We thank you for the opportunity to come and share ideas on our finance activities to SMME businesses.

First and foremost you will agree with me that there is confusion surrounding definitions of what we really mean by SMME. The Small Business Enabling Act covers too wide a scope in this category. So I will only take your time to deal with our level of participation in this market, our penetration, history & experience and hope that we will have a lively debate thereafter.

To begin I’ll give an overview of the contextual background of where small businesses operate, factors external, but highly influential to these businesses as well as the internal environment of these businesses and NedEnterprise’s response to these factors. I will then take you through some of the numbers i.t.o. total loans advanced, number of businesses involved, some insight into race/gender segmentation, bad debts history and profitability.

I will be able to take questions thereafter. I should place it on record that this is a very complex subject to cover in 20 minutes, so what you’ll get is a global summary only of the main points. We assume that the presentation today will be underpinned by a series of structured conversations going forward as this is a matter that will require serious and detailed input in several sessions in view of its importance in the national agenda.

The context:

We are part of the financial system, which is depicted, in the following model:

Individuals, corporates etc

Banks Regulators

Insurance companies Central Bank/Registrar Banks

Fund Managers/Unit Trusts Securities Regulation Panel

* Investment Banks JSE

Stokvels/Informal saving clubs Financial Services Board

Other (Pick & Pay etc.)

The money that banks use to invest (e.g. make loans) belongs almost 90% to depositors. Depositors, some of whom are pensioners, widows and poor people expect funds saved with the banks to not only come back safely but come back with a return/interest. Banks may lend this money or invest it. If there is a perception that a particular bank may have made some bad investments, depositors, almost in a herd like mentality, rush to withdraw their money. The bank so affected will suffer a liquidity problem as it goes below the proposed 10% reserve requirement expected by the central bank. It therefore means such a bank will be placed under curatorship, investigated, and either receive assistance from the Reserve Bank, or be liquidated. Recall a number of banks which nearly collapsed or collapsed, because of these factors.

Our new government has taken a tough stand against banks that get into trouble. The history of the old African Bank is a matter of record. There have been several other examples throughout the history of banking in this country. Once a number of banks collapse the whole country’s financial system becomes questionable, with serious consequences for the whole economy.

Lets now turn to the Small business sector, and in particular the start up sector and within that the historically disadvantaged sector. I’m afraid I don’t have good news for you. So you can tighten your seat belts. This is a high-risk sector with unacceptably high bad debt provisions and write offs. Almost 80% of new products launched fail in the first 18 months. 6 out of every 10 new businesses collapse in the first 18 to 36 months according to research. Our own experience as per Annexure 1 indicates that the start-up sector reflects bad debts ratios of around 25% to total SMME book. Bad debt ratios in most banks other businesses will generally be less than 3%. Some people will tell you there’s only 1 problem and that is access to finance, particularly the reluctance of banks to lend to this market. We as NedEnterprise have identified issues that are critical in the success /failure of this sector.

The structure of the South African market is difficult for start up small businesses. Bigger companies are able to have the competitive edge in view of their ability to influence their value chain from the procurement of raw materials, supplier manufacturers and the distribution which smaller entities do not have. These factors impact on the price that is eventually charged to the customer. Bigger companies will therefore be able to offer better pricing, quality and distribution. The smaller entity then battles to compete effectively.

Bigger and popular shopping malls would like to have bigger companies as anchor tenants to attract the buying public. Because of this factor the bigger retailers are able to negotiate better rentals relative to a smaller entity. A small business would therefore have higher input costs and a lower marketing and advertising budget in fighting for the same market share. Again this makes it difficult for the smaller entrepreneur because of lower resources to be on the same level of competitiveness. Consumers are always going to look for value at the right price, which unfortunately smaller businesses are unable to offer. They do not have the buying power to gain better pricing from suppliers which bigger companies have.

This is another critical area, and our apartheid chickens are coming home to roost. Its difficult to run a business successfully without a skills set. In marketing management, financial management, production and operations, human resources, technology etc. Since it is an acknowledged fact that black people were not allowed to be effectively in business, were denied proper education and training and were not in management positions in the private /public sector, where is this skills set and experience supposed to come from?. South Africa also does not yet have a viable entrepreneurial culture. The majority of the still few black people who have acquired some relevant experience are still climbing the corporate ladder in the private sector or they may be in government. They are yet to get into entrepreneurship.

