Quantitative and qualitative research on SMEs in Gauteng USAID Financial Sector Program

1. Quantitative and qualitativeresearchon SMEs in Gauteng USAID Financial Sector Program FINANCIAL SECTOR PROGRAM TECHNICAL TEAM 11 DECEMBER 2008

2. BACKGROUND • SMEs account for 41.7% of private sector employment in South Africa. • In Gauteng alone there are about 1 053 818 small business owners • Challenges faced by SMEs: Access to markets, finance, business opportunities and business support services • Small businesses were ranked based on their level of business sophistication (BSM) in the 2006 FinScope study in Gauteng.

3. Small and Micro-Businesses by Sophistication Segment Source: FinScope, Small Business Survey Report Gauteng 2006 (Johannesburg: FinScope, 2006)

4. RESEARCH BRIEF AND PURPOSE • Quantitative analysis of SMEs in the BSM 6 & 7 FinScope small business survey of 2006 • Qualitative research by way of focus groups among HDI business owners with a turnover of more than R200 000 in Gauteng • The purpose of the above was to provide useful information to the FSP team to design and implement their work plan

5. QUANTITATIVE SURVEY RESULTS

6. 2006 SMALL BUSINESS SURVEY • About 1 053 818 small businesses in Gauteng • 109 441 are HDI BSM 6 & 7 SMEs • 57% never used support organisations • Need for capital most important problem faced by 42% of small enterprises • 2% had a loan at the time of the survey

7. 2006 SMALL BUSINESS SURVEY

8. 2006 SMALL BUSINESS SURVEY BUSINESS TURNOVER OVER PAST 12 MONTHS

9. QUALITATIVE SURVEY RESULTS

10. BSM Maps • Created from the 2006 FinScope SME survey • Maps show percentage households falling into BSM 6 and 7. • More African and Coloured SMEs found in BSM 6 while Asian SMEs mainly found in BSM 7 • BSM maps enabled focus group areas to be selected and provided epicentres for HDI small businesses to be found

11. Distribution of BSM 6 households Inset: Location of Gauteng province in South Africa

12. Distribution of BSM 7 households

13. SELECTED FOCUS GROUP AREAS Pretoria • Pretoria CBD – African • Eersterust – Coloured • Mamelodi – African • Soshanguve – African • Laudium - Asian Johannesburg • Eldoradopark - Coloured • Florida - Coloured • Lenasia - Asian • Soweto – African • Alexandra – African • Tembisa - African

15. DEMOGRAPHICS

16. COMPANY TURNOVER

17. BUSINESS SECTOR

18. YEARS IN BUSINESS

19. FINANCIAL BUSINESS SERVICES (fBS)

20. Information, awareness and use of fBS Key finding: awareness of providers high / information available, but use of services low Awareness of fBS • Larger institutions offering support & advice services • Awareness created through advertising, offices nearby, forums and consultants Types of fBS needed • Loans • Business and marketing plans • Advice, training and education

21. Information, awareness and use of fBS Key finding: awareness of providers high / information available, but use of services low Factors affecting use • Location of service • Language used • Service levels • Affordability • SME capacity • Service provider requirements

22. BANKING AND FINANCIAL SERVICES

23. Obstacles to accessing finance • Although most have bank deposit accounts nearly all indicated that they could not get external financing • Numerous reasons why SMEs have difficulty getting access to financing : • Must have a deposit account for at least 6 months • Poor credit history or no credit history • Lack of security/collateral • Not enough cash flow • Not enough equity in their business • Inadequate financial records and no accountant – needed 3 years of bank statements for business • Poor financial literacy • Not in business long enough • Blacklisting • Business owners don't have always have title deeds to their residential properties • Feel intimidated by financial institutions

24. Obstacles to accessing government finance “ .. I am aware of all of those, I am in business for a long time now, I went to KHULA and they told me that they will provide a loan, but they want security. It is a long process. When you go to them they will assist you and then they send you there and then they decide if your business is worth it, it is a waste of time. Maybe it is where we come from and we are used to struggling to make ends meet and then maybe in the end we will grow.” “What happens here is that they all have different names, they but they all want the same. If you have a bad experience with one of them, you look at them as just another one.” “Umsobomvu, yes, but it’s not more of a financial assistance if you are in services. They are also not interested in something less than R60 000. If you come up with a need for a small amount like R45 000 they say go to a financial institution. You must remember they are a bank themselves and need to make a profit. Even Khula is also not funding on a small scale”.

