Banking Association South Africa (BASA) briefing on support of financial sector to tourism industry, especially on small, medium and micro enterprises (SMMEs)
The Banking Association South Africa (BASA) briefed the Committee on the support of the financial sector to the tourism industry, especially on small and medium enterprises (SMEs). The Association did not regulate banks. It was a voluntary association which registered banks were members of. Banks constituted 95% of all exposure to SMEs in 2009. The Financial Sector Charter achievement on black SME financing as at end of 2008 totaled R11.4 billion. Relating specifically to tourism Standard Bank collaborated with the Tourism Enterprise Partnership to develop a restaurant guide for SMEs in Fordsburg, Alexandra and Soweto as well as financial and non-financial support to “hidden treasures”. ABSA Bank provided non-financial support via a network of Enterprise Development Centres. It also provided finance for franchises as well as vendor finance to SME suppliers. Other banks had dedicated tourism units which provided various financing options and other support.
The point was made that a great deal of debate took place over the fact that banks were not lending enough. The reality was that over the last 3-4 years many businesses were in financial trouble and were not borrowing money to expand. The demand for credit and loans was thus less. Eight years ago banks were not involved in consumer micro finance. At present nine banks were involved with over 50% of its finance being micro finance. The success was attributed to regulation being done correctly. The same needed to be done on developmental micro finance. The relationship between developmental micro finance institutions and banks needed to be looked at. The reality was that banks remained cautious about lending to the SME sector. Past experience had shown that many SMEs fail in the early stages, this phenomenon feeds into risk. One way to address the issue was to diversify funding
The Association felt that Khula Enterprise Finance (a state-owned development finance institution) should be taking risks that the banks did not wish to take. Khula having taxpayers’ funds at their disposal should be risk leaders. The mandates of institutions like Khula should be re-evaluated. In using taxpayers’ monies to fund SMEs, Development Finance Institutions (DFIs) should not be irresponsible. On the other hand if DFIs only lent to people who could afford to repay then the banks might as well do the lending. What was the point then of having DFIs? It was suggested that perhaps the DFIs should sit down with banks and decide on the best ways in which the banks could do normal lending in the SME sector. The idea was not for DFIs to compete with banks. The private sector and DFIs should work together. The one should leverage off the other.
It was agreed that more meaningful interaction was needed between government institutions and banks. Greater interaction between role players was needed especially since the tourism industry had its own peculiarities.
The Chairperson highlighted the government’s priority programmes. These included accelerated and inclusive growth, jobs and sustainable livelihoods; rural development; prevention of crime and corruption; health and lastly education. The Committee was concerned about support to the Small, Micro, Medium Enterprises (SMME) sector. The problem was that small businesses struggled to access funds from banking institutions. Members were hopeful that the Banking Association of South Africa would be able to guide government as to what needed to be done.
Banking Association South Africa (BASA)
Mr Cas Coovadia, Managing Director, BASA, undertook the briefing. Also in attendance were Mr Abdul Waheed Patel, Managing Director, ETHICORE Consulting and Advisory Solutions (a consultancy group which was contracted to BASA) and Mr Muhammad Khalid Sayed, Research Consultant, ETHICORE Consulting and Advisory Solutions.
Mr Coovadia stated that BASA was the representative of all registered banks in South Africa. Its members included local and foreign banks. BASA did not regulate banks. It was a voluntary association and currently had 37 members. The work of BASA included a great deal of lobbying, policy work and interaction with government departments and Ministers. BASA drove the transformation initiatives of the banking sector. It also undertook some consumer literacy programmes at industry level. The Association looked at ways in which the banking industry could do things differently whilst at the same time remaining sustainable. It was also engaged in regional integration issues with the Southern African Development Community (SADC). BASA was the mandated voice of the industry. The Board of BASA comprised of the CEOs of the banks operating in SA. Banks constituted 95% of all exposure to Small, Medium Enterprises (SMEs) in 2009. The Financial Sector Charter (FSC) achievement on black SME financing as at end of 2008 totaled R11.4 billion. Relating specifically to tourism Standard Bank collaborated with the Tourism Enterprise Partnership (TEP) to develop a restaurant guide for SMEs in Fordsburg, Alexandra and Soweto as well as financial and non-financial support to “hidden treasures”. ABSA Bank provided non-financial support via a network of Enterprise Development Centres. It also provided finance for franchises and vendor finance to SME suppliers. Other banks had dedicated tourism units which provided various financing options and other support.
