SME FINANCING OPPORTUNITIES – BRIDGING THE GAP South Africa SMME Conference Services Forum 1 1

South Africa SMME Conference Birchwood Hotel 21 October 2010 2

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 Less than 200 employees Turnover > R25m p.a. Developed technical & business skills Medium enterprises Medium enterprises Less than 50 employees Turnover < R25m p.a. Developed technical /limited business skills Small enterprises Small enterprises Less than 5 employees Turnover < R150k p.a. Some technical /limited business skills Micro enterprises Micro enterprises Survivalist enterprises 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 Banks/Financial Institutions Private Equity/Venture Capitalists Khula, IDC, NEF Medium enterprises Medium enterprises Own resources Banks & Corporates Khula & PDCs Small enterprises Small enterprises Own & family resources Microlenders & Banks SAMAF & PDCs Micro enterprises Micro enterprises Survivalist enterprises Survivalist enterprises Own & family resources Microlenders SAMAF 8

SME Financiers GAP 9 TERM TRANSACTION SIZE Long Medium Short Micro     Long- term CAPITAL MARKETS Long INVESTMENT BANKS DEVELOPMENT FINANCE INSTITUTIONS TER M Medium - term TERM MORTGAGE PROVIDERS Medium COMMERCIAL BANKS GAP MICRO-FINANCE INSTITUTIONS CONSUMPTION LENDERS Short -term STOKVELS, BURIAL SOCIETIES Short MONEY-LENDERS Micro Small Medium Large Micro Small Medium Large TRANSACTION SIZE Source: Roussos and Ferrandi (2008) TRANSACTION SIZE 9

SMME Business Confidence Index 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 Source: South African SMME Business Confidence Index Report

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 Source: FinScope South Africa Small Business Survey 2010 10

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 Financial sustainability Create sustainable SMEs; in the mainstream economy, thereby contribute to economic development 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 19

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

Khula Client Liaison Centre number THANK YOU Khula Client Liaison Centre number 08600 KHULA (54852) Website - http://www.khula.org.za Email - helpline@khula.org.za