2 Small Enterprise Finance Agency. 1.1 Corporate profile. 1.2 Vision. 1.3 Mission. 1.4 Strategic objectives. 1.5 Values

Transcription

1 INTRODUCING sefa 1.1 Corporate profile Following a Cabinet decision and the State of the Nation address of 2011, the Small Enterprise Finance Agency (SOC) Limited (sefa), was established on 1 April 2012 in terms of section 3 (d) of the Industrial Development Corporation Act, No. 22 of 1940 (IDC Act). sefa is a wholly owned subsidiary of the Industrial Development Corporation (IDC) and brings together the activities of three previous structures (Khula, samaf and the IDC small business activities). sefa operates as a Development Finance Institution (DFI) to foster the establishment, development and growth of small, medium and micro enterprises (SMMEs) and contribute towards poverty alleviation and job creation. 1.2 Vision To be the leading catalyst for the development of sustainable survivalist, micro, small and medium enterprises through the provision of finance. 1.3 Mission To provide simple access to finance with support in an efficient and sustainable manner to survivalist, micro, small and medium enterprises throughout South Africa by: Delivering wholesale and direct lending Providing credit guarantees to SMMEs Supporting the institutional strengthening of financial intermediaries (FIs) so that they can be effective in assisting SMMEs Creating strategic partnerships with a range of institutions for sustainable SMME development and support Monitoring the effectiveness and impact of our financing, credit guarantee and capacity development activities, and Developing, through partnerships, innovative finance products, tools and channels to catalyse increased market participation in the provision of affordable finance. 1.4 Strategic objectives Our strategic objectives are to: Increase access to and provision of finance to SMMEs and thereby contribute towards job creation Develop and implement a national footprint for effective product and service delivery Build an effective and efficient sefa that is a sustainable and performance-driven organisation Build a learning organisation Build a sefa that meets all legislative, regulatory and good governance requirements, and Build a strong and effective sefa brand emphasising accessibility to SMMEs. 1.5 Values The values and guiding principles which we strive to entrench in order to deepen institutional culture and organisational success are: Kuyasheshwa: We act with speed and urgency Passion for development: Solution-driven attitude, commitment to serve Integrity: Dealing with clients and stakeholders in an honest and ethical manner Transparency: Ensuring compliance with best practice on the dissemination and sharing of information with all stakeholders, and Innovation: Continuously looking for new and better ways to serve our customers. 2 Small Enterprise Finance Agency

2 1.6 Group structure Economic Development Department (EDD) Industrial Development Corporation (IDC) Board of Directors Enterprise Risk Committee Audit Committee Human Capital & Remuneration Committee Wholesale Investment Committee Direct Lending Committee Chief Executive Officer Head: Strategy, Business Planning and Reporting Executive Personal Assistant Company Secretary Head: Internal Audit Executive Manager: Direct Lending Executive Manager: Wholesale Lending Chief Financial Officer Chief Risk Officer Executive Manager: Human Capital Head: Stakeholder Relations and Communication Head: Information Technology ANNUAL REPORT

3 1.7 Operational framework sefa s organisational framework is captured in the following diagram: Customers SMMEs and Co-operatives R500 R5 million Corporate Governance: Board of Directors, sefa Management, Risk & Compliance, Internal Controls, Audit & Fraud Prevention and Legal Distribution Channels Product Portfolio sefa s Regional Offices, RFIs, MFIs, Co-ops, Commercial Banks, Specialised Funds, Provincial Development Corporations (PDCs), Post Office & Post Bank Direct Lending Working capital loan Asset finance Term loans Revolving loan Bridging loan Short-term trade finance Wholesale Financing Business loans (RFIs/MFIs/Co-ops/ FIs) Equity investments Specialised funds Credit Guarantee Scheme Land Reform Empowerment Fund Capacity Building Pre-/post-loan mentoring Institutional Strengthening Board representation Management and Technical support Values: Kuyasheshwa, Passion for Development, Integrity, Transparency, Innovation Mission: To provide simple access to finance with support in an efficient and sustainable manner to survivalist, micro, small and medium enterprises throughout South Africa. Vision: To be the leading catalyst for the development of sustainable survivalist, micro, small and medium enterprises through the provision of finance. Enabling/Support: Capital Management, IT Systems, Stakeholder Relations & Communications, Finance and Procurement Mandate: To promote the establishment, survival and growth of SMMEs and thus contribute towards poverty alleviation and job creation. IDC Act s(3)(d) 4 Small Enterprise Finance Agency

4 1.8 Operational footprint Botswana Limpopo Polokwane Hoedspruit Namibia Rustenburg Pretoria Mafikeng Johannesburg North West Gauteng Klerksdorp Mpumalanga Mbombela Northern Cape Upington Kimberley Free State Bloemfontein lesotho KwaZulu- Natal Pietermaritzburg Durban Hluhluluwe ATLANTIC OCEAN Mthatha Eastern Cape indian OCEAN Cape Town Western Cape Mossel Bay Port Elizabeth East London Existing sefa offices Planned sefa branch/satellite offices (branch office is a small staffed office. Satellite office is a desk in e.g. seda/ Post Office, manned at specific times) Cities/towns ANNUAL REPORT

