Mkhululi Mazibuko - Chief Operating Officer, Khula Enterprise Finance

Report
SME FINANCING OPPORTUNITIES –
BRIDGING THE GAP
South Africa SMME Conference
Services Forum
1
South Africa SMME Conference
Birchwood Hotel
21 October 2010
Outline
•
Introduction
•
SMME financing landscape
•
Factors inhibiting small business growth
•
Challenges in Financing SMEs– lender’s perspective
•
Role of Development Financial Institutions in Financing SMEs
•
Bridging the Gap
•
Concluding remarks
SMME Financing Landscape
Characteristics
Opportunity-driven/Entrepreneurial
Medium
Medium
enterprises
enterprises
•Less than 200 employees
•Turnover > R25m p.a.
•Developed technical & business skills
•Less than 50 employees
Small enterprises
Small enterprises
•Turnover < R25m p.a.
•Developed technical /limited business skills
•Less than 5 employees
Micro
enterprises
Micro
enterprises
Survivalist enterprises
•Turnover < R150k p.a.
•Some technical /limited business skills
Necessity-driven/Survival
Survivalist enterprises
•Individual self employment
•Turnover < R50k p.a.
•Limited technical and business skills
Profile of small businesses in South Africa
■ There are approximately 5 979 510 small businesses in South Africa
■ There are 5 579 767 small business owners, 16 years and older, in South Africa (one in six individuals,
aged 16 years and older, generate an income through small business activity)
■ 17% of small business owners have registered businesses
■ 79% of small business owners are traders (sell products)
o Of these, 62% sell their products in the same form they bought it (they do not add any value)
■ 21% of small business owners are service providers. Of these, 5% render professional services (e.g.
accountants, doctors, lawyers, etc.)
 Two-thirds of small business owners needed start-up money and most of these funds came from own
sources, with 37% claiming to borrow from other sources. Only 5% percent of small business owners
claim to have current borrowings or loans for their business and 39% claim to save for business
purposes.
 Awareness of support for small business owners is extremely low with 74% of business owners unable
to name any organisation that gives help and advice to small businesses
Source: FinScope South Africa Small Business Survey 2010
SME Financing Landscape …Supply
Financing Needs - Supply
•Corporates
Medium
Medium
enterprises
enterprises
•Banks/Financial Institutions
•Private Equity/Venture Capitalists
•Khula, IDC, NEF
•Own resources
Small enterprises
Small enterprises
•Banks & Corporates
•Khula & PDCs
•Own & family resources
Micro
enterprises
Micro
enterprises
Survivalist enterprises
Survivalist enterprises
•Microlenders & Banks
•SAMAF & PDCs
•Own & family resources
•Microlenders
•SAMAF
8
SME Financiers
Longterm
CAPITAL MARKETS
Long
INVESTMENT BANKS
DEVELOPMENT FINANCE
INSTITUTIONS
TER Medium
TERM
M
- term
MORTGAGE PROVIDERS
Medium
MICRO-FINANCE INSTITUTIONS
CONSUMPTION LENDERS
Short
-term
GAP
COMMERCIAL BANKS
STOKVELS, BURIAL SOCIETIES
MONEY-LENDERS
Short
Micro
Micro
Source: Roussos and Ferrandi (2008)
Small
Small
Medium
Medium
Large
Large
TRANSACTION SIZE
TRANSACTION SIZE
9
SMME Business Confidence Index
80
70
71.01
60 64.89
66.37
63.71
56.65 55.76
50
52.84 52.43
51.59 51.21
40
48.9
47.03
40.5540.43
30
20
10
0
Source: South African SMME Business Confidence Index Report
55.28
50.79
• Business Confidence
among owners and
managers of South
Africa’s SMMEs remains
fragile, although there
was a slight in the 3rd of
the year.
• The country is still
recovering from the
effects of the global
economic crisis and the
look for the future looks
positive
Outline
•
Introduction
•
SMME financing landscape
•
Factors inhibiting small business growth
•
Access to finance challenges – lender’s perspective
•
Role of Development Financial Institutions in Financing SMEs
•
Bridging the Gap
•
Concluding remarks
Factors inhibiting small business growth
None/nothing
Don’t know
Other
Lack of customers
Corruption
Access to land
Skills and education
Customs/trade regulations
Harassment by officials
Weather/natural disasters
Business licensing
Electricity
Transportation
Crime and theft
Competition
Access to/cost of finance
Space to operate
19%
5%
1%
1%
1%
1%
2%
2%
2%
Source: FinScope South Africa Small Business Survey 2010
3%
3%
3%
4%
7%
13%
14%
16%
Outline
•
Introduction
•
SMME financing landscape
•
Factors inhibiting small business growth
•
Challenges in Financing SMEs– lender’s perspective
•
Role of Development Financial Institutions in Financing SMEs
•
Concluding remarks
Challenges in Financing SMEs – Lender’s perspective
•
Unclear Business Strategy
•
Lack of Entrepreneur /Business Skills
•
Inability to provide proper financial records of business
•
Viability of business
•
Insufficient Information
•
Integrity/Credit Worthiness of Entrepreneur
•
Application falls Outside Investment Criteria of Funding Institution
•
Weak capability among SME entrepreneurs in managing functional areas of business
•
Size of Deal
•
Acceptable assets for collateral are limited
•
Lack of owner’s contribution
•
SMEs do not prepare financial statements or if any, are not acceptable to creditors
Outline
•
Introduction
•
SMME financing landscape
•
Factors inhibiting small business growth
•
Access to finance challenges – lender’s perspective
•
Role of Development Financial Institutions in Financing SMEs
•
Concluding remarks
Role of DFIs in financing SMEs
State-owned development finance institutions exist in order to address specific market
failures, by taking higher levels of risk (lower return for a specific level of risk), “crowding
in” the private sector and moving on to new neglected territories once the gaps have been
narrowed.
DFIs have to balance their development focus with commercial reality because they have
to be financially sustainable in the long term. This has implications for their investment
criteria, pricing, portfolio mix, risk management, systems and skills.
Rather than just driving volume, DFIs have to focus on the sustainability of the enterprises
they support, not only to preserve their own sustainability but also to ensure that the jobs
created are sustainable and the entrepreneurs supported thrive, thus contributing to
general economic prosperity.
Bridging the Gap

