collateral requirement should be removed entirely for loans below a certain amount. That there should not be compulsory minimum amounts in respect of loans. Interest rates for small loans should not exceed market rates. Loans should not be linked to savings, since many people would be excluded. There had to be an agreement at the outset on the time frame within which loans would be repaid.

The financial services sector needed to undergo a fundamental change in mindset as regarding the majority of South Africans as "unbankable" would not help the situation.

National African Federated Chamber Of Commerce And Industry
Mr Boetie Letsoela, Development Manager of NAFCOC, stated that the SMME sector has not made the impact which they should have made for a number of reasons. For example there has been a systematic exclusion of the largest chamber of commerce, representing black business in South Africa. Further, Khula is misplaced in terms of location. He objected to their having offices in Sandton and Rivonia. They should have agencies close to the people on the ground such as in Soweto and Springs.

He further said that "the Department of Trade and Industry had decided that the empowerment of blacks was synonymous with the infiltration of our fellow Indians in all the key positions within that department". He felt that the government had to recognise NAFCOC as the custodians of black business in South Africa. He failed to see how projects, which addressed the SMME sector did not solicit the services and /or participation of NAFCOC.

Funding of the SMME sector had to be more effective and some mechanism should be put in place to deal with this. NAFCOC had suggested that the Industrial Development Corporation and Khula had to join as one in this regard.

He had a problem with the banking sector'slack of involvement. He said that after speaking with Mr Coovadia (of the Banking Council) about the exodus of banks out of highly dense areas, he was told that "banks had to make money like everyone else". Banks, he concluded, had to make a meaningful contribution in order to address the issues of unemployment and crime.

Discussion
Mr S Fenyane (ANC, Northern Province) said that the Diakonia Council of Churches had recommended that the collateral factor should be removed in total from loans and that loans should not be linked to savings. He asked them what recourse the banks should have in the event that loans were not repaid. How should one balance the fact that banks operated to make profit against the fact that SMMEs needed funding.

Ms Dandala said that collateral should be removed for loans below a certain level as determined by the stakeholders involved. In the short-term, there should not be linking of savings to loans because the reality was that this sector did not have savings. People started from a very disadvantaged position. Later on savings could be linked when people got loans of increasing size. People would then have to open savings accounts. It is often said that banks are there to make profits. They were in fact making profit out of the poor because the poor made deposits, often collectively, with these banks. Banks therefore had a duty to reinvest in the poorer communities by financing SMMEs.

Ms B Ntuli (ANC) asked the Diakonia Council of Churches if they would be in a position to be a retailer and finance small business, if given the chance. It was clear that banks have indicated their unwillingness to take risks.

Ms Dandala said that if what was meant was the Diakonia Council of Churches could be providers of credit, she felt that they were in a position to establish collateral funding so that when an ambitious first time entrepreneur went to a bank and needed collateral, the church could have a fund enabling persons to go to a bank and secure a loan.

Ms B Ntuli said that NAFCOC had not given any suggestions on how to finance small businesses. This was the burning issue. She agreed that Khula was in Rivonia which was far from the people, however Khula was not a source of finance. She asked if NAFCOC had suggestions on ways to finance small business especially in the remote rural areas.

Mr Letsoela said that people farming in urban areas were organised into farming unions and co-operatives. Disadvantaged people were not even at this stage. In order to kick start this, there had to be a mechanism in place which would allow them to access persons with expertise to form legal persona in their areas.

Mr R Davies said that the previous week the Banking Council had argued that the banks had a role in financing small and medium businesses through specialised institutions, but would have no role in financing micro business. Other institutions had to be looked at to play this role. He asked whether banks should finance loans for these micro businesses without collateral, or whether other kinds of financial institutions should perform this role.

Mr Moosa asked Mr Letsoela to clarify the statement that "the Department of Trade and Industry had decided that the empowerment of blacks was synonymous with the infiltration of Indians in all the key positions".

