Challenges and Opportunities in Funding SMEs Setlakalane Molepo Managing Director 15 October 2009

1. Challenges and Opportunities in Funding SMEs Setlakalane Molepo Managing Director 15 October 2009

2. Table of Contents • Khula’s mandate • Target market • SMME financing landscape • Why focus on SMEs • Needs of SMEs • General challenges facing SMEs • Challenges - access to finance • Opportunities for SMEs • Accelerating SME funding • Concluding remarks

3. Promote access to finance Maximise financing for SMEs Financial Development sustainability Jobs, BEE, rural impact development, Long - term women objective empowerment Khula’s Mandate The three key focus areas of our mandate as a wholesale financier are: Purpose: To act as a complementary development financial institution that bridges financing gaps that are not addressed by other financial institutions.

4. Target Market • Underserved segments of the SME market; • Primarily Black-owned, owner-managed formal SMEs; • Start-up and development/expansion capital; • Bias towards underserved provinces/rural/townships; and • Loan sizes in the range of R10,000-R3m, with particular emphasis on facilities less than R1m, especially <R250,000.

5. SMME Financing Landscape…Characteristics No. Characteristics Opportunity-driven/ Entrepreneurial • Less than 200 employees • Turnover > R25m p.a. • Developed technical & business skills • 0,1 – 0,3m • 0,2 – 0,5m • 0,6 – 1,0m • 0,7 – 1,2m Medium enterprises • Less than 50 employees • Turnover < R25m p.a. • Developed technical /limited business skills Small enterprises • Less than 5 employees • Turnover < R150k p.a. • Some technical /limited business skills Micro enterprises Necessity-driven/ Survival • Individual self employment • Turnover < R50k p.a. • Limited technical and business skills Survivalist enterprises Total1,6 – 3,0m

6. SMME Financing Landscape … Demand side Financing Needs – Nature of demand • Medium to long term debt & equity • Over R250k • Asset based, working capital, property finance etc. Medium enterprises • Short to medium term debt • Asset based & working capital • Up to R250k • Small enterprises • Short term loans • Up to R10k • Working capital Micro enterprises • Short term loans • Up to R3k • Stock purchases Survivalist enterprises

7. SMME Financing Landscape … Supply side Financing Needs – Supply Side • Corporates • Banks/Financial Institutions • Private Equity/Venture Capitalists • Khula, IDC, NEF Medium enterprises • Own resources • Banks & Corporates • Khula & PDCs • Small enterprises • Own & family resources • Microlenders & Banks • SAMAF & PDCs Micro enterprises Survivalist enterprises • Own & family resources • Microlenders • SAMAF

8. Why Focus on SMEs • Economic reality and opportunity; • Social necessity; • To overcome lack of capital; • To overcome lack of assets or security; and • To participate in growing South Africa’s prosperity.

9. Needs of SMEs • Access to market opportunities; • Direct participation in the broader South African economy to enhance job creation and economic activity; • Access to finance; • Access to general banking facilities; • Access to innovation and incubator facilities, and hubs; • Aftercare through coaching and mentoring; • Ongoing guidance and support on implementing the business plan; • Acquisition and upgrading of knowledge & skills.

10. General Challenges Facing SMEs • Access to finance; • Access to information such as research, technology; • Barriers to markets; • Lack of recognition by big companies (as suppliers to those markets); • Capacity – expertise and resources; • Closing the “income gap”; and • Redistribution of business opportunities and wealth.

11. Challenges Related to Access to Finance • Perceived risk profile of SMEs; • Smaller loan size and cost of funding at the lower level; • Insufficient understanding of the SME landscape by lenders; • Lack of collateral in SMEs; • Information gaps in accessing other finance (other than banks); • Inadequate skills of SMEs; and • Quality of business propositions.

12. Opportunities for SMEs • Government specific policies (IPAP (NIPF)); • R787bn public sector Capex & Procurement programme • Procurement space (10 Key products by Government); • Broad Based Black Empowerment; • Other government’s initiatives to increase SME participation in the economy (APDP, CSDP).

13. Accelerating SME Funding - Recommendations • Deepen and integrate the financial services sector’s systems, services and infrastructure; • Monitor to ensure that the reviewed legal and regulatory framework supports SME development fully; • Build institutional capacity for supervision and monitoring and enforcement of SME regulations and general business-related laws; • Invest in rural infrastructure such as communication technology and transport which would attract funders to locate to remote areas; and • Embrace and adapt new information technologies in order to reduce transaction costs.

14. Concluding Remarks • SMEs are still facing challenges due to slow recovery; • Scaling-up of interventions by the DFIs and commercial banks; • Renewed focus on SMEs by the public sector; • Broadening and differentiation of product offering; • Better co-operation amongst DFIs; and • Increase awareness of official programmes (banks, DFIs, and other stakeholders that support).

15. Thank You 08600 54852 helpline@khula.org.za www.khula.org.za