Disruptors needed to unleash the job-creating power of SMMEs
Those who need funding most have least chance of getting a loan
SA’s enduring economic crisis was amply crystallised by two figures that were part of the national conversation this week. The first figure, of 2-million, relates to the number of jobs that President Cyril Ramaphosa cited in his state of the nation address as the government’s 10-year target to curb the youth unemployment crisis. The second figure — 22,000 — relates to the number of jobs that were added in the past quarter in the non-agricultural sector. While one figure represents a long-term dream that on its own will not solve the problem of unemployment, the second figure represents a sober reflection of the prevailing reality. For the idea of 2-million additional jobs in 10 years to be a successful endeavour, far too many variables need to work in unison. Mainly, the growth in number of job seekers in that group has to be on par with the opportunities created. Any misalignment there will simply worsen the unemployment crisis. Additionally, the current incumbents — those fortunate to have a job — have to be retained in the system so they do not compete with new entrants to the labour market.
Unfortunately, the stumbling blocks are already evident. Big businesses are implementing large-scale retrenchments in various sectors. The public sector — always resistant to cutting jobs, thanks to the power of the unions — is also no longer immune to the tide. As Denel, Prasa and various municipalities struggle to pay salaries, it is now obvious that job cuts are imminent.
Conventional wisdom dictates that one of the best ways to bridge the gap between the ideal — the 2-million dream — and the actual is to unleash the power of SMMEs. SA has a poor record of cultivating and enabling SMMEs. As their capacity to make an impact is well known, we need to interrogate the reasons for the lack of momentum.
Some observers attribute this to a hostile and fragmented funding environment. Additionally, poor financial literacy levels across the country make many business ideas stillborn and condemned to the scrapheap.
Earlier this week, I attended the launch of a research report commissioned by the Banking Association of SA, which identifies the hurdles that banks face in the funding of small businesses. The review also took in some inputs from the entrepreneurs themselves, who were not always in agreement with the banks. The banks say there is a combination of factors, ranging from the funding risk associated with small businesses to entrepreneur knowledge gaps and regulatory hurdles, that make it difficult for them to lend to small businesses. Such elements individually and collectively contribute to the SMME funding gap.
In particular, the impact of the National Credit Act on the funding of SMMEs is illustrated by the fact that, according to FinFind, more than 73% of funding requests fall below the R1m threshold. This means that if you lend to this market, which is the one mostly demanding the loans, you need to comply with the act. However, if you lend to the more medium-sized businesses, which tend to have more experienced management, a longer operational record and a more solid financial performance, as a bank you avoid having to comply with the act.
So clearly we have a mismatch here. The people who most need the funding are the people banks are least incentivised to fund. Obviously, the act was promulgated mostly to protect the vulnerable, but this insight from the lending statistics presents an interesting conundrum.
According to the research from FinFind, of the 73% that seek funding of less than R1m, 44% actually need less than R250,000. Clearly, this is an opportunity for the disruptors.