LENDING by banks to black-owned and empowered small businesses fell by 27% during the recession – down from an R2.6 billion a year to R1.9 billion in 2009, according to the Financial Sector Charter (FSC) Council.
Bank’s lending to black small businesses is one of the key issues on the table, as negotiations between banks and industry roleplayers around the Financial Sector Charter drag into their third year.
A report released in October last year by the charter council titled “FSC Access and Empowerment Finance 2008-2010”, revealed that last year banks lent out R1.3bn as at end August 2010 to black-owned or empowered businesses with an annual turnover of between R500 000 and R20 million, and that lending to black small enterprises was expected to come in at R1.9bn for the year.
A draft Financial Sector Charter was gazetted in December last year, but the draft did not contain any of the specific targets, including lending to black SMEs.
This target and others are expected to be thrashed out by the charter participants this month, according to the FSC council.
Key will be whether or not to raise the target the charter sets for banks to lend to black SMEs, after the four major banks lent R12.8bn to black small businesses between 2004 and 2008 – more than double the charter’s five-year target of R5bn.
Participants are also expected to debate whether banks are providing sufficient finance to black small firms in all areas of the country.
In his 2006 council report, then charter council head Enoch Godongwana (and now deputy minister of Economic Development) expressed concern that 98% of bank’s finance to black SMEs was concentrated in Gauteng, KwaZulu-Natal and Western Cape.
While banks continue to be reluctant to share many details of their lending, Nedbank’s 2009 BEE report revealed that 81% of the bank’s finance was to these three provinces.
A similar percentage of finance goes to black SMEs at FNB, through the bank’s overdraft book, according to figures supplied by Greg Illgner, head of core products at FNB commercial.
But given that banks lend mostly to more sophisticated businesses in the formal sector, according to the Finscope 2010 Small Business Survey, the concentration of lending in the three provinces isn’t surprising.
While about 55% of small businesses reside in these provinces, according to the Finscope report, the three provinces also have a high number of sophisticated firms.
More revealing however are the statistics provided by Standard Bank’s head of small business enterprises, Marius le Roux, that show that among black SMEs that access finance, 52% of finance went to Indians, followed by 38% to black Africans and 10% to coloureds.
The large amount of finance to Indian businesses – which are concentrated mostly in KwaZulu-Natal and Gauteng – could go some way to explaining the over concentration of finance in these provinces.
It’s clear to see why half the small firms Standard Bank finances are Indian. The Finscope report reveals that Indian entrepreneurs make up 10.4% of the country’s estimated 278 800 most sophisticated small businesses (the businesses banks most like to finance), with whites making up a massive 61%, coloureds 9% and black Africans, a mere 19% of these firms.
So was the target of R5bn over five years then not high enough? It’s near impossible to calculate whether this figure is high enough. Even if banks are willing to say how much finance they lent to white businesses of the same turnover, how would one determine what the level of lending to black small firms should be?
Does one set a target according to the percentage of black firms that make up businesses between R500,000 and R20m, the number banked by banks, or set it against the general population make up of South Africa?
On top of this is the low entrepreneurship levels among particularly black Africans – with research by the Global Entrepreneurship Monitor (Gem) revealing that while 87% of white entrepreneurs and 83% of Indian entrepreneurs run opportunity-driven enterprises, just 75% of coloureds and 62% black Africans are opportunity-driven.
Le Roux said he didn’t believed that enough entrepreneurs are receiving funding: “I don’t think it’s due to a lack of wanting to do so, but rather a lack of the opportunities being created to assist black entrepreneurs and entrepreneurs in general to start businesses or to take existing business to the next level”.
This article appeared in Business Day on 15 March 2011.
POLICYMAKERS looking to boost support for small businesses may never know the full extent of the damage the recession has done to business owners, with next to no statistics on the sector to go by.
It’s a problem that the Minister of Trade and Industry Rob Davies is acutely aware of. In an interview with Business Day in November, Davies bemoaned the fact that other than a few reports based more on analogies than hard facts, there were was no concrete data on the impact the recession has had on small businesses.
The only accurate data to fall back on is Cipro’s figures for liquidations of close corporations (CCs), which jumped from 1 263 for the year of 2006 to 2 045 last year.
But Mike Schussler, director of Economists.co.za, said though the number of liquidations recorded last year was the highest since 2003, the rate of liquidations did not tell the full story of the effect of the recession, because it was often only big companies and those with large debts that went the route of liquidation. Many smaller businesses simply chose to shut shop or sell their business off cheap.
Vuyani Nkohla, the Companies and Intellectual Property Registration Office's (Cipro) acting registrar of companies and close corporations at Cipro, said added to this there were no clear statistics on small businesses, as the definition of what a small business was in terms of turnover or other criteria was not clear.
