Khula Enterprise Finance Ltd
Corporate Strategy 2011-13
Economic Development Parliamentary Portfolio Committee
Venue: Parliament: Cape Town
24th August 2010
1
Presentation Outline
SECTION 1: KHULA & THE AREA WITHIN WHICH KHULA OPERATES

Khula’s Mandate, Vision and Mission

Focused Area

Government’s focused area

Financing Gap Filled by Khula

SME Financiers
SECTION 2: KHULA’S HIGH LEVEL STRATEGIC INTENT

Overview of Khula’s Business Operations

Khula’s Activities

Highlights of Strategic Priorities

Strategic Goals: 2011 – 2013
Focusing Financing Programmes

Strategic Goals: 2011 – 2013
SECTION 3: KHULA’S PRODUCTS

Product offering

RFI’s strategic priorities

Profile of Existing RFIs

Credit Indemnity Utilisation

Khula’s Public Sector Funds

2
Presentation Outline ....(Cont)








Khula’s Private Sector Funds
Impact of Khula Funds
Khula’s Products’ historical performance
Mentorship Programme
Khula Properties
Geographic distribution of property Portfolio
Properties’ Strategic Intent
Corporate Balanced Scorecard 2010/11
3
Section 1: Khula & the area within which
Khula Operates
4
Khula’s Mandate, Vision and
Mission
Mandate
To address market failures in the SME finance sector by leveraging and unlocking
private sector and other developmental funding for the creation of a vibrant SME
sector. Khula’s main focus should be on facilitating access to finance by SME;
maximising development impact and ensuring organisational sustainability
Vision
To be the development finance partner of first choice in the field SME
development
Mission
Khula’s mission is to provide finance, mentorship services and small
business premises to SMEs through a network of partnerships and to
encourage the sustainable development of SMEs whilst ensuring that
Khula remains financially viable.
5
Khula’s focus areas
6
Government’s Focus Areas
CHALLENGES
•The latest stats SA figure on unemployment is 25.3%.
•Prior to the economic crisis of 2008 and 2009; SA experienced growth rates that were
marked by structural imbalances.
•The SA economy still experiences structural constraints that impacts on its ability
to generate sustainable growth - - e.g. increases in credit and therefore
consumption has led to growth that is not underpinned by production.
•
•
•
•
To address these economic growth challenges, government adopted
12 outcome-based targets that were approved by cabinet Lekgotla
In January 2010.
Output indicators were developed out of the 12 outcomes.
Both the Economic Development Department and the dti are
responsible for outcome number 4 which talk to “Decent
Employment through inclusive Economic Growth”.
From this outcome 7 outputs were developed. All the 7 outputs have a bearing on how
Khula conducts its business going forward – but output number 6 is directly relevant
for Khula since its on Small Business and Cooperative support
7
Financing Gap Filled by Khula

Primarily black-owned & owner-managed formal SMEs

SMEs requiring financial solutions between R10 000 and R3 million, with
special emphasis on the underserved market segment of loans below
R250 000.

Start-up and expansions of early stage businesses

Focus on underserved provinces, rural areas and “urban poor” communities

Focus on women-owned enterprises
8
SME Financiers
Longterm
CAPITAL MARKETS
Long
INVESTMENT BANKS
DEVELOPMENT FINANCE
INSTITUTIONS
TER Medium
TERM
M
- term
MORTGAGE PROVIDERS
Medium
MICRO-FINANCE INSTITUTIONS
CONSUMPTION LENDERS
Short
-term
GAP
COMMERCIAL BANKS
STOKVELS, BURIAL SOCIETIES
MONEY-LENDERS
Short
Micro
Micro
Source: Roussos and Ferrandi (2008)
Small
Small
Medium
Medium
Large
Large
TRANSACTION SIZE
TRANSACTION SIZE
9
Section 2:
Khula’s High level Strategic intent
10
Overview of Khula’s Business Operations

11
Khula’s Activities …Summarised
Product & Activity
Business loans – Khula gives loans to Retail Financial Intermediaries (RFIs) who further on
lend to SMEs. However, through Khula Direct loans will be extended directly.
Credit indemnities – Khula assists SMEs to access private sector funding (through banks &
RFIs) by indemnifying their loans
Joint Ventures – Khula partners with the private & public sector to finance SMEs.
Funds –Khula establishes a Fund that will facilitate loans to SMEs. The fund is managed by
an experienced Fund Manager who does not contribute their own capital to the fund.
Mentorship Programme - Mentors are used for both pre- and post loan interventions as
well as capacity building to the RFIs.
Currently Khula has entered into an agreement with Institute of Business Advisors of Southern
Africa (IBASA) – to manage the mentors’ database.
Properties - is mostly located in previously disadvantaged areas. It provides operating
space for small entrepreneurs at discounted rates. It encourages entrepreneurs to move away
from operating in informal set ups to a much more formal environment.
12
Highlights of Strategic Priorities

Re-engineering wholesale model: To grow Khula’s outreach and impact thus
fulfilling our mandate as the flagship development finance institution for small
business

Khula Direct: Commence with the initial stages of establishing direct lending
operations to complement the wholesale model.

