The Johannesburg Stock Exchange (JSE) revealed this week that it busy setting up a township exchange for very small entrepreneurs. Given that few SME exchanges prove successful, will it attract the necessary capital?
Business Day reported that JSE CEO Nicky Newton-King told a parliamentary committee on Wednesday that the JSE is currently working on the eligibility criteria and building technology for the proposed bourse.
The exchange will exist alongside the main board, which has 325 company listings (11 of them black-owned), and the AltX for SMEs, which has 56 listed companies.
In October last year Gauteng Premier David Makhura said the exchange was expected to be operating by February this year and would help township businesses to raise R10 billion ($730m) a year.
But a 2015 World Bank report, which draws on the experience of seven exchanges, argues that few SME exchanges have succeeded.
The authors, Alison Harwood and Tanya Konidaris, point out that SME exchanges in such countries are challenging to run largely because emerging market countries have a shortage of larger sized and fast-growing SMEs that are best suited to listing.
For example South Africa’s Johannesburg Stock Exchange AltX, established in 2003, with 106 companies listed since the exchange began now has 56 listed companies
The authors says while the exchange raised over $2bn from launch until the end of 2013, listing and market capitalisation have declined in the wake of the 2008 financial crisis.
They add that tax incentives for investors, typically as part of a broader SME finance programme, might also help.
They point to the publication in 2014 in Brazil of a tax exemption for investors acquiring stocks of SMEs directly or through funds investing a minimum of 67 percent in SMEs.
This should boost Brazil’s BM&FBOVESPA Bovespa Mais, launched in 2005 which has suffered from a lack of investor demand.
Harwood and Konidaris single out the Warsaw Stock Exchange’s (WSE) NewConnect as a rare success. Established in 2007 it listed 442 SMEs as of March 2014 and 508 SMEs since its launch (68 percent of companies with a market capitalization below $5 million).
Poland has dynamic SMEs and a large number of knowledgeable retail investors comfortable with risk taking, who were already active traders in the derivative and foreign exchange markets.
It also has reduced entry requirements and a lower cost than main market along with well-regulated authorised advisors.
Harwood and Konidaris recommend that SME exchanges focus on firms that have a fairly sizable growth rate, as they will have capital demands and be most willing to use an exchange to obtain it.
Say Harwood and Konidaris: "It is generally accepted that micro-companies are not suitable for capital markets, because costs such as prospectuses, annual general meetings, and advisors are too expensive and the personnel requirements to meet ongoing listing requirements are not available."
Are authorities then fooling themselves? Will a listing for such small enterprises then really work?
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
To help the informal sector to thrive, municipalities should craft better policies, and create more effective urban spaces, an expert argues.
Sustainable Livelihoods Foundation co-director Leif Petersen says city authorities need to accept that the sector is here to stay and make it easier for traders to register a business.
The informal sector is essentially a safety net for the unemployed, he says.
A City of Cape Town report last year showed that informal-sector income helped to lower the city’s poverty rate from 25.1% to 20.6% — equivalent to pulling 186,000 people out of poverty. The city estimates that informal trading contributes 12% to Cape Town’s economy.
Petersen reckons the authorities should adopt a mix of enforcement and incentives to make it easier for informal traders to grow into formal business people.
Providing residents in informal settlements with the title deeds to their dwellings, or security of tenure, would also aid in growing informal-sector businesses, he says.
In 2014, the City of Cape Town developed trading zones in townships and introduced an incremental zoning scheme. It allows home-based and spaza businesses to operate legally in the townships.
In 2015, after consultations, the city allowed new land-use rights in the Langa Quarter, which had previously been zoned a residential area.
Petersen says cities could, for example, create container business parks on the fringes of townships to allow for welding and other light manufacturing activities. The cities could provide electricity and charge a small rental fee, giving artisans an opportunity to club together to create the economies of scale necessary to tackle larger contracts.
To tackle the challenge of townships being situated far from urban centres, Petersen says authorities could consider creating new central business districts. He cites a proposed off-ramp near the airport linking the N2 in Cape Town with Japhta K Masemola Road (formerly Lansdowne Rd).
"This is about getting the economy into the township as much as it is about getting the township into the economy," Petersen says.
'City working with traders'
City of Cape Town councillor Garreth Bloor says the city acknowledges the need to adopt a developmental approach to the informal trading sector, and provides support to enable such businesses to grow and survive.
