KHULA, the government’s small business finance agency, is looking to breath life back into its ailing credit guarantee scheme, with the signing of portfolio agreements with several banks to increase lending.
The scheme allows business owners, who lack the necessary collateral to access finance, to take out a bank loan which is then underwritten by the government’s small business funding agency Khula.
But lending at the scheme has virtually ground to a halt – from a peak of 797 loans in the 2002 financial year, to just 53 last year.
Khula’s chief operating officer, Mkhululi Mazibuko said the portfolio agreements, which the agency is expected to sign with banks, will reduce red tape as the banks will be able to bypass Khula when approving loans. Up till now both the bank and Khula has had to vett loans.
Mazibuko said the move made sense as presently over 90% of deals that flow through to it from banks are approved by Khula.
While claims procedures would be tightened, the agency would ensure that banks keep in line with monitoring and collecting repayments.
He said the agency remained committed to fixing the guarantee scheme, even as it begins piloting its Khula Direct model, which bypasses banks.
However while Absa, Standard Bank and FNB are all set to sign portfolio agreements with Khula, Nedbank has opted not to do so.
Graham Erasmus, Nedbank’s general manager of sales, channel and segment management, said the scheme’s “cumbersome” claims process needed to be amended before the bank committed itself anymore to the scheme.
“We have been unsuccessful in claiming on many of the clients where we have done Khula backed loans and it is very evident that a Khula backed loan is not necessarily “secured” lending,” he said.
Added to this at least one banker, who asked to be remaining unnamed, cautioned that portfolio agreements could unwittingly entice banks to lower checks.
A 2003 Unido report on credit guarantee schemes suggests that this risk could however be mitigated if banks feared damaging their reputation if they lent out recklessly.
Sizwe Tati, a former Absa banker who oversaw Khula from it’s inception to 2004, said what was really needed to scale up lending and gain confidence from banks was more capital, either in the form of a cash fund or a sovereign guarantee.
With a R1 billion guarantee, Khula would be able to gear lending by 4 to 10 times and banks would “instantly” be able to lend out about R4bn to R5bn, he said.
He cautioned against the adoption of Khula Direct to the exclusion of the guarantee scheme, saying that the agency would not be able to gear Khula Direct and that administrative costs would likely eat up 25% of lending before factoring in the amount of bad debt which he believed would be significantly higher than Khula’s guarantee scheme.
Tati said during his tenure at Khula he had continually requested a capital injection, but that at the time the political will had not there as the state was still paying off its overseas debts. However he said with the country’s improved balance sheet the idea to capitalise Khula was now ripe for consideration.
Yet whether this will bring down the default rate remains to be seen.
The scheme is beset by a high default rate – 42% between 2006 and 2010 – while bankers complain a lengthy claims procedure of up to two years in some instances.
Economic development’s chief director of development finance institutions, Saul Levin, said the department was currently reviewing the effectiveness of Khula, as part of the planned merger of small business finance entities.
An admission by head of Absa Small Business Nico Jacobs this month that 61% of his bank’s Khula guarantee book of R179m was “in legal” shows the scheme is no where near out of the woods yet.
This article appeared in Financial Mail on 8 April 2011.
Stephen Timm is a