Report of the Portfolio Committee on Trade and Industry.
Hearings on the Promotion of the SMME sector and the Role of Banks
(14 and 21 June 2000)

On 14 and 21 June 2000, the National Assembly Portfolio Committee on Trade and Industry and the NCOP Select Committee on Economic and Foreign Affairs held public hearings on the promotion of the SMME (Small, Medium and Micro Enterprise) sector and the role of banks. The immediate background to the present hearings was a workshop on SMME promotion organised by the NCOP where it was reiterated that access to finance was a critical issue and new initiatives were called for in relation to the banks.

The objective of the hearings was to examine the extent of the involvement of banks in SMME finance, problems being encountered in this regard and proposals to increase access to finance by SMMEs. The hearings attracted a good deal of public attention. Many individuals wrote to the Committee with specific complaints and many significant stakeholders gave verbal evidence. The hearings were intended to contribute to a positive way forward and highlight the work still to be done.

1. Banking Council and Associated Banks (ABSA, NEDCOR, Standard Bank)
The Banking Council began by highlighting a number of steps they had taken since the 1999 hearings of the Trade and Industry Portfolio Committee on bank charges and micro-finance. These included the introduction of a new Code of Banking Conduct, appointment of an Adjudicator independent of the Council, the establishment of a community-based financial institution, Sizanani, and the recent discussions with Khula around the provision of venture capital.

The Banking Council, pointed to a structural tension between their involvement in economic transformation and the maintenance of a "sound financial sector". The Council acknowledges that there is a need for economic restructuring, including drawing in of historically disadvantaged people into the formal economy, income redistribution, and addressing problems created by low levels of capital accumulation and entrepreneurial skills.

This needed to be balanced against the need to maintain a sound financial sector in line with international best practice. According to the Council the unfolding international environment is creating new competitive pressures placing certain constraints on the banking industry in South Africa. These include pressures to eliminate cross subsidisation and scale down less profitable activities.

The Banking Council presented a profile of the SMME sector in relation to the cost and size of loans. The Council argued that the unit costs of making loans to micro-enterprises were too high for banks, which could also not provide the support needed to entrepreneurs with limited managerial skills. They said banks could only become involved in financing very small businesses through specialised institutions such as Sizanani. The banks are, however, currently very much involved in servicing the small and medium enterprise sector and could expect to continue to be involved in this segment of the market.

ABSA, NEDCOR and Standard Bank provided a profile of their individual institutions, mission statements, total loan book and some indication of their involvement in the SME sector. It was apparent that the three institutions were using different criteria, and from the information presented it was difficult, if not impossible, to determine what percentage of the loan book was going to black entrepreneurs. Indeed some of the banks themselves acknowledged that they had no real basis for measuring which of their clients were previously disadvantaged individuals.

The Banking Council proposed the establishment of community-based financial institutions to service the micro and very small sectors which it said the banks could not finance. The Council also proposed the strengthening of the NGO and Retail Finance Intermediary sectors that are currently involved in this function. The Banking Council also proposed the strengthening of the Sizanani project. No clear answers were provided to repeated questions about banks' engagement in "red lining" practices.

2. Business Association, Investment Group, Financial Consultancy
South Cape Investment Network
The presenter referred to the constraints imposed upon smaller enterprises by banks. The Investment Network proposed that black-owned and controlled small businesses face more challenges than those owned by their white counterparts. A case study was presented of a bank manager who refused to open a cheque account for an empowerment group.

It was reported that black entrepreneurs continue to face hostility from white bank managers who are unsympathetic to the experience and plight of black owned small enterprises. The Investment Network, in collaboration with other stakeholders in the Southern Cape, has taken up the issue of racism in the financial sector to the Human Rights Commission. Some of the issues raised included: staff and management attitudes, red lining and a general disregard for the South African context.

Western Cape Black Business and Professionals Alliance The Alliance comprises several institutions operating throughout the country and consists of accountants, building contractors, lawyers and the Black Management Forum. According to the Alliance a key challenge is the changing of an existing mindset in the banking industry that sees black business as representing a high risk. Banks are doing very little to provide start-up capital, guarantees and bridging finance for small black business.

The Alliance focused its submission on the construction industry. Three areas were addressed: provision of bank guarantees, access to bridging finance and bank credit ratings of construction companies. Black contractors are currently receiving construction tenders through government procurement processes but are unable to source funds from the relevant financial institutions. The Alliance reported that their members
are then forced to either forfeit the contract or enter into a joint venture with a white company. According to the Alliance this trend does not contribute to economic empowerment.