Recapitalisation & cost efficiencies: To build an effective institution that
achieves its SME development mandate in a financially sustainable manner.
13
Highlights of Strategic Priorities .. cont

Human Capital alignment: To invest in the development of our people to create
and retain high performance teams

Operational efficiencies: To establish effective and efficient processes to support
operational activities –

Position Khula Brand: To increase awareness of Khula and its products within its
target market and achieve high client satisfaction levels

Increase influence of Khula on SME formulation policy: Establish research unit
through which knowledge management on SMEs can be improved.
14
Strategic Goals: 2011 – 2013
•
Re-engineering of the wholesale model
•
Focusing SME Financing Programmes into distinct offerings.
•
Review and redesign of existing products ( Credit Indemnity ; LREF;
Business Loans)
•
Improved service delivery channels through regional offices and closer
collaboration with funding partners
•
Improved monitoring and evaluation
•
Alignment of human capital
•
Position Khula as a Fund Manager for SME development funds
15
Focusing Financing Programmes
SME Niche Finance
Programme
Focus Areas
Partner with institutions
that provide niche SME
financing products
EDD’s jobs growth drivers
- Minerals & beneficiation
- Manufacturing activities
Khula Products/Partners
- Anglo Khula Mining Fund
- Enablis Khula Loan Fund
- Entrepreneurial Growth
Fund
- Commercial Banks
Rural & Community
Development
Programme
Supply Chain
Finance Programme
Focus Areas
Focus Areas
Develop and promote
sustainable SMEs in rural and
targeted communities
-
Partner with institutions that
provide supply chain finance to
the public and private sectors
EDD’s jobs growth drivers
- Rural, agriculture & agroprocessing sector
- Socio economic development
- Tourism and business services
- Regional economic
development
Khula Products/Partners
- SEF
- Marang
- Identity Development Fund- Local Economic Funds
- Land Reform Facility
- MAFISA
EDD’s jobs growth drivers
- Infrastructure Development
- Public sector growth
Khula Products/Partners
- Khula Emerging Contractors
Fund
- NBF
- Supplyfin
- Mettle Factors
16
Strategic Goals: 2011 – 2013
•
Khula Direct
Detail Design
Build
• Convert regional
offices
•
Processes
•
Policies
•
Blueprint
• Set up first
branches
•
Secure funding
• Hire field staff
•
Credit scorecard • Build IT system
• Organisation
redesign
Phase 1
Phases 2 &
3
• Open first branches • Acquisitions
• Appoint key
strategic partners
• National expansion
• Review model
• Launch SME
development
campaign
• Test model
• Capacitate head
office
17
Strategic Goals: 2011 – 2013
• Recapitalisation
 Establish a corporate affairs function to raise funding and liaise
with donor and investor organisations such PIC, IFC etc to
leverage funding for Khula
18
Strategic Goals: 2011 – 2013
The Human Capital Management (HCM) of the new Khula Structure

will designing organisational structures that supports both the restructured wholesale model and Khula Direct. Activities that the
HCM department will undertake include:


Conducting skills audits with current staff

Developing and implementing a change management programme

Recruiting new staff

Upskilling current staff

Redeploying staff
HCM will recruit competent staff to strengthen its legal compliance
and monitoring and evaluation capabilities
19
Strategic Goals: 2011 – 2013
• Improving operational efficiencies
In line with the EDD growth path; Khula intends improving operational
efficiencies
through:

General costs reduction measures through stricter budgetary controls
and other measures

Reducing red-tape - e.g. Decentralising some business activities to

regions and allowing them to take key business decisions.
Improving turnaround time – measures such as completing forms
electronically; reducing the length of time in approving loans;
automated reporting tool
20
Strategic Goals: 2011 – 2013
•
Branding and positioning of Khula

Launch of the June and Andrew Mlangeni SME Support Programme

Increase access to financial and non-financial support to SMEs

Mobilise public and private sector organisations to implement best
practices in their programmes dedicated towards supporting SMEs

Contribute towards increase entrepreneurial activity amongst South
Africans especially historically disadvantaged people
 Increase linkages between large enterprises and small business for procurement
and enterprise development opportunities through corporate affairs

Profile Khula success stories
21
Strategic Goals: 2011 – 2013
•
Increase influence of Khula on SME formulation policy


Policy formulation is one of the key drivers of the EDD’s growth path.
Research centres and academic institutions in the country have done extensive
on SMEs. However, there is a need for a government agency that plays in the
SME space – agency that understands and relate to the dynamics and
challenges of the sector.