Mr Bruce noted that what came through from NAFCOC was that there was an acceptance that it was not necessarily a banking function to provide very small loans (as NAFCOC had mentioned Khula and the IDC). Mr Bruce wondered why nobody in NAFCOC had come up with a business to get into the small loan market since this had to represent a business opportunity. Finally he was also puzzled by the "Indians and the DTI" statement. He asked why this was raised, who are they and what the problem was.

Mr Letsoela said that because of lack of other words he had "used the words that he had used". He said that everyone was South African. Perhaps he should have said "South Africans of certain origin". He was not being racist. He said that the problem was that if one looked at those in the DTI, from the second person below the Minister, the persons actively involved especially on SMME projects, one would understand what he was saying. Secondly when the DTI was questioned by people about opportunities arising and how to access various things, they were told to look at the DTI's web site. 90% of South Africans did not understand what "web site" was.

Mr Moosa said that if there was a perception that DTI was structured in a way that resulted in disadvantage to the black business sector, then this had to be addressed and taken up. He however did not understand what the problem was. Alec Erwin was the Minister. Lindiwe Ngwane was Deputy Minister, Dr Alistair Ruiters was the Director General, Mr B Sibisi was the chief director in charge of small business, Patrick Kholo was the Director in charge of the small business programme. Siswe Tati was the CEO of Khula, Kate Moloto was the CEO of Ntsika. He could not understand what NAFCOC's complaint was.

Mr Ben Turok (ANC) said that he found NAFCOC's presentation depressing. Everyone knew that there was a serious problem with small business and the fact that the department had not delivered on the scale that everyone wanted. This applied across the board. The committee had had delegations in the Western Cape who had met Coloured, Indian, African, and White small businessmen. They all had problems. Clearly the programs were not working as well as desired and the committee had discussed this on many occasions. What he found very depressing was the racism here. He found the constant harping on Indians very offensive. He had tried over many years to work with NAFCOC, had never heard this kind of talk from them before and was very disappointed. Mr P Gomomo (ANC) agreed with Mr Turok. He suggested to NAFCOC that one perhaps shared the frustration of those who reported incidents of exclusion or discrimination to NAFCOC. However they could not be dealt with if the full details were not revealed.

Mr Letsoela said that he could not avoid the use of the words in order to indicate what he was talking about. He agreed with the proposal that the issue should be addressed and people involved should be pointed out.

Mr L Zita (ANC) felt that NAFCOC had to address some of its own problems, for example the fact that the meeting did not receive a written submission or any "real meat in terms of proposals". NAFCOC had to be committed to return, perhaps in a month's time, with concrete alternatives on financing SMMEs since what had been received was not that helpful.

Ms Ntuli said that she was a bit frustrated since it seemed that there was a new NAFCOC and not the NAFCOC that she had known. She had been a founder member of NAFCOC and was a member for years. A NAFCOC that would speak racially was different to the one she knew. She urged them to come to the committee with concrete suggestions on how to finance small businesses and how they should be run.

Mr Moosa said that the problems and difficulties around the SMME sector was understood. He thought therefore that an organisation like NAFCOC would have suggestions and concrete proposals to put on the table, saying that they represented the SMME black business sector in South Africa and knew the problems and knew what needed to be done in order to address these. NAFCOC was an organisation occupying a position of leadership in respect of the SMME sector and such proposals were not forthcoming from NAFCOC's input. He asked them to address this.

Mr N Bruce (DP) asked Diakonia Council of Churches whether, in making their five recommendations on small loans, they had used research to show what impact these suggestions would have on banks, the banking system and monetary policy in particular. He felt that these were quite radical suggestions. The Banking Council had figures to show that a small loan of R500 if costed out at a market rate (due to the impositions of Reserve Bank and other authorities) would cost out at an interest rate of about sixty percent per month. He felt that there therefore had to be justification for the suggestions made.

Ms Dandala said that the proposals were made from an informed position. Diakonia Council of Churches as an organisation had done its homework and has worked with organisations which had gone to the extent of doing research in this area. In addition these organisations had live experiences on these issues and in Diakonia Council of Churches' campaign, they were working with these organisations who enriched them.

