Financing a middle class
John Etkind
Published: 31-MAR-06

South Africa s faced with choices. It can put an African middle class in place with a hasty and heavily funded BEE programme and hope that it will take root and flourish, or it can financially nurture and mentor entrepreneurship and SMMEs to the point that they mature into strong contributors to the economy through sweat and financial encouragement.

South Africa’s road to economic stability is littered with the debris of failed, expensive, ill-considered BEE enterprises. The way is also lined with the unrealised hopes of entrepreneurs whose ventures did not see the light of day for the want of a few rands in start-up capital.

Common sense seems to be knocking at the door here, suggesting that the best course is a sensible blend of the two, with the one helping the other to the goal of becoming established and economically useful.

However, change could be in the air – at least from the banking and lending community. Doors that were tightly closed to the banging of SMMEs desperately seeking development capital now appear ajar. According to the Annual Report of the Micro Finance Regulatory Council (MFRC), the number of specialised SMME lenders increased from 7 in 2000 to 17 in 2004. During this time, disbursements from NGOs for SMME finance increased from R40mn a year to over R120mn, for loans up to R10 000.

While that’s good news, it’s still not enough.

“Despite this growth, this area remains one of the biggest challenges,” says MFRC chief executive Gabriel Davel. “When adding the estimated value of ‘consumer loans’ that are used for purposes related to small or mico-enterprises, the value of SMME finance increases to R771. This is still only 4 percent of all micro-lending for the year and there is little doubt that increasing the availability of SMME finance remains one of the biggest challenges in financial service delivery in South Africa.”

Whether or not financial doors will open any wider to seekers of SMME capital any time soon is an uncomfortable question.

Bankers agree that small business will be one of the key motivators in the structural alignment of the South African economy, riding on the swell of the consumer boom currently driving the economy.

“The next phase of real growth will come from small business – entrepreneurs adding value to the economy,” said Melt van der Spuy head of small business at Standard Bank. “This makes the small and medium enterprise sector very attractive to the banks.”

He told a Business Day SME banking survey that not only does a booming small-business sector result in economic growth, but fledgling businesses need a higher level of support and this opens up new opportunities for financial institutions.

Gavin Tarr, First National Bank’s head of business banking, says the SME segment is becoming vitally important to South African banks. “Banks internationally are moving their focus from large corporations to small-size ones and SMEs go a stage further to emphasise the lower end of the commercial market,” he says.

However, it’s not as easy as that sounds, and aspiring young business folk should not go rushing off to their banks with a bright idea looking for money. It just might be that your business plan is so astounding that it knocks the advances managers’ socks off, but don’t count on it. Bankers are more likely to tell you, quite reasonably, that they’re not in the high-risk lending business and security of some sort must attach.

That’s not something entrepreneurs in Mamelodi, Guguletu and Alex are flush with, and other funding avenues will generally have to be explored, such as the various provincial and national government SME seeding agencies and NGOs, such as the Small Business Project.

Government initiatives, facilitated by the department of trade and industry (dti) and associated organisations, include the Centre for Small Business Promotion and SEDA. The European Union is donating R550mn towards a risk capital SMME fund in an arrangement with the dti.

Those are the conventional routes. There’s one more that neither the private nor public sectors seem to have considered.

Add another rider to BEE deals. These are normally multi-million rand deals that favour “the usual suspects” as the handful of BEE beneficiaries have been labelled by South Africa’s Minerals and Energy Minister Lindiwe Hendricks. Make it a condition that a percentage of the BEE deal’s value is set aside in a fund for entrepreneur SMMEs in the sector. At least in that way empowerment cash is spread around in a way that benefits the economy as a whole, and not simply the “usual suspects”.

If South Africa is to build the strong, resurgent and innovative middle class it so desperately needs, some creative head-scratching should be the order of the day.

This special report was first published in Business in Africa Magazine, February 2006. To subscribe click here

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