Khula plans to establish an SME research unit that can influence government
SME policy formulation.
22
Section 3:
Khula’s Products
23
Product offering Suite of innovative financing instruments
o Business Loans
o Credit Indemnities
o Equity funds and Joint-Ventures
Khula
Wholesale
o Pre- & post Loan Mentorship
Khula Products
o Business Premises (Retail & Industrial)
oManage third party funds
o Working Capital
o Guarantees
Financing Partners
[Banks, RFIs, Corporate
Sector Partners, Public
Sector Partners]
Retail
o Equity Finance
o Bridging Finance
Financing Instruments
o Asset Finance
o Invoice Discounting & Factoring
o Group lending
o Asset accumulation
SMEs
End-user
o Job creation
o Rural development
Development Impact
o Economic transformation
24
RFI’s strategic priorities

Khula business loans are done through intermediaries (RFIs) who lend
further to end-users (SMEs).

Khula’s focus will be strengthening those RFIs who grow their outreach –
especially to rural areas (talks to spatial dimensions of the growth path).

Focus will be on those RFIs that provide niche products in areas such as
manufacturing; minerals & beneficiation; the green economy etc.

Khula to facilitate collection of current book
25
Profile of Existing RFIs
Branches
Khula Exposure
Loan Book
GP; LP; MP; EC
FS
EC
EC
WC
WC; GP
LP
LP
R30 m
R46 m
R55 m
R4 m
R36 m
R10 m
R5 m
R16 m
Business Finance Promotion Agency
EC
R19 m
Regent Factors (Proprietary) Limited
KZN
R107 m
R 329 m
RFI
Marang Financial Services
Retmil Financial Services (Pty) Ltd
True group(Pty)Ltd (EEIF)
True group (Pty) Ltd(EGF)
New Business Finance (Pty) Ltd
Vengrow Capital (Pty) Ltd
Supplyfin(Pty) Ltd
Small Enterprise Foundation
26
Credit Indemnity Utilisation
27
Credit Indemnity Scheme

Uptake of the scheme has decreased in the recent past due to
stricter lending criteria adopted by banks due to recession.

Scheme will be repositioned & customised such that administrative
burdens associated with managing the product will be reduced.

Take repeat borrowers who want to expand their businesses.

In the past participating partners to the scheme were commercial
banks only. Henceforth Khula will promote Institutional credit
indemnity to allow deserving RFIs to benefit from the scheme.

Scheme will be used as an incentive for private sector that wants to
operate in the green economy – portfolio indemnities.
28
Credit Indemnities
•
The loans to be indemnified must range from a minimum of R10k to a
maximum of R3m
•
The indemnity cover will range from a minimum of 50% to a maximum of
90% depending on the loan amount and the developmental impact
bestowed in the SME project
•
Khula charges an annual indemnity fee ranging between 2% and 3.5%
depending on the loan amount
•
own contribution in cash or assets towards the financial structure of the
business ranging between 2.5% and 10% depending on the loan amount
•
Maximum facility term is 60 months
•
The turnaround time is a maximum of 5 (five) working days
29
Khula’s Public Sector Funds
Partner / Fund Manager
Programme
Focus Area
Port
folio
No. of
Projec
ts
Business Finance
Promotions Agency
KHULA Emerging
Contractors Fund
Construction
R20m
35
Akwandze
KHULA
Akwandze Fund
Agriculture
R28m
29
Absa Bank
LREF
Agriculture /
Eco-Tourism
R42,6m
20
Standard Bank
LREF
Agriculture
R40,8m
9
First National Bank
LREF
Agriculture
R13,8m
4
Nedbank
LREF
Agriculture
R4m
1
Ithala
LREF
Agriculture
R30,6m
5
IDC
LREF
Eco-Tourism
R5,2m
2
R185m
105
Total
-
-
30
Khula’s Private Sector Funds
Partner
Programme
Focus Area
Business PartnersKhula Start-Up
Fund
• Start-up & early expansion
capital
Anglo Zimele
Empowerment
Initiative Ltd
Anglo – KHULA
Mining Fund
• Junior mining projects
Enablis
Entrepreneurial
Network SA
Enablis KHULA
Loan Fund
• ICT-focused
Enablis
Entrepreneurial
Network SA
KHULA Enablis SME
Acceleration Fund
• Supports all sectors
Entrepreneurial
Growth Fund
KHULA SME Fund •Early Stage Funding
Business partners
Ltd
Com’tmnt
R’m
• 120
• Black SMEs, rural areas &
women-owned businesses
• 100
• Pre-feasibility
• 20
• Guarantees up to 90% of
loans to SMEs
• 25
• 25
31
Khula’s Private Sector Funds .. cont
Partner
Programme
Focus Area
Com’tmn
t
R’m
Metropolitan Life Izibulo Fund
Ltd & Median
Fund (Pty) Ltd
•SME venture capital
finance
•Debt and/or equity
facilities
• 22
Identity
Development
Fund Managers
(Pty) Ltd
Identity
Development
Fund
•Start-up & early expansion • 75
capital
Fabvest
Investment
Holdings Ltd
Small Business
Growth Fund
•Start-up & early expansion • 70
capital
•Rural areas & townships
•Women & youth-owned
enterprises
32
Impact of Khula Funds
Actual
Total facilities to end users
334
Facilities to women entrepreneurs
25%
Facilities to Black entrepreneurs
89%
Facilities < R250K
42%
Facilities disbursed to priority Provinces
46%
Jobs created
2790
33
Funds and JVs


