Government launches direct lending for small businesses

Khula, the government’s small-business finance agency, has quietly embarked on the state’s first attempt at lending money directly to small businesses.

The pilot, which is being conducted from Khula’s Pretoria and East London branches, is a major shift for the government, which until now has followed the international best practice of acting as a wholesaler of finance to intermediaries who are expert in dealing with small businesses.

The plan, adopted by the Cabinet in 2008 after years of frustration at the minimal impact of Khula on the small-business sector, has been met with widespread cynicism among small-business developers.
But recent moves in and around Khula have helped to mute the sneers to a sceptical wait-and-see silence.

The first spark of hope that the plan, dubbed Khula Direct, will counter international evidence that governments make very bad small-business financiers comes with the news that Khula will effectively become a subsidiary of the Industrial Development Corporation. This will be the main outcome of the amalgamation of Khula, the microfinance agency Samaf and the small-business programmes of the corporation that was announced earlier this year.

The corporation is an experienced direct lender, albeit to large industrial projects. It has gained some small-business lending experience over the years through occasional projects with which it tried to plug the gap left by Khula’s inability to meet small businesses’ finance needs. But Shakeel Meer, the corporation’s head of corporate strategy, said all these projects had been wound down because they fell outside the corporation’s mandate of only financing large projects.

Khula will therefore not be taking over any of the corporation’s active small-business lending projects, but it stands to gain from its commercial, results-orientated discipline.

The second reason for hope that it may just be able to pull it off is Khula’s appointment of probably the most seasoned small-business financier in South Africa.

George Watson, heading up Khula’s new credit department, is responsible for the Khula Direct pilot project that started in East London and Pretoria in June. R35-million has been made available for the pilot, which will run until the end of the financial year in February. About a dozen Khula loans officers are writing term loans and short-term contract-finance loans to small businesses directly from the Khula branches in the two cities.

Watson’s appointment comes as a surprise, mainly because he is Khula’s prime example of successful indirect lending. Using capital he had built up in the United Kingdom’s small-business finance sector, Watson started a small commercial company called New Business Finance in Cape Town in the late 1990s to lend to deserving small businesses that were being turned away by the banks.

At first Khula rejected his applications for wholesale finance to expand his loan book, because at that stage the agency was only interested in financing non-profit organisations to lend onwards to small businesses.

They relented in 2005 and New Business Finance became Khula’s most successful retail finance intermediary, operating just before the recession in four centres with the help of a home-grown loan management and IT system. Today, all Khula’s successful intermediaries are profit-driven companies—none of Khula’s non-profit intermediaries has survived.

This year, Khula took over New Business Finance and employed Watson to roll out his former company as the ultimate non-profit lender—government-owned Khula Direct.

“I’m a bureaucrat now,” said Watson in mock disbelief. He ­readily agreed that the slow, bureaucratic decision-making of government institutions was just one of many problems that Khula Direct would face.

Watson said repayment rate targets for Khula Direct were “well over 90%”, which was more than the commercial banks expected from their small-business loans.

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