Small Enterprise Finance Agency: briefing on new entity

Meeting report

The Chairperson of the Small Enterprise Finance Agency (SEFA), Ms Sizeka Rensburg, told the Committee that the entity had been created out of the merger between Khula, the SA Microfinance Apex Fund (SAMAF) and the Industrial Development Corporation (IDC) small business lending book, with the purpose of providing and facilitating access to finance for sustainable small businesses, thus contributing to economic development and job creation. The newly constituted board comprised former board members of Khula, former members of the Samaf advisory committee, and IDC representatives, so it had the benefit of people with experience of the previous entities, combined with the values of the IDC.

As SEFA had been established and launched only in April this year, the strategic plan being presented was a “work in process”, and would be finalised only after input from the Committee and subsequent approval of the IDC and the Department of Economic Development.

The objective of SEFA was to contribute to the establishment, survival and growth of survivalist, micro, small and medium enterprises (SSMMEs) in South Africa, and its vision was to be the leading financier in this field. It would seek to provide finance and credit guarantees to SSMMEs, support them with post-investment support, create strategic partnerships for sustainable development and support, and monitor the effectiveness and impact of these activities. It would also support the capacity development of financial intermediaries and develop innovative finance products, tools and channels to promote increased market participation.

SEFA’s guiding principles would be speed and urgency, a “passion for development”, integrity in its dealing with clients and stakeholders, transparency and innovation. The four key pillars underpinning its strategy would be appropriate and affordable products and services which were cost effective; continuous research, learning and innovation; an effective, high-performing organisation with a passion for development; and an appropriate structure to drive the process throughout South Africa.

Ms Rensburg listed five strategic objectives:

•           Increase access and provision of finance to SSMMEs by increasing the use of a guarantee indemnity scheme by commercial banks; expanding partnerships with microfinance institutions (MFIs) and retail finance institutions (RFIs); and scaling up direct lending to SSMMEs. Khula had developed a guarantee indemnity scheme, but use of this product by the banks had declined, so SEFA would need to work constructively with the banks to reduce their risks and eliminate defaults in repayment. Because South Africa was such a large country, with vast rural areas, SEFA was unable to reach its target market on its own, and would make use of MFIs who were closer to those needing assistance with small loans, and also had a better understanding of the local market. SEFA would work with those MFIs that the potential to be viable on their own, but would also assist them to widen their capital base. Khula had also piloted the concept of direct lending to applicants, rather than through financial intermediaries. Many lessons had been learnt as a result, and SEFA was looking to scale up direct lending, with loans ranging from R50 000 to R3 million (although this would initially be restricted to R1 million).

•           Build an organisation that was sustainable and responsive to the needs of the target market through integrating the staff and systems of the previous organisations; building efficient and effective business processes, systems and infrastructure; developing and implementing a dynamic human capital, values and culture, aligned to its mandate; and introducing appropriate, cost-effective and affordable products and services. SEFA had inherited people from two organisations with different skills and systems, so it would take about six months for integration to be completed. It needed to make sure that its products met the market’s needs, but also that its costs were covered by the prices it charged. The achievement of rapid turnaround times would be facilitated by the use of modern technology.

•           Build a learning organisation through the design and implementation of research and development capacity; development of performance-based monitoring and evaluation systems; and the design and implementation of an organisation-wide knowledge management system. It was important to remain abreast of the latest developments, both locally and overseas.

•           Develop and implement a national “footprint” for effective product and service delivery by ensuring representation in all nine provinces; and by implementing effective marketing and communication to relevant stakeholders. It was crucial for all small businesses to know about SEFA, and where to go to access its products and services.

•           Meet all legislative, regulatory and good governance requirements. SEFA offered both wholesale and retail products and services (see presentation). It was proposed that survivalist and micro enterprises be exclusively serviced through the wholesale model, with loans ranging from R500 to R50 000, and the small and medium enterprises through a combination of both funding models. The pricing strategy was to link the prime lending rate with a risk premium, so that operating costs, economic fluctuations and exposure to losses would be covered, allowing sufficient margin for the operation to be self-sustaining. Developmental issues, such as potential job creation, would also have to be considered.

