When the lockdown was announced in late March, government seemed to have matters in hand. Small businesses faced with ruin were promised R200 billion in loan support to tide them through the crisis.
How differently things have turned out.
Business Day reported this week that the government has assisted just 10 000 businesses, a fraction of the 700 000 promised by President Cyril Ramaphosa in April. Of the roughly 40 000 businesses that applied for assistance, only 23% were granted loan relief by government – which is 1.3% of the number promised by Ramaphosa.
The amount lent by government so far is more R13 billion, out of R200 billion set aside for business assistance.
Compare this performance with the 184 000 loans made by developmental (pro-poor) microfinance groups since April, worth R733.6 million. The loan amounts are far smaller, but no one can fault them for stepping in where government has failed.
Loans where needed (and when needed)
These loans went to the country’s poorest entrepreneurs to keep them afloat, says Evans Maphenduka, executive coordinator of the Development Microfinance Association (DMA).
“We’re quite proud of the fact that our member organisations got funding to those entrepreneurs who need it most, and for many it made the difference between being able to eat or go hungry.”
Developmental microfinance loans are typically just a few thousand rands, sufficient to purchase stock and basic equipment. Microfinance organisations have made an outstanding success of lending into a market that banks avoid. These entrepreneurs do not have the kind of collateral banks demand as a precondition for lending, yet microfinancers such as Small Enterprise Foundation (SEF) have a bad debt ratio of just 0.22% – well below that of the commercial banks.
In addition to opening up their cheque books during lockdown, microfinance lenders have also offered repayment holidays.
Active DMA member institutions include SEF, the Phakamani Foundation, Thuthukani Finance, and Siyakula Financial Services.
Says Maphenduka: “Our members have established channels in reaching informal and micro enterprises. These informal and micro enterprises are not typically reached by the commercial banks, which typically focus on larger business and do not have a track record in the micro enterprise market. The informal and micro enterprises are vulnerable businesses, and particularly sensitive to economic shocks such as Covid-19 and lockdown.“
The 184 000 loans disbursed by DMA members went entirely to women, with 18% being taken up by youth aged between 18 and 35.
About 97% of the loans were disbursed to rural based informal and micro enterprises, with the balance of 3% going to township entrepreneurs.
SEF founder John de Wit says those operating at the bottom rung of the entrepreneurial ladder are generally women.
According to a study published by HSRC Press – The South African Informal Sector: Creating Jobs, Reducing Poverty – the informal sector provides employment and income for 2.5 million people, or about one in six of all jobs in the country, and contributes an estimated 6% of national GDP. The size of the informal sector will likely have ballooned in the last three months, given the estimated three million people impacted by the lockdown.
“If we don’t provide assistance to this segment of the market then we face an unprecedented socio-economic crisis,” says De Wit.
“It’s a pity that the government didn’t make a more concerted effort to help this segment of the market. In fact, it could have used our networks since we have the systems in place to handle this.
“Instead, they chose to go it alone and the result has been rather underwhelming.”
Government’s poor response to small businesses in need is a result of unnecessary red tape and lack of capacity to deal with applications, adds De Wit.
Red tape, a whole lot of it …
As Moneyweb previously reported, government’s promise of assistance to micro entrepreneurs was contingent on their:
- Obtaining a licence to operate from the local municipality,
- Registering with the Companies and Intellectual Properties Commission (CIPC),
- Registering with the South African Revenue Service (Sars), and
- Registering with the Unemployment Insurance Fund (UIF).
This went down like a damp squib.
“The last thing most of these entrepreneurs want is to be hounded by the taxman and other regulatory agencies when they are merely trying to put food on the table,” says De Wit.
“This was very ill-considered. The government was using financial aid as a way to migrate informal sector operators over to the formal sector, and it’s pretty safe to say they failed.”
A survey by the SEF, which has 216 000 informal sector entrepreneurs on its loan books, found that only 12% had applied for business permits. It’s likely that far fewer than 12% applied for any kind of financial assistance from the government.
Too little, too late, too restrictive
A report by market research group Intellidex into the reasons for the poor take-up of government-backed assistance suggests it was too little too late, coming seven weeks after the start of lockdown, and the restrictions imposed on how the funds could be used (mainly rent and salaries). Those restrictions have since been eased to allow for a wider range of business spending, and this should prompt more businesses to apply for loans.
Meanwhile, demand for assistance from developmental micro-lenders has never been more brisk. Maphenduka says demand for lending is pouring in from almost every type of informal sector trade, from spaza shops to hawkers, vendors, tailors, metal fabricators, carpenters, hair salons, and even for room rentals.