Transcript SME Finance in South Africa

Financing of SMEs in South Africa
Results of a Survey of SMEs and Financial Institutions
World Bank, Africa Region, October 2011
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Contents
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Introduction
Insights from existing studies and data sources
Survey results
Policy considerations
Discussion points
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Introduction
• During 2010, the World Bank undertook a survey of the supply-side and
demand-side of SME finance
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Important contribution of SMEs to employment, income and growth in SA
Access to finance cited as a major constraint for small business development
Challenging macroeconomic conditions of 2007-2009
Linking the demand- and supply-sides of the market
• Supply-side survey was conducted with 8 institutions including the Big
4, niche banks, non-bank FIs and DFIs
• Demand-side survey of 234 SMEs originally interviewed as part of the
2008 Enterprise Survey
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Key messages of study
• Access to finance for SMEs worsened as a result of the economic
downturn
▫ Sharp worsening of perception of access to finance as obstacle for SMEs
▫ Tightening of credit standards and decrease in successful loan
applications
• Private sector is committed to this space and large in scale relative
to the public sector
▫ Engine for future growth and profitable business in own right
▫ Some innovations (e.g. around credit scoring and provision of BDS)
• BUT banks remain cautious about lending to the sector
▫ Income driven by deposits and transactions, not credit
▫ Perception that SMEs higher risk and more costly to serve
▫ Lack of information about potential borrowers and concern about skills
of potential entrepreneurs
• Therefore there is an important role for public policy
▫ Harness private sector expertise rather than competing directly with it
▫ Support the broader credit environment to overcome obstacles to
lending
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What does existing data say about
banks’ lending to SMEs?
Credit impairments (all)
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SME Retail
SME Corporate
Source: SARB returns (BA120, DI200, BA200)
2009
100
2008
5
2007
120
2006
10
2005
140
2004
15
Mar-10
160
Dec-09
20
Sep-09
180
Jun-09
25
Mar-09
200
Dec-08
30
Sep-08
220
2003
35
2002
240
40
2001
R bn
260
Jun-08
R bn
Exposure to SMEs
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Demand-side
Supply-side
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Demand-side: firms’ perception of
finance as obstacle for business
Is finance an obstacle for business?
SME
Large
Percentage
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Demand-side: worsening perception is
supported by quantitative data
• Decrease in proportion of investment projects financed
through commercial banks
▫ Decrease from 27% to 21% for small firms
• Decline in proportion of working capital financed through
customers / suppliers (halved)... at same time, increase in
share of working capital financed through commercial banks
(doubled)
• Percentage of applications rejected in 2010 increased slightly
from 18 percent to 22 percent
▫ Main reason: lack of appropriate collateral
▫ However decrease in percentage of loans requiring collateral from
68% to 45%, and lower average collateral requirement
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Supply-side: some quantitative insights
• Large banks constitute significant players in the market for SME
lending
▫ Large banks: ~95% of all exposures to SMEs in 2009
▫ Institutions with development mandate: ~2.5%
▫ Niche banks, non-bank FIs and public FIs also named as important
participants
• Average ratio of loans to deposits of 58% for SMEs and 49% for SEs1
• Contribution to profits of SEs large (5.7%) compared to size as
measured by loans (1.7%)
• Over the economic downturn
▫ Decline in loan applications (by 23%) and loan approval rates (from 61% to
45%)
