Global Summit of Women: Revisiting Microentrepreneurship

SPEAKING NOTES: DEPUTY MINISTER OF TRADE AND INDUSTRY

02 JUNE 2012

GLOBAL SUMMIT OF WOMEN: “REVISITING MICROENTREPRENEURSHIP”

Introduction

The government of South Africa, through the Department of Trade and Industry, has been providing support to small, micro and medium enterprises over the last 18 years. In particular, the government support has been targeted at vulnerable groups such as women, youth and people with disability. In the early years of democracy, the government created institutions that specialised in specific focus areas. For example, Ntsika Enterprise Promotion Agency was created to provide non-financial support services to small enterprises. Khula Finance Limited was created to provide financial support to the small business sector.

Over the years, the government has been taking stock of the impact of these support programmes in order to ensure that economic transformation was taking place throughout the South African society. The consolidation of institutions that provide non- financial support services took place in 2003 when Ntsika Enterprise Promotion Agency was merged with the National Manufacturing Advice Centre to form the Small Enterprise Development Agency (Seda). This move was aimed at strengthening non-financial support services to small enterprises. Given the high levels of unemployment and poverty experienced by women, our government sees microfinance and micro entrepreneurship as some of the appropriate tools to eradicate these social ills. We believe that there is more scope for government and all its partners to continue to invest their resources to bring about sustainability to micro entrepreneurs through microfinance and other non-financial support services.

1 How can micro entrepreneurs graduate to SMEs and why is this even necessary?

Micro entrepreneurs play an important role in the South African economy. The Small Business Act defines a micro entrepreneur, for any sector, as any person who employs less than 4 people. This indicates that these enterprises have the potential to graduate to small and medium enterprises (SMEs) if support is provided to them.

Obviously, like any other public discourse, there is an on-going debate on whether do we need to support the micro enterprise sector or should we focus on high-growth enterprises?

Given the South African history of oppression and segregation, our approach is that as government we cannot afford to neglect a vital section of the small business community that contributes so much to the economy in terms of Gross Domestic Product and employment. Even if a micro entrepreneur employs one person, our belief is that a family of such a person is able to buy food, clothing, other basic needs as well as pay for school fees. The best we can do as government is to ensure that such enterprises become sustainable and if possible graduate to become small and medium enterprises.

In 2005, my government took a decision to directly support micro enterprises and micro enterprise support institutions. To this end the South African Micro Enterprise Apex Fund was established. The South African Micro-Finance Apex Fund (Samaf) was established to provide loans of up to R10 000 for households, survivalists and micro entrepreneurs. Samaf was successfully launched in all the nine provinces. One major task of Samaf was to build a developmental micro finance industry in South Africa. The organisation operated as a wholesale funding model that included capacity building and skills development to carefully selected financial services cooperatives, village banks and micro finance institutions.

The value of loans disbursed to micro entrepreneurs increased from R19.8 million in 2006/7 to R58.3 million in 2011/12 financial period. Approximately 70% of loans were

2 disbursed to micro entrepreneurs in rural areas and about 30% to peri-urban micro entrepreneurs. Over 80% of beneficiaries are women.

As pointed out earlier, Samaf was merged with other financial institutions to form Sefa. The new entity, Sefa, is still expected to invest huge sums of money to build capacity amongst these financial intermediaries. Some of the challenges faced by these intermediaries include:

 intermediaries that are sparsely spread across the country, and therefore need capacity boost if they are to stretch their capacity beyond their local operating space,  they have lack of own infrastructure, in particular IT infrastructure that is needed to manage their business transaction and be compliant to acceptable accounting standards,  they are characterised by low levels of corporate governance out of lack of organisational management know-how.