Given the restricted funds at Khula’s disposal; and the fact that funds have
a time lag before returns are realised; Khula will limit the establishment of
new funds in the period under review.
New funds that will be established in this period must meet the following
criteria:






The applicant must have a proven track record and be able to deliver scale
development impact.
Khula’s investment should have the potential to yield good financial returns
to encourage cross-subsidisation (ie financial returns from profitable
investments will be used to support projects that have scale development
impact).
The applicant institution (ie management expertise, systems, prudent
policies and processes) must manifest appropriate capacity.
Funds will be considered only for niche markets and sector-specific projects
The applicant must be able to co-invest with Khula.
Khula will act as an implementing agency for SME development funds –
thus diversifying its income
34
Khula’s Products’ historical performance
800
Approvals
700
600
R'mil
500
480
363
400
300
217
200
100
266
242
98
104
28
2009
2010
0
2007
2008
Credit Indemnity
RFIs/Funds
35
Khula’s Products’ historical performance
1200
Loan Book
1000
179
123
R'mil
800
600
59
264
364
460
473
442
2007
2008
162
230
412
400
200
335
0
Credit Indemnity
2009
Business Loans
2010
Funds
36
Mentorship Programme

PRE-LOAN MENTORSHIP: SMEs will be assisted with the development of business
plans if the meet the following conditions:

o
A feasibility study that demonstrates the viability of the business idea
o
A comprehensive and well researched marketing plan
o
Have some level of experience in the proposed business venture
o
Have a minimum equity contribution as defined by Khula’s financing partners.
POST-LOAN MENTORSHIP - Khula receives the intervention request from one of
its financing partners to:
o
Provide business support services to enterprises at an early stage (introductory/
compliance); Expansion or Decline stage (Turnaround) of the SMEs lifecycle
o
The intervention is only provided to SMEs that have benefitted from: debt and/
or equity facilities provided by Khula through its financing partners (Khula’s
indirect clients)
o
The intervention is offered for 48 hours over a period of 12 months
37
Khula Properties

Khula took over the Property Portfolio from Business Partners in
2001 in order to provide businesses with infrastructure and to
support SME’s.

This was a contribution in part towards the recapitalisation of
Khula - the total number of properties were 100.

The properties were valued at R129.8m when taken over and
currently are valued at R192m

Current total number of properties is 50
38
Geographic distribution of property Portfolio
39
Properties’ Strategic Intent



To earn a reasonable rental income return and sell non aligned properties
Retain and refurbish properties identified for retention
Portfolio is currently split as follows:







Retain - 26
Sell Immediately - 21
In transfer – 13
Empower tenants - Selling properties to them – Installment Sale Agreement
Scheme & Private sales.
Provide mentorship to small businesses with potential to grow
Identify properties to be developed in synergy with Khula’s business and
goals and also assist with local upliftment of the community
Engage in property transactions that assist in promotion of economic
development of SME’s in the relevant communities
40
Corporate Balanced Scorecard 2010/11
ACTIVITY
PERFORMANCE INDICATOR
TARGET
ACCESS TO FINANCE
Maximising access to finance
for SMEs (SME Financing)
Maximising development
Impact
Value of facilities approved to
intermediaries
R316 million approvals
Value of facilities disbursed to
intermediaries
R531 m disbursements
No. of jobs created/maintained
2 000
No. of SMEs financed by
intermediaries
Facilities disbursed to end-users
located in priority provinces (%
value)
Facilities disbursed to Black
businesses (% value)
1 500
40%
70%
Facilities disbursed to women
owned businesses (% value)
45%
Facilities below R250 000
disbursed to end-users (% value)
40%
41
Concluding remarks

The strategic plan focuses on consolidation of existing strategies and structures to
optimise service delivery and dedicated SME finance

The wholesale financier model has limited the ability of the institution to make
optimal impact and will be re-engineered

The key strategic thrust, in order to raise delivery to the next level and thus make
more meaningful impact to SMEs, is the design and implementation of KhulaDirect

Khula has built a strong delivery platform to increase access to finance to SMEs

Bolder investment required to sustain momentum
42
Thank You
43