25. Lack of Support from financial institutions • SMEs reported working through consultants and filling in applications but still not getting support • SMEs informed to come back after 3-6 months once had enough bank statements • SMEs requested institutions to visit their premises to see potential of businesses • Indication of cultural/racial issues in securing funding “There was a white relationship manager at the bank … I needed a cheque that had been deposited into my bank account cleared urgently … there was a big problem … if I had a Black relationship manager there would not have been a problem” “I don’t think it is based on colour, it is based on risk but they don’t go to the level where they explain to you what makes you a high risk.” (Eersterust businessman)

26. Deficiencies in SMEs • Lack of financial education and literacy • Lack of business training • Highly competitive and undiversified markets • Lack of record keeping and proper documents (eg company documents, tax clearance, UIF, etc) • Inability to present formal business plans • Poor credit ratings • Lack of collateral/security for loans • Limited capital bases and ability to grow capital • Misconceptions about the risk analysis process

27. Recommendations • Develop clear step-by-step guidelines on what is needed to secure funding from institutions • Provide guidelines to staff in financial institutions and government organizations on communication standards • Re-design collateral assessment techniques – consider "non-western" collateral • Relaxation on re-payment "holidays", interest rate capping, extended re-payment periods, “skip” payments • Extensive financial literacy training programs • Develop third tier banking system granting smaller loans with short repayment periods – create Micro Banking/Divisions • More flexible interpretation of National Credit Act for MSMEs • Change mindsets of the formal banking institutions regarding SMEs

28. LEGAL AND REGULATORY MATTERS

29. Relationships with public institutions • SMEs indicated that public institutions were not very useful and raised several concerns: • Public institutions are not easily accessible as they are located in major urban centres • Need to communicate with SMEs better and within local languages • Have bureaucratic and long procedures; not transparent and practice nepotism • Don’t follow-up with SMEs after initial engagement

30. Knowledge of BEE legislation • SMEs generally don’t know the BEE legislation - they think it is biased and reserved for big companies • SMEs were not aware that they had to register to be BEE and most of them did not know how to do it. “Yes, I haven’t register for it, I thought being black you are automatically registered as BEE” • SMEs don’t see how they can benefit from the BEE legislation.

31. Knowledge of BEE legislation “BEE is a waste of time for us, for me, myself because first of all it hasn’t been marketed properly. We - I’m talking as a young Indian businessman – we haven’t been educated as to what resources we can get through BEE. I think to be quite frank it is only beneficial to the Black man in the country. In the old government I wasn’t white enough, now I am not Black enough. That’s my view.”

32. Conclusions • SMEs need: • More information and training on all aspects relating to registering of businesses and compliance with regulations • Training on BEE legislation and business opportunities created by BEE legislation • More support of public institutions in their neighbourhood. • More support to strengthen their business/community associations and forums.

33. KNOWLEDGE AND INFORMATION MANAGEMENT

34. Knowledge and information management Knowledge and information management focuses on: • Mechanisms of sharing knowledge and experiences between organizations • Support being provided by government and other organizations • Needs, capacities and challenges in sharing knowledge and learning • Best practices being used amongst SMEs in sharing knowledge and learning • ICT support for SMEs

35. Sharing of knowledge and learning • Learning of SMEs obtained mainly from previous employer • SMEs generally not sharing knowledge and learning with one another • Type of sharing mechanisms suggested • Regular production of bulletins and pamphlets • Simple step-by-step procedures in handbook • Use of Internet (E-mail and web) • Business EXPOs • Organize forums and workshops

36. ICTs in sharing knowledge and learning • SMEs use of computers: • Internet banking • Not many use it for financial management purposes • More advanced uses are for bookkeeping, income and expenditure, tracking profits, monitoring sales and stock taking • E-mail is used to communicate with clients and suppliers • Web is used to access information and place orders with clients • Internet and phones can be used to hold teleconferences

37. ICTs in sharing knowledge and learning • Mobile phones used to do banking and SMSs used to send and receive relevant information, monitor bank transaction and check bank account balances • Radio can be used to: • present short programmes in appropriate time slots (e.g. after 8pm) on running businesses • Have invited guests with people phoning in to ask questions • Similar programmes can be presented on TV