Ms Ntuli asked who the trainers were in Diakonia's training programmes and how they were accredited.

Ms Dandala pointed out that the training that occurred did not happen in a vacuum. It was contextual and was also linked to development. Thus it first had to be determined how a specific person would use a specific skill before the person went for training. In this way they tried to avoid training people for unemployment. Training institutions, such as Kupuka, Umlazi Technikon, Tuzuma and others were made use of. The training was accredited by the various boards. In terms of payment for training and transport, the Diakonia Council of Churches did subsidize this to a certain extent. The participants or beneficiaries were encouraged to contribute however little they could towards this as a commitment fee since they believed in empowering people rather than creating dependency.

South African Reserve Bank
Dr Delport and Dr B Falkena, advisor to deputy governor Jill Marcus, were present.

Their focus was on why new legislation to force banks to direct some of their lending to such agents in the economy as SMMEs, should be avoided. They looked at the role of the Bank Supervision Department within the South African Reserve Bank, responsible for regulation and supervision of banks especially in regard to protection of depositors and maintenance of rigorous credit standards to ensure repayment of loans. A major problem of the 1997-1998 Asian financial crisis was the poor credit-risk management of banks in the region and by forcing banks to lend to SMMEs would not send the right signals to investors, locally or internationally.

The BSD's role in social upliftment was looked at especially in relation to micro lenders as well as village financial service co-operatives. Other alternative methods to finance SMMEs were looked at in terms of a medium to long term scenario but the need for further research existed. The advantages and disadvantages of financing SMMEs by means of bank loans or alternatively by means of investments through securities markets were looked at.

Khula Enterprise Finance Ltd
Mr Phuti Matlala, Manager of Loans at Khula, said that a broad framework had been established for Khula to do what they had been mandated to do. It was however a reality that enough was not being done by the banks.

Khula had taken over the guarantee schemes so that Khula would essentially provide collateral for bank loans for previously disadvantaged entrepreneurs unlike the old Small Business Development Corporation which dealt with guarantee schemes for whites.
Khula had R256 million for guarantees, of which R247 million was already allocated.

He cited the treatment of Khula by the banks. Khula had been subjected to "a shifting of the goal posts" in its interaction with the banks. The banks started off by telling Khula that what they needed were guarantees. When Khula put up guarantees, they were told by the banks that these were insufficient. When they increased the guarantees, the banks said that they were looking for good clients with good managerial skills and not for guarantees against failure. The banks said that Khula had a wrong gearing, since what one wanted to do was to give entrepreneurs loans to gear them 100%. Khula decided to set up an equity fund to look at opportunities for entrepreneurs, coming from disadvantaged communities, in order to make the gearing appropriate. Khula thus went into the scheme of preparing business plans. Finally it was said that the banks were facing competition as a result of globalisation and this was not the sort of business they wanted anyway. The guarantee scheme was thus moving at a sluggish pace because of the banks.

It did not matter how long one had hearings on this issue, there would not be significant progress because of another issue as well: a relationship problem. People wanting guarantees, who walked into the South African banks were poor, without education and with no assets. They had all sorts of problems which other entrepreneurs did not have. Bank managers, who were supposed to be able to advise such people of their alternatives did not even mention Khula to these people. They themselves often did not know about the guarantee scheme, and if they did know they did not even inform people.

He pointed out that it was a fallacy that the micro lending sector was a viable alternative in respect of SMME financing. According to statistics released by the Micro Finance Regulatory Council, only 4% of the 1,7 billion rand of transactions in the micro lending sector was done for enterprise purposes. Micro lenders were never established for enterprise financing. Real alternatives had to be sought. Banks should play a role by entering into partnership with institutions like Khula.

He felt that there had to be institutional arrangements which pointed out as a? banking community what was being done, what problems there were and what areas were being looked at. Khula felt that given what they had done as a company, they should be stretched to the limit in terms of providing guarantees for SMMEs. In terms of their own capitalisation, it was clear that Khula should be able to roll out in the region of more than half a billion rand in terms of guarantees, but because of both the unwillingness of banks to take risks (which were not particularly high) and invest in the people and particularly because of the relationship problems referred to, this was not happening.

