A DISAPPOINTING 17-year attempt to get banks and the government to work together to increase lending to small businesses, provides insight into the significant challenges that face public-private partnerships aimed at assisting entrepreneurs.
Governments and banks in a number of countries around the world have been able to work closely together to fund small businesses using credit guarantees. Globally there are more than 2 000 credit guarantee schemes in operation.
Credit guarantees can be an effective way to fund small firms that lack collateral and struggle to access to finance, because it involves the government guaranteeing finance that banks lend to small firms.
This way banks, which have the systems to advance loans to businesses but often fear the risk of lending to the sector, are drawn into lending to business owners knowing that if the loans are defaulted upon the government will cover a portion of the loan.
However while guarantee schemes around the world lend billions of rand annually to SMEs, South Africa’s credit guarantee scheme which the Small Enterprise Finance Agency (Sefa) inherited from the government’s small business finance agency Khula, has never backed more than 800 loans in a single year.
The scheme ground to a virtual halt in 2009 after defaults rocketed – to over 42% between 2006 and 2010. This has made banks weary to make use of the scheme. Last year a measly R21.4 million was approved under the scheme.
The scheme’s fallout since 2009 has also had wider implications: it has seen the government move to lend direct to business owners – a risky decision which could significantly raise defaults as banks are arguably better suited to assessing quality businesses.
Principally it shows how poor design and implementation of programmes by the state can negatively influence the uptake of a scheme.
Sefa however now plans to revive the scheme. In April officials at the agency met with banks to discuss their concerns over using the scheme, and had in the last year introduced a more flexible claims process – which up till now has been one of the banks’ central gripes with the scheme.
The agency now settles claims immediately upon the bank having secured judgement against a borrower. Any subsequent outstanding monies recovered from the borrower are then paid to the agency.
Sefa’s executive manager of wholesale lending Dennis Jackson claims that like this banks can get a settlement between 21 days and two months.
In the past a claim was only settled after the bank had produced proof that it had done everything it could to sell the assets it needed to recoup outstanding monies. This could take over a year, according to bankers.
Yet despite this, the Sefa is targeting to have banks lend out only R790m in guarantee lending over the next five years or 15% of the R5.8 billion the agency aims to disburse to business owners over this period.
This translates to about R160m a year that Sefa plans to get banks to lend out via the scheme, way higher than the current R21m in guaranteed loans lent out in the last financial year – but peanuts in comparison to that of other emerging countries.
For example in 2009 when the scheme was under Khula, it lent out just 53 loans valued at R30m, compared to over 52 000 loans valued at R14.2bn lent out by Chile’s guarantee scheme Fogape and over 14 000 loans valued at R8.2bn by Malaysia’s Credit Guarantee Corporation.
Jackson conceded that the target for guarantee lending was small, but pointed out that the scheme had to “literally start from scratch” because the momentum had been lost in 2008.
Sizwe Tati, who formerly oversaw the scheme when he headed Khula, recently said the government needed to recapitalise the scheme, which would provide banks with the confidence to increase lending.
His call seems to have been answered – the Industrial Development Corporation (IDC) has committed over R987 million to the agency until the end of 2014/15. But it seems little is being doing to use that amount to entice banks to up lending through the scheme.
Jackson’s view is that if the banking sector approaches the agency with a pipeline of business, then the agency could go to the IDC and ask it to increase the amount allocated to the guarantee scheme.
He admits that there has long been a level of mistrust between the government and banks, points out that the scheme would be involved in training frontline staff and had already started doing so at two banks.
But the managing director of the Banking Association Cas Coovadia wants the government to be more bold in its use of the scheme.
He believes that the government’s development finance institutions had to be more at the cutting edge of innovation when it came to taking risks and designing lending products that reached more small businesses.
Banks’ chief complaint is that the scheme has in the past often increased moral hazard and led to massive default “multiples” higher than bank’s business banking default rates, despite both credit assessment criteria being identical.
“This is because the entrepreneurs may not have been trying as hard to make their businesses successful, knowing that the government was prepared to step in,” points out Caryl Regnault, FNB Business Banking programme manager of credit, indemnity and investment Products.
Last year the bank lent out not a single Sefa guarantee, but Regnault said despite this the bank had none-the-less increased lending to small businesses for two consecutive years.
Another key shortfall – and one that probably stands in the way of banks utilising the scheme more – is that the scheme only backs term loans, not other forms of finance like factoring, asset finance and overdrafts which are far more in demand by small firms.
Says Regnault: “Of our clients with credit facilities, the ratio of loans to overdrafts is 1:10”.
In contrast Chile’s Fogape and Malaysia’s CGC schemes guarantee among them offer various products including factoring contracts, leasing contracts, overdraft and shipping guarantee – which may have helped both schemes to drive lending.
Both have backed thousands of bank loans of billions of rands a year.
It is welcoming that Sefa officials and banks are attempting to get things going again, with a national tour now planned, but fundamentally the scheme is in needs of a serious redesign.
It also requires a bold leaders in the state that are willing to listen to the needs of the market for instance by allowing a wider range of lending products, without losing the main aim of the scheme, which is to increase lending to SMEs that lack collateral.
This article originally featured in the Wits Business School Journal in September 2013.
Stephen Timm is a