Close Corporations Amendment Bill: hearings; SA Micro Finance Apex Fund: briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
25 May 2005
CLOSE CORPORATIONS AMENDMENT BILL: HEARINGS; SA MICRO FINANCE APEX FUND: BRIEFING

Chairperson:

Close Corporations Amendment Bill [B6-2005]
Department briefing on SA Micro-Finance Apex Fund
Institute of Certified Public Accountants submission

SUMMARY
The Committee was briefed on the South African Micro Finance Apex Fund (SAMAF) by the Department. The Apex Fund was not a saving institution, but would mobilise savings as a risk-reducing factor. The Apex Fund was created as a result of the market’s failure to reach the poor and unemployed with appropriate financial services. It would target 80% of women. Members raised concerns about the ability of the Fund to reach the "poorest of the poor"; capacity constraints and interest rate intentions.

The Committee also received a submission on the Close Corporation Amendment Bill from the Institute of Certified Public Accountants (CPA). The CPA proposed that the last four words of the proposed Clause 60(4)(c) should be amended to read "of its duties in terms of section 62". They also proposed that Clause 60(4) should also provide for the appointment of an incorporated private company as an accounting officer. The Department requested time to study the proposals and promised to revert tot the Committee in due course.

MINUTES
The Department of Trade and Industry delegation consisted of Mr L October (Deputy Director General), Ms M Johnson (Acting Chief Director: Small Business and Enterprise Development), Mr X Sithole (Khula: Managing Director), Ms W Ximiya (SAMAF: Social Development Specialist) and Ms N Msimang (SAMAF: Project Manager).

South African Micro-Finance Apex Fund briefing
The purpose of the presentation was to provide an overview of the Apex Fund Implementation Strategy.

Mr October said that part of the initiative came from pressure from the Committee. The Department had previously adopted a very generic approach with Khula Enterprise having to service the entire market on a wholesale basis. It was clear that Khula was not reaching all constituencies, especially micro enterprises. There was a gap in the market and hence it was decided that a dedicated micro finance fund should be established for micro entrepreneurs. The fund had been established and had a budget of R1 million. It had been launched and the Department was on the way to building a very effective institution.

Ms Msimang took the Committee through the presentation. (See document attached). She quoted the President as having said, "Almost ten years after its liberation from white minority rule, our country still faces many challenges. Many of our people are unemployed. Many of our people continue to live in poverty". The Apex Fund was created as a result of the market’s failure to reach the poor and unemployed with appropriate financial services.

The Apex was not a saving institution. It was looking at the mobilisation of savings as a risk-reducing factor. The fact that people had been saving together and had a reputation for working together on their finances gave them an advantage as opposed to a person who had been working alone. The people that the Fund was dealing with had no assets to use as collateral. The collateral that the Fund would be concerned about would be more in the form of social collateral. The core function was to reach as many people as possible.

Discussion
Ms F Mahomed (ANC) was pleased that women were driving the Apex Fund. There were many co-operatives in the form of stokvels. She asked how the Department envisaged making funds available to the poor who were computer illiterate and had very little accounting skills. She also asked how many women had gained as a result of disbursement of funds by the Fund. The presenter had said that they were available and not shy to go remote rural areas. She asked how "available" their office was in terms of outreach projects.

Ms Ximiya replied that when they started village banks they introduced manual systems. It was found that within the village itself there were always people who were educated to some extent. Such people could be trained to keep and reconcile books. This had been done and there were some success stories. The reason why they talked about appropriate systems was that they would not deploy systems that were used in a commercial environment. One should look at the environment and choose the appropriate system accordingly. One should rely on communities because they had been sustaining themselves. There was experience in the communities and they had better knowledge of poverty in the area. The Fund should build on the community’s experience and not obliterate it by a new product. She agreed that capacity building was a huge exercise but one could not avoid it. The interventions should be linked with what already existed within the communities.

Ms Msimang replied that computers were necessary to make systems "talk" to each other. If one did not try and ensure systems were in place then they would never be used. There were places where one could not introduce computers immediately but this should be an exception rather than the rule.

