National Standard intends to launch an SME Development Private Debt Impact Fund by the end of 2023 for purposes of investing in post revenue and growth stage Small and Medium Enterprises (“SMEs”) that fall outside the specialised impact debt funds. With high unemployment rates among youth in South Africa and the rest of the African continent, coupled with stagnant economic growth, the importance of SMEs in stimulating economic growth and job creation cannot be underestimated. The Banking Association of South Africa (“BASA”) undertook a study in 2018 about SME financing in South Africa whose findings were as follows:

• Access to finance remains a challenge particularly for start-ups who are associated with high cost of servicing and volatility, and for smaller businesses and smaller loan sizes, where demand is greatest.


• The funding gap remains very large, with SME funding estimated by the OECD at only 26% of total private sector funding, and the overall funding gap estimated by Finfind at between R86 billion and R386 billion. Financial sector sources show that the sector continues to fall below its annual Financial Sector Charter targets. The highest estimates show that some R14 billion of financing was offered to SMEs in 2013 by institutions affiliated to the Financial Sector Charter Council. This compares poorly to the R40,9 billion reportedly sought by just around 11,000 SMEs on the Finfind platform in 2017, even taking into consideration the passage of time from 2013 to 2017.


• While most respondent financial institutions assert that there has been improvement in SME access to finance from the institutions themselves, they also agree that in general access has only increased marginally or not increased at all since 2010. SMEs, on the other hand, don’t see any improvement at all. Therefore, the overall finding is that there has been no meaningful improvement in access to finance since the previous study.


• Factors accounting for lack of increase in access to funding remain largely similar to those identified in the 2010 study and are to be found:
  
  
  • within the financial institutions themselves
  
  
  • within SMEs, and
  
  
  • within the external environment which both the financial institutions and SMEs have no control over.

SME issues largely have to do with unviable business proposals, lack of financial management knowledge and discipline, and seeking the wrong type of funding. Financial institution issues, especially within banks, largely derive from strong risk aversion towards SMEs, particularly start-ups and smaller businesses. In the external environment several factors have a bearing on access to finance:

• the weak state of the economy, which results in high SME failure rate


• the regulatory environment, especially the National Credit Act which regulates reckless lending,


• late payment by the government, which has resulted in government business being seen as a risky and unreliable source of cash flow to service a loan; and


• lack of effective risk mitigation measures such as credit guarantees.

Operational difficulties associated with the SEFA credit guarantee scheme have resulted in banks withdrawing from the scheme, leaving it facing total collapse and removing what was meant to be an important risk mitigation measure for SME lending.

• Available literature points to a significant problem with the availability and quality of data on SME lending in the country. This makes it difficult to appreciate the full extent of SME funding issues and dynamics.


• Overall, the study finds that the proposals contained in the 2010 FSP report still hold valid as there is not much evidence that there have been any significant changes since then, both in terms of access to finance and the nature of hurdles preventing increased access.

These findings create opportunities for funding SMEs based on intervention strategies such as business implementation and monitoring to manage risks and improve business success. This resonates with National Standard’s model for risk management through project implementation and monitoring. The same BASA study in 2018 recommended six actions that should be undertaken by the broader SME support ecosystem to improve access to finance for SMEs:

• Action 1: Undertake a review of the impact of the National Credit Act on SME lending.


• Action 2: Invest in developing the business and financial acumen of entrepreneurs, particularly those starting out, so that they can identify viable business opportunities and formulate business and funding proposals that demonstrate their full grasp of the opportunities they seek to pursue.


• Action 3: Have an open conversation about the problems experienced by both sides, namely banks and SEFA, with the SEFA credit guarantee scheme and fundamentally redesign the scheme to make it more user-friendly. Simultaneously investigate other risk mitigation mechanisms used successfully in various parts of the world, such as mutual guarantees, to determine their suitability for the South Africa market.


• Action 4: Support initiatives aimed at helping entrepreneurs that have ‘thin’ credit files to develop positive credit profiles.


• Action 5: Have an open, public dialogue with various stakeholders, including government and SME representative organisations, about the negative impact that lack of disciplined financial management behaviour and a culture of non-payment on the part of borrowers has on the general environment for SME financing in the country.


• Action 6: Work with institutions such as the Department of Small Business Development, Financial Sector Charter Council, National Credit Regulator, and South African Reserve Bank to confront the challenge of lack of accurate and credible data on SME financing in the country.

The Covid 19 economic stimulus measures in 2020 introduced a R100 billion loan Government Guarantee scheme, to be increased to R200 billion if necessary if the scheme was successful, for lending into SMEs. However, this was only meant to be a short-term scheme to address economic shocks caused by Covid 19 lockdown. In addition, the scheme seemed to have had slow uptake with BASA reporting that as of 16 January 2021, R17.84 billion in loans had been approved by banks and taken up by small businesses under the Covid-19 loan guarantee scheme, despite an expected increase in financial pressure on small enterprises. Whilst there are broader economic issues affecting small businesses, the low financing of SMEs by banks suggests that private debt funds with more hands-on approaches to business operations and risk management may be more appropriate to funding SMEs than bank lending.