For example, the city contributed R401,300 to give 46 entrepreneurs access to fibre-optic connections at the Philippi Village hub, where more than 5,700 people access the internet.
Bloor says the city’s economic development department is working with informal traders to create a more conducive environment for trading in the city centre, and is researching the provision of trading infrastructure.
The city is also working on a markets policy which, if approved, would allow additional access to markets for the informal sector.
The city uses an online permit system, and has about 3,700 traders registered on its database. "Our estimate is that less than 1% of permits were revoked in the last year for infringements," Bloor says.
Providing trading facilities
In Durban, eThekwini municipality spokesman Thulani Mbatha says the metro has built trading facilities worth R150m that are provided with free security, water, refuse-removal and electricity.
The city has issued 42,000 permits for informal traders, he says.
In Pretoria, informal traders are still waiting for promised infrastructure, including a new market to be delivered by the city, says Vincent Manganye, the secretary-general of the Tshwane Informal Traders Steering Committee.
City of Tshwane spokesman Blessing Manale says spending in Cullinan and Pretoria North was deferred to 2016-17, due to "internal factors".
While the construction of stalls in Rosslyn, in partnership with Nissan SA, will be completed this financial year by the city’s Tshepo 10,000 Co-operative, an informal traders’ inner-city market would be ready in the next two financial years, Manale says.
He says the city needs R7.5m to develop the Marabastad area, making it conducive to doing business.
Strike Sebake, the president of the Tshwane Micro Entrepreneurs’ League, says the establishment of satellite fresh produce markets could help traders save about R150m a year through discounts.
New permitting system
Johannesburg mayor Parks Tau announced in May that an improved street trading management system for the inner city would be introduced. This followed the Constitutional Court’s ruling in 2013 that the removal of 7,000 street traders during Operation Clean Sweep was illegal.
The city has now produced an inner-city informal trading plan, allowing informal-sector trading on certain streets.
City of Johannesburg spokesman Virgil James says this came after almost two years of consultations with stakeholders, and allowed for the creation of new trading spaces and an efficient management system that does not rely on by-law enforcement only.
The city will deploy street ambassadors to introduce new smart cards to informal traders. It also plans to create new trading spaces including inside buildings in the central business district.
Brian Phalo, the general secretary of the South African Informal Traders Forum, says the City of Johannesburg should also provide toilets and other infrastructure for traders, who are instead directed to trade at taxi ranks.
Socio-Economic Rights Institute of SA researcher Dennis Webster says the City of Johannesburg’s new computerised system is often at odds with how informal traders take ownership of their sites — often through their networks or inheritance. He says while many traders pay rent for trading spaces, several have indicated that they do not sign lease agreements.
This story originally appeared in Business Day (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight.
While the South African government begins a new push to develop and fund informal-sector businesses, an increasing number of entrepreneurs are developing solutions to address the many problems that township residents face.
Among these, black African entrepreneurs are using their knowledge of townships to develop apps or to adopt new business models or products, to service the growing market and solve social problems there.
One such person is Desmond Mongwe of start-up MoWallet (pictured above), who in July won Hack Jozi, a hackathon sponsored by the City of Joburg and with it R1 million in seed funding for an app that allows township residents to redeem coupons from large retailers for specific branded goods on sale.
Another is 25-year-old Nhlakanipho Shange, originally from Umlazi who has developed digital signage for mini-bus taxis (ad.it TaxiTV). Already 21 taxis – that ply the route between his former home and Durban city centre – have the screens installed. He’s aiming to get another 200 screens fitted in taxis by 2016.
Even though taxi owners get a 10% cut of advertising sales, Shange, who has been operating since August last year, admits that with no track record it’s often difficult to convince many. Yet he remains confident that his business will expand. “If they say no I just go to the next one,” he adds.
On the increase
Mongwe and Shange are among hundreds of new black Africans running tech start-ups.
A survey released in June by start-up news website Ventureburn reveals that 17% of SA tech start-ups were founded by black Africans – up from the six percent reported in its 2012 survey.
Two thirds of tech founders are white males, but the growing number of black African founders could bode well for the development of solutions to tackle some of the challenges that townships face.
A number of black Africans in the IT sector are focusing on solutions for townships, says Mixo Ngoveni, who runs Geekulcha, a Pretoria-based group that helps students and learners keen on technology to connect with industry heads and to get business help.
“Some people are now looking at building for the local market rather than the international market,” he adds.
Hubs, incubators stepping in
Many of the new ideas and apps are being nurtured by the increasing number of tech hubs, social innovation labs and incubators that have sprung up in recent years.