5 1.9 Product portfolio mix Wholesale Lending Product Business loans Specialised funds: joint ventures and partnerships Credit Guarantee Scheme Land Reform Empowerment Fund Description Partnership with intermediaries for on-lending to SMMEs. Partnership with mainly private and public sector entities for on-lending to SMMEs. sefa provides guarantees to banks and financial institutions, enabling loans to small businesses that do not otherwise have sufficient collateral/security to support facilities. Facility through which sefa lends money to commercial banks and other reputable agricultural lenders for on-lending to land reform beneficiaries, including production, moveable assets, equity, etc. Non-Financial Support Institutional strengthening Post-loan business support Description Aimed at providing institutional strengthening and technical assistance to intermediaries who have benefitted from facilities provided by sefa. This service is provided to SMMEs who have benefitted from facilities provided by the intermediaries. Support is provided through the Direct Lending Division and its partners. Direct Lending Product Revolving/bridging loans/working capital loans Asset finance Term loans Post-loan mentorship Description To facilitate short-term capital requirements or bridging finance for delivery of contracts or orders (e.g. a small business gets a contract to supply stationery, but needs finance to buy the stock). The capital repayment is structured according to the cash flow projections of the borrower. For acquisition of fixed assets for use in the operations or expansion of the business. To finance longer-term business expansion requirements and specific capital acquisitions (similar to asset finance, but not necessarily linked to a specific asset). This service is provided to SMMEs that have benefitted from facilities provided by sefa and its financing partners as a risk mitigating intervention (e.g. sefa provides a mentor to a small business to assist with specific aspects of running the business). 6 Small Enterprise Finance Agency

6 LEADERSHIP COMMENTARY Board of directors Dr Sizeka Magwentshu-Rensburg Chairperson of the Board Mr Thakhani Makhuvha Chief Executive Officer Mr Ismail Tayob Chair: Audit Committee Member: Enterprise Risk Committee Member: Human Capital & Remuneration Committee Ms Hlonela Lupuwana Member: Human Capital & Remuneration Committee Mr Lawrence Mavundla Chair: Direct Lending Committee Member: Wholesale Investment Committee Ms Katinka Schumann Member: Wholesale Investment Committee Member: Direct Lending Committee Mr Richard Mutshekwane Chair: Human Capital & Remuneration Committee Member: Enterprise Risk Committee Member: Audit Committee Ms Barbara Calvin Member: Wholesale Investment Committee Member: Direct Lending Committee Mr Gert Gouws Chair: Enterprise Risk Committee Member: Audit Committee Mr Setlakalane Molepo Member: Wholesale Investment Committee Member: Human Capital & Remuneration Committee Mr Marius Ferreira Chair: Wholesale Investment Committee Member: Direct Lending Committee ANNUAL REPORT

7 Chairperson s statement The integration creates a platform for greater customer outreach, a one-stop financing house, streamlined business processes and for effective small business finance delivery to SMMEs. sefa fills the gap by providing funding with support through its Direct Lending and Wholesale Lending channels. The establishment and success of small, medium and micro enterprises (SMMEs), including survivalists and co-operatives, is globally recognised as critical to address the challenges of job creation, poverty alleviation, socio-economic conditions and equality for all. This is especially the case in South Africa where the role of SMMEs is vital to drive economic growth, employment, innovation and competitiveness. It is estimated that South Africa has some 5.9 million SMMEs which generate 40% of its gross domestic product and 60% of employment in the country. Small business owners have identified the lack of access to finance and business support as key impediments to their growth and sustainability. The New Growth Path (NGP) adopted in 2010 identified enterprise development as a key priority. Resultant policies aim to promote small business and entrepreneurship by improving access to and efficiency of government funding and making more resources available to SMMEs. A subsequent business case recommended the merger of Khula, samaf and the IDC s small business activities into one organisation the Small Enterprise Finance Agency (sefa). The integration creates a platform for greater customer outreach, a one-stop financing house, streamlined business processes and for effective small business finance delivery to SMMEs. sefa fills the gap by providing funding with support through its Direct Lending and Wholesale Lending channels. Our greatest challenge as the board of sefa has been to strategically position the organisation with a sustainable business model to create access to funding for SMMEs who have traditionally been excluded from mainstream financial institutions. It is essential that we follow best practice and learn from the experiences of others in the world of micro- and small business financing. In this regard we are strategically aligning the organisation to provide business support and institutional strengthening to both clients and intermediaries. In the five years to 2017/18, sefa plans to: Increase access to finance for SMMEs through the approval of loan products to the value of R6.4 billion and the disbursement into the economy of approximately R5.7 billion Facilitate ±R1.7 billion to finance youth-owned businesses since sefa recognises that a large number of young people are unemployed Contribute to the facilitation of about 140,000 jobs over the next five years and assist approximately 120,000 small businesses over the same period 8 Small Enterprise Finance Agency

