/ 15 March 2019

Slow growth hits lending to SMEs

Slow Growth
How well do South Africa's banks measure up? (John McCann/M&G)

Slow economic growth is throttling the development of small and medium enterprises (SMEs) and lending by the major banks to black-owned small businesses shrank by 7.7% between 2016 and 2017, according to figures from the Banking Association South Africa (Basa).

Alongside issues such as the level of black ownership of banks, the lack of funding for small black-owned business is often cited as a stumbling block to transforming the sector and the wider economy.

Basa officials say sluggish economic growth has meant the number of SMEs is not increasing, and many of them need significant nonfinancial support and forms of investment other than debt financing by banks to develop.

Lending to SMEs has remained a problem and their number has stagnated for the past 10 years, Basa’s head of financial inclusion, Khulekani Mathe, says.

“The pipeline of new SMEs coming in is pretty much broken. And that talks about the whole ecosystem to support small and medium enterprises that … is not allowing new organisation to come in, grow and become successful.” Small businesses also face nonfinancial difficulties, according to Basa managing director Cas Coovadia, such as labour legislation.

“It’s not what you pay workers; it’s the ease or difficulty of hiring or firing people,” he says.

South Africa’s venture capital market for SMEs is also undeveloped, he says.

“Banks do debt finance; they don’t do venture capital finance and no business, let alone an SME, can survive on debt finance alone,” he adds.

Mathe says about 75% of the funding for SMEs comes from the banks, which is not ideal. Nevertheless, according to a report released by FinFind last year, the credit gap for SMEs in South Africa was between R86-billion and R346-billion, suggesting there is significant demand for funding.

Although there has been growth in certain other areas of transformation in the sector, such as lending for affordable housing, Basa concedes improvement is needed in other areas.

Black ownership of banks according to several measures, outlined in a report for Basa by Intellidex, has declined because a number of black economic empowerment deals matured between 2015 and 2017.

Black ownership measured by voting rights fell from 34.8% to 30.5% between 2016 and 2017 and black economic interest fell from 30.3% to 25.4%.

But the representation of black people in the banks’ management has increased. For instance, among middle management, the proportion of employees who are black increased from 59% to 61%, and the proportion of those in senior management who are black increased from 25% to 37%.