If you put your faith in figures, it looks as though the SA economy has much to thank small, medium and microenterprises (SMMEs) for. While the corporates pursue their efficiencies and reduce staff, the smaller operations have been taking up the slack.
Only 44% of people in the private sector were employed by SMMEs in 1995, but this number had risen to 52% in 2000 and 68% in 2002.
Accepting the reliability of the statistics, one question is whether government policy has had anything to do with this trend. This is almost impossible to tell, but it hasn't stemmed rising criticism of public-sector efforts. Government programmes to support SMMEs are criticised for falling short of their intended goals.
Khula Enterprise Finance's credit guarantees are channelled to SMMEs through retail banks and other agencies. MD Xola Sithole - who has been in office since December - has presented the Khula board with a blueprint for a refocused "customer-centric" organisation.
The department of trade & industry's (DTI) nonfinance arm Ntsika Enterprise Promotion Agency will be merged with Namac Trust, which, among other functions, oversees a network of technical advice centres countrywide. There is a growing realisation that Ntsika's brief to pursue SMME interests is too broad.
With a plethora of other agencies, these organisations have been trying to put some momentum behind government policy on SMME development. The pillars of this policy are:
- Greater access to finance for SMMEs;
- A friendlier regulatory environment for SMMEs;
- Improved market access for SMMEs; and
- Building skills and capacity within SMMEs.
Access to finance has probably been the most serious issue. The main concern about SMMEs and finance is simple: money is not reaching as many potential entrepreneurs as government would like. The finger has been pointed at the banks. Khula was so frustrated by the banks' underperformance with its loan guarantees that it recently investigated lending the money through its own branches.
Consultants scrapped the idea because it was not commercially viable, but the real problem is that neither banks nor government have the capacity to implement the most appropriate lending model, which is still subject to debate. However, the growing consensus is that lenders need specialised people to consider the merits of SMMEs' business plans and the entrepreneurs behind them and to identify the other kinds of support the business requires. Collateral-based lending is still central to retail banking philosophy and operations.
"Banks' lending criteria and credit processes are focused on collateral-based lending and companies that have solid track records," says First National Bank small business division enterprise solutions CEO Duncan Randall. "They are not set up to assess risk in the [small business] sector or manage the portfolio risk."
Problems arise when banks have to deal with businesses that don't meet their traditional criteria, he says. The result is either high rejection rates - because applicants don't meet the credit-scoring criteria - or, if loans are passed simply because they have a Khula guarantee or because of political pressure, there are high default rates.
Also, banks have adopted credit guarantees with varied levels of enthusiasm and the number of guarantees issued by Khula has been in decline for the past couple of years. Absa reportedly uses Khula it the most, accounting for over half of the value of guarantees. Absa is followed by Standard Bank. "The other banks are virtually nonexistent," says Upstart Business Strategies chief executive Septi Bukula.
"But there is apparently growing interest from smaller banks. "
Sithole acknowledges problems with the credit guarantee scheme, but says he has been working with the banks to find solutions.
The aim, he says, is not just to promote the product and make it more useful, but to build better partnerships with banks that will be based on other development finance products that Khula plans to evolve.
"There are other ways we can participate with banks," says Sithole.
Once Khula's customer needs analysis is complete, he will look at ways to "reorganise our offering of products and services in line with those needs, into discrete market segments [such as procurement, franchising, agribusiness or mining] that we can target, as opposed to being product focused".
Sithole hopes to change the public perception that Khula's role is limited to the credit guarantee and is concerned that the product's structure has been static though "market dynamics may have changed dramatically".
"I'm not saying it [Khula's credit guarantee scheme] will not be there in the future, but its relevance in the whole process has to decrease," he says.
The DTI's recent move to set up the Apex fund will help Sithole to identify and target his market segments more accurately.
The Apex fund will essentially take the "micro" out of Khula's SMME focus, leaving it with just small and medium-sized enterprises (SMEs). Microenterprises, defined as those with turnovers of less than the Vat registration limit, are not usually registered for tax or accounting purposes. The new fund will offer loans of up to R10 000 to these businesses.
This is a positive move, says Sithole. "The two market segments require different outlooks, skills and approaches.
"Microenterprise is highly developmental and it tends to work if you are using a group methodology of lending - as opposed to SMEs, which use an individual-focused lending methodology."
Microbusiness is also longer term and more marginal, but with a higher development impact. This will be better for Khula's bottom line, but Sithole says there will still be marginal segments in Khula's portfolio. "[There are some businesses] we have to support because of a lack of finance and infrastructure in certain areas," he says. "But there are other businesses that are sustainable and commercially viable. We have to have a mix in our portfolio or Khula's long-term sustainability is under threat."
Closely related to the policy goal of improving SMME access to finance is government's aim of supporting them in nonfinancial ways. Ntsika was originally set up to tackle this area, and other agencies such as Namac were launched to deal with specific programmes. Now the problem of co-ordination has taken centre stage and government wants some consolidation of activities.
There is a fragmentation of services, says Ntsika CEO Lefa Mallane, and small businesses are sent from pillar to post when looking for the support they need.
Khula' s retail financial intermediaries deliver certain services; Ntsika has local business support and tender advice centres; and Namac has manufacturing advice centres (MACs).
"If you were a customer looking for support or services, you might start at Khula and be referred to Ntsika, where you could be referred again to Namac," says Mellane.
To prevent this sort of frustration, former trade & industry minister Alec Irwin set in motion a process that ensured the agencies reviewed policy and strategy to ensure the consolidation of service delivery.
It has also been difficult to quantify the impact of Ntsika's interventions, says Bukula.
"If you went to a small businesses and asked: What has Ntsika done for you?', you would find few able to tell you because Ntsika does not work directly with them."
Ntsika is a "wholesale" operation, mandated to work through intermediaries. Where local capacity is weak, "Ntsika cannot really make a difference", he says. "Ntsika is not really to blame; in a sense, it was set up to fail."
Mallane agrees his organisation's mandate was too broad. "There was a vacuum, so the expectation on Ntsika was to become the saviour' of small business," he says. "Ntsika was perceived to be too many things to too many people, and it lacked focus."
Bukula says retail strategies are getting better results. "There is now recognition in government that the wholesale strategy doesn't seem to have worked," he says. "[Namac's] MAC programme was an experiment in entering the retail sector and it seems to have delivered the kind of goods government was looking for."
The merger with Namac, then, might have some longer-term implications for the way government interacts with SMMEs.
Bukula says: "I think what we're seeing with the Ntsika-Namac merger is some kind of tacit endorsement of the retail approach. The model that is seen to have worked in SA is the Namac model, so you can see a clear intention to go retail."
However, it will be some months before the consultants employed by Khula can produce a plan for future options for Khula and Ntsika.
