Khula Enterprise Finance Ltd Corporate Strategy 2011-13

1. Khula Enterprise Finance LtdCorporate Strategy 2011-13 Economic Development Parliamentary Portfolio Committee Venue: Parliament: Cape Town 24th August 2010 1

2. Presentation Outline SECTION 1: KHULA & THE AREA WITHIN WHICH KHULA OPERATES • Khula’s Mandate, Vision and Mission • Focused Area • Government’s focused area • Financing Gap Filled by Khula • SME Financiers SECTION 2: KHULA’S HIGH LEVEL STRATEGIC INTENT • Overview of Khula’s Business Operations • Khula’s Activities • Highlights of Strategic Priorities • Strategic Goals: 2011 – 2013 • Focusing Financing Programmes • Strategic Goals: 2011 – 2013 SECTION 3: KHULA’S PRODUCTS • Product offering • RFI’s strategic priorities • Profile of Existing RFIs • Credit Indemnity Utilisation • Khula’s Public Sector Funds 2

3. Presentation Outline ....(Cont) • Khula’s Private Sector Funds • Impact of Khula Funds • Khula’s Products’ historical performance • Mentorship Programme • Khula Properties • Geographic distribution of property Portfolio • Properties’ Strategic Intent • Corporate Balanced Scorecard 2010/11 3

4. Section 1: Khula & the area within which Khula Operates 4

5. Khula’s Mandate, Vision and Mission Mandate To address market failures in the SME finance sector by leveraging and unlocking private sector and other developmental funding for the creation of a vibrant SME sector. Khula’s main focus should be on facilitating access to finance by SME; maximising development impact and ensuring organisational sustainability Vision To be the development finance partner of first choice in the field SME development Mission Khula’s mission is to provide finance, mentorship services and small business premises to SMEs through a network of partnerships and to encourage the sustainable development of SMEs whilst ensuring that Khula remains financially viable. 5

6. Khula’s focus areas 6

7. Government’s Focus Areas • CHALLENGES • The latest stats SA figure on unemployment is 25.3%. • Prior to the economic crisis of 2008 and 2009; SA experienced growth rates that were • marked by structural imbalances. • The SA economy still experiences structural constraints that impacts on its ability • to generate sustainable growth - - e.g. increases in credit and therefore • consumption has led to growth that is not underpinned by production. • To address these economic growth challenges, government adopted • 12 outcome-based targets that were approved by cabinet Lekgotla • In January 2010. • Output indicators were developed out of the 12 outcomes. • Both the Economic Development Department and the dti are • responsible for outcome number 4 which talk to “Decent • Employment through inclusive Economic Growth”. • From this outcome 7 outputs were developed. All the 7 outputs have a bearing on how • Khula conducts its business going forward – but output number 6 is directly relevant • for Khula since its on Small Business and Cooperative support 7

8. Financing Gap Filled by Khula • Primarily black-owned & owner-managed formal SMEs • SMEs requiring financial solutions between R10 000 and R3 million, with special emphasis on the underserved market segment of loans below • R250 000. • Start-up and expansions of early stage businesses • Focus on underserved provinces, rural areas and “urban poor” communities • Focus on women-owned enterprises 8

9. SME Financiers Long-term CAPITAL MARKETS Long Source: Roussos and Ferrandi (2008) INVESTMENT BANKS DEVELOPMENT FINANCE INSTITUTIONS TERM Medium- term TERM MORTGAGE PROVIDERS Medium COMMERCIAL BANKS GAP MICRO-FINANCE INSTITUTIONS CONSUMPTION LENDERS Short-term STOKVELS, BURIAL SOCIETIES Short MONEY-LENDERS Micro Small Medium Large Micro Small Medium Large TRANSACTION SIZE TRANSACTION SIZE 9

10. Section 2: Khula’s High level Strategic intent 10

11. Overview of Khula’s Business Operations 11

12. Khula’s Activities …Summarised 12

13. Re-engineering wholesale model: To grow Khula’s outreach and impact thus fulfilling our mandate as the flagship development finance institution for small business Khula Direct: Commence with the initial stages of establishing direct lending operations to complement the wholesale model. Recapitalisation & cost efficiencies: To build an effective institution that achieves its SME development mandate in a financially sustainable manner. Highlights of Strategic Priorities 13