Similarly, access to bridging finance, credit ratings and financing of commercial property in black areas are barriers to emerging small entrepreneurs. A construction tender requires bridging finance and credit rating from a financial institution. Banks have given several negative ratings to members of the Alliance. They said that these problems are not confined to micro and very small enterprises. They said that small and medium established black owned businesses (not just start-ups) were encountering such problems.

EYETHU Butchery The presenter, the owner of several properties and businesses employing more than 40 people, is an established entrepreneur with a proven track record. She has been a customer of Standard Bank for the past 19 years. She characterises her relationship with the bank as a 'hands off’ relationship that has not contributed to her success or business growth. It was reported that the local bank manager does not have a 'passion' or commitment to the development of SMMEs.

Bureaucratic requirements, as imposed by the bank, have slowed down the growth of her business. Several of her (white) competitors have developed more co-operative relationships with the bank manager and are receiving preferential terms from the bank. Access to working capital is often restricted due to stringent collateral requirements. It was reported that when collateral is provided banks are still hesitant to provide access to finance. This impacts negatively on the cash flow and stock levels of the business, which in turn influences the growth of the business.

Citizens Finance, Financial and Business Consulting The presenter highlighted the important role of banks in contributing towards the economic growth of the South African economy. Previous government policies were not supportive of SMME development, especially black-owned SMMEs. It is estimated that black entrepreneurs received less than 2% of total bank credit under the previous government. It was argued that the policy of banks have not changed towards SMME finance.

Banks look more favourably to financing empowerment deals that involve mergers and acquisitions. Banks view SMMEs as high risk, but poor performance of SMMEs is due to underdeveloped entrepreneurial skill that in turn requires access to finance. There is no history of an understanding between banks and black communities. Government has begun addressing several of these challenges through the SMME strategy. The effectiveness of the strategy needs to be evaluated.

Banks, in turn, have also introduced several measures including the Community Bank that was recently closed down. Banks have also established the SMME desks and the Sizanani project. It was suggested that government had overestimated the role of banks in advancing the SMME sector. In general, the policies of government have been correct but the implementation is more difficult than envisaged. As part of a way forward the presenter proposed that SMME policies be targeted and focused. The existing economic structure needs to be changed. This is a long-term objective.

Banks must find new and creative ways of providing access to finance. The SMME sector must be made less risky. More training must be provided. Government must increase funding to SMME programmes and actively support business associations. It was suggested that consultation between banks and government needs to be strengthened to provide targeted financial services. The presenter concluded by proposing improved communication between banks and government so as to establish a dynamic relationship.

Diakonia Council of Churches (DCC) The objective of the Diakona Council of Churches is to contribute to peace, development and a b quality of life for the people of the greater Durban. Individual congregations have expressed concern over the increasing unemployment and poverty in the region. The DCC is a result of the response to the local situation. A project of Diakona includes life-skills and technical and small business training. In the past four years over, 1 500 people have been trained in a range of skills such as sewing, electrical installation, carpentry, construction and motor mechanics. The presenter highlighted that the idea of skills training is to generate 'job creators' rather than job seekers.


Several case studies where provided which emphasized the importance of access to finance in creating a culture of entrepreneurship, facilitating employment and providing income to large numbers of vulnerable people. Several barriers to micro enterprise development where identified. Banks exclude micro entrepreneurs on the basis that a minimum amount is maintained in a bank account, that banks open accounts for people with permanent jobs only, and by levying excessive administrative costs and conditions. The micro and very small enterprise sector is an important income generator for a vast number of people.

The DCC proposed a change in the banking 'mindset' regarding risk and economic growth. It also proposed the removal of collateral requirements for certain loans in the micro and very small enterprise sector, no minimum amount for loans, that interest be charged at market rates and that Ioans should not be linked to savings. The DCC also called for improved sensitivity of bank staff in local branches.

National African Federation Chamber of Commerce (NAFCOC). The submission focused on the failure to accord organisations like NAFCOC a more prominent role in the SMME programme, the demographic make up of staff in the Department of Trade and Industry responsible for the SMME programme and the slow pace of land reform as constraints faced by black entrepreneurs. Nothing specific was said about the banks and access to finance by SMME’s.

3. South African Reserve Bank: Bank Supervision Department (BSD) The presentation highlighted the importance of banking and the significance of a sound, credible financial environment for economic growth. The Banks Act of 1990 focused on 'prudential regulation and risk management’ of financial institutions. This Act, reflecting a number of concerns of the time, focused on the regulation of deposit-taking institutions and prohibited non-registered entities from accepting deposits. The main function of the BSD is to protect depositors and maintain sound credit standards. The presenter stressed the importance of a sound credible financial system and called for circumspection when addressing structural challenges.

