1. THE PROBLEM AND ITS SETTING

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1 Table of contents Page 1. THE PROBLEM AND ITS SETTING Historical development of small businesses in South Africa Problem statement Reasons for the study Aim and objectives of the research Hypothesis and research questions asked Research methodology Deployment of the study 6 2. THE RELATIONSHIP BETWEEN SMALL BUSINESSES AND COMMERCIAL BANK FINANCE THEORETICAL APPROACH Introduction Categories of small businesses Advantages of small businesses for the economy Challenges facing small businesses in the economy Types of financing available to small businesses in developed and developing countries Characteristics of the financial sector in South Africa Reasons for disapproval of loan applications from small businesses Financial risks facing commercial banks Selection criteria of loan requests by commercial banks Types of collateral required by commercial banks when providing loans Characteristics of loans from commercial banks Selecting appropriate financier by small businesses Summary of the main findings from the theoretical studies 42 i

2 3. SMALL BUSINESS DEVELOPMENT POLICY FRAMEWORK IN SOUTH AFRICA Introduction Small Business Development Policy in South Africa The functions of the small business support institutions in South Africa Evaluation of small business support programmes Commercial banks and their support to small businesses in South Africa Black Economic Empowerment (BEE) and small businesses Summary of the main findings MEASURING THE EFFECTIVENESS OF FINANCE TO SMALL BUSINESSES IN THE GAUTENG AREA Introduction Working definition of a small business by business chambers and commercial banks Standard of the financial sector Standard of small business sector Challenges facing small businesses Risks posed by small businesses to commercial banks Selection criteria of commercial banks Trend of commercial bank loan applications from small businesses Reasons behind commercial banks disapproval of loan applications Collateral requirement for small loans Effect of loan requirements on the performance of small businesses Impact of the Small Business Development Policy of 1996 and Financial Services Charter on the performance of small businesses Alternative sources of funding for small businesses Other business related services to small businesses Summary of the main findings 96 ii

3 5. SUMMARY OF THE MAIN FINDINGS, CONCLUSIONS, AND TENTATIVE RECOMMENDATIONS Introduction The relationship between small businesses and commercial banks theoretical approach Small business policy framework in South Africa Measuring the effectiveness of finance to small businesses in the Gauteng Area Conclusions and tentative recommendations Areas of further research 107 Bibliography 109 Appendix 1: Questionnaire 119 iii

4 List of tables Page Table 2.1 Classification of SMMEs in South Africa 12 Table 3.1 The use of DTI programmes 54 Table 3.2 The use of Ntsika/Khula programmes 56 Table 3.3 Employment features, March 1996 to March Table 3.4 Rural versus urban breakdown & household support 62 Table 3.5 Loan features 62 Table 4.1 Standard of the financial sector 74 Table 4.2 Standard of the small business sector 75 Table 4.3 Assignment of scores for rankings 77 Table 4.4 Ranking of each challenge to small businesses by respondents 77 Table 4.5 Number of times each challenge to small businesses was ranked number one 78 Table 4.6 Overall ranking of challenges to small businesses 79 Table 4.7 Ranking of risks by respondents 81 Table 4.8 Risk type as a first ranking 81 Table 4.9 Overall risks ranking by all respondents 82 Table 4.10 Selection criteria and percentage vote 83 Table 4.11 Trend in loan applications 84 Table 4.12 Rankings by individual respondents 87 Table 4.13 Number of times the criterion was ranked first 87 Table 4.14 Overall ranking by respondents 88 Table 4.15 Collateral requirement ranking 90 Table 4.16 Loan requirements and small business performance 92 Table 4.17 Impact of Small Business Development Policy of 1996 on the access of small businesses to financial resources 93 Table 4.18 Impact of Financial Sector Charter on the access of small businesses to financial resources 94 iv

5 List of abbreviations and acronyms ABSA: Amalgamated Banks of South Africa BDS: Business Development Services BEE: Black Economic Empowerment BMF: Black Manager s Forum BMR: Bureau of Market Research BPP: Business Protection Plan BRAIN: Business Referral and Information Network CGIC: Credit Guarantee Insurance Corporation CSIR: Centre for Science and Industrial Research DBSA: Development Bank of Southern Africa DTI: Department of Trade and Industry ECFIR: Export Credit and Foreign Investment Re-insurance EEN: Enablis Entrepreneurial Network EESa: Emerging Enterprise Scheme EESb: Economic Empowerment Scheme EMIA: Export Marketing and Investment Assistance Scheme FDI: Foreign Direct Investment FNB: First National Bank FSC: Financial Services Charter GDP: Gross Domestic Product GEAR: Growth, Employment and Redistribution Strategy HOC: House Owner s Insurance IDC: Industrial Development Corporation IFS: Import Finance Scheme KEF: Khula Enterprise Finance KELF: Khula Enablis Loan Fund KZN: Kwa-Zulu Natal LBSC: Local Business Service Centres LPA: Loan Protection Assurance v

6 MAC: Manufacturing Advice Centre MBI: Management Buy-In MBO: Management Buy-Out MCO: Micro Credit Outlets NAFCOC: National African Federated Chamber of Commerce NAMAC: National Manufacturing Advice Centre NCD: Negotiable Certificate of Deposit NEC: National Empowerment Corporation NEDLAC: National Economic Development and Labour Advisory Committee NEF: National Empowerment Fund NFS: Normal Finance Scheme NSBC: National Small Business Corporation NSBSS: National Small Business Support Strategy PDI: Previously Disadvantaged Individual PMSI: Purchase Money Security Interest RDP: Reconstruction and Development Program RFB: Reference for Business RFI: Retail Finance Intermediaries SACOB: South African Chamber of Business SAP: Structural Adjustment Program SARB: South African Reserve Bank SBDA: Small Business Development Agency SBDC: Small Business Development Corporation SCGS: Standard Credit Guarantee Scheme SEDA: Small Enterprise Development Agency SLFBS: Standard Leased Factory Building Scheme SMEDP: Small and Medium Manufacturing Development Programme SMME: Small, Micro, and Medium Enterprises SSACI: Swiss South Africa Corporation Investment SSP: Skills Support Programme STEFGF: Short Term Export Finance Guarantee Facility vi

7 TA: Training Assistance TAC: Tender Advice Centres TCB: Training Capacity Building TIPS: Trade and Industrial Policy Strategy RFB: Reference for Business UFFTAF: Umsobomvu-First Rand Foundation Technical Assistance UNECE: United Nations Economic Commission for Europe UNIDO: United Nations Industrial Development Organisation UNISA: University of South Africa USSBA: United States Small Business Administration VAT: Value Added Tax VCS: Venture Capital Scheme WC: Western Cape vii