New entrepreneurs need to have a hand to hold them. Even a senior business leader like Bill Gates still talks about the special relationship he has with Warren Buffet. Our black entrepreneurs also need to build and establish these relationships, particularly in the start-up sector, to receive and benefit from the experience, counsel, advice and wisdom of older hands.

It’s not easy for start-up entrepreneurs to access these relationships. We live in a strange country, where we do not follow and support the same sporting codes, do not socialize and play together and also do not share the same background e.g. old connections established by going to the same schools. The terms of engagement therefore become unclear.

There are 3 technological revolutions that have been at play, particularly beginning in the last century to the present period..

1. The technology of destruction e.g. armaments, missiles etc.
2. The technology of communications e.g. satellites, e-mail etc.
3. The technology of productive economic outputs e.g. hardware, software, bar coding, engineering etc.

The last 2 have become serious competitive issues in business. If a small business is unable to leverage either but competitors can, the small business will be in trouble. From an inventory management point of view most major retailers are able to use the latest technology to track inventory turnaround times, to understand which goods and volume are quicker sellers and which are slow, to enable them to manage their reorder levels properly and their working capital effectively. Smaller entities without access to some of these technologies have a problem in that it costs a lot of money to keep slow moving inventory, since a huge portion of this stock was financed by borrowed money. Requests for increased financing are then made without a clear understanding of what an optimum product mix and reorder level should be. The advent of the internet, business to business and business to consumer electronic commerce has become a major issue affecting all businesses. If smaller businesses do not have plans to increase their capabilities in this area, they will be facing negative consequences.

6. Rivalry within businesses

When a new business enters a particular market, existing businesses are likely to react in a manner that will protect their market share. Some of these businesses are even JSE listed. There’s a perception that small start up businesses only compete with like businesses. Nothing could be further from the truth. If you start a small diamond mining company you will be competing with the major conglomerates in the same arena.

These big companies have better resources in terms of raising finance, supplier relationships, marketing, intellectual capital, technology and even better customer relationship management. In short, if they chose to, they can turn your dream into a nightmare. We had a customer recently who was in the manufacturing of hair products, household cleaners and a cosmetic line. This business collapsed within 2 years from inception. The proprietor could not get access to the shelves of the major retailers because his competitors shut him out of shelf space by offering better terms to the major retailers. This they did by raising premiums on shelf space, increased promotion of their products, financial incentives to the retailer and reducing their prices on equivalent products. The small proprietor was later bought out by a major competitor.

This is the reality of free markets.

7. Access to finance

This to our view is the last piece in the jigsaw puzzle. Once both the impact of the external and internal environment of a business has been analysed and assessed, a decision can then be made on whether depositors’ money will be safe with a particular loan or equity transaction. Because we have to price for risk, loans in this sector will attract interest rates in the region of Prime+3%, which is costly on a total capital structure where between 80%/90% of capital is borrowed money. Some people will tell you that cost of borrowings is not at all an issue in this market. We do not know where this is coming from. Any cost in the input cycle of a business will have to be borne by customers. The higher the price you charge your customers to recover these costs, the lower the barriers of entry to potential competitors becomes. Profit margins are under pressure in most industries globally and those businesses that assume they can sustain themselves on higher margins without value added products, will always be vulnerable. If sharp competitors have not seen the gap, in time they will.

These to us are the issues that are facing start-up businesses in South Africa. I would be naïve or even intellectually dishonest if I pretended that all was well with the banks and that the issues of racism in advancing finance to black people was not a factor. I think like all other organisations in the country, banks mirror the strange society in which we live. But to simply generalise and say that the issue of not lending to black business is purely racially motivated would be inaccurate. I think that economic interest is the major imperative. Unless they are not working for a serious bank, there are no bank managers that I know of who have not been given tough targets to grow their businesses and make profits, in a highly competitive environment, when in fact there is not even much business going around. I would therefore find it strange that there are bank managers who are still preoccupied with pigmentation issues instead of doing business. But maybe again you can never say you know. If this is happening, then the impact of this behavior is largely exaggerated in the context of the debate about access to finance. We can only hope that the architecture of racial polarisation and stratification is improving.

The new political order and the revolution in communications globally have become allies in the struggle against racism. Blatant racism is on the defensive. The language of racial abuse is looking around for new euphemisms. The racists have never been more reluctant to proclaim their prejudices in public. Racism on the world stage and indeed in South Africa is at best declining and at worst in search of disguise and camouflage.

Nedcor has been involved in a number of initiatives in the past as well as going forward.

