There is consensus that South Africa needs to create millions of job opportunities, and these are needed now more than ever as the country’s unemployment continues to rise unabated because of the corona pandemic. Stats SA’s latest Quarterly Labour Force Survey (QFLS) for the first quarter of 2021, shows the number of unemployed people in the country at an all-time high of 32.6%. There is a second, and generally accepted, consensus that most of these jobs will come from micro, small and medium enterprises. The first iteration of the National Development Plan (NDP) proposed that for South Africa to overcome poverty and reduce the proportion of people who are dependent on state’s welfare, the SME sector would have to grow significantly. In 2015, the government had set ambitious unemployment reduction targets aiming for 14% by 2020 and 6% by 2030, and this was to be achieved by creating about 11 million new jobs through the SME sector.
These were bold ambitions by the NDP crafters and government received it with open arms because it would go a long way in reducing the current dependency on social welfare and hopefully add to the fiscus through taxes. However, reality today is that the official unemployment figure is 32% and the economy is in worse position due to corruption in key institutions and the corona pandemic in the last 13 months.
Our SME sector is also hindered by another hurdle in the form of limited funding options. South Africa has well developed and sophisticated financial institutions capable of funding most well packaged projects. The 2019 IFC-World Bank Report* on Micro Small and Medium Enterprises (MSME) shows that most SMEs fail to grow due to red tape, uncoordinated support for small businesses and risk averse type of funding by banking institutions. Unfortunately, if this attitude does not change drastically, and with immediate effect, we will not see the millions of jobs the SME sector has potential to create in the short term.
Fortunately, the corona pandemic has also exposed the need for a change in attitude on how we take SME funding decisions. The fact that only a small fraction of the government’s R200-billion meant to support businesses during the pandemic has been disbursed is a serious indictment on how traditional funding decisions need to evolve with the times. The government fund has suffered immensely because these funds are administrated by financial institutions which have been accused of applying their normal funding criteria even during a crisis, leading to thousands of SMEs folding under the pressure of prolonged economic inactivity.
If South Africa is to move a gear or two up in fighting unemployment, there needs to be a serious rethink on SME funding. Khulisa Investment Partners has found that wearing an entrepreneur’s hat when assessing an investment works better to see the potential of a start-up or a business at its formative stage. The company has managed to fund and offer support to some inspiring SMEs in the past year, these are business that falls within the “missing middle” category as they are either too small or big in the traditional sense of assessing funding criteria. The current trajectory of using traditional credit assessment when looking at an investment or funding for SMEs will idle the country for the next decade, whilst more jobs will be shed and, opportunities missed.
According to the IFC the total MSME finance gap between supply and demand in South Africa is about $30 billion. Total funding provided to this sector is currently $16 billion or about R230 billion. At the moment, commercial banks provide the majority of the financing extended to formal MSMEs, representing 68.9 percent or about R160-billion. There is also a huge chunk of funding which comes through Government and microfinance institutions, mostly focusing on the informal sector.
The IFC also notes that the potential for the MSME sector to drive economic growth and employment could be better utilised if MSMEs were able to access productive financing. MSMEs face serious challenges gaining access to finance, especially from banks. One estimate suggests that 75% of MSME credit applications are rejected, while only 2 percent of new MSMEs are able to access bank loans. Constrained access to finance is especially acute at the lower end of the MSME market where a “missing middle” – those firms too big for micro-finance but too small for traditional institutional financing – leads to MSMEs being under-served. This is due to a combination of factors affecting the supply of finance by bank and non-bank financial institutions, such as regulation, as well as MSME specific characteristics, such as a lack of basic business or financial skills.
South Africa is struggling with high unemployment levels, especially among young people aged 15 to 34 years. The Stats SA’s Quarterly Labour Force Survey shows the unemployment rate within this age group was 43.3% in the first quarter of 2020. To deal with this ticking timebomb, we need on new lenses on how the country funds SMEs, and a significant part of the solution could be a increasing the role of private equity players, in the same vein as the Section 12J.
SMEs make up 98% of all companies in South Africa and continue to prove that they are the lifeblood of the economy. While SMEs can play a critical role in creating jobs – they also perform other important functions such as supporting innovation and helping drive diversification and economic transformation.
For South Africa to take advantage of the potential of the SME sector, there is a need to remove the burdensome credit and collateral requirements of commercial banks and traditional financing institutions. We need to find alternative ways of securing funding and while encouraging an entrepreneurial spirit. This will enable us to capture more of the “missing middle” businesses, and in turn help resurrect this floundering economy as we emerge from the ruins of covid.
If South Africa is to have a fighting chance against unemployment, we should look at the alternative funding space of venture capital and private equity institutions. We should use every available opportunity to fund inherently good businesses that have been overlooked purely because of their size or other traditional criteria. At Khulisa Investment Partners, we have found and partnered with some amazing SMEs, and that is possible because the spectacles used to identify and invest in these businesses are those of entrepreneurs and not the traditional risk averse institutions. It is in these SMEs that we will turn the tide against unemployment and build an inclusive economy that gives young South Africans the opportunity to be creators of jobs instead of being job seekers.
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Dr Phumla Mnganga is the Chairperson of Khulisa Investment Partners. Khulisa is an innovative Black-owned management company providing investors with a diversified portfolio of investments. It was established in 2020 and currently have 3 funds which are centred on achieving the United Nations Sustainable Development Goals (SDG).