PRESENTATION TO THE SELECT
COMMITTEE ON TRADE AND
INTERNATIONAL RELATIONS
FUNDING FOR SMMEs IN SOUTH AFRICA
Mr Lionel October, DG
1
INDEX
• HISTORICAL PERSPECTIVE
• GOVERNMENT’S TARGET MARKET
• GOVERNMENT’S DIRECT LENDING TARGET MARKET
• THE SMME FINANCING LANDSCAPE
• DIRECT LENDING MARKET POSITION
• DFI SUPPORT CHALLENGES
• INTERVENTION BY GOVERNMENT – DFI CHALLENGES
• REFLECTION ON THE CURRENT SCENARIO
• FUTURE CONSIDERATIONS AND THE WAY FORWARD
2
HISTORICAL PERSPECTIVE
• Since the decision by government to intervene in the SMME
sector in 1995, SMME funding have been one of the critical
element of support
• Based on this quite a number of programmes in and outside
the dti family of institutions have been developed
• Pioneering these was the establishment of Khula Enterprise
Finance in 1996
• Government intention has been to address the market failure
as opposed to taking the entire share of the funding market
3
HISTORICAL PERSPECTIVE
CONT.
• The State envisaged itself as a facilitator of private sector
financing to SMMEs rather than the primary driver, relying on
the overriding assumption that the commercial banking
sector and other financing institutions would be attracted to
address the SME financing needs if they were backed by
government guarantees
• A high expectation was that government intervention will
crowd in the private sector funding to the sector
• This was to be enhanced later through the B-BBEE Financial
Sector Charter
• The above however, did not happen as expected
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GOVERNMENT TARGET MARKET
Loan sizes in the range of R10K-R3m, with particular
emphasis on facilities less than R1m, especially
<R250k
Start-up and
development /
expansion capital
Bias towards
underserved
provinces / rural
/ townships
Primarily Blackowned ownermanaged formal
SMEs
Underserved segments of the SME market
GOVERNMENT’S DIRECT
LENDING TARGET MARKET
o SMEs operating in low economic activity areas
o Start-ups and early expansion businesses
o Primarily bridging and working capital finance (no tangible
security)
o Primarily black owned and managed enterprises
o Priority to women owned and managed enterprises
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THE SMME FINANCING
LANDSCAPE
Driver
Category
Characteristics
Nature of Demand
Source of Funding
Number of
Enterprises

Medium
 Less than 200 employees
Medium to long term debt &

Corporates
equity

Banks/Financial Institutions

Over R250k

Private Equity/Venture

Asset based, working capital,

 Turnover > R25m p.a.
Opportunity Driven
Entrepreneurial
 Developed technical & business skills

Small
Capitalists
property finance etc.

Khula , IDC, NEF , Other DFIs
 Less than 50 employees

Short to medium term debt

Own resources
 Turnover < R25m p.a.

Asset based & working capital

Banks & Corporates
 Developed technical /limited business

Up to R250k

Khula & Provincial
skills

Micro
0,1 – 0,3m
0,2 – 0,5m
Development Corporations
 Less than 5 employees

Short term loans

Own & family resources
 Turnover < R150k p.a.

Up to R10k

Micro-lenders & Banks
 Some technical /limited business skills

Working capital

SAMAF & Provincial
0,6 – 1,0m
Development Corporations
Necessity Driven
Survival

Survivalists
 Individual self employment

Short term loans
 Turnover < R50k p.a.

Up to R3k
 Limited technical and business skills

Stock purchases

Own & family resources


0,7 – 1,2m
Micro-lenders
SAMAF
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DIRECT LENDING MARKET
POSITION
Low
Banks
Credit
Indemnit
y
High
Equity Investors
(JVs & SME
Funds)
Loan
Amou
nt
Risk
RFIs
(Business Loans for onlending to SMEs)
High
KhulaDirect
(Direct loans to SMEs)
Low
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DFI SUPPORT CHALLENGES
• The wholesale approach by the Development Finance
Institutions established by government posed a challenge
• The wholesale financing model has limited the ability of the
institution to make optimal impact
• The results were limited accessibility to the remote areas
and a limited range of offered products
• The slow take up of risk mitigating products such as credit
indemnity scheme by commercial banks meant that
government had to do something
9
DFI SUPPORT
CHALLENGES…CONTINUED
• The whole sale model did the following:
• Distorted market perceptions of the funding organisations
• Distance from end-users and assumed risk
• Fragmented small business initiatives
• The State envisaged itself as a facilitator of private sector
financing to SMMEs rather than the primary driver, relying
on the overriding assumption that the commercial banking
sector and other financing institutions would be attracted to
address the SMME financing needs if they were backed by
government guarantees
10
DFI SUPPORT
CHALLENGES…CONTINUED
• A large section of micro and small businesses experience
great difficulty in securing finance from commercial banks
due perceived risk and lack of collateral.
• An acute market failure exists in the provision of finance
(debt and equity) for early stage enterprises and those
requiring smaller facilities
• In addition, enterprises operating in areas with low
economic activity (e.g. rural areas) face even more barriers
in accessing finance than those in economically active
areas
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INTERVENTION BY GOVERNMENT –
DFI CHALLENGES
• Based on the abovementioned challenges, the dti in 2007,
proposed a direct lending to address issues of accessibility
and funding scale
• This was to be done through the existing infrastructure - A
khula direct lending was proposed
• The principle of direct lending model was intended not to
close the lending opportunities from commercial lending
• But was based on the principle of closing he existing gap
and addressing the market failure particularly in the lower
level of the enterprise market
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REFLECTIONS ON THE CURRENT
SCENARIO
• Direct lending alone will not solve the lack of funding
appetite in SMME market
• Challenges such as credit listing still pose some challenges
• The perceived risk in the sector still exists
• The recent SMME review raises lack or slow growth in some
other alternatives of funding, i.e. private equity funding,
venture capital and angel investments opportunities
• Even where they exist, the above still cater for the upper
lending market
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FUTURE CONSIDERATIONS AND
WAY FORWARD
The following should be considered for future SMME funding:
• Continue to provide risk mitigating products
• Assess the impact of direct lending (through SEFA)
• Investigate the involvement and growth of other lending
alternatives i.e venture capital, angel investments etc
• Investigate the possibility of introducing credit rating system to
mitigate the lending risk
• Introduction of information sharing platforms for the sector-an
alternative to the current credit listing
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FUTURE CONSIDERATIONS AND
WAY FORWARD
• Proposed B-BBEE Financial Sector Charter
– The Draft Financial Sector Charter introduced two additional
Sector specific elements being Empowerment Financing and
Access to Financial Services which are necessary for the
overall transformation of South Africa’s economy.
– There is undertaking by the banks in the Draft Charter of a
targeted investment of R48 billion towards Transformation
Infrastructure, support for development of black farmers,
support for Black SMME financing and access to affordable
housing
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THANK YOU
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