ANNUAL REPORT – 2010/11 Enhancing Growth

1. ANNUAL REPORT – 2010/11 Enhancing Growth 14 October 2011

2. Outline • Introduction • Khula mandate • Overview of 2010/11 activities • Khula Direct implementation • Financial results • Outlook for 2011/12 • Concluding remarks

3. Khula’s Mandate, Objectives & Business Model

4. Khula Mandate Maximise access to finance for SMEs • Intervene in underserved segments of the SME finance market to increase access to finance • Attract private sector partners to join the sector • Narrow the financing gap facing SME (reach out to as many SMEs as possible) Maximise development impact All investment efforts must result in – • Sustainable job creation • Black Economic Empowerment (black-owned SMEs) • Women Empowerment • SME development in economically disadvantaged provinces and communities Financial sustainability Maintain the capacity to be self-funding through – • Pricing • Optimal asset utilisation (capital, people, infrastructure) & leveraging resources of partners • Diligent cost management and control • Effective risk management

5. Objectives Khula’s core business is to provide appropriately-structured financing to SMEs - • In form of loans, equity and indemnities • Provided through a network of partnerships • Offers SMEs business support services (pre and post investment) • Provides capacity building grants for intermediaries • Provides business premises to SME tenants to support their growth and development Target market • To target South African SMEs that are Black-owned; owner-managed in need of start-up, development and/or expansion capital • To increase participation of women-led businesses in SME sector • To increase outreach in rural provinces • To target lower-end of the SME financing market (R10k – R3m)

6. Products and Services

7. Geographic distribution of Khula offices and partners Khula regional offices Financing partner location

8. RFI Portfolio

9. JV/Funds Portfolio

10. Overview of 2010/11 activities

11. Highlights • Approval of Khula Direct Business Plan and securing funding for the pilot phase • Establishment of the Post Investment Monitoring Unit • Strengthen stakeholders relations • Explore other avenues to secure funding • Reposition the wholesale lending model • Align Khula’s strategy with the New Growth Path

12. Disbursements to intermediaries • Cumulative disbursements in the last 5 years of R1,4 bn • 2 605 SMEs financed through intermediaries in 2010/11 • 2 500 job opportunities created in 2010/11 • 80% of SMEs financed were black owned in 2010/11 • 34% of SMEs financed were women owned in 2010/11

13. Approvals to intermediaries • Level of approvals lower than budgeted largely driven by: • Stricter lending criteria by commercial banks; • Poor economic climate, especially affecting SMEs; • Risk aversion by financing partners and • Reduced funding from shareholder

14. National Treasury Allocations

15. Loan book growth • Business loans increased by 29% year on year • Funds increased by 4% • Credit indemnity decreased by 20%

16. Property Portfolio • Provide development properties for largely black entrepreneurs • Large number of properties located in underdeveloped areas requiring larger maintenance budget • Estimated employment ± 6,000 jobs

17. Property Portfolio Performance • Rentals billings R41.6m (2010: R39.3m) • Property Portfolio expenditure and overheads R48.1m (2010: R36.9m) • R15m in 2011 provided as doubtful debt for rental arrears • 2011 carrying value R187.5m (fair valuation increase of 3% since 2010) • Current actions to improve performance: • Conversion of “gross leases” to “net leases” • Installation of utility metres in property units • Roadshow by Khula Chairman to visit tenant associations • Preparation of Portfolio Strategy (dispose/develop/maintain) for Board approval • Complement with existing SME investment portfolio

18. Factors affecting overall performance • Adverse impact of economic crisis on SMEs • Reduced allocation of capital by the shareholder • Reduced lending through Khula’s intermediaries • Focus by financing partners on distressed SMEs to ease effects of poor economic climate • Higher than normal bad debt provision across the sector due to poor economic conditions • Low interest environment affecting revenue streams

19. Khula Direct Implementation

20. Khula Direct Implementation • Business case approved in December 2008 • Between 2008 and April 2010, Khula undertook extensive research, study visits and consultations with key stakeholders • Business plan approved during 2010/11 financial year • Funding secured for pilot in East London and Tshwane offices

21. Financial Performance For the year ended 31 March 2011

22. Financial Performance

23. Financial Performance (cont.) • Company Revenue down 13.25% correlating to decreased lending activity. • Operating expenditure maintained by not filling staff vacancies, and reducing variable overheads linked to lending activity. • Provision for bad debts and impairments increased by 178.9% because of write-offs in RFI’s and also RFI net book values impaired below investment values. • Impact on bottom line ~ Loss. • Loans and advances (NBV) to RFI’s down 17.4% due to lack of shareholder funding to grow the loan book. • Khula’s equity and reserves decreased by 2.8% ~ erosion of capital base as a result of lack of funding to generate growth in income and reserves. • Uncommitted cash R110,9m (2010: -R53.6m neg/over-committed). • No taxation payable due to assessed loss available.

24. Revenue

25. Expenditure and Overheads

26. Bottom line

27. Abridged Balance Sheet

28. Outlook for 2011/12

29. Merger of Khula, samaf and IDC’s small business activities with anticipation of significant Government and IDC Funding and support, rationalisation of costs and resources, improved access by SME’s, best practice operations and processes. • Establish SME Supply Chain Fund • Khula Direct implementation • Credit Indemnity Reform • Strengthen risk and credit management processes

30. Concluding remarks • Limited financial resources and restrictive wholesale mandate limit Khula’s impact and sustained growth • Mandate dictates highly developmental activities (start-ups, smaller sized loans, rural) • Current pricing model does not price for the credit risk and high development cost • Balance sheet to include a portfolio of strategic investments with a high level of profitability to subsidise highly developmental initiatives

31. THANK YOU 14 October 2011