Wholesale products and services would be delivered by financial intermediaries, while SEFA’s retail branch network, operating in all nine provinces and 48 districts of the country, would be responsible for retail products. Efficiency and effectiveness would be enhanced through a “one stop shop” concept, where branch or satellite offices would be established on the premises of sister organisations, or other Development Finance Institutions (DFIs), local government agencies or other local development agencies.

Ms Rensburg pointed out that Khula had been a legal entity, as a subsidiary of the IDC, and with the transfer of staff and assets from Samaf, it had remained a legal entity by changing its name to SEFA. The acting CEO had been seconded from the IDC to head up the interim management team, and was responsible for the day-to-day operation of the entity.

Over the next five years, SEFA’s target was to make available loans totalling R3.9 billion to applicants through its wholesale and retail operations, and to provide banks with up to R360 million in credit indemnities. The total number of jobs created, including an estimated 180 000 through micro-finance wholesale loans to intermediaries, was expected to reach over 225 000.

The draft strategic plan would be reviewed and submitted to the SEFA board by the end of May, and thereafter to the IDC and the Minister for review and approval. It was hoped that it could be tabled in Parliament by the end of June.

Discussion
Mr X Mabasa (ANC) asked whether SEFA had taken into account the strengths and weaknesses of Khula and Samaf when developing its strategic plan. Had any activities of Samaf been discarded because they were considered not to be relevant for SEFA? He also suggested that financial intermediaries might be an unnecessary cost, merely using the small businesses they were financing as a source of income. How could one be sure they were not benefiting at the expense of the intended beneficiaries?

Mr H Hoosen (ID) asked how SEFA’s pricing structure – prime interest rate plus a risk premium – compared to the rate offered by commercial banks. He expressed concern that SEFA seemed to be focussing its activities on the main centres, instead of the rural areas, where its support was badly needed. He also asked for the anticipated job creation figures to be justified.

Ms S van der Merwe (ANC) said SEFA seemed to be operating in a very competitive area, and it was important to ensure its funds were directed to where they were needed. She asked whether SEFA had an age profile of its borrowers, and what sort of competitive “edge” it had in the market in order to reach the smallest and neediest applicants. She felt the entity had to ensure that its loan application system was simple, that it promoted its products and services so that they were widely known in the market, and that it used modern technology to speed up delivery, such as allowing applications to be processed by cellphone.

Ms D Tsotetsi (ANC) said it would beneficial to develop “success stories” detailing the progress of applicants who had managed to develop their businesses through the assistance of SEFA. She also called on board members to be held accountable for their performance, and those who under-performed should be replaced.

Mr Z Ntuli (ANC) said he would like the difference between SEFA and its predecessors to be spelt out. It was important for the new entity to be active in the rural areas, and there should be an alignment between the national activities and what happened in the provinces and local governments. He was particularly worried at the exorbitant rates charged by some financial intermediaries, which severely curtailed the capacity of small entrepreneurs to develop.

Mr N Gcwabaza (ANC) said the presentation had not given him a sense that there was a focus on rural economic development, but rather that SEFA’s funds would be directed to cities and peri-urban areas. He wanted to know to what extent, as a new entity, it was prepared to reach out and market its accessibility in rural areas. Linked to this was the need to focus on the informal sector, so that the “survivalists” could be helped to move into the formal economy.

Ms M Mohorosi (ANC) said her experience was that neither Samaf nor Khula had been well known, so SEFA’s strategy had to include creating awareness of its products and services. She also suggested that members of SEFA’s board should also show they were “passionate” about their objectives by making themselves available to visit the rural areas to get first-hand experience of what was needed in these areas.

The Chairperson supported the call for SEFA to create wide awareness of its products and services, so that disadvantaged communities could be brought into the mainstream of the economy. She sought clarity on the range of SEFA’s lending rate, and asked whether it was intended to just cover costs, or to make a profit. She also questioned why it would want to expand its partnerships with retail and micro finance institutions, taking into account the problems experienced by Khula in the past.