14. Human Capital alignment: To invest in the development of our people to create and retain high performance teams Operational efficiencies: To establish effective and efficient processes to support operational activities – Position Khula Brand: To increase awareness of Khula and its products within its target market and achieve high client satisfaction levels Increase influence of Khula on SME formulation policy: Establish research unit through which knowledge management on SMEs can be improved. Highlights of Strategic Priorities .. cont 14

15. Strategic Goals: 2011 – 2013 • Re-engineering of the wholesale model • Focusing SME Financing Programmes into distinct offerings. • Review and redesign of existing products ( ; LREF; Business Loans) • Improved service delivery channels through regional offices and closer collaboration with funding partners • Improved monitoring and evaluation • Alignment of human capital • Position Khula as a Fund Manager for SME development funds Credit Indemnity 15

16. Focusing Financing Programmes 16

17. Strategic Goals: 2011 – 2013 Phases 2 & 3 Phase 1 Build Detail Design • Khula Direct • Processes • Policies • Blueprint • Secure funding • Credit scorecard • Convert regional offices • Set up first branches • Hire field staff • Build IT system • Organisation redesign • Capacitate head office • Open first branches • Appoint key strategic partners • Launch SME development campaign • Test model • Acquisitions • National expansion • Review model 17

18. Strategic Goals: 2011 – 2013 • Recapitalisation • Establish a corporate affairs function to raise funding and liaise with donor and investor organisations such PIC, IFC etc to leverage funding for Khula 18

19. Strategic Goals: 2011 – 2013 The Human Capital Management (HCM) of the new Khula Structure • will designing organisational structures that supports both the re-structured wholesale model and Khula Direct. Activities that the HCM department will undertake include: • Conducting skills audits with current staff • Developing and implementing a change management programme • Recruiting new staff • Upskilling current staff • Redeploying staff • HCM will recruit competent staff to strengthen its legal compliance and monitoring and evaluation capabilities 19

20. Strategic Goals: 2011 – 2013 • Improving operational efficiencies • In line with the EDD growth path; Khula intends improving operational efficiencies through: • General costs reduction measures through stricter budgetary controls and other measures • Reducing red-tape - e.g. Decentralising some business activities to regions and allowing them to take key business decisions. • Improving turnaround time – measures such as completing forms electronically; reducing the length of time in approving loans; automated reporting tool 20

21. Strategic Goals: 2011 – 2013 • Branding and positioning of Khula • Launch of the June and Andrew Mlangeni SME Support Programme • Increase access to financial and non-financial support to SMEs • Mobilise public and private sector organisations to implement best practices in their programmes dedicated towards supporting SMEs • Contribute towards increase entrepreneurial activity amongst South Africans especially historically disadvantaged people • Increase linkages between large enterprises and small business for procurement and enterprise development opportunities through corporate affairs • Profile Khula success stories 21

22. Strategic Goals: 2011 – 2013 • Increase influence of Khula on SME formulation policy • Policy formulation is one of the key drivers of the EDD’s growth path. • Research centres and academic institutions in the country have done extensive on SMEs. However, there is a need for a government agency that plays in the SME space – agency that understands and relate to the dynamics and challenges of the sector. • Khula plans to establish an SME research unit that can influence government SME policy formulation. 22

23. Section 3: Khula’s Products 23

24. Business Loans • Credit Indemnities • Equity funds and Joint-Ventures • Pre- & post Loan Mentorship • Business Premises (Retail & Industrial) • Manage third party funds Khula Wholesale • Working Capital • Guarantees • Equity Finance • Bridging Finance • Asset Finance • Invoice Discounting & Factoring • Group lending Financing Partners [Banks, RFIs, Corporate Sector Partners, Public Sector Partners] Retail SMEs End-user • Asset accumulation • Job creation • Rural development • Economic transformation Product offering - Suite of innovative financing instruments Khula Products Financing Instruments Development Impact 24

25. RFI’s strategic priorities • Khula business loans are done through intermediaries (RFIs) who lend further to end-users (SMEs). • Khula’s focus will be strengthening those RFIs who grow their outreach – especially to rural areas (talks to spatial dimensions of the growth path). • Focus will be on those RFIs that provide niche products in areas such as manufacturing; minerals & beneficiation; the green economy etc. • Khula to facilitate collection of current book 25