▫ “Pricing for risk”: difference between best interest rate for large and small
enterprises increased from 2.5% to 3.8%
▫ Credit quality: NPLs for SEs remained flat at 4%, while NPLs for MEs tripled
to 5%
1. For the Big 4 aggregated (all business areas) the ratio is 100% (source annual reports).
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Supply-side: Drivers and Obstacles to
Banks’ Engagement with SMEs
Drivers
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A feeder for future business
▫ Important to develop healthy pipeline of
MEs
▫ Evidence of reorganisation to support
this migration
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A profitable and resilient business in its own
right…
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… but mostly transaction and deposit-led
model, not credit
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Public programmes matter only to a very
limited degree
▫ FSC: limited impact on lending volumes
▫ Khula guarantee scheme: volumes low
Obstacles
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Macroeconomic factors
▫ Most significant constraint cited
▫ Reflective of character of boom & nature
of SME market
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Bank-specific factors
▫ Capacity to assess credit risk of SEs
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SME-specific factors
▫ Significant information gaps (e.g. financial
statements) & lack of SME credit bureau
▫ Lack of basic business and financial skills
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Regulatory & policy constraints
▫ Concern of judicial processes required to
recover a debt & R7,000 limit on small
claims court
▫ Companies Act: concern over ‘business
rescue provisions’
Credit represents a small proportion of
total revenues
Proportion of credit revenues, Big 4, 2009
Source: Based on authors’ analysis of survey results
Deposit &
transactional
Innovation in new
credit technologies
may increase share
Credit
80%
70%
60%
50%
40%
30%
20%
10%
0%
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Impact of public policy
Could Government increase appeal
through the following?
Percentage of institutions
Percentage of commercial banks
Impact of Government programmes
on willingness to lend
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Policy themes identified
Issue
Recommendation
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Banks large in scale relative to DFIs but take
cautious approach to SME lending
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Improve effectiveness of partial credit
guarantee scheme
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Performance of direct public lending
schemes is mixed
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Review cost effectiveness and objectives of
schemes
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Entrepreneurs lack business and financial
skills but how to supply effective BDS?
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Support development of BDS market
through public research
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Lack of credit information on SMEs
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Support development of market credit
information for SMEs (e.g. sharing of
information & support for credit bureaus)
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Lending to SMEs is costly and risky, and
information is lacking
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Subsidize R&D on lending technologies to
overcome information gap (e.g. challenge
fund)
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Some regulatory & judicial issues identified
(e.g. collateral enforcement & impact of
business rescue in Companies Act)
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Review impact of these issues
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Khula experienced declining
volumes over downturn
New credit indemnities (Khula)
250
• Concerns being addressed by
Khula & implementing
portfolio indemnity scheme
• Will new structure reverse the
trend in volumes?
600
200
Value (Rm)
▫ Complicated to administer
▫ Dual credit assessment
▫ Long recovery times
700
500
150
400
100
300
200
50
100
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2006 2007 2008 2009 2010
Volume (right-axis)
Value (left-axis)
Volume
• Khula Credit Indemnity:
volumes declining
• Banks raised concerns
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Appropriately designed PCGs can
increase access to finance
All SMEs
All creditworthy SMEs
• Banks do engage with SMEs but
mostly for transactional revenues
and deposits
• They take a more risk averse
approach to credit where risk
parameters unknown
▫ “Get to know you” periods
▫ 80% perceive SMEs to be more
risky and less profitable
▫ SME information gaps cited as
major constraint
• Credit guarantees can be used to
expand set of SMEs with access, but
SMEs with
access to credit
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Be prepared for some loss
Allow banks to asses the risk
Ensure banks face sufficient risk
Streamline administrative
processes
▫ Payout quickly
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Some features of PCG scheme design
Feature
Considerations
International comparison (Beck
et al): 46 countries
Loan-level versus portfolio
guarantee
(Typically loan-level involve
guarantor in reviewing eligibility
and risk profile)
• Staff of scheme any advantage in
assessing risk?
