Finance sector code will help fund black business

The past few years have been associated with calls to accelerate broader participation of black South Africans in the economy. Underlying such calls is the recognition that without proactive strategies, the legacy of apartheid — an intractable hegemony of large financial firms and little in the form of the empowerment of the historically disadvantaged — would not be reversed.

This stubborn persistence of the status quo has necessitated regulatory approaches to direct funds to meet the demands of inclusion.

As an engine of development and with its critical role in funding growth, much has been expected of the financial sector.

It is against this backdrop that the introduction of the Amended Financial Sector Code (effective from December 1 2017) should be applauded. The most notable part of the FSC is the introduction of black business growth funding as a way for financial sector participants to help the country transform, in their position as capital allocators.

The revised FSC enables financial sector participants to meet the requirements of the code under the ownership and empowerment pillars of the scorecard by providing financing to black-owned companies. The code also provides for the capital to be distributed by black investment managers, which will help tremendously in transforming private equity.

Under the ownership pillar, banks and life offices can top up their BEE ownership shortfall through this scheme as an equity equivalent. This means that financial institutions that had done an empowerment deal, and whose empowerment partners have sold their shareholding, now have a mechanism to make up this shortfall. Entities exempt from the ownership provisions, such as international banks in South Africa, can still achieve the requirements of the code.

Worth close to R100billion, black business growth funding is envisioned to channel funds from the financial sector through black private equity funds into the real economy. This will help to drive growth and job creation as well as transformation.

What makes this mechanism smart is that unlike some government-led redistributive efforts, black business growth funding leverages existing mechanisms for capital deployment, but tweaks these to achieve empowerment objectives.

Economic realities, especially the loss of business arising from the failure to implement or meet the FSC’s ownership and empowerment financing scorecard thresholds, are an effective incentive to guarantee market player compliance.

Already, the private sector is responding, with black women-owned asset manager 27four Investment Managers setting up the Black Business Growth Fund in partnership with the Association for Savings and Investment South Africa.

This initiative should be celebrated for its intended purpose of unlocking the catalytic role of the financial sector and private equity to achieve transformation and propel investment in industrialisation.

Banks and life offices can top up their BEE ownership shortfall