- Small businesses have, again, been touted as the key to South Africa’s economic recovery.
- But there does not appear to be a serious review of existing statistical data and relevant policy frameworks.
- For example, access to finance has been flagged over and over as a critical issue for small businesses – yet it remains a problem.
- The SMME lending ecosystem is broken and has to be fixed, says Mncendisi Xego.
The ANC’s Economic Transformation Committee released its latest economic policy discussion document titled “Reconstruction, Growth and Transformation: Building a New, Inclusive Economy”, mainly in response to, and as a roadmap to economic recovery post the Covid-19 pandemic.
Like it’s forebears, it reserves an important seat for SMMEs at the economic growth table; but the seat at the head of the table goes to infrastructure development.
What’s different this time around?
Since the dawn of democracy, South Africa has had five major policy documents: the Reconstruction and Development Plan (RDP: 1994), the Growth, Employment and Redistribution (GEAR: 1996), the Accelerated and Shared Growth Initiative for South Africa (ASGISA: 2005), the New Growth Path (NGP: 2010) and the National Development Plan (NDP: 2012).
Of all things, the ANC government cannot be accused of the lack of ability to formulate policy documents. Nor can it be accused of failing to consult widely. What remains unclear though, is the extent to which the views of stakeholders shape policy formulation.
At times, ideology appears a major determinant of policy even in instances where there is overwhelming evidence against it.
SMME development, as an instrument to stimulate inclusive economic growth, transformation and job creation, is recognised in all the five policy documents. However, none of all these policy documents has been as pronounced on the role of SMMEs in driving inclusive economic growth as the NDP, which projected that SMMEs will contribute 60% to 80% to GDP growth and create 90% of the projected 11 million jobs by 2030.
With just a little over nine years to go to 2030, we are none the wiser regarding how close or far we are from realising these NDP projections. And it is not clear from the new economic policy framework whether these projections still remain relevant.
Further, we do not appear to have the critical data to evaluate the interventions implemented in the pursuit of these projections.
And therein lies the major problem in our government’s policy formulation approach – it does not appear to rely on an earnest review of existing policy frameworks, stakeholders’ input and statistical data.
On closer inspection, this would appear to be symptomatic of bigger problems of the lack of monitoring and evaluation tools and the lack of capacity to collate data.
Plainly put, the ability to draw lessons from previous experiences and to calibrate successes and avoid repeating the same mistakes.
Unfortunately, this is why policy frameworks sometimes tend to be superficial and regurgitate the same rhetoric, rather than go to the heart of the matter.
To illustrate the point, lack of access to finance by SMMEs has been a major problem since time immemorial and has been dealt with in all the policy frameworks.
But this remains a major barrier with a 2017 Finfind survey placing the SMME finance gap anything between R86bn and R346bn. An IFC study estimates that 40% to 45% of formal SMMEs remain unserved.
The new policy framework proposes three broad interventions: first, regulation of the financial sector to promote fair access to finance by SMMEs; mobilise funds from both local and international development institutions – local DFIs are urged to modify their funding models in order to attract cheaper capital; and increase competition in the banking sector by establishing a State Bank and capacitating the Land Bank and the Post Bank.
The document also hints at the possibility of providing grant funding to SMMEs but is quick to concede that the fiscus is currently constrained.
The brutal truth is that the SMME lending risk remains unacceptably high and renders SMME lending not sustainable. Impairments on SMME loans range from 2% (for commercial banks) to close to 50% (for some DFIs). Banks are able to keep their impairments low by inter alia lending to formal and more established SMMES. This leaves DFIs and non-bank lenders to fill the gap by servicing the highly risky segment.
A number of factors contribute to the high risk: a prevalent culture of loan non-repayment, abuse of loans, an inefficient legal framework to protect lenders – on average it takes two to three years to recover loans through our legal system.
Good guys carry the can
Failure to address these challenges mean the risk remains unacceptably high. Unfortunately, this results in unaffordable SMME loans and, worse, lack of access to finance. At the end of the day, the bad guys who refuse to pay their loans ensure that we cannot have an efficient and accessible SMME lending ecosystem. The good guys are left to carry the can by paying expensive loans or simply being denied access to loans.
The discussion document does not appear to address the high SMME lending risk other than to require the DFIs to modify their funding models in order to attract cheaper capital. In the end, this would result in superficial solutions.
For example, in a bid to reduce loan default risk and ensure their survival, DFIs have opted to fund SMMEs with purchase orders or long term off take agreements. A cursory glance at the DFIs’ Covid-19 relief schemes underscores this point. Consequently, a large number of SMMEs engaged for example in the retail, transport and personal services sectors struggle to access funding.
We need to fix the broken SMME lending ecosystem by creating a conducive environment to attract both local and international capital. After all, even the State Bank and Post Bank will need the environment to be effective, competitive and sustainable. We must deal head on with the culture of loan non-repayment and create an enabling legal framework to protect capital.
Failure to address the high risk means that access to finance will remain a pipe dream for the majority of our SMMEs and we will be banking on broke SMMEs for inclusive growth.
Mncedisi Xego is an SMME Finance and Development Specialist and Founder and CEO of Royal Fields Finance. He writes in his personal capacity and views expressed are his own.