Nkohla attributed the decline in the registration of companies – from a high of 44 501 registered in the year 2005 to 24 844 last year – to a number of factors, such as the political instability before and post Polokwane, the recession and the new Companies Act of which has created some uncertainty until regulations are finalised.
“The same Act is going to do away with the registration of new CC’s upon being effective however allows those existing CC’s to continue to exist. This led to a number of potential investors to optimise the grace period hence increase in new cc registrations despite the recession,” he said.
Turning to studies, the only report that has revealed how the recession has affected small businesses was last year’s SME Survey.
In the study, which questioned 2 500 managers or owners of small businesses, 86% of small businesses reported that the recession had affected their business, with five percent of respondents saying they were unprofitable.
However the report may not have taken into consideration the full impact of the recession, as it was released in July last year, with the recession only ending in the last quarter of 2009.
Statistics provided in a presentation in October by Haroon Bhorat, the director of the Development Policy Research Unit at the University of Cape Town, revealed that the overwhelming majority of retrenchments – in most sectors close to 100% – had taken place at businesses with 50 or fewer employees.
In his presentation Bhorat suggested that perhaps more emphasis needed to be placed on small enterprises.
There’s also some anecdotal evidence on the effects of the recession, from the Africa Growth Institute’s SMME confidence index which surveys business confidence among small business owners.
The index for the last quarter of 2009, which quizzed 131 business owners drawn from a random sample, revealed that 42% of manufacturing firms, 41% of businesses in the services sector and 35% in the retail sector, reported that they had experienced a fall in demand in the last three months.
Compared with the second quarter of 2008 the results are quite different, where 24% of manufacturing firms, 30% of businesses in the services sector and 31% of businesses in the retail sector, reported a decline in demand.
The boom that auction houses experienced last year in the sale of commercial and residential properties is also evidence of the effects of the recession.
Rael Levitt, chief executive of Auction Alliance, said among commercial assets, restaurants were particularly hit hard.
He said the number of restaurants whose assets Auction Alliance auctioned off – jumped from 15 in 2008 to 50 last year. Motor dealers were also hit hard – with increase from about 5 in 2008 to some 60 or 70, last year he said.
We may never truly no the effect the recession has had on small firms. The lack of hard data on how many small businesses were effected by the recession, points to a larger problem of an absence in South Africa of sufficient statistics on small business.
In contrast to South Africa, the Indian government carries out a census of the small business sector every five years, which looks at among other things the number of businesses that are struggling as well as those forced to shut.
Schussler said it was difficult enough to even get an accurate number on how many small businesses were simply in survival rate, he said, adding that this wasn’t a statistic anyone tracked in the country – even before the recession. He called on Statistics SA, Cipro and the SA Revenue Service (Sars) to make more information on small businesses available.
Said Schussler: “One of the ironies is we want to get the SME sector going, but we don’t have any statistics on it.”
Sars spokesperson Adrian Lackay did not respond to a request for statistics on the effect the recession has had on small firms, by time of going to press.
This article appeared in Business Day on 16 February 2010.
MORE business owners are being turned away by banks as the effects of the credit the crunch continue to linger. Yet despite this banks say they are still “open for business”.
Since the start of the credit crunch last year, the percentage of applications for finance from business owners that Absa approved had dropped from 70% to 60%, while at Nedbank the rate of approval had dived from about 55% to around 40% of all applications.
But Faisal Mkhize, managing executive of Absa Small Business said this had come at a time when the number of applications were also down.
He said the unit was now receiving 20% fewer applications for finance than last year. The majority of applications that now landed up on its desk were for expansion capital rather than for start-up finance and these were generally for larger, rather than smaller amounts.
Absa Small Business, which lends to businesses with an annual turnover of up to R10 million, had also tightened its lending criteria, by putting in place measures such as a “stress test” where bank looks at what contracts an applicant might have in place and whether the business would be able to stay afloat for three to six months for example, if it lost these contracts.
Absa is the leading bank when it comes to handing out Khula-backed guarantees, but for the last eight to nine months the bank had limited its exposure to Khula,
particularly for start-up businesses which made up half of the bank’s book linked to the government agency’s guarantee scheme.
A lending limit of R100 000 on Khula guarantees for start-ups had been put in place, even though the guarantee scheme will ordinarily lend out to R1 million.
Mkhize said now that the bank had proper systems in place to handle Khula guarantees it was looking to increase this limit to R350 000 or R400 000 for this group.
The bank was also helping struggling clients to restructure finance agreements and had for the first time ever put in place a restructuring policy specifically for its small business clients.
Assistance could involve moving short-term debt into long-term agreements, granting an interest holiday, temporarily waiving service fees and increasing working capital requirement.