It was reported that over the years a number of initiatives had been taken to address constraints experienced by 'un-banked people'. These included: the passage of the Mutual Banks Act, the promotion of community banking, stokvels, savings co-operatives, village financial service co-operatives, launch of the Mortgage Indemnity Scheme and consultations with stakeholders about alternative strategies to informal financing and micro lending.

There have also been moves to establish an effective regulatory environment for the micro lending industry through the Micro Finance Regulatory Council. It is possible that the Micro Finance Regulatory Council will facilitate the accepting of deposits by micro finance institutions. It was reported that FinaSol and Financial Services Association have been appointed as regulatory bodies for the village financial service co-operatives. All of these initiatives have more or less operated on the basis of exemption from the Banks Act.

The presenters expressed the view that what was needed in the medium to long term was to facilitate the emergence of new institutions that might be more effective than banks in financing SMMEs. They argued strongly that government should not force banks to lend to SMMEs, the so-called stick method. They felt that greater success might be achieved by increasing competition in the market. This might be achieved by encouraging the emergence of a securities market as an instrument for accessing finance. Various co-operative ventures could also be encouraged. The success of this strategy will largely depend on the availability of financial information.

It was reported that the Reserve Bank, due to improper practices encountered by various institutions in the past, had expanded the definition of a deposit-taker. This placed certain restrictions on the emergence of what may be more appropriate financial institutions. What was required was a streamlining and refocusing of legislation including the Banks Act, the Companies Act, the Collective Investments Schemes Bill and the Investments Services Bill to overcome current legislative restrictions that make it impossible to access the securities market for SMME finance. Redefining deposit-takers in conjunction with the fine-tuning of the above legislation was called for as part of a strategy to promote competition between financial instruments. The presenters also supported greater compulsory disclosure by financial institutions of their involvement in community-based activities, including provision of finance to SMMEs.

4. Government
Department of Trade and Industry (DTI). Business Regulation and Consumer Services Chief Directorate and Khula Enterprise Finance.
The DTI highlighted the importance of the SMME sector as a means of poverty alleviation, a vehicle for black economic empowerment, in increasing competition and promoting job creation. The many barriers to SMME development were re-emphasized.

The National Enterprise Survey, commissioned by the President's Office and the support of the Ministry of Trade and Industry had reported that black-owned firms find it more difficult to access finance than their white counterparts. The same Survey found that while access to finance was not a major problem for South African companies generally, it was for black-owned SMMEs. These problems were particularly acute for recently established enterprises, i.e. those that are three years and younger.

The survey highlighted the following problems experienced by SMMEs in accessing finance: lack of collateral and equity finance, effectiveness of affirmative procurement, perception of risk, failure rate of start-ups, management support systems, high costs of operating SMMEs and the adequacy of credit guarantees. The Survey also found that there are relationship problems between bank managers and black entrepreneurs, regulatory inconsistencies, problems with high interest rates, the Usury Act, the Credit Agreement Act, a lack of second-tier institutions and tax incentives.

Structural and institutional challenges require sustainable interventions at several levels. Similar to other stakeholders, banks have a crucial role in the formation of capital in the economy. The DTI recognised the global constraints experienced by banks in South Africa and argued for an approach which balanced the need for sound banking practice against the imperative to extend services to people excluded from financial services. The growth of the micro-lending sector had exposed the slow responsiveness of South A banks in entering profitable markets.

Government will continue to encourage banks to improve access to finance for disadvantaged communities and also promote alternative financial institutions. It was noted that it is becoming increasingly difficult to measure the extent of credit extension to SMMEs due to definitional inconsistencies, but studies have agreed that overall bank credit extension is low. Another key challenge facing government is to work to improve banking practices in relation to black entrepreneurs. It was noted that SMMEs have complained of continued discrimination and blacklisting.

The presenter highlighted that banks are crucial to any SMME strategy result of their outreach, capital base, product and expertise. The lack of competition in the banking sector remains a fundamental problem. The DTI supported the promotion of the micro lending and credit union sectors as alternative instruments as well as the easing of regulations to allow smaller banks to establish themselves. It was reported that the department, in consultation with other departments, is looking into the implementation of a disclosure requirement mechanism. The presenter cautioned against simply importing a US-based Community Reinvestment Act given the different structural model of US banking. There was however, support for compulsory disclosure of the type contained within this type of legislation as a step towards financial reform. The low level of bank utilisation of the Khula Guarantee Scheme was also highlighted as a concern and the department is at present monitoring the unfolding scenario in this regard. The participation of a range of stakeholders in developing a strategy to address the many challenges facing the SMME sector in accessing finance was supported.