Last year the Pretoria’s Innovation Hub and the City of Tshwane partnered to form eKasi Labs, an initiative based at the Ga-rankuwa Arts and Craft Centre.
In March the Barn Khayelitsha, run by the Cape IT initiative (Citi), opened in the Cape Town township. At present about 20 entrepreneurs from the local community have hot desks there. While some are running things like marketing firms or a children’s soccer club, others are developing solutions using the likes of education apps.
Barn manager Chris Vermeulen believes there is “huge potential” for the new centre to use innovation to address social and economic challenges in the township. The idea he says is to use a living-lab model to get entrepreneurs to interact with the surrounding community to learn what the key problems are and then develop and test solutions to these.
In much the same way, the University of Western Cape’s Colab for social inclusion and innovation has since 2012 attempted to get youth from poor areas to work with communities to develop apps that address social problems.
These include an app to help community members find where the nearest point is to recharge their electricity account and another to offer matrics advice on what university subjects to take.
The centre’s director Leona Craffert says a key challenge is that great ideas take time to be refined. To get one good idea one often has to go through about 300, she reckons. Getting various stakeholders involved also helps to see to realise a successful idea, she adds.
By solving township problems entrepreneurs can run profitable businesses. Take Luvuyo Rani based in Khayelitsha. His internet café and computer training business, Silulo Uluthu, which he started with two partners in 2004 and now has 36 branches. Each outlet makes about R80,000 a month, with an average gross profit margin of 60%.
Rani says he has now become like a “bridge” for those wanting to get into the township market. He runs a monthly event called eKasi Network and is also trying to encourage businesses based in the wealthy suburb of Constantia to partner with those in Khayelitsha.
Despite one robbery, he says crime isn’t really a problem, because the community see the business as adding value, he says.
In addition while internet access has not been a big problem in the Western Cape, he says in some more rural areas of the Eastern Cape he’s had to turn to using 3G connections.
He’s presently in talks with internet providers, but says the company aims to become an internet service provider (ISP) in the future, to address the problem.
In much the similar way that Rani has tried address the internet challenge, the Soweto Wireless User Group aims to bring free wireless internet to the country’s biggest township.
Jabulani Vilakazi, who works in telecommunications company, founded the non-profit in 2010. The group has a license from telecoms authority Icasa to broadcast the 2.7GHZ and 5.8GHZ spectrum and currently has 28 hotspots that receive about 2 000 unique visitors a month.
An e-commerce platform has been proposed by a local spaza association, while Soweto residents already use the network to search for jobs and or for their children to do homework.
Vilakazi admits that resources to expand have been a “huge challenge”, but despite this, more than R100,000 has been invested with the project thus far from different big companies to fund branding and some infrastructure. Some big companies offer help to score BEE points.
Yet as any entrepreneur operating there knows, designing solutions for the townships doesn’t come without its challenges.
Ludwick Marishane, of Headboy Industries, designed Drybath – a soap powder that one can use as an alternative to bathing. He initially sold the product to overseas companies and to middle-income households, rather than punting it at poorer communities.
“You don’t want to position it as a poor man’s product,” says Marishane, who adds that demand for the product initially lay outside the country.
Since about the middle of 2015 he’s been testing the township market, using unemployed youths to sell sachets to homes there. His main customers seem to be those who live mostly in city centres and then return to the rural areas and townships on weekends.
Another challenge is getting licensing for ones business. Sizwe Nzima, who runs Iyeza Express, has had to put his plans to grow his logistics business which delivers medication to those in the township using bicycles, on hold while he gets both accreditation with the
SA Pharmacy Council and to run a courier business.
Once he has accreditation from the council he plans to offer delivery services to both private and government-run clinics and to help courier companies extend their services to townships.
Gap in state thinking
The hope now is that the government’s new drive to support township entrepreneurs could help transform townships. Yet much of the government’s strategy to develop the informal sector focuses on unregistered traders and those in light manufacturing – through the provision of grants, business training and by funding new work spaces.
The department’s National Informal Business Upliftment Strategy does not specify how entrepreneurs from both inside and outside townships can help develop solutions to address specific problems in townships.
But the department’s director of the informal sector Stephen Umlaw stresses that this doesn’t mean that such entrepreneurs won’t be included in the department’s move to uplift townships.
He adds for example that his unit is collecting names of smart ideas that entrepreneurs have developed to solve township problems. But he doesn’t say what these will be used for.