8 Build strategic partnerships to grow and strengthen the SMME sector in South Africa Expand and strengthen sefa s organisational capability to improve service to the SMME market, including improvements to the delivery model, system infrastructure, risk management and research and development capabilities, and Increase stakeholder outreach and communication. for small businesses in our country. Let me express my gratitude to my fellow members of the board of directors of sefa for your dedication and for sharing your expertise so generously. And finally, I thank sefa s CEO, Mr Thakhani Makhuvha, for the professional and enthusiastic approach that he and his management team and staff have adopted. I look forward to a productive year ahead. In concluding, I wish to extend my sincere appreciation to the Minister of Economic Development, Mr Ebrahim Patel, for his passion for small business development. I thank the IDC, especially the CEO, Mr Geoffrey Qhena and his management team, as our shareholder for their on-going support as we move forward in launching sefa to be a formidable institution Dr Sizeka Magwentshu-Rensburg Chairperson ANNUAL REPORT

9 Chief executive officer s statement We will intensify our effort to ensure access to finance with support to small businesses. Of critical importance is up-skilling of our core functional teams and provision of on-the-jobtraining and other interventions in order to increase our own capacity. Introduction I am pleased to present this inaugural annual report of sefa following the merger of Khula, samaf and the small business activities of the IDC in April last year. The year under review has marked an important milestone in government s on-going support for small businesses in South Africa. sefa, as a development finance institution, has been given a mandate to address the challenges faced by SMMEs, including survivalist businesses and co-operatives. Aspiring and existing small business owners experience difficulties in accessing finance from mainstream financial institutions such as commercial lenders to start, grow and expand their business operations, primarily due to the perceived risks inherent in SMMEs. Whilst sefa needs to be a responsible provider of access to finance for the development of sustainable small businesses, we have a higher appetite for risk than commercial financiers. Our ultimate objective is to contribute towards the reduction of unemployment, poverty and inequality. Implementation of the merger process The year under review was characterised by bedding down the merger processes, including organisational change management, human capital integration, IT systems and processes, and the development of enterprise-wide policies and procedures. These processes have laid the critical foundation for sefa to begin delivering on its key strategic objectives. The integration of staff from the erstwhile institutions was essential and critical to the merged entity, and as such has occupied a great deal of management s time as it required engagement and collaboration with organised labour. We have also, during this period, enhanced internal capacity and developed the necessary capability by way of in-house and outsourced training interventions. The relocation of staff from separate head offices into a single headquarters towards the end of October 2012 has played a significant role in fast tracking the integration process and has helped to embed our corporate identity and our sefa brand. We have also successfully set up operational regional offices in nine provinces. Key strategic positions have been filled during the year under review. sefa operating model Our operating model is based on key delivery channels, namely Direct Lending, Wholesale Lending through retail financial and microfinance intermediaries, as well as the Credit Guarantee Scheme offerings through commercial lenders. The last two channels are equally important to generate critical mass and reach, especially in the rural areas. 10 Small Enterprise Finance Agency

10 Whilst it is vital to provide access to finance for SMMEs, sefa has also identified the need to provide non-financial support such as mentorship and monitoring to assist small business owners with specific aspects of running their businesses. This support is provided in collaboration with our strategic partners. We also support the institutional strengthening of financial intermediaries so that they can be effective in assisting SMMEs. Performance overview The financial position of sefa is sound, with total assets in excess of R2.1 billion and sufficient capital and reserves (approximately R1 billion at year-end) available to lend to small businesses. We are an organisation in transition following the merger and we are not expecting to post profits in the immediate future as we build up the loan book from a low base. For the year under review, sefa s initial start-up net losses amounted to R64.4 million. A grant of R170 million was received from the government to support sefa s activites. The grant was paid to IDC, which is conducting the required oversight over sefa s operations, and will be made avalible to sefa as and when required for operational purposes. I am pleased to report that, notwithstanding merger-related challenges, sefa s performance in terms of approvals and disbursements exceeded the combined results of its predecessor institutions. During the year under review, sefa approved credit facilities of approximately R440 million which represents about 78.5% of its set target for the year. Of this, R146 million was achieved through the Direct Lending channel. The set target for the Direct Lending channel was R185 million (thus, an achievement of 78.9%). Overall, sefa s approvals were 108.2% higher than the combined approvals of ex-khula and ex-samaf in the 2011/12 financial year. We have also disbursed approximately R200 million, which went into the economy during the period under review. Approximately 45.4% of the disbursements are to small businesses operating in the priority provinces, and women-owned businesses represent about 39.8% of the disbursements. The predecessor institutions together disbursed about R143 million in the last financial year. The number of SMMEs assisted through both the Wholesale and Direct Lending channels amount to over 28,300 small businesses. sefa anticipates creating approximately 19,900 permanent and non-permanent jobs through our funding to small businesses. Future prospects We will intensify our effort to ensure access to finance with support to small businesses. Of critical importance is up-skilling of our core functional teams and provision of on-the-job-training and other interventions in order to increase our own capacity. Our structure and processes will continue to be reviewed to align them with our strategic objectives and corporate plan and to enable us to fulfil our developmental mandate. We hope to improve significantly on our 2012/13 performance and to be more customer-centric in our approach. Acknowledgements I would like to extend my sincere thanks to the sefa board of directors for their support during this challenging period and to the Chairperson of the Board, Dr Sizeka Magwentshu- Rensburg, for her continued counsel and leadership as we entered the journey of the post-merger period, whilst at the same time needing to deliver on our mandate. I am grateful to the management of the IDC, our shareholder, and the team at the Economic Development Department (EDD) for being there to lend the necessary support to this young institution. I would also like to express my special appreciation to my predecessors, Mr Willie Fourie, the Interim Managing Director of Khula and Mr Loni Mamatela, the Acting Chief Executive Officer of samaf, for overseeing the merger process. Lastly, and most importantly, I would like to express my heartfelt gratitude to my management team and staff for enthusiastically embracing our new organisation despite the uncertainties that characterise a merger of this nature. This has been a year in transition! Mr Thakhani Makhuvha Chief Executive Officer ANNUAL REPORT

