Access to credit for small business in South Africa towards a value-based decision framework

Abstract

The focus is on access to credit for small businesses in South Africa. The literature study revealed that in South Africa more businesses are shutting down than opening. One of the main contributors identified was the reluctance of banks to provide credit to small businesses. A small business for the purpose of this study is based on the number of employees’ ≤50, and excludes survivalist enterprises. The main objective of the study was to develop a value-based decision framework for small business lending. By establishing this, there will be more value to the bank, the small business customer, and ultimately to the economy in South Africa, by enabling more job opportunities. In order to achieve the objective, it was important to understand access to credit for small businesses in South Africa from a broader perspective. This included a literature review and an empirical study. The legislation investigated was the National Credit Act (NCA), and from a Government support perspective, the Khula Credit Guarantee Scheme. The empirical study was divided into two parts; Empirical Study A and Empirical Study B. The main study (Empirical Study A) method was a questionnaire comprising 112 items which included closed and open-ended questions. The results were positive with 323 “usable” questionnaires received. The aim of Empirical Study B was to identify whether there were any variables which may contribute to the probability of default. The empirical results revealed that one of the biggest challenges for banks to grant credit to small businesses is the high cost involved compared to the return earned. Considering that banks have a responsibility to protect the depositors funds, the focus from a bank perspective will always be on the customer segments which can provide the required financial documentation which demonstrates repayment ability, and which can provide a higher return on equity (ROE). For the NCA regulation that was investigated, the results revealed that small businesses have less access to credit as a result of the NCA, and that the NCA does not allow for more credit to be advanced to businesses. The results of the Government Khula Credit Guarantee Scheme revealed that it is not creating any “additionality” in that it mainly guarantees the credit advanced to businesses which the bank would have approved anyway (even without the guarantee). Based on the identified challenges, gaps, and recommended solutions, the study concludes with a proposed Bank Guarantee Securitization Model and Small Business Lending Framework.