1. ANNUAL REPORT – 2010/11 Enhancing Growth
14 October 2011 1

2. Outline Introduction Khula mandate Overview of 2010/11 activities
Khula Direct implementation
Financial results
Outlook for 2011/12
Concluding remarks

3. Khula’s Mandate, Objectives & Business Model

4. Khula Mandate Maximise access to finance for SMEs
Intervene in underserved segments of the SME finance market to increase access to finance
Attract private sector partners to join the sector
Narrow the financing gap facing SME (reach out to as many SMEs as possible)
Maximise development impact
All investment efforts must result in –
Sustainable job creation
Black Economic Empowerment (black-owned SMEs)
Women Empowerment
SME development in economically disadvantaged provinces and communities
Financial sustainability
Maintain the capacity to be self-funding through –
Pricing
Optimal asset utilisation (capital, people, infrastructure) & leveraging resources of partners
Diligent cost management and control
Effective risk management

5. Objectives Target market
Khula’s core business is to provide appropriately-structured financing to SMEs -
In form of loans, equity and indemnities
Provided through a network of partnerships
Offers SMEs business support services (pre and post investment)
Provides capacity building grants for intermediaries
Provides business premises to SME tenants to support their growth and development
Target market
To target South African SMEs that are Black-owned; owner-managed in need of start-up, development and/or expansion capital
To increase participation of women-led businesses in SME sector
To increase outreach in rural provinces
To target lower-end of the SME financing market (R10k – R3m)

6. Products and Services
Business loans - business loans to Retail Financial Intermediaries (RFIs) who on lend to SMEs
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.

7. Geographic distribution of Khula offices and partners
Khula regional offices
   
Financing partner location

8. SME Financing Activity
RFI Portfolio
Financing Partner
SME Financing Activity
Geographic spread
True Group
Asset based finance EC
Cape Capital
Asset based finance, trade finance and working capital WC
Supplyfin
Bridging finance for government contracts LP
Mettle
Invoice discounting in the panel beating industry
National footprint
Marang
Group lending to micro and survivalist enterprises
EC, GP, KZN, LP, MP
Retmil
General SME financing
FS, NC
SEF
EC, LP, MP
Shoprite
Financing of OK stores
New Business Finance
Bridging finance for government contracts, term loans
WC, GP, MP

9. JV/Funds Portfolio Fund Name Period Fund Size Khula’s Contribution
Financing Activity
Anglo American-Khula Mining Fund
R200m
50%
Junior mining projects
Business Partners-Khula Start-Up Fund
R150m
80%
Start-up & early expansion capital
Enablis Khula Loan Fund
R50m
40%
Start-up & early expansion capital in ICT sector
Khula Enablis SME Acceleration Fund
Start up and early expansion capital
Identity Development Fund
R80m
94%
Start up and early expansion capital primarily for women and youth owned enterprises
Utho Capital SME Infrastructure Fund
R65m
46%
Early expansion construction companies
Khula SME Fund
R40m
100%
Khula Akwandze Fund
R100m
75%
Small scale sugar cane growers and contractors with an off-take agreement with TSB

10. Overview of 2010/11 activities

11. Highlights
Approval of Khula Direct Business Plan and securing funding for the pilot phase
Establishment of the Post Investment Monitoring Unit
Strengthen stakeholders relations
Explore other avenues to secure funding
Reposition the wholesale lending model
Align Khula’s strategy with the New Growth Path

12. Disbursements to intermediaries
Cumulative disbursements in the last 5 years of R1,4 bn
2 605 SMEs financed through intermediaries in 2010/11
2 500 job opportunities created in 2010/11
80% of SMEs financed were black owned in 2010/11
34% of SMEs financed were women owned in 2010/11

13. Approvals to intermediaries
Level of approvals lower than budgeted largely driven by:
Stricter lending criteria by commercial banks;
Poor economic climate, especially affecting SMEs;
Risk aversion by financing partners and
Reduced funding from shareholder

14. National Treasury Allocations
2010/2011
2011/2012
2012/2013
2013/2014
2014/2015
KEF (Lending)
R40.0m
KIS (Capacity)
R29.7m
R33.9m
R35.9m
R40.1m
R44.9m
Khula Direct
n/a
R55.0m ?
Total
R69.7m
R128.9m
R75.9m +?
R80.1m +?
R84.9m +?

15. Loan book growth Business loans increased by 29% year on year
Funds increased by 4%
Credit indemnity decreased by 20%

16. Property Portfolio
Provide development properties for largely black entrepreneurs
Large number of properties located in underdeveloped areas requiring larger maintenance budget
Estimated employment ± 6,000 jobs
Sector
No of Business
Percentage
Industrial
449
44%
Retail
377
37%
Service
203
20%
Total
1029
100%
Community
White
106
10%
African
656
64%
Coloured
178
17%
Asian 89 9%

17. Property Portfolio Performance
Rentals billings R41.6m (2010: R39.3m)
Property Portfolio expenditure and overheads R48.1m (2010: R36.9m)
R15m in 2011 provided as doubtful debt for rental arrears
2011 carrying value R187.5m (fair valuation increase of 3% since 2010)
Current actions to improve performance:
Conversion of “gross leases” to “net leases”
Installation of utility metres in property units
Roadshow by Khula Chairman to visit tenant associations
Preparation of Portfolio Strategy (dispose/develop/maintain) for Board approval
Complement with existing SME investment portfolio