11 Executive management Mr Thakhani Makhuvha Chief Executive Officer Ms Lesego Mashishi Executive Manager: Human Capital Mr Piet Swanepoel Executive Manager: Direct Lending Mr Dennis Jackson Executive Manager: Wholesale Lending Ms Leonie van Lelyveld Chief Risk Officer Mr Andile Ramavhunga Chief Financial Officer 12 Small Enterprise Finance Agency

12 PERFORMANCE OVERVIEW 3.1 Financial review Introduction While much of the world struggled in the wake of the global economic downturn, South Africa has managed to stay on its feet, largely due to its countercyclical fiscal and monetary policies. The economy continues to grow, driven largely by domestic consumption, however the growth is at a slower rate than previously forecast. It is projected that the economy will grow at a rate of 2.7% in 2013 and 3.5% in sefa has not been immune to the slower growth rate. Although approvals in the current year have exceeded the approvals done by both predecessor companies combined, there is still a shortage of quality, fundable transactions. During the period under review, sefa adopted the International Financial Reporting Standards (IFRS). This was to align the organisation with international reporting trends as well as to improve the manner in which we disclose our information. Financial performance As a result of fully embedding the merger, there were some challenges in achieving financial targets, however, the group still managed to achieve a satisfactory development target score. The successes and challenges are highlighted below: The collection rate in the retail businesses exceeded 93% Approvals and disbursements exceeded those of the predecessor companies combined, and The disbursement of approved loans proved challenging as a result of clients not being able to fulfil the conditions as per scheduled payment agreements. The group reported a loss of R64.4 million for the financial year under review. This is mainly on the back of a fair value loss on the valuation of investment properties and an impairment expense raised on a loan granted to Marang, one of the microfinance intermediaries. Impairments in the loan portfolio are high due to the existence of legacy transactions, which were fully provided for, but not written off. Minimal impairments have been raised on new loans, specifically on the Direct Lending business. These are mainly as a result of late payments by government departments. Total assets increased by 14% when compared to the prior year, mainly due to the inclusion of the samaf assets into the results. During the current financial year, the board approved a turnaround strategy for the Investment Property Portfolio, which will be implemented in the 2013/14 financial year. This strategy is expected to yield results by way of increased rental collections and property values. To improve customer service, and thereby improve financial results, management is currently working on refining and improving its internal processes to successfully resolve the challenge of turning approvals into disbursements. ANNUAL REPORT

13 3.2 Direct Lending Division Direct Lending is primarily designed to offer simple access to finance and business support services to SMME s. The focus is geared towards supporting entrepreneurs that intend starting, expanding or acquiring viable or potentially viable enterprises. The disbursement of approved loans proved challenginging as a result of clients not being to fulfill conditions as per scheduled payment agreements. The programme provides debt facilities ranging from a minimum of R50,000 to a maximum of R5 million. The Direct Lending market offerings are provided through sefa s suite of regional Offices. There are currently nine (9) regional offices located in each of South African s nine provinces. In order to broaden the distribution network, branch offices will be established on a co-location basis with the Small Enterprise Development Agency (seda) and/or the Industrial Development Corporation (IDC). It is anticipated that a total of fourteen (14) branches will be established during the 2013/14 financial year. Performance of Direct Lending The Direct Lending Division achieved 78.9% of the set target for approvals for the reporting period. The disbursement of approved loans proved challenging as a result of clients not being able to fulfil the conditions as per scheduled payment agreements. Inadequate credit assessment skills and expertise affected turnaround times and the quality of customer service. Staff training and development, as well the simplification of the application process will be the focus for the 2013/14 financial year. 32 Approvals 2012/13 (R million) 25 Disbursements 2012/13 (R million) Bridging Finance Term Loans Bridging Finance Total: 146 Term Loans Total: /13 Actual Facilities disbursed to youth-owned SMMEs 22% Facilities disbursed to rural-based SMMEs 30% Facilities disbursed to women-owned SMMEs 39% Facilities disbursed to black-owned SMMEs 97% Facilities less than R250,000 disbursed to SMMEs 22% 14 Small Enterprise Finance Agency

