Lynda Loxton
The government has been urged to provide subsidised interest rates to carefully targeted small businesses and to allocate more funds to support this sector, which is seen as playing a vital role in easing South Africa’s high unemployment rate.
The recommendation was made by the parliamentary trade and industry portfolio committee after a tour of the provinces to find out how the drive to support small, medium and micro-enterprises (SMMEs) had progressed since President Nelson Mandela’s special conference on SMMEs in Durban in March 1995.
“The most pressing demand we encountered was for affordable finance,” the committee said. “We are aware of, and appreciate, the argument that when businesses cite their inability to raise finance as their major obstacle, this often reflects other needs and problems of a non-financial nature.
“It, nevertheless, also appears to us that the combination of the restrictive attitude of established financial institutions and prevailing high interest rates creates major obstacles to the development of small business.”
Khula Enterprise Finance Limited, set up by the government to provide wholesale finance for on-lending to SMMEs, makes subsidies available to banks that are then passed on to clients as non-financial services rather than soft loans.
The committee said Khula planned to offer loans to banks at 14% and provide them with other non-financial services. The banks, in turn, will on-lend the funds to individual businesses at market rates.
Khula believed small businesses had to be encouraged to gear themselves up to absorb loans with commercial interest rates and that discount finance would not encourage them to become self-sufficient.
“They also pointed to the experience of various provincial and former homeland development corporations, several of which were close to bankruptcy, to argue that providing subsidies of this nature was neither sustainable nor affordable.”
But the committee said there was “a considerable body of opinion” both within the government and among business people that supported the idea of “making finance at subsidised interest rates available to carefully targeted small enterprises in priority areas”. This would kick-start the SMME programme and was in line with experiences in Japan, South Korea and Singapore.
The committee also criticised Khula’s policy of guaranteeing up to 60% of loans approved by commercial or community banks. This had done little to encourage banks to finance SMMEs, and Khula should rather provide guarantees for loans made to non- governmental organisations, community financial institutions and business associations, which had proved far more effective in this field.
Given the scale of the problem facing SMME development, the committee also believed the small business programme should receive a larger slice of the Department of Trade and Industry’s budget, while government tendering procedures should be adapted to allow greater access to contracts by SMMEs.
The government’s SMME support drive is underpinned by the National Small Business Act, which paved the way for the establishment of four institutions aimed at promoting small business. These are the Centre for Small Business Promotion to co- ordinate a small business support strategy; the Ntsika Enterprise Promotion Agency to provide non-financial support services; Khula to provide credit guarantees and technical support and the National Small Business Council to represent SMME interests.
The committee found that not only was there a wide range of organisations, associations and agencies involved in supporting the SMME sector, but that their strengths varied greatly. The Western Cape, Gauteng and KwaZulu-Natal were better off in terms of access to markets, raw materials, energy and availability of non-governmental organisations involved in SMME work.
Most SMMEs were still involved in traditional areas such as clothing or chemical manufacturing, construction, transport and the service sector. But more were moving into “new” areas such as farming, tourism and other manufacturing activities. Disturbingly, however, most black-owned SMMEs still appeared to be confined to apartheid-era group areas.
“A very large proportion of business operated by Africans remains survivalist, micro-enterprises,” the committee said.
“This reflects the still tenuous economic position of many African entrepreneurs in the different provinces, which the committee observed with some concern.”
The committee admitted that most of the institutions created to support SMMEs had only been operating for little over a year on limited budgets, but it was clear they had little impact on the ground as yet. It was also clear that there was a great deal of confusion about their roles. This pointed to the need for better communication with the SMME sector about what was, and was not, available.