4. Conclusion and Recommendations
Improving access to finance for black-owned SMMEs is agreed by virtually everyone to be a major priority of economic policy.

The Committees' hearings have identified a number of 'structural' and 'relationship' challenges that will have to be addressed in making this priority policy objective a reality.

Structural issues include transforming the present financial architecture to make it more appropriate to current priorities. This was argued particularly in the submission of the SARB. A number of scams in the 1980s had led to the introduction of strict controls over deposit-taking institutions, which while still warranted in many respects, had tendered to limit the emergence of other financial institutions. Alternative institutions today were still largely operating on the basis of exemptions from the Banks or Usury Acts rather than according to their own purpose-built regulatory framework. The Committees agree with the SARB that there is an urgent need for a systematic and inclusive review of the broad legislative and regulatory framework of financial institutions with a view to devising strategies to encourage the emergence of a range of institutions that might serve this segment of the market.

At the time, the Committees are of the view that the banks need to play a more active role than they have to date. The banks themselves agree that provision of finance to small and medium businesses is very much an activity they need to engage in, and that by co-operating in specialist divisions, like Sizanani, they can serve the 'very small' sector as well. The only real debate, even according to the banks themselves, is over whether and how they can be involved in serving the micro-sector.

The Banking Council suggested that the costs of finance as well as being linked to the size of an enterprise, is also a function of the degree of access to collateral and the level of managerial skill. The Committees propose the exploration of creative partnerships to address such constraints, to deal with the perception of risk, and co-operation in the promotion of alternative financial institutions. Organisations like the Industrial Development Corporation are already playing a crucial role in the provision of finance and need to be more actively drawn into the strategy.

Mentoring is generally agreed to be a major challenge, both to transfer skills and as a mechanism for reducing risk. Focused and targeted training linked to loan applications is clearly required. Ntsika Enterprise Promotion Agency has already launched several mentoring programmes. The banks need to be engaged both on ways they can contribute to improving the efficiency of such programmes and how they can be validated in the process of loan applications.

The system of payment of government contracts also needs review, particularly as it impacts on SMMEs. The Committees are aware that the Public Finance Management Act should lead to the ending of the practice of long delays in the payment for work completed. But the question of finance for the period between the award of a tender and completion of a contract needs attention. Black business people complain that banks are currently not providing bridging finance for those SMMEs awarded tenders. The fact of being awarded a tender coupled with a proven ability to perform should, in our view, be regarded as a form of collateral by banks. Relevant procurement authorities and banks should explore this issue.

In addition to structural issues there are clearly also a number of relationship problems. There are too many black-owned small businesses who complain that attitudes to banks are less than positive, and feel that relationships are "at an arms length" for this dimension to be ignored. Entrepreneurs complain of an alienating and unsympathetic environment and there is a clear perception that black businesses are viewed less favourably than white.

The Committees draw attention to the fact that banks could face litigation under the Equality Act if they engage in discriminatory practices, including ‘’red lining", which many say continues to be prevalent. The Equality legislation also obliges banks and other institutions to establish proactive measures to combat the effects of discrimination particularly in relation to race, gender and disability. The Banking Council in its submission also drew attention to the Equality legislation and, in fact, invited aggrieved parties to use this remedy to deal with any discriminatory practices of banks. Beyond this, the Committees believe that banks need to urgently review what the SARB called 'politeness factor' and develop a more positive attitude to SMMEs. Steps need to be taken to ensure that decisions taken by top management in this regard are translated into meaningful change at the level of local managers and officials.

There is, furthermore, an urgent need, in our view, for a uniform system of disclosure that will allow the performance of particular institutions in providing SMME finance and other national priority activities to be measured and compared to that of other institutions. The Committees are of the view that this will require legislative and regulatory intervention. There was, in fact, virtual unanimity amongst presenters that uniform disclosure requirements allowing for such measurement was necessary. While the US Community Reinvestment Act was developed in a specific context different in significant respects from our own, a broader discussion of the type of legislation that is appropriate to our own specific South African conditions needs to be encouraged.

The Committees note that only one national black business organisation representing SMME interest participated in the hearings. Members of the Committees expressed disappointment that the NAFCOC presentation offered little insight on the issues under review, which the National Enterprise Survey identified as major constraints. Black business needs an organised Ieadership to champion their cause, lobby and negotiate in a more favourable climate. We hope that organised business in general, and black organised business in particular, will in future be more proactive in presenting proposals to deal with the many constraints that black small entrepreneurs face.

The Committee would like to thank all those who participated in the hearings and endorse the continued engagement between government, organised business, black business and banks.