Ms D Ramodibe (ANC) said that the initiative was exciting because it was addressing the poorest of the poor. She asked the presenter to elaborate on their roll out plan as far as it related to Gauteng province.

Ms Msimang replied that Gauteng province had a lot of stokvels. The Fund was targeting such formations. Rolling out in the province was not any different from rolling out in Limpopo province. Spaza shops were forming co-operatives because they had seen the need to consolidate their energies so that they could have a positive impact in their communities. They also needed financial services and transport.

Dr E Nkem-Abonta (DA) said that poor people would always be around us. The government was trying to solve the poverty problem. He wondered if it was closer to doing so than it was ten years ago. It appeared that the Apex fund would operate on a wholesale strategy. The Committee had been told that the model had failed and this was one of the reasons for the re-engineering of Ntsika and the National Manufacturing Advisory Centre (NAMAC) complex. He was not against the model and there was a lot one could say in favour of the model. He asked if the Department had thought through the model and if it would say that the strategy was not working. In terms of this strategy, the Fund would have to work through intermediaries. Sustainability was important. The institutions that the Department would want to work with would have to be profitable and not need too much support. There was nothing to indicate that they would be sustainable. He asked what kind of support the Fund would give to the institutions. The question was whether the institutions would be trained or just given money to lend to more people at a lower interest rate? He asked if the Fund would lend the institutions some money at a lower interest rate so that they could lend it to people at a higher interest so as to make profit? If this were to happen, would the person on the ground not receive the loan at a higher interest rate and therefore find it difficult to run their business? The Fund would appraise organisations that it would want to work with. He asked what they would look for in the appraisal process. Would they ask for the institution’s books in order to see if they were profitable?

Msimang replied that the poor would always be amongst us and this was the reason why the government had seen the need for SAMAF. This was a mammoth task mainly because SAMAF was dealing with demand rather than supply. In the past financial services were given to people because the banks or individuals had money from which they wanted to make more money. As consumers, people had their own needs. SAMAF was saying that there were demands and people needed financial services. What was needed was to say to the people that if they had some kind of organisation, the Fund would top up their capacity and give them what they needed. The satisfaction of a demand always created a demand of another product.

Professor B Turok (ANC) reassured the presenters that the Committee would support the initiative. However, the Committee had a public responsibility to evaluate and understand things. The use of acronyms was very problematic. If the Committee did not know what the acronyms stood for how would the public know? He requested a document with the full names. He said that his wife ran a credit organisation for domestic workers in Muizenberg. It had been running for about three years, had about R40 000 and about a hundred members. She had attended a lot of meetings in order to get the organisation off the ground. So far there had never been any disbursements. She had made a huge human investment. If one were to expand this kind of process on the scale that the Department was talking about there would be a huge investment by the state. One should look at the institutional investment that was required. The presenters had been very eloquent and had a development language. However, the development language must be backed by facts. He asked how many people were running the Apex Fund. He said that his wife was building the capacity of domestic women in Cape Town. Some of them were educated and sophisticated but the capacity building effort that was required to manage the institution was very big. There would always be problems if one did not get the issue of capacity building right and Ntsika had this problem. He asked if the Fund had the capacity to do capacity building. Internal evaluation by the Department was suspect because the Department had a vested interest. It would be better to have evaluation by independent and external institutions. The flow chart of activities would take long. It would be preferable to have details on costs per loan from an independent evaluator. He would welcome a copy of the audit by National Treasury. The Committee would support the initiative on the basis of a sound understanding of issues.

Ms Msimang replied that the point on external evaluators was taken. However, the Fund had a unit. People would normally approach the Fund and show them the different institutions that they were running. What was important was to look at their organisation’s capacity, whether if fitted the required profiles and whether they had a coherent and registered structure. SAMAF could help such organisations if they met the criteria.

Mr L Labuschagne (DA) asked if the Fund would be a wholesale operation and if individuals would be able to approach the Fund for money.