14 Monitoring and collections One of the main challenges that faced the collections team during the early stages of direct lending was limited capacity and resources. This has now been addressed by having dedicated resources both at Head Office and at Regional Office level. Despite these challenges the team did reasonably well to maintain a collections rate in excess of 93% during the financial year. Payment delays to small businesses negatively impacted on their cash flow, which in turn influenced their ability to pay sefa as per scheduled payment agreements. To support small businesses in the start-up phase, sefa extended mostly bridging finance facilities as a means to overcome their cash flow challenges. The uptake of the term loan product is low in comparison with bridging finance due to the quality of the business plans submitted and lack of demonstration of long-term sustainability of these businesses. sefa has entered into a number of strategic partnerships with public and private institutions (e.g. seda and the South African Institute of Chartered Accountants (SAICA)) to provide small businesses with pre-loan support. Success Story Bridging finance facilitates project completion Mr Wilson Khetisa Matete is thankful to sefa for the R3 milion bridging loan awarded to him. He is the owner of BBT Construction, a company which undertakes electrical, plumbing, construction and maintenance. As a young man, Mr Matete gained his artisanship and went on to gain work experience while employed by large companies like Anglo American Corporation and LTA Construction Limited. When his entrepreneurial character took hold, he went on to set up his own business, initially as a sub-contractor. In 1998, having gained a good grading from the CIDB, he registered his own company and began to pitch for tenders in his own right. In 2012 Mr Matete was awarded two large tenders, valued at R10 million, by the Mangaung Metropolitan Council for the construction and maintenance of roads in the Botshabelo and Bloemfontein areas. With a staff complement of 165 people to consider and faced by cash flow constraints, he approached the sefa Bloemfontein regional office for a bridging loan of R3 million. This was granted and allowed Mr Matete to complete the projects. The loan also allowed Mr Matete to realise a profit which enabled him to repay the loan in full and to invest in further assets to grow his business. During the process, further jobs were created and skills were transferred to Mr Matete s construction workers. ANNUAL REPORT

15 Success Story Joint venture set for growth With a Chief Operations Officer like Magdeline Paledi, Mudzhadzhi Mmagongwana Joint Venture (MMJV) is set to achieve great things in the future, and sefa is committed to assist them. Based in Burgersfort, the business is a joint venture between Mudzhadzhi Building Contractors and Mmagongwana General Construction, the latter of which is owned by Ms Paledi. This industrious business woman worked her way up to start her own company, Mmagongwana General Construction, in Ms Paledi is also involved with various community projects, and serves as the chairperson of Bokamaso Women Investment Club, as the co-ordinator for South African Women in Mining (Tubatse and Greater Sekhukune area), and as an executive member of the Tubatse branch of the National African Chamber of Commerce and Industry. In 2003 Ms Paledi entered into the joint venture with Mudzhadzhi Building Contractors. Since its inception, the joint venture has grown significantly, and has completed some big projects, such as the De Hoop Dam Housing Project in Limpopo. The company has trained its entire staff, and over the last nine years many unskilled labourers have become skilled workers who deliver quality products. Anglo American Platinum Ltd recently awarded MMJV the contract for the development of a school in Serafa Village, Burgersfort. In order to fulfill their commitments on this project, MMJV approached sefa Limpopo regional office for a bridging loan of facility of R3 million. This assisted the JV to fulfill its obligation. Ms Paledi was invited to parliament in May 2013 as one of the sefa beneficiaries. sefa is ensuring that SMME s such as MMJV are able to achieve their goals by making funding accessible to all South Africans. 16 Small Enterprise Finance Agency

16 3.3 Wholesale Lending Division The Wholesale Lending Division complements Direct Lending by forming synergistic partnerships, focussed on providing access to finance with support to survivalist, micro, small and medium businesses, including co-operatives. These partnerships are formed on the developmental requirements as stipulated in the New Growth Path, addressing the needs of specific sectors and/or markets not serviced by Direct Lending. The disbursement target is lower due to lack of drawdowns by clients.through these relationships sefa is able to extend its reach in servicing the financial needs of SMMEs. The Wholesale Lending operations focuses on productive sectors of the economy with labour-intensive initiatives. These include the development of new business initiatives in markets that addresses the needs of women, youth, rural development, people with disabilities and priority provinces. Together with our partners, the division is able to target specific sectors and/ or markets while addressing the needs of its clients: Microfinance Intermediaries survivalists and micro-enterprise businesses Retail Intermediaries small and medium businesses Banking and Financial Institutions micro, small and medium businesses Specialised Funds (JV partners) micro, small and medium businesses Land Reform Empowerment Fund small and medium agricultural businesses, and Co-operatives (Apex) survivalists, micro, small and medium businesses. Performance of Wholesale Lending During the initial period of the merger much time was taken in addressing the integration process, which impacted on performance. However, during the latter half of the year performance levels improved with 85% of the approval target being reached and 35% of the disbursement target being achieved. The disbursement target is lower due to the low level of drawdowns by intermediaries. Together with our partners, the division was able to address its developmental targets for SMMEs financed and jobs created. This process needs further refinement, given the nature and profile of the intermediaries and their reach. Approvals 2012/13 (R million) Disbursements 2012/13 (R million) Microfinance SMME 109 Microfinance Total: 293 SMME Total: 157 ANNUAL REPORT

