Small businesses could lose

Billions of rands in finance is expected to be channelled to black-owned small businesses (SMEs) by banks in the next four years, following the launch of the new Financial Sector Code at the JSE this month.

But lending to black entrepreneurs risks being subsumed by lending to other BEE segments, as banks and other signatories of the code — which was gazetted in November last year — failed to agree on a specific target for how much banks should lend to black SMEs.

The first Financial Sector Charter, which ran from 2004 to 2008, specified a target of R5-billion that banks were expected to advance to black SMEs during that period. Banks surpassed the target by lending out R11.4-billion.

However under the current code —which effectively runs from January 1 2012 to December 31 2017 — lending to black SMEs has been lumped together with three other targets under an element in the code called “targeted investments”.

The other targets in this group are financing black farmers, affordable housing and transformational infrastructure. The code sets banks a target of R48-billion for targeted investments over five years, which translates to about R8-billion a year.

Although some banks have developed internal targets for each of the four separate targets, the Financial Sector Charter (FSC) council’s head, Busi Dlamini, said that the charter would still monitor the lending by banks under each of the four targeted investments.

Guidelines for banks
She said a decision had been taken by the signatories to lump the four together, to allow each bank to focus on the type of lending that they were best at.

The Banking Association’s managing director, Cas Coovadia, added that the association is in the process of finalising guidelines for banks on each of the targeted investments.

“I don’t think there’s any agenda by banks not to expand lending to black small businesses,” said Coovadia.

He pointed out that banks complained that the business plans they receive from business owners who were applying for loans are often “not of sufficient quality”.

“You can’t jack up the figures for black SMEs for the sake of jacking them up (only) to find that in five years’ time 80% (of business owners) have failed,” he said.

Black entrepreneurs, he said, need non-financial support more than they need finance and added that any finance had to be made in a sustainable way. Incubation programmes, where businesses could get quality help, were key to solving this problem, he said.

Banks partnering with the government
Some years ago banks began putting in place business support programmes, including everything from seminars and classroom-based training to assigning mentors to assist their small business clients.

Banks have also partnered with the government in a bid to reach more black business owners, including through a credit guarantee scheme run by the Small Enterprise Finance Agency’s (Sefa).

The scheme backs loans that banks make to small businesses which don’t have sufficient collateral to access ordinary bank loans. However, since it was launched in 1996 under the then-Khula Finance Agency, the scheme has never disbursed more than 800 loans in any one year.

Coovadia said the government needed to be more bold and innovative in expanding the use of the guarantee scheme.

Meanwhile, lending to black SMEs from two banks reveals that a significant share of targeted investments will go to black-owned small enterprises.

At Standard Bank, advances to black SMEs last year amounted to R1.8-billion, or half of all lending under targeted investments of R3.6-billion during that year. The bank’s book for lending to black SMEs stood at R4.7-billion at December 31 last year.

Lending to black SMEs
Last year Nedbank advanced over R1.1-billion to 2 989 black SMEs, of which 1 122 were new clients, said Nirmala Reddy, the bank’s senior manager of enterprise development.

However, Reddy said the bank couldn’t provide the percentage that advances to black SMEs accounted for out of the total targeted investments as “the total number had not yet been audited”.

Nonetheless, 2011 figures show that lending to black SMEs accounted for 37% of the bank’s targeted investments made that year.

If figures from these two banks hold true and banks channel between a third and half of the R48-billion to black SMEs, the segment could receive between R16-billion and R24-billon in finance, or between R2.7-billion and R4-billion a year.

FNB was unable to supply figures saying it was in a closed reporting period, and Absa did not respond by time of going to print.

To put the above figures into context, data from the Reserve Bank’s bank supervision department indicates that banks’ total SME book grew by R66-billion between the end of 2009 and May this year to R477-billion. This means SMEs account for 14% of the R3.3-trillion on banks’ books.

If lending grew
If banks grow lending to SMEs at the same rate (R19-billion a year), about R114-billion in new advances could go to the entire sector between 2012 and 2017. Using the earlier projections, it would mean that between 14% and 21% of all new SME finance from banks would be directed at black-owned small enterprises.

Despite this, banks could still opt to reach the R48-billion target by offering banking services to more of the country’s existing black entrepreneurs, rather than to start-ups, cautioned BEE analyst Ajay Lalu of Black Lite Consulting.

Simone Cooper, head of franchising and enterprise development at Standard Bank, said an enterprise development unit located within the bank’s business banking division had been tasked with looking at how the bank could finance more black SMEs, including start-ups.

FNB is also looking at banking start-ups and is currently piloting mass lending products aimed lending small amounts to new small firms.

Lee Bromfield, head of credit, pricing and analytics at FNB Business Bankin, said the majority of the lending would be made to customers where the bank already has an existing relationship — either from business or in the personal banking arm.

Another concern is that a sufficient amount of finance is channelled to black SMEs in all provinces.

Back in 2006 the FSC council was already concerned that banks were targeting black SMEs from mostly KwaZulu-Natal, Western Cape and Gauteng rather than entrepreneurs from the more rural provinces.

Finscope 2010 Small Business Survey
Nedbank’s 2009 BEE report revealed that 81% of the bank’s finance was to these three provinces. In 2011 FNB reported that it lent a similar percentage of finance to black SMEs in these provinces.

According to the Finscope 2010 Small Business Survey, the provinces with the highest number of unbanked business owners are the Free State (34.1%), KwaZulu-Natal (37.6%) and Limpopo (37.8%).

Standard Bank, FNB and Nedbank told the Mail & Guardian that ensuring that they reached a broad number of black entrepreneurs was key to meeting their charter commitments.

Under the first charter, black SMEs were defined as black-owned firms with an annual turnover of between R500 000 and R20-million. The latest code defines black SMEs as black-owned firms up with a turnover of up to R35-million a year.

This is likely to widen from the current R35-million to R50-million upper threshold for qualified small enterprises, proposed by the department under the new draft BEE codes.

Minister of Trade and Industry Rob Davies said last month that a number of BEE charters would have to be aligned to the amended BEE codes of good practice, which are likely to be approved later this year.

Lalu said Davies had written to the charter councils to notify them that they would have a two-year period in which to align their respective charters with the codes, once they had been approved.

The new code could represent a boon for black entrepreneurs, but if banks are to make a real impact they will have to significantly scale up business support programmes and develop innovative products to bank those that lack collateral.

Banks will also have to work more closely with the government, through its Sefa guarantee scheme.

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