Department of Trade and Industry
Mr Alan Hirsch, Chief Director of Business Regulation and Consumer Services in the Department, stated that small business development was important for four reasons: poverty alleviation, black economic empowerment, competition in the economy and job creation. There were various factors constraining small business development such as the lack of access to professional, financial and managerial skills, to growing markets, to competitive technologies and to finance.

With regard to SMME problems in accessing finance he also referred to the relationship problem between bank managers and their black clients.

He acknowledged that the problems could not simply be solved through new rules for the banking sector. There were structural and institutional challenges which required a continued concerted effort from government and the broader society. More effective ways had to be found to transfer wealth and incomes to the poor. Nevertheless there was a great deal more that banks could do as critical economic development institutions occupying a central role in the formation of capital in a market economy.

The DTI's involvement in facilitating bank lending to SMMEs, competition and risk in the banking sector, the role of Khula and credit guarantees, disclosure and a possible Community Reinvestment Act like the USA model were other issues elaborated on by Mr Hirsch.

Discussion
Ms Ntuli felt that the marriage between Khula, the banks and entrepreneurs did not work. Banks were not prepared to help black entrepreneurs. She said that the Reserve Bank had indicated that there had to be competition of some kind. Would this cause banks to "repent" and start to help black entrepreneurs. She felt that white entrepreneurs were helped because they had collateral but blacks could not get money anywhere.

Mr Matlala said that he would broadly give the reason for the relationship between the banks and Khula not being what it should be. It had much to do with Khula's mandate to provide access to finance for previously marginalised communities. This reality seemed to be a problem for the banks. It was possible that one was trying to flog a dead horse in asking the banks for finance. Thus the relationship could possibly never work at all. Perhaps Khula would have to look at other options.

Mr Moosa said that the Reserve Bank's suggestion that a bond market type mechanism be used to raise financing for SMMEs was a very exciting suggestion. He said this definitely needed to be looked and the committee had to see if there was a way in which it could concretise its ideas around this. However this would apply in the medium term (and the Reserve Bank agreed that this was a medium term strategy). In the short term there needed to be some solutions found around broad perceptions which may or may not carry certain legitimacy, such as the fact that there was a popularly held view (confirmed by the National Enterprise Survey) that banks were not doing adequate business with small black business. There was not the same kind of relationship established with white entrepreneurs who were looking for finance. This had to be looked at in the short term.

Mr Moosa said that in the short term other mechanisms such as red lining by banks which tended to exclude small businesses, needed to be looked at. Most SMMEs who had collateral, but who came from traditional townships or were part of tribal land schemes, were not regarded as having adequate collateral. They held huge chunks of the country in terms of property, which could provide the necessary collateral. There was certainly value attached to this property which was marketable and there was ample evidence to this effect.

Mr Moosa understood that there could not be tight regulation brought to banks to force them to change their lending policies, resulting in their not having sound lending frameworks. Yet something had to be done to address the immediate concerns, some of which were not in respect of lending policy).

He asked if the Reserve Bank was in agreement with some of his concerns and asked what the possibilities were around them.

Dr Falkena said that he did not have the answer to this question and would evade it to some extent. He said that if one was the head of a department and one appointed a person, two things to look at in evaluating such a person would be whether the person had the knowledge to do the job and if he was trustworthy. The same applied with a business. If a business had to supply credit, it had to that the client could use it (whether he had the knowledge) and whether he could be trusted. Capital did not feature that much. This evaluation of trust and knowledge, which ultimately drove all trade in a society, was probably best valued by a society itself. Banks practised red lining, often because they were not part of a local community. If people were confronted with serious red lining problems, this was another reason for opting for direct financing and not indirect financing through banks. Local communities could for example generate their own savings and decide where to invest it. Red lining could be solved in the long run, far better by the security markets than by the banking sector, which simply did not have the infrastructure of the security markets.