17 2012/13 Actual Facilities disbursed to youth-owned SMMEs 16% Facilities disbursed to rural-based SMMEs 45% Facilities disbursed to women-owned SMMEs 40% Facilities disbursed to black-owned SMMEs 76% Facilities less than R250,000 disbursed to SMMEs 48% Monitoring and collections One of the key aspects of the Wholesale Lending Division was the creation of the Post-Investment Monitoring Unit. The unit supports the division by: Protecting its investments and ensuring that losses are minimised Focusing on compliance and governance control of all agreements, and Monitoring requirements as stipulated in sefa s provision of funding. Success Story Entrepreneur opens her own business The funds sefa issues to retail finance institutions allows many entrepreneurs, who would not have had access to finance, to start their own businesses thanks to short- to medium-term loans. One such entrepreneur, Vuyiswa Bheyi, approached Tetla Development Services, a sefa-funded MFI based in Observatory, Cape Town, for funding. Vuyiswa moved from Lusikisiki in the Eastern Cape to Cape Town to look for employment opportunities. In 1998, she decided to start her own business, initially doing sewing. In an effort to maintain a faster turnover, she changed her business and started selling fruit and vegetables, later adding groceries to her products. In order to fund her growing business, Vuyiswa took out an initial R1,300 loan through Tetla in 2008, followed by five more loans. She has repaid five of the loans, totalling R8,300, and is busy repaying the last R1,400 loan. Many other entrepreneurs, especially women and young people from rural communities, have indirectly benefited from sefa s funding. 18 Small Enterprise Finance Agency

18 Success Story Small business now a force to be reckoned with The funds sefa makes available to retail financial institutions, gives many burgeoning entrepreneurs the opportunity to grow their businesses. In 2009, one such business owner, Mr Mqwathi, approached Retmil, a Bloemfontein-based financial institution funded by sefa, for a loan to save his struggling security business and buy out his business partner. At that stage the business, SSS Security Services, was struggling with severe cash flow problems. In addition, the business completely relied on government contracts and could only afford to employ 100 people. Retmil made short-term funding available to Mr Mqwathi, and also awarded him a R1.8 million loan to buy out his business partner. Since then, Mr Mqwathi has made a tremendous success of his business. Mr Mqwathi has not only repaid his loan in full, but has been awarded several additional loans in the past four years, which he has serviced according to the agreed terms. All were made possible by sefa s funding of Retmil. SSS Security Services is now 100% black-owned, and operates across the Free State and North West provinces. The business now employs 1,500 full-time employees and has branched out to sectors outside the government sphere. ANNUAL REPORT

19 3.4 Risk Management review Inherent in exploiting business opportunities is risk taking and the management thereof, especially in the development finance environment where the rewards sought transcend financial returns to include a range of socio-economic development impacts. The activity of financing small, medium and micro enterprises (SMMEs) traditionally entails the assumption of a higher degree of risk than what traditional financiers would necessarily assume. As a result, the imperative of an effective risk management system for sefa was, and remains, the determination of an appropriate level of risk to ensure development and financial return. During the year under review, risks embedded within the continuing activities of the previously existing entities were managed in accordance with the practices and processes previously governing these activities. A specific assessment was performed and risk management mechanisms adopted for the merger process. The enhanced risk management practices and procedures required for the newly merged entity were conceptualised for implementation by an enhanced and fully capacitated Risk Management Division. Risk management objectives The objectives of effective risk management within sefa are: To ensure the sustainability of sefa and its interventions, i.e. the development impact created, and To empower sefa to exploit business opportunities with confidence, having the capability to effectively manage the risks taken. Risk management model Considerable effort was directed at developing an integrated risk management strategy for the newly merged sefa to achieve the stated objectives on an enterprise-wide basis. The strategy is to be achieved through an integrated model for the risk management functions and responsibilities, adapted from the internationally recognised three lines of defence model, as the basis for an effective risk management system. This approach not only ensures the principle of integrated risk management, but assigns responsibility for the management of specific risks to the relevant tier of management of the business. Support is provided by the Risk Management Division, as a centre of excellence in risk management practice, and independent assurance on the effectiveness of risk management is provided by the Internal Audit function. Ultimately, all risk management activities are championed and governed by the sefa board through its Audit and Enterprise Risk committees. 20 Small Enterprise Finance Agency