In the micro lending sector we were involved in the financing of micro business lenders such as IBEC, Women’s Development Bank, Cash Bank etc. The costs of administering loans in that sector are prohibitive, so we chose a strategy to use some of these retail financial institutions from a distribution point of view. With the problems experienced in this sector we continue to look for opportunities which will make viable access to finance to micro businesses. In this regard our People’s Bank initiative with Capital One will also develop appropriate strategies for this sector. Capital One of the USA has had success in developing lending products in the retail sector and we intend to leverage this technology for micro businesses as well.

Having identified some of the factors which are restricting small businesses in the broad environment we have developed our strategy on 4 pillars, i.e.

1. Access to markets

Various discussions have been held with amongst others Parastatals such as Denel, Transnet, Telkom, Eskom in terms of their small business procurement activities. Nedcor itself has designed a policy to guarantee the participation of small businesses in its overall procurement. 10% of the total spend which should be in the region of R 300m per annum has been targeted in the first year. This percentage will progressively increase on a year by year basis until it reaches critical mass. Government tender boards will also play an influential role in this regard.

2. Training and Development

We have designed projects with some of the country’s tertiary institutions to offer training to entrepreneurship where skills gaps exist. In this regard discussions have already been held with the centre for entrepreneurship at Wits Business School, Portchefstroom University’s Small Business Advisory Bureau and other universities, Technickons and other service providers, including some overseas bodies such as the United Nations Empretec Programme.

3. Mentorship

The retireved business executives association in South Africa has agreed to offer mentorship to small business people. Other agencies such as the British Executive Services Organisation will be sending out retired executives to assist in these initiatives in the area of mentorship. We have already held discussions with them and they have agreed to participate.

4. Access to finance

NedEnterprise will be playing a major role in the provision of finance in these steering committees in each project such as the Nedcor procurement project, to bring issues from 1 to 4 in a single structure.

A lot of progress in this regard has been made with the United Nations Empretec Programme, which should be launched shortly.

As you may have read in recent media announcements. Nedcor’s intended acquisition of Future Bank will give us a good opportunity in advancing our small business financing initiatives through our People’s Bank brand which NedEnterprise will now be part of. Our staff composition within NedEnteprise itself is presently in excess of 70% black from senior to lower management. As you can see in the annexure we have made interesting progress in the number of black business clients in our books.

Our lending book at NedEnterprise has been growing at the rate of R50m per annum in the last 3 years and we intend to drastically increase our participation in this market through the initiatives we have already created.

With that I thank you

A. BUSINESS BANKING R4.96BN

SME - NEDBANK

1. TOTAL LENDING O/D R36 342 502

Start up SMME and Mortgage Loans R16 477 000

Black business T/L & I S A R155 868 730

(NEDENTERPRISE) R208 688 232

NUMBER OF BLACK CLIENTS 1003 R 86 495 054

NUMBER OF WHITE CLIENTS 447 R122 186 178

TOTAL NUMBER 1450

2.) BAD AND DOUBTFUL BOOK

START-UP BLACK BUSINESS

NUMBER OF BLACK CLIENTS 56 R19 246 194

NUMBER OF WHITE CLIENTS 93 R28 869 292

TOTAL NUMBER 149 R48 115 486

3. TOTAL LENDING PER SECTOR

3.1 FOOD (FRANCHISED & NON-FRANCHISED) R 39 698 322

3.2 MANUFACTURING R 12 151 918

3.3 RETAIL R 64 556 023

3.4 SERVICES R 66 083 964

3.5 PERSONAL & OTHER R 26 198 005

R208 688 232

4.) WOMEN ACCOUNT FOR + 5% (NO. + 69) + R9 610 562

Having identified most of the problems which are restricting the environment in which SMME’s operate, our strategy in this market going forward means that we have to build linkages which can give these SMME’s some fighting chance in the areas of access to markets, training and development, mentorship etc.

In this regard we are building linkages with the following organisations in terms of their own SMME procurement programmes.

*Nedcor *Transnet

*Telkom *CSIR

*Eskom *Government Tender Boards

*Denel *Others

We have lined up various tertiary institutions/other training providers such as the Small Business Advisory Bureau of Potchefstroom University, as well as organisations of retired business executives in the mentorship area. All these entities will be brought in per project in an integrated manner. For example the Nedcor procurement project will have an integration of 4 elements:

• Guaranteed procurement
• Finance (NedEnterprise)
• Mentorship
• Training and development.

In view of our market share we expect to do financing in the region of

R400m per annum, best case, in these projects.