Erasibo Consulting

“It was noted that South African banks weathered the global financial crisis well, due to a strong regulatory environment and sound risk management practices.”
- Meeting between Minister of Finance and Bank CEO’s 31 May 2010

Small, medium and micro-enterprises (SMMEs) represent an important vehicle to address the challenges of job creation, economic growth and equity in South Africa. Around the world, one finds that SMMEs are playing a critical role in absorbing labour, penetrating new markets and expanding economies in creative and innovative ways.

The availability of finance is important for SMME business development. In South Africa the major banks have for years tried to limit their exposure to previously disadvantaged communities and SMME’s. The public relations spin, which is directed to us by the banks and their communications specialists, simply don’t live up to the spins promises. Banks say they are your “partners”; they are here to help with your “dreams” etc. to the point of nausea.

In my opinion, the apathy shown by the commercial banks towards the SMME sector is surprising, the banks talk a good talk about “development” and “empowerment” but have delivered very little in real terms to South Africans. Recently I interviewed a leading economic analyst to the government of South Africa, who pointed out to me the following perspective: “ there are two sides in South Africa; the banks and their interests and the rest of us”. Here is an excerpt from the Competitions Commission about the Banking Sector from their annual report 2008-2009:

Competition concerns in this sector arose from the fact that concentration was very high in almost all banking product categories with little evidence of rivalry between the four largest banks which accounted for 86% of total deposits and 99.7% of transactions through the payments system. Fees were also high and increasing rapidly with the incidence of costs falling particularly heavily on low-income customers and small businesses. There was also substantial public concern regarding the level of bank charges and other providers of payment services to consumers. The sector is of particular significance as more efficient and competitive financial services would reduce the cost of capital to SMME’s and all consumers. Lower bank charges and fees would also make banking services more affordable to low income earners

Read the National Treasuries: Facilitating the implementation of the Recommendations of the Banking Enquiry Panel report which is available at the National Treasury via this link http://bit.ly/9PQuz1

In researching this article it was very difficult to ascertain exactly what percentage of the major banks loan books are extended to SMME’s. Add to this the fact that the major banks coerce you as an SMME to enter into contracts which gives them all the protection whilst exposes you to all the risk and you start to see the banks for what they really are: profit at all costs.

A South African bank in 2010 is not your partner; it’s a line item for which you need to carefully budget every single month. The courts are filled with examples of what kind of partner’s banks are. You need to realize that when a bank evaluates your business idea what they are actually looking at is not the viability of the business, but whether or not your personal net worth will cover their loan, so that in the event of a recession, crime, malpractice on the part of the bank or even an act of God they will get their money back from you, even if it leaves your family destitute.

Here are some alternative sources of funding that you may want to try out first, before handing over your life to a major bank.

I find that the reason so many SMME’s don’t approach alternative funding partners is because:

• They don’t know what’s out there in the way of alternative funding
• They don’t know how to access and interact with these funds – this is more to do with the maturity of the individual applicant and less to do with the agencies procedures albeit that they are sometimes cumbersome; what did you think borrowing money was going to be easy?
• They prefer approaching the major banks because the marketing of the major outshines the alternative funders marketing and they find the major banks processes to be easier. In affect many people will take the riskier option of a commercial bank simply because the banks process faster by demanding higher risk burdens to be borne by the lender.
• They assume that these alternative funds are only for “blacks” – for the 2008/2009 period Khula Enterprise Finance allocated 52% of its funding to “black” business’s meaning the other 48% went to non black business. These alternate institutions don’t help their cause by not being clear on this message.
• Alternative funders don’t seem to have tailored the products as attractively as the commercial banks have i.e. where commercial banks will have specific products for franchising, financing of private schools, the funding limits are below the market value of viable business ventures such as franchises etc.

I prefer alternative funders to the banks because:

1. they take on more risk,
2. they don’t tie you as heavily to personal sureties (some in fact don’t ask for personal surety at all),
3. they do a an actual due diligence on the business you want to acquire, and
4. if you negotiate your contractual terms correctly you can get them on as backup should your deal go sour – and this is not be underestimated.

The organization listed below in my view are the best alternative funding options that a South African SMME / entrepreneur from a working class or previously disadvantage background has:

How should you go about engaging with these potential funders? Potential funders are an essential element to your business network. Businesses cannot survive in isolation, especially SMME businesses.

Consider the following diagram, it illustrates where the commercial banks fit in servicing the South African market. Identify where you fit and begin an engagement process with the institutions that are targeting you.