20 Risk universe sefa s risk universe can be broadly categorised as follows: Strategic risk Operational risk Financial risk Governance risk People Clients, product and business practices Credit Corporate governance Stakeholder Execution, delivery and process management Market Political risk Macro-economic Employment practice and workplace practice Concentration Regulatory risk Reputation External and internal fraud and theft Liquidity Supply chain Business disruption and systems failure Capital structure Legal Damage to physical assets Financial sustainability IT governance The critical risks that sefa faces are: Credit The risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flow, and increased collection costs. The loss may be complete or partial. It is envisaged that the credit risk profile of sefa will increase based on the aspirations of an increased portfolio of facilities granted directly to SMMEs through the Direct Lending Division Operational Operational risk is the potential loss that emanates from inadequate, absent or failed systems or processes. It is not inherent in financial, systematic or market-wide risk and can be triggered internally or externally Regulatory Potential losses that may arise as a result of non-compliance with legislative and regulatory requirements, as well as recognised codes and policies, and Strategic The current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an organisation s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. Implementation philosophy Risk management is a balancing act of risk-taking for reward. In respect of this, sefa s challenge is the ability to meet high expectations for delivery of financing (primarily through a debt instrument), whilst managing the expectation of recovery of debt and its own financial sustainability. The key to overcoming the above challenge is to determine the appropriate level of risk to be taken for the achievement of development impact and financial return. Hence, sefa has adopted the following principles in implementing an effective risk management system: Gradual maturity of risk management Implement basic governance policies and structures first Embed risk management through management, ownership and accountability Balanced approach and on-going engagement with all stakeholders Leveraging technology by automating the risk assessment and reporting processes, and Effective monitoring of and reporting on the risks taken and being managed. ANNUAL REPORT

21 Building risk management capability The next reporting period will see specific focus on building enhanced risk management capability, whilst ensuring that all risk exposures assumed are effectively assessed and managed. This will include: Fostering a culture of risk awareness and practice to enable sefa to respond to risks where and as they arise Acquisition and development of people with the right level of risk management knowledge and skills, thereby creating a centre of excellence in risk management to serve the business areas in the identification, assessment, treatment, monitoring and reporting of risks Developing technological solutions to dynamically record, monitor and report on risks, including risk models which inform us on the behaviour of the risks, specifically credit risk, and Improving governance processes, including policies, procedures, tools and templates to create a standard that will ensure uniformity, efficiency and effectiveness in the management of risks. 22 Small Enterprise Finance Agency

22 3.5 Human Capital review Underpinning Human Capital s objectives for the period under review was the establishment of an integrated organisation following the merger which included: Establishment and approval of the organisational structure Transfer and placement of employees into the new organisation Implementation of a change management programme that supports and enhances an integrated organisational culture and values Relocating to new offices, and Development of new conditions of employment, human capital policies, procedures, processes and systems. Staff complement The table below indicates the staff complement as at 31 March The number of employees is expected to increase to 191. Table 1: Employment equity profile Male Female Level Black Coloured Indian White Black Coloured Indian White Total Executive Manager Professional Administrative Support Total The percentage of black employees is 92% of the overall staff complement. Female employees constitute approximately 69% of sefa s staff. Table 2: Employment equity target versus actual at 31 March 2013 African Coloured Indian White Employees with disabilities Target 78% 10% 4% 8% 1% Actual 83% 5% 4% 8% 0.6% Variance 5% -5% 0% 0% -0.4% Table 2 indicates that the target for Indian and White representation has been met, whilst minimal variance exists in terms of the other race groups. sefa uses natural attrition and new appointments for movement towards its EE targets. Learning and development sefa is registered with the BANKSETA, in compliance with the Skills Development Levies Act. To capacitate sefa s employees to deliver on our strategic mandate, training initiatives were undertaken in line with the individual development plans and organisational needs. 130 training interventions were undertaken to the value of approximately R1 million. Occupational health and safety In line with occupational health and safety regulatory requirements, employees underwent the necessary training to create awareness of health and safety expectations, requirements and obligations. sefa engages the services of Independent Counselling Advisory Service (ICAS) Southern Africa for a Employee Assistance Programme (EAP). The aim is to provide support for employees and their families in terms of both psychological and physical health. All employees have access to the ICAS Employee Wellbeing Programme which offers counselling and advisory services to them and their dependents on health (e.g. HIV/AIDS), finance and performance matters, amongst others. ANNUAL REPORT

23 PERFORMANCE AGAINST PREDETERMINED OBJECTIVES Performance Indicator CUSTOMER PERSPECTIVE 45% FINANCIAL PERSPECTIVE 25% Target 2012/13 Actual achieved 2012/13 Achieved as % of target Reason for Variance Access to finance by SMEs and business support R560 million approvals R560 million R440 million 78.5% Lower target achieved due to work done towards embedding the merger. R450.4 million disbursements R450 million R198 million 44.0% Lower target achieved due to conditions precedent not being met by clients. 11,812 loans to SMMEs (number of SMMEs financed) 11,812 28, % Overachievement was due to expansion in the microfinance and small loan programmes. 13,196 jobs created* 13,196 19, % Overachievement was due to expansion in the microfinance and small loan programmes. 30% of facilities disbursed must be youth-owned years old 45% of facilities disbursed must be in priority rural provinces 40% of facilities disbursed must be women-owned businesses 70% of facilities disbursed must be black-owned businesses 40% of facilities less or equal to R250,000 to be disbursed to end-users Ensuring sefa's sustainability plus strengthening risk management & compliance Net operating income as a % of average assets at cost Cost to income ratio (excluding impairments and finance charges) Bad debt ratio (wholesale and direct lending loans issued by sefa) (Impairments as a % of portfolio at cost) Portfolio at risk of active clients less than or equal to 5% Ratio of claims provisions vs. amount indemnified of 20% Actions taken to mitigate risk included in risk register 75% of actions identified Reduce clients handed over to loss control from 5 to 2 in % 16.5% 54.8% Limited viable business propositions and entrepreneurship amongst youth. 45% 45.4% 100.9% 40% 39.8% 99.5% 70% 78.1% 111.6% It was a target focus to support black-owned SMMEs. 40% 45.4% 113.5% Overachievement was due to expansion in the microfinance and small loan programmes. 1% -9% % Lower target achieved due to limited disbursement. 146% 124% 117.7% Target achieved due to cost containment as a result of restricted income. 34% 30% 113.3% Target achieved due to low bad debt in the operating year. 5% 23% % Target under-achievement due to aggressive target setting for the nature of business as well as SMME trading conditions. 20% 5% 400.0% Limited activity by banks on the indemnity scheme. 75% 100% 133.3% Target achieved due to increased internal control and risk mitigation measures % Target achieved due to increased internal control and risk mitigation measures. 24 Small Enterprise Finance Agency