Ms F Hajaij (ANC) said that Dr Falkena, had said that structural adjustments were needed in the banking system. She asked what kind of structural adjustments would alleviate the current problems.

Dr Falkena said that the Reserve Bank was talking about a major adjustment. In the current banking system. In relation to deposits made, one had no say in where the money was invested. The shareholders of the bank decided on this. However with investment in a money market fund, one had far more say. If there was an SMME fund, the securitisation markets and all the instruments available in the capital markets could be used. Instead of investing with banks, people could through collective investment schemes - money market funds - create competition with the banks. He said that this competition had to come about.

Ms F Mahomed said that the Reserve Bank had vividly explained in their submission, that they did not believe that it was necessary to promulgate new legislation to force banks to lend money to SMMEs. It stated that it was for the banks to decide, based on sound business and risk management practices, whether they could cater for the special needs of SMMEs. She was concerned with this statement, since six years had elapsed since banks had first been approached about SMME financing problems. She asked what the rationale was for the current thinking of the Reserve Bank.

Mr Delport said that with the village bank concept, one did not need new legislation. If one looked at the submission one would see that these village bank co-operatives could accept funds from members against the issue of shares. They could accept deposits and make loans to members at their own interest rate. The existing structure was there and he did not see the necessity for new legislation.

Ms F Mahomed referred to Mr Alan Hirsch's comments. She said that there had been much talk about creative relationships between the banking sector and Khula and Ntsika. She wondered whether the parties were not stuck in their stagnating boundaries, which constrained them with regard to providing access and to ensure sustainable financial systems. With the current hearings, it would be the second time the stakeholders would have spoken. She wondered whether they would not be back at the drawing board again in the next couple of months without success in providing sustainable access to finance for SMMEs.

Mr Hirsch said that there certainly was not stagnation. There was quite a lot that had happened between the March 1999 hearings and the current one. The most important for the DTI was the issuing of the then new exemption to the Usury Act which was an attempt to begin to re-regulate the micro lending sector, which happened in July 1999 with the establishment of the Micro Finance Regulatory Council. Mr Hirsch felt that there were really significant possibilities if the re-regulation of the micro-lending industry was managed correctly. It could have a much more significant impact than the 4% or less of loans which currently went from micro lenders to small businesses. This process had begun and within a day or two DTI would be publishing a study on interest rate caps for micro lenders. This would provoke another debate about the regulation of the micro-lending sector. This might create an opportunity for the DTI to further refine the issue of the relationship between micro lenders and small businesses. There were several things which could be done in the next month or two as the response to the interest rates study came in.

The DTI was reforming the various pieces of consumer credit legislation which were supposed to serve consumers who borrowed money. Role players in this process included the Reserve Bank, the Department of Finance and various other regulatory agencies, as well as labour, business and the community through NEDLAC. It was hoped that this process would have an impact. It may be one of the ways in which to improve the disclosure of banks which could make a significant difference.

There was also a bilateral discussion between DTI and the Department of Finance over the fragmentation of regulation in the banking sector. Much of the challenge was to try and co-ordinate a wide range of industry players, both on the government side (the Reserve Bank, DTI, parastatal financial institutions, the Department of Finance and various regulatory agencies like the Micro Finance Regulatory Council) and the equally fragmented private financial sector as well as the other stakeholders. It was quite a challenging process where there was sort of a division of authority and a division of mandate, and sometimes other people were afraid that their territory was being invaded. Sometimes this was a mistaken assumption. When he had spoken about creative relationships, he said that was not trying to "fudge" the issue. The DTI had a fairly good sense of where it needed to go but it was difficult to get there because of the complexity of the institutional framework it had to deal with. This was a challenge being addressed in the bilateral discussions and hopefully in some of the other forums he had mentioned.

Another important development was the equity scheme which Khula had developed to solve the fundamental risk capital problems in small businesses. There was development but there was still a way to go.