26. Profile of Existing RFIs 26

27. Credit Indemnity Utilisation 27

28. Credit Indemnity Scheme • Uptake of the scheme has decreased in the recent past due to stricter lending criteria adopted by banks due to recession. • Scheme will be repositioned & customised such that administrative burdens associated with managing the product will be reduced. • Take repeat borrowers who want to expand their businesses. • In the past participating partners to the scheme were commercial banks only. Henceforth Khula will promote Institutional credit indemnity to allow deserving RFIs to benefit from the scheme. • Scheme will be used as an incentive for private sector that wants to operate in the green economy – portfolio indemnities. 28

29. Credit Indemnities • The loans to be indemnified must range from a minimum of R10k to a maximum of R3m • The indemnity cover will range from a minimum of 50% to a maximum of 90% depending on the loan amount and the developmental impact bestowed in the SME project • Khula charges an annual indemnity fee ranging between 2% and 3.5% depending on the loan amount • own contribution in cash or assets towards the financial structure of the business ranging between 2.5% and 10% depending on the loan amount • Maximum facility term is 60 months • The turnaroundtime is a maximum of 5 (five) working days 29

30. Khula’s Public Sector Funds 30

31. Khula’s Private Sector Funds 31

32. Khula’s Private Sector Funds .. cont 32

33. Impact of Khula Funds 33

34. Funds and JVs • Given the restricted funds at Khula’s disposal; and the fact that funds have a time lag before returns are realised; Khula will limit the establishment of new funds in the period under review. • New funds that will be established in this period must meet the following criteria: • The applicant must have a proven track record and be able to deliver scale development impact. • Khula’s investment should have the potential to yield good financial returns to encourage cross-subsidisation (ie financial returns from profitable investments will be used to support projects that have scale development impact). • The applicant institution (ie management expertise, systems, prudent policies and processes) must manifest appropriate capacity. • Funds will be considered only for niche markets and sector-specific projects • The applicant must be able to co-invest with Khula. • Khula will act as an implementing agency for SME development funds – thus diversifying its income 34

35. Khula’s Products’ historical performance Approvals 35

36. Khula’s Products’ historical performance Loan Book 36

37. Mentorship Programme • PRE-LOAN MENTORSHIP: SMEs will be assisted with the development of business plans if the meet the following conditions: • A feasibility study that demonstrates the viability of the business idea • A comprehensive and well researched marketing plan • Have some level of experience in the proposed business venture • Have a minimum equity contribution as defined by Khula’s financing partners. • POST-LOAN MENTORSHIP - Khula receives the intervention request from one of its financing partners to: • Provide business support services to enterprises at an early stage (introductory/ compliance); Expansion or Decline stage (Turnaround) of the SMEs lifecycle • The intervention is only provided to SMEs that have benefitted from: debt and/ or equity facilities provided by Khula through its financing partners (Khula’s indirect clients) • The intervention is offered for 48 hours over a period of 12 months 37

38. Khula Properties • Khula took over the Property Portfolio from Business Partners in 2001 in order to provide businesses with infrastructure and to support SME’s. • This was a contribution in part towards the recapitalisation of Khula - the total number of properties were 100. • The properties were valued at R129.8m when taken over and currently are valued at R192m • Current total number of properties is 50 38

39. Geographic distribution of property Portfolio 39

40. Properties’ Strategic Intent • To earn a reasonable rental income return and sell non aligned properties • Retain and refurbish properties identified for retention • Portfolio is currently split as follows: • Retain - 26 • Sell Immediately - 21 • In transfer – 13 • Empower tenants - Selling properties to them – Installment Sale Agreement Scheme & Private sales. • Provide mentorship to small businesses with potential to grow • Identify properties to be developed in synergy with Khula’s business and goals and also assist with local upliftment of the community • Engage in property transactions that assist in promotion of economic development of SME’s in the relevant communities 40

41. Corporate Balanced Scorecard 2010/11 41

42. The strategic plan focuses on consolidation of existing strategies and structures to optimise service delivery and dedicated SME finance The wholesale financier model has limited the ability of the institution to make optimal impact and will be re-engineered The key strategic thrust, in order to raise delivery to the next level and thus make more meaningful impact to SMEs, is the design and implementation of KhulaDirect Khulahas built a strong delivery platform to increase access to finance to SMEs Bolder investment required to sustain momentum Concluding remarks 42

43. Thank You 43