Mkhize said about 10% of clients were being assisted in this way, which he said was up from the usual 5% of clients that the bank assisted in this way.
He said Absa had seen an “upswing” in bad debt, something it hadn’t seen in five years and a “high level” of the bank’s book now fell into the legal department. Actual impairments raised for 2008 came to 4.07% of the total advances book. For 2009 the bank projects this ratio will rise to 4.53%.
The bank had also set up a forum where business owners can have application that are turned down by business managers or relationship managers, reviewed. Said Mkhize: “This is also linked to the recession because when times are tough you have to reinvent yourself”.
Nedbank’s Managing Executive for Small Business Services Sibongiseni Ngundze said his unit had experienced a 40% drop in applications from businesses that were looking to access finance for the first time.
Said Ngundze: “Our view is that the entrepreneurs have become quite cautious about taking on any new debt which stands the chance of not being repaid”.
He said Nedbank, which defines small businesses as enterprises with a turnover of below R7.5m, had initially taken “quite a hard stance on marginal transactions” and had been “aggressively” declining these. Only those with solid businesses cases were securing finance, he said.
In March last year the bank had set up a dedicated team to encourage branches to look through their client portfolios to determine if any business were in danger of defaulting on payments and needed to engage with the bank.
He said while the bank had restructured lending agreements with some clients, others had engaged mentors who had helped them with turnaround plans.
Of those businesses that approached the bank during the current economic period, franchisees and those with tenders or contracts had a higher chance of securing finance, he said.
Sean Robertson, director of personal and business lending at Standard Bank, said though the bank didn’t have a specific policy in place to address the credit crunch, it was being more careful when it came to approving applications for finance.
He said the bank was now paying closer attention to a business’s cash flow projections before approving finance. It was also “quite watchful” around applications from certain industries such as the motor industry, as well as those from the transport, retail and mining sectors, but would still opt to approve any application based on its merit.
Like other banks, Standard Bank was also seeing fewer applications, but Robertson emphasised that Standard Bank was still open for business.
This article appeared in Business Day on 21 July 2009.
THE CREDIT crunch created by the turmoil on the global markets had placed an additional squeeze on business owners waiting for payment from goods and services they supply to larger companies.
George Watson, managing director of New Business Finance, a company that lends to small business owners, said it been “increasingly noticeable in the last month” that large companies were taking longer to pay those entrepreneurs he lent finance to.
He pointed out that corporates had in many cases stretched their usual payment period of 30 days on receipt of invoice to 60 days.
Watson said the financial crisis had lead to his company taking a “closer look” at applications for finance when deciding whether to fund deals or not.
“This is not a period for expansion, it’s a period for consolidation,” emphasised Watson, who believed the credit crunch would last “well into next year”.
Yet despite this he pointed out that the current instability on the markets represented an opportunity for some business owners who were well managed and financially sound and could compete on price and efficiency.
This was echoed by Jo’ Schwenke, managing director of Business Partners, who said the financial crisis was a good time for some businesses to break out into the market as demand had dried up and businesses could probably get things at a better price.
Sibongiseni Ngundze, managing director of Nedbank’s small business services, advised business owners who were looking for finance to sharpen their selling skills and to first look for alternative sources of business.
This could for instance involve seeking out the opportunities created by those businesses in an entrepreneur’s particular sector that might have closed down or missed payment deadlines.
Only as a last resort, he said, should the business owner look for funding. But even then they should consider sourcing funding from shareholders first before approaching the bank.
He said Nedbank had built in additional measures for those looking for finance from the bank and had also become “more robust” in testing a loan applicant’s cashflow.
Pointed out Ngundze: “You really have to have your business robust to access credit.”
One business owners whose small Cape Town-based publishing firm, was currently experiencing a growth despite the financial crisis, is Monika Elias.
Elias runs the World’s Favourite Publications which publishes various tourism publications including the monthly tabloid Wine Tourism News.
She believes it is because she is able to move quicker than larger companies and because she had less overheads that she is able to undercut more traditional magazines.
While she admitted the last four years setting up her business had been “hell”, she said her current growth had been buoyed by the wine industry’s demand for a marketing outlet and the hype leading up to the 2010 Soccer World Cup.
“If think if you’re an entrepreneur you just have to keep on going,” said Elias, who said despite the high interest rates she was now looking to buy a vehicle for her business.
Exporters may stand to gain with the weakening rand, but Vinya Kumar, who co-owns Pacific Paper Technologies with Dev Varyani, said the current financial crisis was “like a two-edged sword” for their business, which distributes paper products to African countries like Kenya, Cameroon and Mozambique.
He said though the drop in the rand’s value would increase their business’s profitability, their sales numbers are set to decrease as customers he said, were “holding off” during this time of market instability.
This article appeared in Business Report on 23 October 2008.
Stephen Timm is a