Mr Lockey said that Mr Hirsch had a good submission which however concluded that the DTI "does not currently have answers to these questions" - which was very interesting. The submission stated that the state's experience in direct lending activities in the past was not very successful. Further, it was observed that a very high rate of 8 out of 10 SMMEs fail. Mr Lockey commented that everyone knew that in business, it was always a question of risk and reward, and given these kinds of risks it was almost certain that there would be no reward.

Another observation was that a main consideration for SMMEs was the high interest rates. It was questionable whether they would be able to repay loans at the high interest rates here.

Mr D Lockey looked at answers for what could be done to assist SMMEs. Firstly there was the issue of "incubators" where one could nurture, train and assist SMMEs to become viable businesses and become part of a value chain that would ensure that they become sustainable businesses.

Secondly he addressed the issue of a venture capital fund. The issue was not loans or credit for businesses, but the establishment of a venture capital fund assisted by the state in the form of tax rebates or other incentive. This would ensure that entrepreneurs with successful business propositions could become part of a value chain. They would have access to these funds for working capital to make their ventures successful. The problem in South Africa was not the absence of capital but the fact that people were scared to risk. Unless an environment could be created where insurance companies and businesses would take a risk and have a realistic chance of reward, one would not be successful in dealing with this problem.

Finally, given the magnitude of social problems such as unemployment, unless one created some form of subsidised interest rate for the poor and for start-up businesses, one would not solve the problem. There was an anomaly in society that the poorer you are, the more you pay for everything. Sometime the risk would have to be taken once more to ensure that opportunities are created for entrepreneurs in society.

Mr Hirsch said that he did not have the knowledge to respond effectively to the question of incubators since he was not really involved in small business development issues. He knew however that the Small Business Development Corporation had established a number of incubators and some were successful and others less so. There was a lack of managerial skills for many small businesses and these could be provided in a number of different ways. Incubators was one system through which small businesses could share managerial competence between them.

With respect to venture capital, there were currently a number of proposals under consideration in the DTI. There had to be a distinction between venture capital as defined commonly which was for a relatively established company, to get them from a certain stage of development to the next stage. What was being looked at here was very early stage venture capital. The National Empowerment Fund would have a significant venture capital component aimed at capitalising businesses of historically disadvantaged individuals and groups. This was on the table and would happen. In fact it should have commenced already but had been delayed somewhat. There were also a number of venture capital proposals on the table, relating to technology type businesses, which was a separate issue.

On the question of subsidising interest rates, either one had to go the route of trying to capitalise SMMEs, perhaps through the National Empowerment Fund, or through Khula's Equity Scheme. Perhaps other schemes could be developed which could be more effective in capitalising very small businesses. If one was able to go this route effectively, then the idea of subsidising interest rates probably would not be necessary. However he was not too sure if the problem was the relatively high overall interest rate. The path of a subsidised interest rate was a slippery one, which could be dangerous and very expensive. International experience showed that this would escalate and be very difficult to sustain.

Ms Ntuli referred to the Reserve Bank's submission and asked them what existed before the Banks Act of 1990 and how it worked. She was concerned about the changing of the Act shortly before the first democratic elections.

Mr Delport said that in the 1980s the banking sector was heavily regulated and very non-competitive. This gave rise to the De Kock Commission which set new standards for banks. Its recommendations to enhance competition were put in place in the new Banks Act of 1990.

Ms Ntuli said that it was a pity that she could not see the De Kock Commission report. She felt that if the guarantee scheme was not benefiting black people as it was intended to do, then the scheme had to be completely halted.

She quoted from the Reserve Bank's submission: "Banks are there to accept deposits of the general public and invest these savings of the nation in profitable businesses." She asked who the "general public" was since normally it referred to everyone and it was a fact that most people - the general public - deposited their money in savings accounts with banks. However when it came to banks lending to small businesses, they only looked into one sector of the "general public". She suggested that a Community Reinvestment Act could address this issue to protect consumers, because she felt that they were not protected.

Mr Delport said that the Bank Supervision Department was there to protect depositors and they amounted to 25 million depositors - the general public, who would be 33 million by 2003.