There is no secret formula for successfully approaching a funder. There is not guarantee you will get the financing you require.  Your best chance of success with a funder is to firstly know your business and your environment; if you are a going concern you must have stable financial results and you should know how your potential funders would react to your business and its environment.

Your engagement process with funders should not start with the initial loan application. I would suggest following this elementary engagement process

Collate all your information: you will be asked by a funder to submit along with a business plan, financials and application forms, the following:

1. All company registration document
2. Place of residence and operation (typically a municipal account
3. Detailed CV’s on yourself and partners
4. Tax Clearance certificates if you are a going concern and are registered for tax with SARS
5. A detailed business plan with financials and projections – most funders have their own formats
6. Know your industry – collate as much information and interpret it about your industry, what are the drivers of your industry and where do you fit in your industry.

Pre-Application: Send out requests for information packs to the list of potential alternative funders. I would suggest learning as much as you can about the various funders and then selecting who to apply to:

• Ask for a complete profile on their products and services as well as application packs, and
• A detailed explanation  (most do not have these detailed) on the application process including what happens if you are successful and what prejudice will you face if you are rejected.
• Ask for a meeting with an account manager. You need to build personal relationships with these people. Funders receive thousands of requests a year, its best to try to differentiate you as best as possible; start with a handshake
• Enquire about whether or not the funder will take ownership in your business and what the pros and cons of this are.

Application: My best advice to you is to sit down with the funder (actually schedule time with someone) to walk you through the application process and the development of your business plan. This is one of the big differences between commercial banks and the alternate funding agencies; the agencies will assist you develop your business plan more than a commercial bank will.

Securing funding is no mystery. It’s just very difficult. If you speak frankly with knowledgeable account mangers in the lending game they will tell you, that ideally a SMME should start off with out any need for financing, financing can kill a good business idea. You really need to know what you need the money for and be disciplined to follow the application process and if you are lucky to secure the funding (by being pedantic about the detail) you need to be disciplined about how you spend that money, ensuring that you repay the funder.

This past few weeks have seen a clash between the ANC and the South African Institute for Race Relations (SAIRR) on the issue of poverty levels in South Africa. The latest salvo was fired yesterday by the office of The Presidency in which they further attack the credibility of the SAIRR sources.

I think it’s great that this debate is raging.

The briefing note released by The Presidency is quoted below:

Briefing note released by Policy Co-ordination and Advisory Services – Global Insight, South African Institute of Race Relations (SAIRR) and Poverty: Whose Reality?

22 November 2007
The South African Institute of Race Relations (SAIRR), citing Global Insight Southern Africa (2006) reports that “[t]he number of people living on less than US$1 per day (the measure of extreme poverty used by the World Bank) in South Africa, increased from 1,89 million in 1996 to 4,2 million in 2005. As a proportion of the population, this represents an increase from 4.5% to 8.8% of the population living on less that US$1”.

This report differs dramatically from reports by various distinguished academics in the field.

From the onset, it is important to note that officially there is no consistent time series data on poverty and inequality trends over time. Most researchers use a combination of Statistics South Africa official data and unofficial data sources whose credibility they can guarantee, e.g. All Media Products Survey (AMPS) to arrive at a view on poverty levels and trends. They also adopt different poverty lines, ranging from about R2000 to R4000 per annum. Global Insight probably also uses a combination of data sources. However, there is no reflection on their sources and methodologies in the report.

What then should guide our understanding of the realities of poverty in South Africa? Perhaps the starting point should be the South African Constitution and the socio-economic rights it asserts should be progressively realised. These include access to housing/shelter, education, social assistance, health provision, food and water. This starting point, by implication, acknowledges that taking a narrow view of poverty and using a simplistic measure such as money-metric poverty barely engages with the reality of poverty and thus the combination of things that should be done to deal with it. The Constitution adopts a multi-dimensional approach to poverty that incorporates the meeting of basic needs.

Money-metric poverty

Let us begin with money metric poverty, the same indicator used in the SAIRR survey. How has this evolved over this reported period and beyond? Different reports are used here to illustrate the inconsistent view of the SAIRR report with the views of major work done in this area. Amongst this is work by UNDP covering the period 1995 to 2002. Using a national poverty line of R354 per month, the UNDP reported that the proportion of people living in poverty fell from 51.1% to 48.5% between 1995 and 2000. However, the absolute number of people living in poverty increased from 20.2 million to 21.9 million as a result of population growth. Other work by Hoogeveen and Ozler (2004) covering the same period, reports stability in the proportion of people in poverty using the R322 poverty line, and an increase in the absolute number of people living in poverty due to population growth.