Mr Coovadia stressed that he did not delve too much into the affairs of banks. If the Committee required more specifics the banks would be able to provide greater detail. There had been great deal of debate about the fact that banks were not lending enough. The reality was that over the last 3-4 years many businesses were in financial trouble and were not borrowing money to expand. The demand for credit and loans was thus less. Some of BASA’s SME initiatives included the FSC and Broad Based Black Economic Empowerment (BBBEE), a Financial Sector Program (FSP) run with the help of USAID as well as stakeholder engagement with the likes of the Gauteng Department of Economic Development, the Industrial Development Corporation and Khula Enterprise Finance (a state-owned development finance institution) amongst others. Eight years ago banks were not involved in consumer micro finance. At present, nine banks were involved with over 50% of its finance being micro finance. He attributed the success to regulation being done correctly. The same needed to be done concerning developmental micro finance. The relationship between developmental micro finance institutions and banks needed to be looked at. BASA had conducted an online survey with the assistance of USAID on hurdles to SME financing. Eighteen financial institutions which included banks, Development Finance Institutions (DFIs) and private equity funds participated in the survey. One of the problems identified was that there was no private equity funds aimed at the SME market. To expect SMEs to survive only on debt was setting them up for failure. The survey showed that successful financing was greater amongst SMEs with higher turnovers. Another revelation was that financial institutions were working with a model that was totally inappropriate for the market of largely previously disadvantaged entrepreneurs. Some other findings showed that there needed to be a review of the evaluation criteria for SMEs, the application process was far too complex, SMEs’ business skills needed to be developed and there was ineffective advocacy for the SME sector. Proposed interventions included business development support to SMEs and a review of policy and regulation so as to identify inhibiting regulations and laws.
Mr Coovadia felt that Khula should be taking risks that the banks did not wish to take. Khula having taxpayers’ funds at their disposal should be the risk leaders. The mandates of institutions like Khula should be re-evaluated. Khula and the BASA should have discussions on how to structure the guarantee scheme. He understood Khula to be lending directly to SMEs presently. He did not comprehend why this was the case. In conclusion, he stated that banks remained cautious about lending to the SME sector. Past experience had shown that many SMEs failed in the early stages, this phenomenon fed into risk. One way to address the issue was to diversify funding. Another concern was that there was a lack of information about potential borrowers and the skills which potential entrepreneurs had. BASA was partnering with stakeholders like public sector institutions and multilateral organisations to address key concerns. The importance of public policy was stressed. Efforts should be directed at harnessing private sector expertise rather than trying to compete directly with it. There was a need to support the broader credit environment to overcome obstacles to lending. A champion with clout in government was needed to represent SME interest.
The Chairperson read out a question which had been forwarded by a Member who was unable to attend the meeting. The Member concerned asked about the double dip recession and the impact that it had on tourism.
Mr Coovadia did not believe it to be a double dip recession. The turnaround in the South African economy was slow and the same applied to the country’s trading partners. Europe and the USA were still in debt. The South African economy had already turned the corner but progress would nevertheless be slow. It was indeed a difficult environment for SMEs to grow in.
Mr G Krumbock (DA) asked for clarification on the issue of lending criteria where the risks would be greater than what the banking industry would be willing to accept. He noted that there was a belief by some that the banks behaved the way they did because they were only funding successful businesses. He referred to earlier comments by Mr Coovadia that DFIs should fund SMEs with taxpayers’ funds and asked for reassurance that taxpayers’ funds would not be thrown around and invested without considering risks. It was after all not the lending institution’s money but the taxpayers’. He did accept that there was a need to redress the legacies of the past so that loans could be made available to SMEs which would normally not be able to access funding the traditional way. The only concern was that bad loans should not be given. He asked Mr Coovadia to elaborate on lending criteria. Risks could be high but there should be reasonable measures to mitigate the risk.
