Small business finance and the collapse of African Bank

With the Reserve Bank putting African Bank into curatorship on Monday the issue of micro loans is once more hitting the headlines for all the wrong reasons.

Micro loans are typically spoken of as personal loans but a growing number are issued to small business owners who can’t get finance through the big banks, mainly because they don’t have collateral.

Difficulty in accessing finance is always cited in the top three challenges facing small businesses. In South Africa, micro loans have filled a gap for survivalist businesses and the so-called un-banked, people who do not have a cheque, savings or transmission account. For years it was virtually impossible for a business owner who did not have collateral in the form of a house, life policy or other assets to get a loan. African Bank, then Capitec and scores of un-registered loan sharks have been happy to go where the big five banks have feared to tread. But now it seems this whole house was in danger of crashing down, until the Reserve Bank came to the rescue by splitting African Bank's loan book into good and bad loans. 

My question is: what proportion of African Bank's loans were used for consumption, investing in a productive enterprise or for lifestyle purchases of some kind such as a car, furniture or holiday? The poor economic growth of the past 5 years and the persistently high rate of unemployment, not to mention the collapse of African Bank's disastrous investment Ellerines, suggests a worryingly high proportion of its total loans were for consumption.

I will be writing to the Curator of African Bank asking him to reveal the details of its loan book to glean any information available about the types of loans offered, and if it has a business loans category. 

The whole issue of loans to small businesses was starkly illustrated just before Parliament rose for a two week break earlier this month when the Small Enterprise Finance Agency (Sefa) came to present its five year plan to the Portfolio Committee on Economic Development. It left me realising this government’s attempts to stimulate small businesses and create jobs are just a pin prick that will barely be felt in the economy at large, while its reliance on intermediaries in the micro loans sector is highly questionable.

Sefa is a wholly owned subsidiary of the Industrial Development Corporation and was formed in 2012 out of a collection of small business development finance institutions (DFIs) that individually were failing to make an impact. The President made it plain in his state of the nation address that South Africa’s DFIs need a radical overhaul and Sefa is no exception.

Sefa’s total lending in the 2013 financial year was R440 million, just 78% of its target. This compares to total credit extension by the four big banks of R2,5 trillion in 2013 – that is 6,250 times SEFA’s lending! Is it any wonder people question its relevance?

The institution lends money in three ways: direct lending of amounts ranging from R50 000 to R5 million; wholesale lending of similar amounts via retail financial intermediaries; and wholesale lending via micro finance institutions of amounts ranging from R500 to R50 000.

In the 2014 financial year (due to be reported in September), Sefa disbursed roughly 280 loans in each the first two categories and financed around 15 000 SMMEs in the micro finance category, totalling R737 million. Therefore by far the largest proportion of total loans, by quantity if not by value, are micro loans. Sefa claims to have created 18 311 jobs but it did not break these down by loan category.

The question should be asked - how many of these micro loans were disbursed by African Bank and how many of them fall into the good and bad loans categories?

Sefa's target for the 2018/19 financial year is R1,3 billion in loans disbursed, financing 80 000 SMMEs and creating 118 566 jobs. The African Bank debacle should give it pause for thought that this target is both reachable and sensible.

But on analysing the figures after Sefa's presentation two weeks ago I came to a different realisation. I put it to the CEO, Mr Thakhani Makhuvha, that these were woefully inadequate targets when set alongside the NDP’s goal of 5 million new jobs by 2020. I also pointed out that at a ratio of 1:1,5 jobs created for each SMME financed, the leveraging impact on job creation was minute.

Sefa, far from being a development finance institution, is more of a social grants distribution agency, using taxpayers’ money to support mainly survivalist individuals, families and businesses and only a small handful of genuine, growing enterprises. How much of this taxpayers' money has now gone down the drain of African Bank?

Equally worrying is that Sefa is unable to report on the sustainability of the jobs it claims to have created. If 50 000 jobs are created in one year, who’s to say they still exist the next year and the year after that? There is no analysis of the return on investment of the finance disbursed, because the financial accounts of Sefa place the loans in the income statement as an expense not on the balance sheet as an investment.

So Sefa is just dishing out money, without any proper accountability or attempt to report on the effectiveness or impact of its investments on the wider economy. Is this what is expected from a development finance institution? If there had been more effective oversight perhaps the early warning signs of African Bank's difficulties could have been detected and its collapse avoided. 

I tackled one of the Sefa officials present after the meeting and he was refreshingly up front about the challenges they face. Part of the problem, he said, was finding fundable businesses, those with a decent business plan, regular cash flows, tax compliant and with real growth prospects.

This problem has been reported to me by a number of other business development specialists in the private sector, such as RaizCorp, MEDO and Awethu Project. Because of South Africa’s history of economic exclusion and the dominance of big companies, small and emerging enterprises have been frozen out of the economy while the huge burden of red tape has discouraged new entrants.

In the townships and rural areas, which are Sefa’s main hunting ground, the poor education provided by schools and FETs has left young people without the skills, self-confidence or support systems to go out on their own. When it comes to government support for small business a feeling of hopelessness prevails in too many communities.

Sefa is being transferred from the Department of Economic Development to the Department of Small Business Development. The DA would like to see it and the other small business development agencies and programmes examined for their cost effectiveness and be measured by ROI, beneficiary turnover and profit growth and sustainable jobs created. Only when this happens will we be able to asses their true impact on the economy.

Reckless lending does the lender and the borrower no good, as African Bank has proved. But lending at scale, with concomitant support mechanisms in place to safeguard the investment and enable the borrower to grow a sustainable business, is a necessity. Finding the right formula for this should be a top priority for all of us in the business of small business development.