Ultimately more can be done very few entrepreneurs are developing solutions for townships.
A key challenge says Stuart Thomas, one of the authors of the Ventureburn survey, is that about 70% of start-up founders come from corporate backgrounds and are therefore far removed from the poor and their problems.
Connecting start-ups to townships and teaming township residents up with support centres that encourage innovation, could help entrepreneurs to solve many more township problems.
This story originally appeared in the November 2015 issue of Fast Company SA. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
With the South African government’s new drive to assist informal businesses (see this earlier post), big companies are increasingly looking to invest in and help build township economies. But if it doesn’t make commercial sense it has little chance of being sustainable, a fact that Standard Bank has discovered.
Six years ago the bank launched its Access Point product, a point-of-sale device that allows customers to withdraw cash and buy cellphone airtime and electricity vouchers. Some devices enable people to send and receive payments.
Offering these services helped the bank to meet its obligations under the Financial Sector Code of boosting financial access to the poor.
Standard Bank signed up more than 5,000 retailers and spaza shops to use the device, but today there are only 1,600 active trading points.
Nitesh Patel, head of customer financial solutions at Standard Bank’s personal banking division, says the bank decided two years ago to remove the devices from operators where they had proven not to be commercially viable.
Many of the outlets didn’t have sufficient sales volumes to justify continuing to rent the device, while some stores, mainly those in rural areas, battled with poor cellphone network coverage.
"For the store owners it became annoying at times because during peak times the signal would drop and then they couldn’t process transactions," Patel says.
Initially all the devices came with Instant Money functionality, which allowed customers to make payments to a third party or receive payments from others.
However, the bank removed the functionality from devices in smaller stores, because it proved difficult for them to abide by the Financial Intelligence Centre Act (Fica) requirements that stipulate that when a transaction is made both the sender and the receiver must be clearly identified.
Now Standard Bank allows only larger stores such as Spar, Cambridge and Rhino Foods to have the Instant Money functionality.
The Fica requirements mean that when sending payments, people in charge of trading points have to ensure a copy is made of a user’s ID. Most spaza shops don’t have the means to make copies, and Standard Bank had to help source and fund copy machines.
When the machines broke down or the paper ran out, some spaza shop owners expected of the bank to send someone to repair or replace them, despite the contract’s stipulation that the store owners were responsible for maintaining the equipment.
"You don’t just make a copy of the ID — you have to put it under a UV (ultraviolet) light. So we had to put UV lights in a lot of the stores. And then the UV lights were breaking and we had to replace the globes," he says.
"Compliance legal contracts don’t work well in this environment."
Because the Fica compliance obligations remained Standard Bank’s responsibility, it initially repaired and replaced the copy machines and ultraviolet lights, but then the bank decided that the store owners should pay half of the maintenance costs through the rental fees.
Stores then began to terminate their Access Point contracts, Patel recounts.
Sydney Majoko, a business owner who still uses the device at his International Butchery in Tembisa, complains that the first version had many network issues and customers had to wait two minutes or more for an airtime transaction.
When the device was first introduced he made 50c on each cash withdrawal by a customer. Standard Bank changed this to a percentage-based fee on each withdrawal. Now, after the cost of the rental of the device has been deducted, he only breaks even occasionally.
"Standard Bank made a lot of fanfare (when it launched) but didn’t give the product a lot of support," Majoko says.
Still powerful tool
But the Standard Bank device remains a powerful tool for business owners looking to boost foot traffic to their stores, as Andy Moore, who helps manage three butchery and grocery stores, has discovered.
"When the device works, it works well," he says, pointing out that last month the group’s Tzaneen store customers made withdrawals totalling R125,000 in a single day.
At month end, his staff go out to the long queues at ATMs to tell people they can withdraw money elsewhere, he says. He is hoping to increase withdrawals to a total R200,000 in a single day this month.
Moore estimates that almost half of the customers who come to the shop to make a withdrawal on the Access Point device end dup buying something off the store’s shelves.
But Standard Bank no longer believes it will make money on the device. When the bank had 5,000 access points, the cost of running and maintaining the system was more than its income in commission fees.
The bank only broke even with the product earlier this year — and then partly only because the hardware had depreciated in value.
"I think the lesson for us was mainly around the fact that you had to get the commercial viability right for the store owner and for us — and it was based on the store owner generating sufficient foot flow," Patel says.
This story originally appeared in Business Day (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook
Stephen Timm is a