Mr Coovadia replied that BASA was pressurised by government to get banks to do certain things. The banks in South Africa were not in such a bad state as those in the USA. The banks in South Africa were well regulated by the Reserve Bank. Banks in this country were very sound unlike the banks in Europe and the USA which had problems because of bad lending. These banks lent money to persons who were unable to repay. The banks in the USA and Europe relied on high property values as a means of collateral against the granting of loans. When the property market crashed so did the banks. The banks in South Africa did not make loans to persons who could not repay.
He emphasised that BASA represented banks and not institutions which lent money. Because they used taxpayers’ monies to fund SMEs, DFIs should not be irresponsible. On the other hand if DFIs only lent to people who could afford to repay then the banks might as well do the lending. What was the point then of having DFIs? Perhaps the DFIs should sit down with banks and decide on the best ways in which the banks could do normal lending in the SME sector. If DFIs were willing to provide guarantees so be it. DFIs should nevertheless account on how it lent its funds. The idea was not for DFIs to compete with banks. DFIs could sit down with banks and explain which sector it wished to make loans to and what the relevant conditions would be. DFIs should not use taxpayers’ funds “willy nilly”. It should be considered as an investment in the creation of a market. The private sector and DFIs should work together. The one should leverage off the other.
Mr L Khorai (ANC) suggested that a meeting between the Committee, BASA, DFIs and Khula be held. He was concerned that if things continued as it were then SMEs would not grow. Funding for SMEs working in tourism in rural areas was literally non existent. He never heard of any bank assisting young entrepreneurs financially. He gave an example of young entrepreneurs in his constituency starting a carwash and stated that banks like ABSA had not come forward to assist the young entrepreneurs. The bank cited lack of guarantees as an obstacle to assisting the entrepreneurs.
Mr Coovadia agreed that a session with the Committee, banks and DFIs would be a good idea. The issue was that DFIs operated solely within their mandates. It was not Khula’s fault that it was operating in the manner in which it did. It was simply fulfilling its mandate. He wished to make it clear that he was in no way attacking DFIs. Government needed to reassess the role of DFIs.
He further explained that a carwash was a micro business and not a small business. He repeated the idea that BASA, the Committee, Khula, banks and co-operatives should meet and discuss how to solve the problem. A possible solution was perhaps that Khula should set up a guarantee. Another option was that ABSA Bank could lend a co-operative R20 000 and the co-operative could in turn extend loans to the young carwash entrepreneurs. The problem with the present scenario was that banks were not micro lenders. It was truly a difficult situation. Passion for business was all good and well but passion alone did not build a business. The solution lied with Khula teaming up with banks to come up with a solution.
The Chairperson referred to page 7 of the briefing document which spoke to some of the findings of the Financial Sector Programme (FSP) Survey and asked which of those ought to be prioritised. The tourism sector being seasonal meant that lodges and bed and breakfasts for example during off season periods did not always have cash on hand. How were these businesses expected to access funding? He pointed out that Islamic banks operated with certain principles and asked whether traditional banks could not adopt a hybrid of traditional and Islamic principles.
Mr Coovadia cited the regulatory environment, the internal capacity of banks, non-financial support and the diversification of funding other than debt funding as priorities in his opinion.
He explained that Islamic banks worked with equity funding. The bank took equity in the asset that was being funded. For example on a house the bank would own part of the house. An ideal situation would be a mix of funding. The equity funder worked hand in hand with the client. The equity funder got involved in the business. On the seasonality of tourism business, he suggested partnerships with DFIs and banks. An agreement could be entered into with banks whereby for example during off season periods the client did not pay interest and during peak season periods the interest charged could be increased. The other option was that DFIs could come aboard and offer guarantees. It was impossible for him to prescribe to banks to give loans when those banks knew there was no guarantee of repayment of such loans. Banks were regulated heavily on depositors’ monies and not on funds that were lent. The alternative was that where there was too much risk for banks, the DFIs should step in.
The Chairperson stated that more meaningful interaction was needed between government institutions and banks. On the issue of ineffective advocacy of the SME sector, he asked who should perform the function.
Mr Coovadia replied that it should be performed by business institutions.
The Chairperson reiterated that greater interaction between role players was needed. Especially since the tourism industry had its own peculiarities. He asked Mr Coovadia if he had any concluding comments.
Mr Coovadia thanked the Committee for the good interaction. His job was to continuously push the envelope so that banks could do more without having to take unnecessary risks.
The meeting was adjourned.