18. Factors affecting overall performance
Adverse impact of economic crisis on SMEs
Reduced allocation of capital by the shareholder
Reduced lending through Khula’s intermediaries
Focus by financing partners on distressed SMEs to ease effects of poor economic climate
Higher than normal bad debt provision across the sector due to poor economic conditions
Low interest environment affecting revenue streams

19. Khula Direct Implementation

20. Khula Direct Implementation
Business case approved in December 2008
Between 2008 and April 2010, Khula undertook extensive research, study visits and consultations with key stakeholders
Business plan approved during 2010/11 financial year
Funding secured for pilot in East London and Tshwane offices
Actual -YTD
Annual target
Approvals
R5,4m
R35m
SMEs financed
174
980
Black SMEs
93%
70%
Female owned
27%
40%
Youth owned
11%
30%
Rural/peri urban
100%
45%

21. Financial Performance For the year ended 31 March 2011

22. Financial Performance
Group Actual
R’m
Company Actual
Revenue
161.2
 %
131.5
 13.25%
Operating Expenditure (before provisions and impairments)
144.5
3.2%
107.5
 1.3%
Provision for bad debts and impairments
147.0
179.5%
150.9
178.9%
Profit before tax (before provision and impairments)
16.8
71.2%
24.1
43.55%
Loss before tax (after provisions and impairments)
1583.9%
-126.8
1003.5%
Non-Current Assets
803.5
1.32%
816.4
1.34%
Loans and Advances
326.5
9.3%
212.4
17.4%
Investment Property Portfolio
187.5
2.4%
Core business investments
115.0
2.0%
68.5
29.7%
Investments in Subsidiaries and Joint Ventures
n/a
177.6
7.5%
Current Assets
514.8
10.9
376.5
11.0%
Total Assets
1,318.2
3.8%
1,192.8
2.9%
Equity
1,216.5
3.3%
1,166.7
2.8%
Total Liabilities
101.7
9.1%
26.1
8.4%

23. Financial Performance (cont.)
Company Revenue down 13.25% correlating to decreased lending activity.
Operating expenditure maintained by not filling staff vacancies, and reducing variable overheads linked to lending activity.
Provision for bad debts and impairments increased by 178.9% because of write-offs in RFI’s and also RFI net book values impaired below investment values.
Impact on bottom line ~ Loss.
Loans and advances (NBV) to RFI’s down 17.4% due to lack of shareholder funding to grow the loan book.
Khula’s equity and reserves decreased by 2.8% ~ erosion of capital base as a result of lack of funding to generate growth in income and reserves.
Uncommitted cash R110,9m (2010: -R53.6m neg/over-committed).
No taxation payable due to assessed loss available.

24. Revenue Group Company 2011 Actual R’000 2010 Actual 2011 Budget
Group
 Company
Actual
R’000
Actual
Budget
Actual
Revenue
161,215
198,601
131,534
119,479
151,627
Indemnity fees
7,946
10,811 -
Interest from lending operations
46,240
45,451
33,713
29,072
35,525
Investment property rental income
41,591
39,313
45,275
Other income
11,097
10,834
15,456
12,553
14,942
Investment income
41,439
54,538
35,825
24,882
43,076
Net fair value gain on financial assets
12,902
37,654
4,949
7,757
18,771

25. Expenditure and Overheads
Group
Company
2011 Actual
R’000
Actual
Actual
Budget
Expenses
(291,465)
(192,911) )
(258,358)
(132,274)
(163,104)
Personnel expenses
(33,949)
(33,629)
(37,313)
Investment property expenses
(48,109)
(36,854)
(40,494)
Movement on impairments and bad debt provisions
(96,309)
(52,738)
(149,074)
(19,822)
(42,895)
Bad debt written off
(54,347)
(20,951) -
Other operating expenses
(58,751)
(48,739)
(27,226)
(34,645)
(28,775)

26. (Loss)/profit before tax
Bottom line
Group
Company
2011 Actual
R’000
2010 Actual
Actual
(Loss)/profit before tax
(129,090 )
8,642
(126,824
(11,477)
Taxation*
45,580
2,119
53,462
3,243
(Loss)/profit after tax
(83,510)
10,761
(73,362)
(8,234)
* Mainly deferred tax reversal

27. Abridged Balance Sheet
Group
Company
2011 Actual
R’000
2010 Actual
Actual
Non Current Assets
803,447
792,874
816,357
805,564
Current Assets
514,774
577,726
376,445
423,062
Total Assets
1,318,221
1,370,600
1,192,802
1,228,62 6
Equity and shareholder’s loans
1,216,531
1,258,622
1,166,720
1,200,08 1
Non-controlling interests 3 75 -
Non-current liabilities
15,929
31,567
Current liabilities
85,758
80,336
26,082
28,545

28. Outlook for 2011/12

29. Merger of Khula, samaf and IDC’s small business activities with anticipation of significant Government and IDC Funding and support, rationalisation of costs and resources, improved access by SME’s, best practice operations and processes.
Establish SME Supply Chain Fund
Khula Direct implementation
Credit Indemnity Reform
Strengthen risk and credit management processes

30. Concluding remarks
Limited financial resources and restrictive wholesale mandate limit Khula’s impact and sustained growth
Mandate dictates highly developmental activities (start-ups, smaller sized loans, rural)
Current pricing model does not price for the credit risk and high development cost
Balance sheet to include a portfolio of strategic investments with a high level of profitability to subsidise highly developmental initiatives

31. THANK YOU
14 October 2011 31