Using a poverty line of between R3000 per capita per annum (in 2000 constant Rand) Van der Berg et al. report a slight increase in the proportion of people living in poverty between 1993 and 2000. However, this declined substantially even in terms of absolute numbers – from 18.5 million in 2000 to 15.4 million in 2004. Extending the period further to 2006, as is shown in the table below, headcount poverty significantly decreased from 2001 to 2006. In the entire period, 1993 to 2006, there was a proportionate decrease from 50.1% to 43.2%.

PERCENTAGE OF POPULATION LIVING BELOW R3 000 PER ANNUM
Year & Poverty headcount index 1996: 53.1% 1997: 51.2% 1998: 51.0% 1999: 52.1% 2000:50.8% 2001: 51.4% 2002: 49.0% 2003: 47.6% 2004: 46.9% 2005: 44.5% 2006: 43.2%

Van der Berg et al. also reflect on the changes in the poverty gap and severity of poverty. They show that the poverty gap index declined from 0.26 to 0.21 during the period under review (1996-2005). This implies a significant improvement in income and expenditure of those in poverty, bringing them closer to the poverty line of R3000. Furthermore they report a reduction in the depth and severity of poverty, from 0.16 to 0.12 in the same period. Calculated as the square of the difference between the poverty line and the incomes of the poor, the measure of depth and severity of poverty gives greater weight to those who are most deeply in poverty; and the fact of its improvement is even more significant.

Furthermore there is evidence that income poverty levels are indeed declining in part because of improvements in employment levels, but more importantly because of the enormously improved reach of the social grant system. Between 2000 and 2004 the per capita income of the poorest two population quintiles increased by over 30%.

Reaching the bottom 40% of the income distribution, government expenditure on cash transfers in the form of social grants increased from R10 billion in 1994 to R55 billion in 2005 and the number of beneficiaries grew from 2.6 million to 10.5 million. With the extension of the Child Support Grant to children under the age of 14, the total number of children accessing the grants is now over 7 million.

The impact of improvements in the labour market on poverty cannot be overstated. The number of employed people increased from 11.1 million in 2001 to 12.8 million in 2006.

The social wage

Beyond income poverty, which relates to private income and cash transfers, is the social wage. It will be folly to ignore the analysis of this component in the monitoring of progress or lack thereof with regard to poverty in our country. Emphasising the importance of the social wage, the HSRC made the following recommendation:
“The magnitude of the social wage is so great relative to poor people’s incomes, and even to the grants they receive, that any ongoing appraisal of government performance in supporting the poor, must take it into account…. [T]here would be value in ensuring the ongoing tracking of the social wage, with further methodological refinement.” (HSRC, 2004, p.32).

What are some of the elements of the social wage and how has it changed over time? The recent Community Survey provides a pointer in this regard. It finds that the proportion of households who use electricity increased from 56% in 1996 to 80% in 2007. The proportion of households who had access to piped water in dwelling or on site increased from 61% in 1996 to 70% in 2007. Households with access to flush toilet has increased from 52% in 1996 to 60,4% in 2007.

Another measure of the social wage is the government’s role in improving access to assets such as housing and land. According the Community Survey, the number of households living in formal dwellings increased from 69% in 1996 to 71% in 2007. More than R50 billion of assets (in the form of subsidised housing and land) was transferred to poor households in the period 1994 to 2003, according to the government’s Ten Year Review.

How well targeted are these programmes? Bhorat et al., although reporting on an earlier period, provide a sense of the beneficiaries of these improvements in services by income deciles. They indicate that during the period 1993 and 2004 access to formal housing grew by 42% and 34% for income deciles 1 and 2 respectively (the poorest sections of society) and 21% and 16% for deciles 3 and 4. Access to piped water increased by 187% in decile 1, while the growth was 31% in the 4th decile; and access to electricity for lighting for those in decile 1 grew by a phenomenal 578%. As the government’s programme of action indicates, 74% of those with access to water also receive free basic water, and the figure stands at 59% for electricity.