However, the positive aspect about this capacity building investment model is that it benefits group-based community financial services cooperatives, and therefore contributes to broad-based community development. The provision of technical assistance is aimed at ensuring that specialised non-financial interventions are provided to financial Intermediaries so that they better and effectively service the enterprising poor. The mandate of samaf is to contribute to government’s poverty reduction goals by acting as a catalyst for the development of an effective microfinance sector through:

(i) support for the establishment of sustainable financial intermediaries that can reach deeper and broader to the enterprising poor;

(ii) facilitating the establishment of an enabling environment for effective financial intermediation for the enterprising poor; and

(iii) Building a strong, effective and efficient developmental micro finance industry.

3 The current administration took a decision in 2011 to rationalise the small enterprise funding institutions (DFIs). Based on this decision Samaf was integrated into Khula Enterprise Finance (Khula) and the latter was established as a wholly subsidiary of the Industrial Development Corporation of South Africa (IDC). The mandate of Samaf will however, continue albeit the incorporation of the institution as a component of Khula programmes.

In 2011, my department undertook the review of government support to SMMEs with a view to identify gaps and make improvements where necessary.

The panel appointed to carry out the review made a number of recommendations that would assist to improve our support to the small business sector, in particular the micro enterprise sector. The review alludes to the known fact that the SMME financing gap in South Africa manifests itself in much the same way as it does in many other developing countries. The gap is most prevalent for micro and small enterprises, startups and early-stage businesses. Much like in the rest of the developing world, the quantification of the SMME financing gap in South Africa remains a challenge. This makes it difficult to determine which policy interventions are required and to measure their impact.

4 Is the entrance of large commercial banks into the microcredit market a plus or a minus?

As pointed out earlier that the government and its partners recognised the important role played by the micro enterprise sector, it became clear that government support attracted large commercial banks to play a role into the microcredit market.

Prior to the introduction of the Usury Act Exemption Notice (1999), the micro enterprise sector experienced harsh conditions from micro lenders who charged exorbitant interest rates. These high costs of doing business meant that micro entrepreneurs faced long periods of stagnation until loans were paid up. This was, obviously, not good for the growth and sustainability of micro entrepreneurs.

After publishing the Usury Act Exemption Notice, the government through my Department approved the Micro Finance Regulatory Council as an institution that would ensure that micro lenders comply with the Usury Act. The mandate of the Regulatory Council brought order to the micro credit sector as there was a call to register all micro lenders. Micro lenders who did not want to register and were found to be lending above the set limitation were acting unlawfully. Some of the activities that the Regulatory Council was mandated to carry out include:

 the promotion of the micro-lending industry

 encouragement of sustainable growth in the industry

 lending credibilty to the industry

 serve unserved credit needs of South Africans who may not have access to credit by formal banks

 protection of consumers against unfair business practices by lenders

 to educate consumers and lenders about their rights and obligations

Prior to the Usury Act Notice, large commercial banks did not want to venture into the microcredit market because they said it was too costly for them to do business in this market – because of transaction costs. Over and above government’s commitment to

5 improve the micro enterprise environment, the global credit crisis has created an opportunity for large banks to explore various ways of increasing their profit margins. One way of doing so was to enter the micro credit market.

The entrance of commercial banks to this market is viewed as a plus, given that it encourages a healthy competition, which in turn could result in positive spinoffs for micro entrepreneurs to obtain competitive interest rates from a variety of players. We however, continue to carefully monitor this interest since our intention is to promote developmental micro finance industry as opposed to the one lenient to the commercial side.

In conclusion, micro entrepreneurship and micro finance will continue to receive government support especially since the majority of beneficiaries are women and mostly based in rural areas. Impact studies have concluded that these beneficiaries have been assisted to move out of poverty line.

6 DEPUTY MINISTER OF TRADE AND INDUSTRY

REPUBLIC OF SOUTH AFRICA

SPEAKING PRESENTATION

DEPUTY MINISTER: ELIZABETH THABETHE : DEPARTMENT OF TRADE & INDUSTRY, SOUTH AFRICA

DELIVERED AT GLOBAL SUMMIT FOR WOMEN

ATHENS, GREECE

28 MAY 2012