Ms Rensburg said the board had been asked whether it had considered the strengths and weaknesses of Khula and Samaf adequately. The first strength was that the SEFA board comprised former Khula board and Samaf advisory committee members, so they knew exactly what had happened in those organisations. In SEFA board discussions, therefore, the strengths of Khula were discussed, and this helped in the planning of bank guarantee levels, for example. In addition, there was management which had worked for the previous organisations, and who could advise the board and analyse effectively what needed to be done.

When it came to the question of what had been discarded from Samaf, she wanted to refer to Khula as well. Khula was originally established only as a wholesale financer, so it made funds available only through financial intermediaries, with its focus on survivalist, micro, small and medium enterprises. When Samaf was formed, this was separated so that Khula could focus on the small and medium enterprises, and Samaf on the micro enterprises. The philosophy behind the separation was that international experience had shown that if one was going to finance small businesses through intermediaries, there needed to be a large number of them in order for it to be successful. South Africa did not have a wide range of retail finance institutions, so the decision was made to separate Khula and Samaf so that a vibrant RFI and MFI environment could be built up and supported. This required capacity-building grants, and as the Government was inclined to make the grants available for survivalist and micro enterprises, this became the responsibility of Samaf. However, there were very few RFIs, and they knew they were the only avenue through which Samaf could transfer funds to applicants, so Samaf was vulnerable and unable to dictate terms to them. This weakness had been identified and led to the decision to seek more partnerships so that SEFA could impose conditions which were related to its own objectives, particularly in respect of the financial intermediaries offering affordable products and services.

Ms Rensburg said SEFA lent money to financial intermediaries at a lower rate than they would have had to pay to banks. SEFA would take into account what would be a reasonable cost of recovery from the RFI itself, and then limit the rate of interest which the RFI itself could charge. It could not do this if it operated purely as a wholesale financer. It also had to ensure that when it made loans available directly to small businesses, these were affordable. Direct lending also helped to prevent SEFA being “held to ransom” by RFIs.

The Chairperson referred to a women’s group in Durban, and another group in Newcastle, both of whom had had to wait for more than two years to have loan applications approved. How did one explain these delays to the communities involved?

Mr Mabasa asked whether members of the SEFA board had ever visited the rural areas and come into contact with these communities. He also asked whether it would not be better to do without RFIs and go direct to small businesses.

Ms Rensburg said she had never been to KwaZulu-Natal (KZN) and had visited only one MFI (in Tzaneen). This was a weakness, because as a board, they recognised it was important to have RFIs in the same room when they planned. If one planned to deliver 20 000 loans, how could you plan this without involving them? So SEFA would be going to whoever was a potential partner to let them know how the entity worked.

When SEFA used the phrase, “Passion for Development”, among its values, it was addressing an issue which was of concern to the Committee, such as what had happened to the Durban women’s group. Even assuming the group had not met the requirements at the time for the granting of a loan, they should not have been abandoned, but rather assisted by referring them to another department or a more appropriate financer. SEFA would look to help groups who were committed to projects which would promote development.

Mr Saul Levin, Chief Director: Development Finance Institutions, Department of Economic Development, said that performance standards had been set and, working with the IDC, the time for processing loan applications had been reduced. SEFA would be required to start recording applications from the day they were lodged until final approval so that progress could be monitored and delays speedily eliminated.

Ms Rensburg rejected the suggestion that SEFA would be better off not dealing through intermediaries. There were both good and bad RFIs. Sometimes the bad RFIs were the result of a lack of capacity, non-compliance with agreements, or poor oversight on the part of Khula or Samaf. SEFA recognised that all RFIs needed to be closely monitored, as they were provided with a lot of money and were relied upon to repay it. For this reason, it had introduced a monitoring system to ensure agreements were adhered to. SEFA would not work with any FI that did not share its development objectives. On the other hand, it intended to learn from the experiences of the good RFIs. Furthermore, SEFA could lend directly only to registered businesses, while financial intermediaries could lend to informal businesses and reach those who needed assistance the most.

