Prepared for the Trade and Industry Portfolio Committee – Parliament of the Republic of South Africa.

By: Bertin Badiata

Date: June 14, 2000

Venue: Good Hope Chambers – Cape Town.

The reconstruction of South Africa cannot be undertaken without the committed participation of the country’s great financial institutions. Government alone cannot transform the economy as it stands today. In our current situation , banks are the single largest type of financial institutions who can act as intermediaries between entities with surplus funds and those with deficit.

Therefore access to a stable source of funding is necessary, especially in the case of small, medium and micro-enterprises (SMME’s) in S.A. But the reality on the ground has shown that it is becoming increasingly difficult for SMME’s to obtain finance, whereas they are the driving force of the economy, with regard to job creation, economic empowerment, stimulating competition, entrepreneurship and skills development.

The present paper examines how banks can participate in the broadening of access to financial services by SMME’s in a sustainable way.

If we analyze the historical economic structure of the old South Africa, we will find that the policies in place were not in favour of the small , medium and micro-enterprise (SMME), especially from the previously disadvantaged groups. SMME’s struggled to get credit and loans to start and expand their businesses. While official data is still lacking, it has been estimated that blacks received less than 2% of total bank credit in the previous dispensation. One also need to look at entry barriers for small businesses in the big picture of the economy in those years. The legislative environment was complex and set up in a way not to favour the small entrepreneur, mainly from disadvantaged communities. Financial institutions at the time, particularly banks played a very important role in this process.

Since the 1994 election to date, experience has shown that banks have not totally adjusted their lending policies to accommodate emerging SMME’s. They have rather reduced their retail exposure to this sector of the economy. Market forces have driven the banks away from the very policy target group identified by the government for its long term economic growth strategy. This is in sharp contrast to the attitude to large empowerment deals where empowerment groups are being allowed to take equity in various ventures. The reason is because the SMME sector is about "lending" while the empowerment deals are about mergers and acquisitions.

It should be emphasized that the problem lies on two sides. On one side, banks still believe that the SMME’s market is a high risk market and less profitable. They still show a lack of confidence on the players in this market. On the other side, it is fully recognized that poor performance of SMME’s to deliver good results and repay their loans is mainly due to lack of training, management skills, business experience and collateral to secure their loans

It should be further emphasized that the banks so far did not know how to assess the risk for black owned SMME’s because they were unfamiliar with the sociology and local economics of black business.

To address the above shortcomings, the government has embarked on a number of initiatives in partnerships with the private and banking sectors. Institutions like Khula Enterprise Finance, Ntsika and the Community Bank were created. Khula’s mission is to provide collateral for SMME’s when seeking funding from the banking sector. Its peer Ntsika was charged to provide non-financial services to small business through service providers. The service providers provide business skills training and tender advice to entrepreneurs. 16 tender advice centres around the country can be considered to be like a drop in the ocean compared to the demand for such services from small businesses throughout the country. The community Bank was established in April 1994 with support from ABSA, Nedcor, Standard Bank and the Development Bank of Southern Africa (DBSA); the aim of which was to provide banking services and to make credit easily available to previously disadvantaged communities. But the Community Bank was not a success and went into liquidation.

Another major development from commercial banks has been that they now have small business units which offer a wide range of services to SMME’s.

Other initiatives by banks and the Johannesburg Stock Exchange (JSE) under the auspices of the government are respectively the Sizanani SMME’s financing project which is a joint project between a consortium of commercial banks and Pricewaterhouse Coopers sponsored by the Kellogg foundation; and the Emerging Enterprise Zone (EEZ) administered by the JSE playing an intermediary role between Capital seekers (SMME’s) and capital providers which could be commercial banks or business Angels. All these structures have so far worked but not to the extent that they were expected to deliver.

With regard to the banking sector, the government had wrongly overestimated the ability of this sector to advance the " National Imperative" of promoting SMME’s, and hence job creation. It was insufficiently unaware of the shortcomings of this sector and the constraints within which banks were operating.

In general, it can be said that the policies put in place were correct, but implementation has not been quite effective and coherent. Practical experience has for instance shown that guarantee schemes provided by Khula Enterprise Finance through commercial banks were not emphasized by banks to prospective SMME’s borrowers . Furthermore, it had been found that financial resources were allocated for SMME’s but not sufficient human resources were provided. Linked to this weakness was the inaccessibility of many of the government programs related to SMME’s development.

What South Africa needs presently is a clear and unambiguous policy supported by banks, the private sector and SMME’s. The current economic structure is not perfectly working because of its nature inherited by the government from its predecessors. There is a need to explore how the banks can get fully involved in broadening access to financial services in a sustainable way by SMME’s. Adequate solutions to render the SMME’s sector less risky should be adopted in order to enable banks to lend to this sector and recoup their money and make profit. Provide more training and make skills available to SMME’s in order to boost confidence at all levels (banking and within the SMME’s sector itself). More training should also happen in the banking sector for them to understand the SMME’s market.

On the other hand, the government should increase more funding for support of service providers to make more training and management experience available to the SMME’s sector. A lot of emphasis should be put in place for entrepreneurs to belong to professional business organization for networking purposes.

The government should consult with commercial banks for providing specific financial packages structured around satisfactory financial results which can be classified in certain categories on their performance.

To improve the current relationship between banks and SMME’s the government must review the current legislation, but not in a manner compelling banks to provide finance to SMME’s; rather a consultative approach should be taken whereby the banks jointly with the government , SMME’s and the private sector to find a common solution to the problems currently faced; in the interest of developing the SMME’s sector on one side and also rendering this sector more profitable to banks on the other side. Therefore providing more business to the banking sector and more credit available to the SMME’s.

Bertin Badiata

Managing Director

Citizens Finance Corp. of SA.

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