Create a One-Stop-Shop for SMEs to access services (business registration, tax
clearance certificates etc)

Promote business linkages between SMEs and large corporations towards integration
into national and global value chains

Business incubation

Strong networking amongst entrepreneurs

Conducting regular training seminars for creating awareness and capacity building of
SME entrepreneurs
Khula Background

Khula, is a development finance institution (DFI) reporting to the Department of Trade and Industry
(the dti), with an independent Board of Directors

Khula was established in 1996 and its mandate derives from the dti White Paper on the National
Strategy for the Development of Small Business (1995).

The decision to establish Khula as a wholesale rather than a retail institution was taken after
considering the following factors:
•
The role of the State is to create an enabling environment rather than to participate
directly.
•
Government backed guarantees would assure Commercial banks and other financial
institutions and get them to participate in the SMME sector.
•
As a wholesale financier; Khula works through a network of partners inter alia
Commercial Banks; non-bank RFIs; and other partners – to ensure that SMMEs have
access to finance.
3
Khula’s Mandate is focused on
three key areas …
Promote access
to finance
Access to
finance for
SMEs
Development
impact
Create sustainable
SMEs; in the
mainstream economy,
thereby contribute to
economic development
Financial
sustainability
Long-term
objective
6
Khula’s Activities …Summarised
Product & Activity
Business loans – Khula gives loans to Retail Financial Intermediaries (RFIs) who further on
lend to SMEs. However, through Khula Direct loans will be extended directly.
Credit indemnities – Khula assists SMEs to access private sector funding (through banks &
RFIs) by indemnifying their loans
Joint Ventures – Khula partners with the private & public sector to finance SMEs.
Funds –Khula establishes a Fund that will facilitate loans to SMEs. The fund is managed by
an experienced Fund Manager who does not contribute their own capital to the fund.
Mentorship Programme - Mentors are used for both pre- and post loan interventions as
well as capacity building to the RFIs.
Currently Khula has entered into an agreement with Institute of Business Advisors of Southern
Africa (IBASA) – to manage the mentors’ database.
Properties - is mostly located in previously disadvantaged areas. It provides operating
space for small entrepreneurs at discounted rates. It encourages entrepreneurs to move away
from operating in informal set ups to a much more formal environment.
12
Financing Partners
13
Concluding Remarks

Khula is a development finance institution dedicated to the needs of small business

Primary role of DFIs is to address specific market failures and “crowd-in” private
sector


There is a need to bridge the information gap between lenders and SMEs
Prospects for SME sector are good and there is renewed focus on SMEs by both the
public and private sector

Future of the financing needs of the SMEs lies with strong public-private sector
partnerships

Khula is always looking for corporate partners who provide the opportunity to finance
SMEs
THANK YOU
Khula Client Liaison Centre number
08600 KHULA (54852)
Website - http://www.khula.org.za
Email - [email protected]

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