In rural areas, there were limited economic opportunities, and therefore few potential clients. In the circumstances, it was not sustainable for SEFA to establish offices throughout the country. This was why SEFA needed financial intermediaries, who were not only in the rural areas, but also understood the local conditions and the communities involved.

Ms Rensburg gave details of the people who had been targeted by Khula Direct. Research had shown that a lot of entrepreneurship in South Africa started around age 16, with many young people operating quite profitably in the informal sector. So they were a prime target, along with women, who made up about 90% of MMIs. Male Africans would not be turned away, neither would senior citizens, but different criteria would be applied to different groups.

Many borrowers did not realise that they could get loans direct from SEFA, and were also unaware that funds they received from RFIs were originally from SEFA. Communication was therefore essential, including co-branding with financial intermediaries, so that the SEFA name became known in the small business sector.

Turning to pricing, Ms Rensburg said SEFA had to be sustainable as an organisation. However, the businesses which it serviced were high risk – which is why they could not get financing from commercial banks in the first place – and lacked the resources to drive their businesses to viability. All these factors had to be taken into account when considering pricing, which would be based on the prime rate plus a “risk premium”, and whether the application would contribute to SEFA’s development objectives, such as job creation. At this stage, it was not possible to state what range the prices would cover, as it was important to establish a risk profile over the next three months to ensure that the organisation’s sustainability was not compromised by charging too low a rate. However, small businesses would always pay less than if they borrowed from the commercial banks.

The Chairperson asked if it would be possible, in the interests of transparency, to include the different rates in a printed brochure.

Ms Rensburg said this would be very difficult, owing to the wide range of variables involved.

The Chairperson said Samaf and Khula had faced problems in the past, owing to the high interest rates charged by RFIs. They would charge up to 40% in interest, making a profit at their clients’ expense. As SEFA would be targeting survivalists and micro enterprises, how would it be able to overcome this problem?

Ms Rensburg said the price charged would differ, based on the risk profile of the applicant. However she accepted the comment that SEFA’s financing process needed to be transparent.

The Chairperson said small businesses were coming to the Government for help, but they were receiving the same treatment from the Government as they got from the banks. If the objective of SEFA was developmental, why was the focus more on profit than on assistance? The Government should intervene, through SEFA, and take the risks itself. This was the Committee’s main concern, and she appealed to SEFA to look into the issue. The merger of Khula and Samaf had been approved because it was thought more assistance would be available to small businesses, but the proposed approach would not achieve anything.

Ms Rensburg responded that SEFA’s pricing was not intended to make a profit, but to cover its costs, which included providing services such as mentoring, which banks did not provide. However, the Committee’s concerns would be taken into account.

The Chairperson said there was agreement that SEFA should be sustainable. The question which needed to be answered was, at whose cost – the Government or the beneficiary? This needed to be clarified by the board of SEFA.

She was supported by Mr Hoosen, who said the current system could not be maintained, as there were “loan sharks” operating in the sector.

Mr Saleem Mowzer, Acting Director General, Department of Economic Development, said careful note had been taken of the Committee’s views, and all would agree with the philosophy expressed by Members regarding SEFA’s role, compared to that of commercial banks. The Department would work with SEFA to address the issue, which would impact on the entity’s policies with regard to funding of small businesses. They would report back to the Committee after engaging with the board on the matter.

Mr Levin said Khula had been working on a price of “prime plus 2%”, and the Department would like to see a cap on this level.

Mr Mowser summarised other issues which would be considered during the process of finalising the strategic plan. These included the need for board members to undertake visits to rural areas, measures to keep RFIs accountable, the location of offices in non-urban areas, simplifying the application process, and the use of technology to speed-up approvals. The Government, through SEFA, wanted to help small businesses, and should therefore be prepared to accept the risks so that this could be achieved.

The Chairperson concluded by commenting that the Government was not doing enough to extend a hand to those needing assistance, and it was up to SEFA, as a new entity, to reach out and deliver the benefits which the community expected.

The meeting was closed.