The role of banks in the provision of finance to small, medium and micro-enterprises (SMMEs)

A submission from the Diakonia Council of Churches

Background information

The Diakonia Council of Churches is an ecumenical church agency which serves the Durban Functional Region.

Diakonia works in partnership with the churches - both ‘mainline’ and independent - to contribute to peace, development and a better quality of life for the four million people in this region.

In recent years, Church leaders and congregations have expressed increasing concern over unemployment and poverty in the region. The Diakonia Council of Churches Council has decided that economic justice should be the top priority for at least the next three years.

Economic empowerment

Diakonia’s concern with economic justice is not a recent phenomenon. For some years, it has given serious attention to the question of economic empowerment. In 1996, the Economic Empowerment Programme (EEP) was launched. The EEP co-ordinates a three-phase programme, which offers:

* life skills training;

* technical training; and

* training in small business skills.

Training is provided by various institutions. In the past four years, 1 500 trainees have been trained in a range of skills, such as business management, electrical installation, carpentry, construction, motor mechanics, sewing, upholstery, woodwork, catering and sales. Half of the trainees are women.

While some course participants may go on to find jobs in the formal economy, the EEP aims to produce ‘job creators’, rather than ‘job seekers’. Participants are encouraged to set up small businesses and are provided with assistance in accessing loans from financial institutions.

Credit

Even if they have skills, it is very difficult for unemployed people to start a small business. As the following case studies show, access to start-up capital can make the difference between success or failure:

 

The difference between the first two and the last stories is obvious - in the first two cases, finance - received from a non-governmental organisation and an overseas funder - enabled a small business to get off the ground. In Mr Mlaba’s case, the refusal of the formal banking sector to assist him has meant that he cannot make any progress.

The finance sector

The banking sector regards South Africa’s poor, the majority of whom are black and female, as (to borrow the words of a highly respected banker) "unbankable". Recent statistics show that:

* sixty percent of South Africans have no access to formal banking

services;

* of the 40% that do, very few people from disadvantaged communities have access to credit;

* only 20% of South Africa’s 16 million economically active people have access to formal banking facilities.

Banks effectively exclude customers through:

* requiring that a minimum amount must be kept in an account at all times;

* only opening accounts for people who have permanent jobs;

* charging high amounts for withdrawals and management fees;

* setting conditions for credit which the majority of South Africans cannot meet.

The refusal of the formal banking system to extend its services to the poor has been a decisive factor in the rise of the money lending industry, which, despite recent attempts at regulation, still stands accused of exploitative and even fraudulent practices. Ironically, the formal banking sector is itself now getting involved in the money lending business.

Proposals

While there is widespread consensus that small, medium and micro enterprises will be crucial to the economic survival of millions of South Africans in the future, such enterprises will not succeed unless they are provided with the assistance they need. It must also be acknowledged that, for the majority of people, the future lies in micro - or very small - businesses. Yet these are precisely the people who are being excluded from access to financial services.

As a first step in addressing this situation, the financial services sector needs to undergo a fundamental change in mindset. Regarding the majority of South Africans simply as ‘unbankable’ will do nothing to help the situation.

The following are practical suggestions for changes to current banking practice:

* The collateral requirement should be removed entirely for loans below a certain level. International research has shown that survivalist business people (particularly women) tend to pay back loans almost religiously. They are not high-risk clients like those who are better off and want larger loans. The exact level below which collateral is not required would need to be assessed and regularly reviewed.

* There should be no minimum amount for loans, as a very small loan can sometimes help a small business get on its feet and repayment can be achieved without any trouble. Invariably, this would put the person in a position to proceed to apply for, and pay back, a larger loan the next time. There should be a maximum amount for loans where collateral is required.

* Interest should be charged at market rates for small loans, but should not exceed market rates.

* There should be an agreement at the outset on the time frame within which loans will be repaid, and only once a loan has been repaid should the person be able to apply for further loans.

* Loans should not be linked to savings, as this would exclude a lot of people. However, people who want to continue to get loans of increasing sizes need to be encouraged to have savings accounts and to be directed to those institutions where they are able to realistically maintain accounts appropriate to their needs.

Finally, and most importantly, financial institutions need to provide trained staff who are familiar with the needs of small businesspeople, who can speak the language of their customers and who can provide guidance in terms of business plans, financial planning etc.

In line with its commitment to economic justice, the Diakonia Council of Churches will be campaigning on the issue of credit for the poor in the future.