24 Performance Indicator INTERNAL BUSINESS PROCESSES 15% PEOPLE LEARNING AND GROWTH 15% Improved internal business processes & systems Development of at least 5 key policies, processes, systems and procedures Integration and implementation of business application systems 99.9% uptime of critical systems Alignment, development and motivation of Human Capital 8% Labour Turn Over Rate (LTO) 80% of Employees have Individual Development Plans (IDPs) Performance management assessments conducted by 100% of Managers for the year ending 31 March 2013 Employee engagement survey conducted by 31 March 2013 Target 2012/13 Actual achieved 2012/ % 100% 100% 100.0% 100% 100% 100.0% 8% 8% 100% Achieved as % of target Reason for Variance 80% 53% 66% Lower target achieved due to work done towards embedding the merger and aligning employee performance management system. 100% 54% 54% Lower target achieved due to work done towards embedding the merger and aligning employee performance management system. 100% 100% 100% * A factor of 0.7 was applied to the number of SMMEs financed to derive the number of jobs created. ANNUAL REPORT

25 GOVERNANCE 5.1 Introduction Governance of sefa is guided by the Public Finance Management Act, No. 1 of 1999 (PFMA), and the King Report on Governance for South Africa 2009 (King III). In keeping with best practice, sefa also ensures that its governance practices and procedures comply with the Companies Act, No. 71 of Board and committees sefa s board is constituted to ensure a wide range of skills and knowledge necessary to meet strategic objectives. The size of the sefa board is dictated by its Memorandum of Incorporation, which permits a minimum of five and a maximum of fifteen directors to be appointed by the shareholder. sefa has a unitary board structure, and as at 31 March 2013 the board comprised one executive and ten non-executive members and a gender composition of four female and seven male directors. The Chairperson of the sefa board is an independent, non-executive director. In line with the recommendations of King III, the positions of Chairperson and Chief Executive Officer are separately held to ensure a clear division of duties. The non-executive directors are not involved in day-to-day operations of the business and do not draw any remuneration from sefa other than board fees. Directors terms of appointment are governed by the company s Memorandum of Incorporation and are subject to periodic re-election and the shareholder s approval. Our directors are individuals of high calibre with diverse backgrounds and expertise, facilitating independent judgement and effective deliberation in the decision-making process, whilst pursuing sefa s strategic objectives. The board met for the first time on 20 April 2012 since the appointment of the new board members. The board is responsible to the shareholder for setting economic, social and environmental direction through strategic objectives and key policies, and monitors implementation through structured reporting systems. The board accepts responsibility for the annual financial statements. The adequacy of the board and the appointment of new directors are reviewed periodically by the shareholder. 26 Small Enterprise Finance Agency

26 Board members attended the following board meetings during the reporting period: 20/04 03/05 18/05 07/06 13/08 23/08 01/10 20/11 30/01 06/03 S Magwentshu- Rensburg M Ferreira IAS Tayob A H Lupuwana A A A A A A A SA Molepo A A A A LB Mavundla A A VG Mutshekwane BP Calvin A A GS Gouws A K Schumann W Fourie T Makhuvha Present A Apology Remuneration sefa directors were remunerated as follows: Name of director R R S Magwentshu-Rensburg (Chairperson) M Ferreira D Jackson (Resigned 23 February 2012) M Kekana (Resigned 31 March 2012) - 40 Z Lees (Resigned 31 March 2012) N Swana (Resigned 31 March 2012) V Twala (Resigned 31 March 2012) IAS Tayob H Lupuwana SA Molepo LB Mavundla VG Mutshekwane BP Calvin GS Gouws* - - K Schumann* - - Total 1,635 1,191 The difference in directors remuneration can be attributed to the increasing number of meetings held. * Mr Gouws and Ms Schumann are employed by the IDC and do not earn director s fees for services rendered to sefa. sefa non-executive board members are remunerated for the meetings they attend at (market-related) rates approved by the shareholder. No performance-based remuneration or retainer fees are paid to directors. Senior management and other employees are paid market-related salaries as well as remuneration through the sefa short-term incentive schemes based on performance. ANNUAL REPORT