Ms Msimang replied that during most of last year, all interventions were wholesale based. It was very important to revisit why there had been so much failure around Khula. Khula was set up as wholesaler but the message that was put across was that small businesses could get finance from Khula. This set the institution up for failure. SAMAF was about outreach and ensuring that services were available. The model that SAMAF was working on envisaged a fairly small organisation with expertise to work with partners. At the end of three years, it was envisaged that it would have 33 staff members. This was due to the partnership model that it was following. SAMAF was a hybrid. It was a wholesaler that had retailers in communities.

Dr Nkem-Abonta said that SAMAF was a wholesaler. The Fund would rely on partner organisations to extend services to the people. This was how Ntsika had operated. It had small business support centres that were not part of it. The partner organisations were the Fund’s outreach "tentacles" but did not belong to it. He preferred a wholesale arrangement. The Fund would have required a gigantic organisation if it was not a wholesaler. People should be aware that SAMAF was a wholesaler and should not do what they did to Khula by approaching it for individual finance.

Ms Msimang replied that the Apex Fund was not a wholesaler in the manner that Khula was. Khula was a credit guarantee office. They would say to a bank that if a person had applied for a loan, the bank should assess whether the person could establish a successful small business using its own criteria. Khula would for instance provide 80% of the loan and the bank would have to put pressure on the person should they default. This was not how the Fund would operate. The Fund was responsible for outreach and would be a wholesaler to institutions. The Fund would remain accountable for ensuring that the funds reached the people.

Mr October replied that SAMAF had been a hybrid model. It had a different scope and mandate. The concept of Khula was about trying to get the private sector to lend to small black businesses. It tried to reduce their risks by giving guarantees. It was unfortunate that Khula was judged on a broader mandate. People expected it to ensure that there were loans for small businesses. It terms of its scope and mandate, SAMAF would be responsible for the number of people it had lent money. The question would not be how many partner organisations it had helped. The organisational model it was using was very clear. Given the reach, SAMAF could not establish its own retailers across South Africa. The model would emphasise building partner organisations or building retailers that would not be fully owned by the Fund.

He said that there was a lot of encouragement from the questions and one was dealing with a mountain of scepticism about government intervention. There were people who were already asking how much the Fund had delivered. The Fund had spent time with the Minister looking at the model. It would lend the first money in the next few months. He welcomed any comments on the model. He appealed to people to give the Fund a chance to deliver on its mandate. People were already expecting failure in terms of this intervention.

Mr S Rasmeni (ANC) was pleased with the presentation. The agency had just been launched and had done well in terms of outreach. There had been many institutions that were set up and spent most of the time on themselves and not doing work. The question whether SAMAF would deal with individuals was important. The issue of staffing was very important. He asked if people knew about the existence of SAMAF. He asked if the Fund would rely on the information that was distributed by the partner organisations.

Ms Msimang replied that the Apex Fund was meant to target women because women were mostly grappling with poverty. In terms of its mandate, SAMAF had to target at least 80% women. SAMAF was launched on Friday. It had operationalised to an extent that it had identified partner organisations. There had not yet been a disbursement to an end user. The disbursement to the end users would come after building the organisation’s capacity.

Ms Ramodibe said that the Fund would use the community to identify people who were in need of assistance. There had been serious problems with the child support grant in that some of the people who were accessing it did not deserve it. She asked what would be done to ensure that the Fund did not find itself with such a problem? She also asked if there would be anything done to assist people who were running their businesses from the "pavement".

Ms Ximiya replied that the Fund would reach out to communities by identifying structures in the community. In remote areas there were church groups, savings groups and women’s groups. The Department was not new in the sector and some of its staff had worked in the area for some time.

Professor E Chang (IFP) asked what interest rate the Fund would charge. It was important to have a sense of the interest rate charged by the Fund to retailers and retailers to the end user. She had been told the minimum rate was between 19-29%, depending on the risk. She asked if Khula would give credit guarantees to both the Fund and banks.

