Presentation to Portfolio Committee on Trade and Industry Setlakalane Molepo (Managing Director) KhulaDirect Update 17 June, 2009

2 Contents Executive Summary Target Market Mandate & Operating Model Wholesale Model Achievements SME Financing Gap Development Impact Constraints Constraints of Wholesale Model KhulaDirect Proposal Conclusion

3 Summary Khula has made significant strides towards meeting its mandate to bridge the SME financing gap Within the constraints of a wholesale model, Khula has substantially grown its outreach and impact, while remaining operationally financially sustainable We proposed that Khula be allowed to introduce a retail platform to complement its wholesale activities The proposed approach is designed to utilise existing infrastructure as a base to grow further and meet the needs of the lower end of the market KhulaDirect will produce positive results in the form of sustainable SMEs and jobs.

Summary (contd) Cabinet gave in principle approval to extend the Khula mandate to include direct lending on 3 December 2008 The dti and Khula will work on a detailed implementation plan The implementation plan will include recommendations for the recapitalisation of Khula. 4

Vision, Mission and Values Vision To be the development finance partner of first choice in SME development. Mission To provide finance, mentorship services and small business premises to SMEs through a network of partnerships and to encourage the sustainable development of SMEs whilst ensuring that Khula remains financially viable. Values Entrepreneurial - we understand our customers’ challenges Approachable - we treat fellow staff and clients with the respect we expect to receive Efficient - we break down all the red tape Innovative - we understand our customers’ needs and drive innovation. 5

Khula is a limited liability company wholly owned by Government Primary mandate - facilitate access to finance for SME development It is the sole development finance institution (DFI) charged with a mandate exclusively focused on SMEs It focuses on those areas of the SME finance market that are neglected by commercial financiers. It is mandated to: Maximise access to finance for SMEs; Achieve maximum development impact; and Remain sustainable in the long term. Mandate

Inflationary rate of return Maximise financing for SMEs Jobs, BEE, rural development, women empowerment Promote Access to Finance Financial Sustainability Development Impact Mandate Triple Bottom Line

Wholesale Model Since inception in 1996, Khula has not been permitted to lend directly to SMEs Assistance to SMEs is provided through: –Business loans to intermediaries who on-lend to SMEs; –The Credit Indemnity Scheme which provides collateral for SMEs without the security required by banks; –Joint venture funds, in partnership with private enterprise, which invest in start-up businesses; and –The provision of mentorship support.

9 Achievements Grown annual disbursements from R195m in 2004 to R443m in 2008 Increased its total loan book from R415m in 2004 to R859m in 2008 Greatly improved the quality of the loan book - reducing bad debts from 21.8% in 2004 to 9.9% in 2008 Built a solid network of partner organisations for product distribution that has 290 branches (excluding banks) Grown income from core operations from R40m in 2004 to R78m in 2008 Remained profitable throughout, while fulfilling its development mandate.

10 In a Nutshell Khula has earned its colours as the flagship DFI for small business Khula has built up substantial institutional knowledge and expertise in the SME financing arena Khula has steadily increased outreach and maximised impact, within the constraints of the wholesale model. A solid base has been established, now only needs a more flexible business model and more financial resources All of this has been achieved without any major further capital injection from the State.

Development Targets 2009/10 11 Performance indicatorBudget - Value of facilities disbursed to intermediaries - New loans to end users - Facilities disbursed to end users in priority provinces - Facilities disbursed to black businesses - Facilities disbursed to women owned businesses - Facilities below R250K disbursed to end users R605 million % 70% 45% 40%

12 Financing Gap and Broadening Access Global phenomenon – SMEs perceived by commercial financiers as high risk Locally manifests as lack of finance for start-up/early stage businesses and lower end of market Underserved target groups/areas - smaller loans, rural areas, female entrepreneurs, black-owned businesses Credit crunch means that these SMEs need even more support than under normal circumstances.

13 Development Impact of Products Product / Channel Black- owned SMEs Women- owned SMEs Priority Provinces (excl GP, WC, KZN) Wholesale Funding (RFIs) 92%63% JV Funds88%32%45% Credit Indemnities (Banks) 51%18%30% Banks have the lowest development impact of all the existing channels

14 Constraints Constraints of the wholesale business model: Limited ability to drive development and control destiny. Over-reliance on co-operation from partners that have purely commercial objectives. Model is complex and hard to explain to target market. State support for SMEs is concealed, leading to distorted market perceptions. Model adds a layer between Khula and the customer, increasing risk, costs of delivery and interest rates charged.

15 KhulaDirect Normalises Khula business model, giving it a retail platform to complement wholesale activities (hybrid model) Targeted intervention – focus on lower end of SME market Utilise existing infrastructure and partnerships for delivery Enhanced collaboration with like-minded commercial partners Organic growth to achieve higher scale and impact Simple clear message about State support for SMEs, free from undue obfuscation by partners Better control, lower risk and reduced delivery costs.

16 KhulaDirect KhulaDirect will be implemented through: Acquisition of selected RFIs Organic growth through consolidation and expansion Rebranding of acquired branch infrastructure Partnerships with private and state-owned enterprises Restructuring of Khula regional offices to enhance service delivery Complementary mentorship support.

Implementation Process 17 Infrastructure spend and procurement programme driven by the President’s office Best and quickest solution is contract based funding - SMEs will have secure contracts i.e. a guaranteed market. - Risks to Khula will be minimal Will pilot with one commercial bank - to use their infrastructure - Khula will control lending policies - Khula will take ownership of mentorship and monitoring Thereafter bring other banks into the fold.

Implementation Process (contd) Will continue to utilise the wholesale model e.g. - by expanding operations of existing RFIs and providing additional funding - by acquiring equity stakes in additional RFIs Simultaneously develop the direct lending model. 18

Financials 19 The following is an example of the results that an investment of R3bn will produce over the next 4 years: Disbursements to SMEs of R2.9bn The Khula loan book will grow to R2.2bn Only R640m will be spent on infrastructure A total of 17,100 SMEs will be assisted Facilitating the creation of 44,250 jobs.

20 Conclusion KhulaDirect will empower Khula to meet the needs of the lower end of the SME financing market It will allow Khula to have the complete arsenal of products to bridge the SME financing gap KhulaDirect will improve performance in the three focus areas of the mandate: - Promote access to finance - maximise financing of SMEs - Development impact - Job creation, rural development and women empowerment - Financial sustainability - rate of return.

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