Microloans to entrepreneurs the key to jobs, says Motlanthe
FOR former president Kgalema Motlanthe, the growth of microlending facilities will help to reduce unemployment by providing funding for new entrepreneurs, thus promoting equal participation in the struggling economy.
“We need more microlending facilities — not loan sharks but properly regulated microlending facilities, because many entrepreneurs in townships and rural areas need financing. And it’s not astronomical figures — some of them need R400 000 just to take their ventures to a higher level,” said Motlanthe in an interview on the sidelines of the Legends in the Making conference hosted by Solomon Mahlangu Freedom College Trust.
He said microlenders could fund a small business and own 30% of it. At a later stage, after the business had grown, the lender would exit and use the money that had been invested to fund another start-up company. Some commercial banks were already doing this.
“Microlending that could take care of the need [for capital] could go a long way in building local economies . . . To try to ensure that we have thriving local economies that are capable of cultivating local markets to the extent that when the national economy is floundering, they should not be affected. This is how strong economies are underpinned by local economies.”
With unemployment in South Africa at 25.5%, many young people would need to pursue entrepreneurial opportunities to avoid being unemployed.
Motlanthe said there was a “mismatch between the education system and the needs of the economy”, and slow economic growth — especially in the mining and manufacturing sectors — was a major contributing factor to unemployment.
“Structurally, the South African economy has reached the pits . . . minerals we produce here are exported as raw materials and so we are exporting jobs. The downstream jobs in beneficiation should actually be taking place here,” said Motlanthe.
“Manufacturing has also gone down, there is an attempt CASH-STRAPPED: Former president Kgalema Motlanthe says lack of capital hinders start-ups and the National Empowerment Fund cannot provide enough to reindustrialise the manufacturing sector. We used to produce our own railway stock and now we import.”
Access to capital remained a challenge as institutions such as the National Empowerment Fund, which were created by the government to fund black business, had struggled with managerial problems and as a result provided limited funding for small businesses and entrepreneurs.
“In institutions, when you have a high turnover of CEOs or senior managers, that’s a sign of instability and it means you have no institutional memory and no understanding,” said Motlanthe.
The NEF, which had approved 94 deals worth R895million in the 2014-15 financial year, was negotiating further capital from the government as it had received no funding from the state since the R2.5-billion allocated between 2004 and 2010. It also raised R1-billion in 2007 from selling MTN shares to meet an increase in demand for funding.
Hlengiwe Makhathini, the NEF’s divisional executive: venture capital and corporate finance, said: “The increase in demand [for funding] can be attributed to the growing body of knowledge of entrepreneurship by funders and research institutions and among the general population.
“Also, the number of black professionals who have acquired knowledge and experience and accumulated savings to start businesses is continually increasing.”
Makhathini said the length of the application process, the readiness of an entrepreneur’s proposed business, the funding required and the availability of information were all factors that could determine the outcome of funding.
Other alternative forms of funding were “development finance institutions”, which, like the NEF, “have a higher risk appetite than banks and thus offer a higher probability for funding approval”, Makhathini said.
Yudhvir Seetharam, head of analytics at FNB Business, said that because of the tough economic climate, microlenders were the best short-term solution to obtain capital for entrepreneurs. “Over the long term, more collaboration and initiatives are needed between the private and public sectors to ensure that we reach the target of 90% of South Africa’s GDP coming from small to medium enterprises,” he said.
Seetharam added that because of increased regulation, banks were making an effort to ensure responsible lending in terms of the National Credit Act and monitoring of microlenders. It was often up to the entrepreneur and the microlender to establish trust.
“Entrepreneurs who are in need of capital can be tempted to approach microlenders for financing, but must ensure that they have assessed the company in detail before agreeing to borrow from them.”
Some goals of the National Development Plan, to reduce the unemployment rate to 6%, employing 24 million people by 2030, may be a pipe dream. Motlanthe said these targets would be unattainable if all sectors in South Africa did not become relevant and put an effort into taking the plan forward.
“Language is a barrier; so many people are excluded from reading and understanding the National Development . . plan,” he said.
Minerals we produce here are exported as raw materials and so we are exporting jobs