Account should also be taken of the education and health programmes, which include free medical care for pregnant women, children under six and people with disability; free text-books, improved infrastructure and no-fee paying schools

Using 2003 data (and Rand value), an HSRC study estimated that about 50% of this gross social wage value was directed at households in the poorest 40% of the population. This suggests that, taken as a whole, the programmes are progressively targeted. For social grants, 62% of the total went to the poorest 40% of households, and 82% to the poorest 60% of households. Furthermore, the HSRC study reports that female-headed households, those comprising single women supporting children, and granny households, receive larger-than-average social wage totals.

The benefit incidence demonstrates the impact of government programmes aggressively to address poverty and inequalities which reflect a history of systematic discrimination. This pro-poor bias of government social expenditure also demonstrates the critical role of the fiscus as an instrument of redistribution of wealth.

Exchange rate and purchasing power

Perhaps the central flaw in the SAIRR (Global Insight) report is the use of $1 per day as a poverty line. While this poverty line is recommended by the World Bank and used by most international agencies such as the UN, the uncritical adoption of this by SAIRR is unfortunate. This is particularly so in the context of the problematic nature of this measure especially with regard to exchange rate translations. Further, it is highly complex to correct for the differences in the relative purchasing power of the Rand to the US dollar.

But irrespective of these complexities, the report that the proportion of those below this poverty line has increased in the period under investigation is in contrast to evidence presented in other work. The All Media and Products Survey data for example, shows that the poorest income group (Living Standard Measure, LSM 1) fell from 10.5% to 4.8% of the population between 2001 and 2006. The bottom three income groups (LSM 1-3) shrank from 38.8% to 27.7% of the population in this period. Furthermore the incomes of people in the poorest groups grew by about 38% between 1993 and 2004, mostly as a result of the expansion of social grants.

The inconsistency of the SAIRR report calls into question their selection of particular data sources and their processing thereof. On a matter as critical as poverty-reduction, one would have expected at least a rigorous process of peer review and wider consultations before publication. In the event, the SAIRR in its carelessness and haste has served to generate more heat than light.

Who are the poor? How many poor are there? How do we improve their quality if life? These are not as easy to answer as you might think. It is widely acknowledged that South Africa is confronted by an unacceptably high rate of poverty. Yet it would seem that being able to identify and target vital programmes at the poor is not simply achieved.

Government departments and institutions apply varying standards and criteria when it comes to determining who qualifies for service. In many cases these varying standards and criteria do not align and what results is people who qualify for one service not being able to qualify for another e.g. two old age pensioners who live in the same household and both receive state pensions may not qualify for Free Basic Service benefits from their municipality because jointly their income exceeds the income threshold set by the municipality.

The president has talked about ensuring that those who are need are able to access the “social package” of services.

A society in which large sections depend on social welfare cannot sustain its development. Our comprehensive programme to grow the economy, including the interventions in both the First and Second Economies, improving sustainable livelihoods and create work is meant precisely to ensure that, over time, a smaller proportion of society, in particular the most vulnerable, subsists solely on social grants.

Unfortunately when you read through a lot of the policy documents authored by government you see very little indicating that they have given consideration to where their programmes fit into a broader social package of services and therefore how their programme will best assist with poverty alleviation. This lack of an integrated view on how programmes need to be dove tailed coupled with the multiplicity of views on the poor, burdens government across all three spheres unnecessarily.

Being able to know who you are meant to service not only helps in targeting but also allows you to better plan, manage public funds and monitor and evaluate the success of your programme.

I am not for one second suggesting that government is not aware of this. They are aware and carefully – correctly so – they are moving towards dealing with the issue of developing a single view on who the poor are. Statistics South Africa has been tasked with developing a national poverty line, the purpose of this poverty line is explained as:

The nature of poverty, vulnerability and income inequality, and their shifts in response to economic trends and policy, need to be better understood if poverty reduction and social development programmes are to be well designed and effective. An appropriate index to assist in measuring and tracking poverty over time is therefore a useful statistical instrument for research and analysis. It can also serve as a reference measure for various policy purposes, such as the allocation of resources for poverty-focused spending programmes or the assessment of social and development needs.

We now have movement towards obtaining agreement on a universally accepted definition of who the poor are. All we need now is for departments to recognise that they do not work in silos, independently from each other and that in order to be able to give poor families who have not as yet realised the basic (service) benefits of our new democracy a greater sense of their “human dignity”. The fact that government has established the cluster system for departments and put into place legislation like the Intergovernmental Relations Framework Act [13 of 2005] are all steps towards better synchronisation of efforts, but much work needs to be done within the corridors, meeting rooms and offices of government.

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