Professor Turok said that scepticism was not necessarily negativity. As public representatives, Members had responsibilities that they had to discharge. He did not mind having subsidies. The State should provide subsidies but one should know the scale of subsidies. South Africa could afford a degree of subsidies to the poor as long as the subsidies were for a creative endeavour and not just consumerism. A lot of money was given back in the form of tax relief every year. The Fund would require a big roll out to the entire country and it might be useful to enlist the help of Members of Parliament. The Fund could use constituency offices to assist in identifying target groups. Every Member of Parliament could help and there would be a number of people working on the project instead of 33 people servicing the whole country. Members of Parliament might have a more positive attitude to the project if they were involved in it.

Ms Msimang replied that they were hoping that Members of Parliament would be involved.

Mr Nkem-Abonta said that the issue of sustainability should have been at the core of the presentation. It would be preferable if the Committee were to have a full presentation on this. The money given back in the form of tax relief was money that government had taken from the people. Giving subsidies meant that the recipient was not being "useful" because they should have been able to pay for themselves. People liked subsidies but detested the increase in taxes. The only way of sustaining subsidies was by increasing tax.

Mr Sithole said that there was an economic dimension to the issue of wholesale versus retail models. There was a point beyond which one could not create direct retail capacity. Capacity building must be targeted and sustained. The decision on when to stop was critical. Systems and the capacity to collect were also essential. Some of the intermediaries that Khula had established were based on their ability to collect money. A sustained level of subsidisation was also important.

Mr J Maake (ANC) was worried about a complete staff of 33 people and outreach to the most rural areas. He asked if the 33 staff members would do capacity building or whether this would be outsourced. It had been said that the Fund would focus on women because they were usually the poorest of the poor. He asked if this meant that men would be disadvantaged and would have to form a ‘men’s league’ before they could access finance.

Ms Msimang replied that SAMAF would target 80% of women. It could dictate that women should not involve men in their organisations. The bottom line was that it was asked to target 80% of women. It would outsource capacity building.

Mr S Njikelana (ANC) said that it would have been helpful had the presenters shared some international experiences with the Committee. Loan recovery in some countries was very good. The role of Members of Parliament was very fundamental. He asked to what extent the Fund would use or enhance community support, particularly the role of community leaders.

Ms Msimang replied that the Fund had looked at other models internationally in order to see which one worked well. It was important to find something that would work in South Africa. They came up with a model that would focus on groups. In some countries, groups consisted of about 200 people because the countries were densely populated. SAMAF’s group size would be 15-20 people. It had looked at the cost of capacity per partner organisation. It had also looked at infrastructure and when it would be appropriate for the Fund to that start reducing input to partners. Risk was an element of the cost of capital and interest. The Fund had a band of interest rates that it was discussing with the Department and National Treasury. The band was sustainable within a certain context. The costing for sustainability had been done. It was important to hire the right kind of people. It was estimated that once the necessary capacity had been built in an institution, it would take between six and eight weeks for credit to come in.

Mr S Rasmeni (ANC) said he had always maintained that the money provided was too little to make an impact. Most people would require above R10 000. He wondered when the Fund would reach the poor if it was going to focus on the poorest of the poor.

Institute of Chartered Public Accountants briefing on the Close Corporation Amendment Bill
Mr N van Wyk (CPA (SA) Technical Consultant) presented the submission. (See document attached). He proposed two amendments to the Bill.

Discussion
Ms Labuschagne if asked if members of a Close Corporation could act as accounting members but could not act as such if they were in a Pty Ltd. Mr van Wyk agreed.

Mr M Moeletsi (DTI Chief Director: Policy and Legislation) requested time to look at the comments and see how to deal with it and come back to Committee. The Department could accommodate the first proposal but would have to discuss policy issues around the second one.

Ms Mohamed had a problem with the proposal that would exclusively benefit registered auditors. She felt too many people would have the powers of auditors, even those not registered.

Mr van Wyk replied that if a company was allowed to act as accounting officers, they should be officially recognised as accounting officers. They would not by-pass any regulations.

The meeting was adjourned