Abstract
The study examines the relationships between the financial sector and small businesses, and the small business policy framework in South Africa. The study also measures the perception of the Business Chambers and Commercial Banks on the effectiveness of financial sector support to small businesses in the Gauteng area through a questionnaire.
The Small Business Development Policy of 1996 outlines the functions of various small business support institutions such as Ntsika Enterprise Promotion Agency, Khula Finance Ltd, the DTI institutions and the Provincial SMME Desks.
Ntsika was established in 1996 to implement the national small business strategy. It provides non-financial support to small businesses through a number of programmes including Local Business Service Centres (LBSC), Tender Advice Centres (TAC), and Manufacturing Advice Centres (MAC). These non-financial support services are essential for creating access and utilisation of financial resources.
Khula was also established in 1996 to provide loan guarantees to small businesses in order to increase their access to finance through commercial banks. Khula manages a number of programmes namely business loan schemes, guarantee schemes, Khula start funds and equity funds. Khula guarantees 80 percent while commercial banks bear 20 percent of the risk. This has enabled small business without collateral to have access to financial resources.
The DTI provides a number of incentive schemes for registered small businesses, namely, Standard Leased Factory Building Scheme (SLFBS), Small and Medium Manufacturing Development Programme (SMEDP), Economic Empowerment Scheme (EES), Venture Capital Scheme (VCS), Normal Finance Scheme (NFS), Import Finance Scheme (IFS), Short-term Export Finance Guarantee Facility (STEFGF), and Export Marketing and Investment Assistance Scheme (EMIA). The Provincial SMME desks are established to represent the interests of small businesses and to contribute to the implementation of the national small business strategy. The DTI incentive schemes provide the necessary infrastructure and contribute towards increasing the performance in the small businesses sector.
The small business support programmes are evaluated using a number of criteria, namely, the small entrepreneurs’ awareness of the programmes, if small businesses ever approached these schemes, if small businesses received assistance, what quality of assistance was offered, the cost of assistance, employment creation, poverty alleviation and economic empowerment.
Small businesses face a number of challenges such as the lack of competent human resources, low profit margins, inadequate financing, stiff competition from large monopolistic and well established businesses, inadequate marketing strategies, unfavourable policy and legal environment, lack of information about government support initiatives, cyclical sensitivity of their products, and high inflation rates.
The selection criteria of commercial banks is based on factors such as whether or not the borrower is organised and knowledgeable, his competence in terms of understanding accounting, management, and financial and marketing aspects of the business, the borrower’s character, his capability, capital contribution, credit rating, insurance coverage, and collateral pledged, the purpose of the loan, local economic conditions, and the length of lending relationship. However, in South Africa lending criteria is more inclined towards the ability to pledge collateral instead of the viability of the project being financed.
Commercial banks face a number of risks when lending to small businesses. The most common risk is the credit risk which results from the inability of the small businesses to honour their financial obligations. High failure rate in the small business sector also contribute towards high credit risk to commercial banks.
The study concludes that there is a need for mentorship programmes in the small business sector in order to increase the success rate. The government should also assist commercial banks to reduce their stringent requirements in order to accommodate small businesses. Viability based lending is recommended. The government should facilitate provision of non-financial services in order to address internal incapacities of small businesses. More research is required in the small business sector to create awareness about potential benefits accruing to the financial sector and the economy as a whole. More players are required in the commercial banking sector in order to enhance competition. The government should reduce barriers to entry into the banking sector. The government should educate the population on the importance of personal savings in order to reduce over-dependence on financing from commercial banking sector. Women are still marginalised in terms of accessing funds from commercial banks. However, they have low rate of default and pose lower credit risk to commercial banks. The government should level the playing field to facilitate access of women to financial resources.
Prof. R.R. Mears
Mrs. J.M.M. Viljoen.