Challenges and Opportunities in Funding SMEs

Setlakalane MolepoManaging Director

15 October 2009

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Table of Contents

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• Khula’s mandate• Target market• SMME financing landscape• Why focus on SMEs• Needs of SMEs • General challenges facing SMEs• Challenges - access to finance• Opportunities for SMEs• Accelerating SME funding• Concluding remarks

Khula’s Mandate

Purpose:To act as a complementary development financial institution that bridges financing gaps that are not addressed by other financial institutions.

The three key focus areas of our mandate as a wholesale financier are:

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Promote access to finance

Maximisefinancing for

SMEs

Jobs, BEE, rural development,

women empowerment

Development impact

Long-term objective

Financial sustainability

Target Market

• Underserved segments of the SME market;

• Primarily Black-owned, owner-managed formal SMEs;

• Start-up and development/expansion capital;

• Bias towards underserved provinces/rural/townships; and

• Loan sizes in the range of R10,000-R3m, with particular emphasis on facilities less than R1m, especially <R250,000.

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No.

Total 1,6 – 3,0m

0,1 – 0,3m

0,2 – 0,5m

0,6 – 1,0m

0,7 – 1,2m

• Less than 200 employees• Turnover > R25m p.a.• Developed technical & business skills

• Less than 50 employees• Turnover < R25m p.a.• Developed technical /limited business

skills• Less than 5 employees• Turnover < R150k p.a.• Some technical /limited business

skills• Individual self employment• Turnover < R50k p.a.• Limited technical and business skills

Opportunity-driven/Entrepreneurial

Necessity-driven/Survival

Mediumenterpris

es

Small enterprises

Micro enterprises

Survivalist enterprises

Characteristics

SMME Financing Landscape…Characteristics

Small enterprises

Micro enterprises

Mediumenterpris

es

Survivalist enterprises

Financing Needs – Nature of demand

SMME Financing Landscape … Demand side

• Short to medium term debt• Asset based & working capital• Up to R250k

• Short term loans• Up to R10k• Working capital

• Short term loans• Up to R3k• Stock purchases

• Medium to long term debt & equity• Over R250k• Asset based, working capital, property

finance etc.

Small enterprises

Micro enterprises

• Corporates• Banks/Financial Institutions• Private Equity/Venture Capitalists• Khula, IDC, NEF

• Own resources• Banks & Corporates• Khula & PDCs• Own & family resources• Microlenders & Banks• SAMAF & PDCs

• Own & family resources• Microlenders• SAMAF

Mediumenterpris

es

Survivalist enterprises

Financing Needs – Supply Side

SMME Financing Landscape … Supply side

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Why Focus on SMEs

• Economic reality and opportunity;

• Social necessity;

• To overcome lack of capital;

• To overcome lack of assets or security; and

• To participate in growing South Africa’s prosperity.

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Needs of SMEs• Access to market opportunities;

• Direct participation in the broader South African economy to

enhance job creation and economic activity;

• Access to finance;

• Access to general banking facilities;

• Access to innovation and incubator facilities, and hubs;

• Aftercare through coaching and mentoring;

• Ongoing guidance and support on implementing the business plan;

• Acquisition and upgrading of knowledge & skills.

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General Challenges Facing SMEs

• Access to finance;

• Access to information such as research, technology;

• Barriers to markets;

• Lack of recognition by big companies (as suppliers to those markets);

• Capacity – expertise and resources;

• Closing the “income gap”; and

• Redistribution of business opportunities and wealth.

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• Perceived risk profile of SMEs;

• Smaller loan size and cost of funding at the lower level;

• Insufficient understanding of the SME landscape by lenders;

• Lack of collateral in SMEs;

• Information gaps in accessing other finance (other than banks);

• Inadequate skills of SMEs; and

• Quality of business propositions.

Challenges Related to Access to Finance

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Opportunities for SMEs

• Government specific policies (IPAP (NIPF));

o R787bn public sector Capex & Procurement programme

o Procurement space (10 Key products by Government);

• Broad Based Black Empowerment;

• Other government’s initiatives to increase SME participation in the economy (APDP, CSDP).

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Accelerating SME Funding - Recommendations

• Deepen and integrate the financial services sector’s systems,

services and infrastructure;

• Monitor to ensure that the reviewed legal and regulatory framework

supports SME development fully;

• Build institutional capacity for supervision and monitoring and

enforcement of SME regulations and general business-related laws;

• Invest in rural infrastructure such as communication technology and

transport which would attract funders to locate to remote areas; and

• Embrace and adapt new information technologies in order to reduce

transaction costs.

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• SMEs are still facing challenges due to slow recovery;

• Scaling-up of interventions by the DFIs and commercial banks;

• Renewed focus on SMEs by the public sector;

• Broadening and differentiation of product offering;

• Better co-operation amongst DFIs; and

• Increase awareness of official programmes (banks, DFIs, and other

stakeholders that support).

Concluding Remarks

Thank You08600 54852

helpline@khula.org.zawww.khula.org.za

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