AFRICA SMME CONFERENCE Financing Small and Medium Enterprises – Challenges and Options 25 October 2007

1. AFRICA SMME CONFERENCE Financing Small and Medium Enterprises–Challenges and Options 25 October 2007 Presenter : Don Mashele

2. Outline • The SMME Finance Gap – Where is the Gap? • The Market (Demand vis-à-vis Supply) • Challenges – Room for Improvement • State Intervention – Options (South African Experience) • Conclusion

3. The SMME Finance Gap – Where is the Gap? • Bottom end of the market (smaller loan sizes) • SMMEs in rural areas – less economic activity • Early stage businesses • Businesses operated by: • Previously marginalised communities • Entrepreneurs with disabilities • Women entrepreneurs • Youth entrepreneurs • HOW BIG IS THE GAP?????

4. The Market (Demand vis-à-vis Supply) The Demand Side • Limited pool of innovative ideas • Lack of entrepreneurial drive and management skills The Supply Side • Risk averse attitudes of existing financiers (banks) • Lack of skills in assessing and understanding the needs of SMMEs • SMMEs continue to experience difficulties in obtaining risk capital • Traditional markets offer collateral backed lending

5. Challenges – Room For Improvement • “There are no systematic studies on the demand for financial services in the SMME market broadly” Finmark Trust Report; April 2004 • Lack of a properly coordinated market intelligence around the SMME sector • Stream-lining of state intervention to avoid ineffective overlaps • Encourage private sector investments in poorer provinces (create economic engines) • Inadequate human capacity – entreprenerial drive • Product marketing – marketing difficulties relate to competitive pressures on the domestic and export markets

6. State’s Intervention – Options [South African Experience] • Underlying objective is to leverage private sector participation (e.g Venture Capitalists; Private Equity Investors and Banks) • Development Finance Institutions (DFIs) – tasked with different mandates: • Khula Enterprise Finance Limited - (est. 1996 to provide wholesale, quasi-retail and credit indemnities for SME development) • Industrial Development Corporation - (est. 1940 to promote economic growth and industrial development) • National Empowerment Fund - (est. 1998 to finance black economic empowerment transactions) • Umsobomvu Youth Fund - (est. 2001 to finance youth entrepreneurs) • Land Bank (est. 1912 as an agricultural financier) • Provincial Development Corporations • Funding Instruments: • Debt • Equity • Credit Indemnities • Guarantees

7. Conclusion • Promotion of a flexible and enabling environment for SMMEs to flourish • Credit providers to tailor credit in line with the financing needs of SMMEs • Give greater emphasis on training programs to help financiers understand the unique requirements of SMMEs better • Training of SMMEs in understanding the requirements of the credit providers An extract from President Thabo Mbeki’s State Of The Nation Address – February 2006 “Our experience with regard to the development of this sector indicates that we must pay particular attention to issues of access to capital, entrepreneurial training, assistance with marketing, and the development of cooperatives”

8. THANK YOU