Ms Ntuli felt that the time for research on funding SMMEs should end since in the meantime the poor was getting poorer. Solutions had to be found and financing had to occur.

Mr Delport said that banks should not have to take the "brand" when non-banking financial institutions were not involved in development. There had to be a village co-operative structure elected to assist SMMEs meaningfully.

Dr Falkena said that it was wrong to promote SMMEs by making exemptions in the Banks Act. It was far better not to look at deposits but at investments. One should remember that a major problem at the moment was that the Companies Act was not up to scratch. It lacked accounting rules, corporate governance rules were totally outdated, and one simply could not make adjustments to the Banks Act unless the Companies Act was first in place.

Ms F Mahomed commented that more than 50% of the poorest of the poor were women, and thus gender sensitivity had to be taken into consideration when dealing with SMMEs.

Summing Up Remarks
Dr R Davies said that during parliamentary recess, a report would be prepared which would be circulated for comment before members returned. It would then be adopted when members returned, and the committee could consider having a debate in the House on this matter.

The issue of SMME finance was a real issue. This was underscored by Mr Hirsch's reference to the National Enterprise Survey. Access to finance was a major matter for the promotion of particularly black owned SMMEs.

From the evidence heard, there were a number of structural issues. These related to the challenge posed, particularly by the Reserve Bank, of a long term restructuring and reform of the financial sector with the possibility of the emergence of bonds through securitisation.

In the shorter term, the re-regulation of the micro finance industry could be used to differentiate between consumer credit and enterprise development loans with the balance tilted in favour of the latter.

There were also co-operative financial institutions and saving and loan co-operative ventures. There was the question of venture capital funds. There had to be a longer term vision which was looking at all these issues. There was legislation in the pipe line which would deal with some of these things. There was the need for banks to play a more meaningful role in financing micro enterprises.

There was what Khula called "relationship issues". There was legislation in place which dealt with such problems. The Promotion of Equality legislation required that there had to be reasonable accommodation for people who had been discriminated against. This may be something which would end up in the courts. Those that wanted to ignore this issue may want to take note of this, since they might find themselves engaged in jurisprudence in terms of the Equality legislation. There did seem to be another angle since there needed to be some coherence between longer-term reforms and shorter-term measures.

There seemed to be consensus around the need for more adequate disclosure of involvement in particular sectors. This was not to force banks to be involved in activities which were completely unviable. Disclosure and a somewhat more active financial press would instead allow people to distinguish between banks, affecting decisions around placement of bank accounts, involvement in particular institutions and access to various regulatory benefits

Mr Moosa added that the problems needing addressing were the risk capital, managerial skills and mentoring, and the failure rate of SMMEs.

On the issue of perceived discriminatory practices and perceived transformation problems, tere was probably much which could be done by the banks. A new culture and mindset needed to develop in banks from bottom up about how one dealt with people and how issues and problems were handled, how they were re-directed and how one found solutions.

The immediate solutions could be in the venture capital mechanisms, the micro financing industry mechansims, the mechanism in managing interest rates for SMMEs through subsidisation or other form and the village finance service co-operatives.

DTI had to formulate now a clear programme around four or five of these immediate strategies, which showed who was doing what. How Khula, the banks, the micro lenders and the village finance service co-operatives would be involved. There had to be clearly defined roles in this shorter term strategy.

In the medium to long term, he agreed that the solutions were in bonds, securities and new proposals around new forms of banking.

He said that there was another window which had to be looked at, namely the role of provincial and local government around certain incentive schemes which were in place such as the Maputo Corridor. This was a perfect vehicle to release finance to SMMEs involved in the Maputo, Coega or the greater Gauteng Special Development Initiatives These were vehicles which could be used to reduce and manage risk and to make sure that procurements going out to SMMEs were in a form that was linked to invoicing and so on.

Legislation such as the Banks Act, the Companies Act and the Usury Act had to be looked at. The roles that Khula and Ntsika played had to be redesigned.

The meeting was adjourned.