• Administration costs
• 72% loan-level
• 23% portfolio or combined
• Government involvement in credit
decisions related to higher losses
Coverage ratio
• Incentives of institutions to
assess risk and recover
• Economic attraction of scheme
• Many schemes offer 50%
• Median coverage ratio of 80%
Fees
• Sustainability versus uptake
• Administration costs
• 63% per-loan fee vs 30% annual fee
• 25% adopt fee based on risk of
borrower
Payout timelines
• Incentive for intermediaries to
collect
• Economic attraction of scheme
• 34% after borrower defaults
• 42% when bank initiates recovery
• 14% when bank writes off loan
Targeting
• Additionality
• Verifications costs and limit
uptake
• 95% have target restrictions
• Specific sectors, new businesses,
geographic region, economic
policies
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It is also important to review the
performance of direct credit schemes
• Performance of DFIs involved in direct credit provision varies
greatly but all face challenges
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Unclear mandates
Not pushing the risk envelope (e.g. holding large deposits)
Profits derived from non-core activities (e.g. money market investments)
Poor portfolio quality
• Achieving well performing and sustainable direct credit schemes is
not straightforward and it dependent on:
▫ Capacity to assess credit
▫ Operational efficiency
• Scale of private sector involvement (>95% of SME lending) suggests
that best option for government would be to harness private sector
expertise, not compete with it
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Other potential areas for
Government support (1/2)
Policy area
Comments
Support development of BDS market through
public research
• BDS can help to address some of intrinsic
weaknesses in SMEs
• Banks remain vexed how to provide BDS
efficiently and how to ensure it is
appropriate and of a high enough standard
• Government may have a role both as a
provider of BDS and in promoting good
practice and standards across the sector
Support development of market credit
information for SMEs
• Challenges for credit bureau to capture all
credit information relating to SMEs (e.g.
from trade suppliers)
• Two potential areas for government support:
1) refinements to legal & regulatory
framework to improve incentives to share
information among lenders, and 2)
education campaign promoting value of
credit bureaus to SMEs and vice versa
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Other potential areas for
Government support (2/2)
Policy area
Comments
Subsidize R&D regarding lending technologies
to overcome the information gap (e.g.
challenge fund)
• Technologies have potential to reduce the
issues of high transaction costs and risk
profiles of potential borrowers (e.g. from
microfinance sector)
• Evidence of innovations occurring in SA
(e.g. relating to credit risk assessment)
• However the sector is still experimenting
and room for innovation
• Establishment of new “window” of credit
guarantees specifically to stimulate the use
of automated scoring techniques?
Address any regulatory, judicial and legal
obstacles
• In general, not highlighted as significant
constraints in SA
• However, still areas identified: e.g. issues
registering and enforcing collateral, and
concerns over the business recovery
provisions in the new Companies Act
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Definitions
• In principle, the term “SME” encompasses a very wide range
of businesses: from a one-person business to firms with
hundreds of employees
• No consistent national definition
▫ National Small Business Act: based on 3 measures of size
(employees, turnover, asset value) but differs by sub-sector
▫ Financial Sector Charter: annual turnover range R500,000 to
R20m
• Used in this study
▫ Demand-side: small (5-19 employees), medium (20-99), large
(100+ employees)
▫ Supply-side: institution definitions of small and medium
enterprises (typically based on turnover ranges R0.5 – 100 m)
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Demand-side methodology
• World Bank’s South Africa Enterprise
Survey of 2008 complemented by
second round in 2010
• Written questionnaire conducted
through face-to face interviews with firm
managers
• Information on four broad areas:
managers’ ratings of business
environment; objective indicators of
business environment; business
information; business characteristics
• 2008: 1,057 establishments sampled
from four locations: Johannesburg, Cape
Town Port Elizabeth and Durban
• 2010: 234 of the original establishments
resurveyed
• Sample compositions very similar
Size distribution of
sampled firms
2008
2010
Small (5-19
workers)
47%
52%
Medium
(20-99
workers)
35%
31%
Large (100+
workers)
18%
17%
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Supply-side methodology
• Specially designed questionnaire, administered to selected banks via on-site
discussions
• Institutions chosen both to represent the major players actively involved in
SME finance
• Institutions included both the Big 4 private-sector commercial banks,
Sasfin, Business Partners, Khula1, IDC and NEF
• 9 institutions surveyed, representing 89% of banking sector assets
• 72 questions focussed on:
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iv.
Extent of bank’s involvement with SMEs
Determinants of SME bank financing
Bank’s SME business model (including products and credit risk management)
Effect of the economic downturn and international financial crisis
1. Discussions were also held with Khula, although as a wholesale funder, this institution was not asked to complete the full
written survey.