The Lifeblood of South Africa’s Economy: Collaborating Corporates, DFIs, and Banks to support inclusive finance for SMEs

Johannes de Kock

For more than half of all South Africans, Small and Medium Enterprises (SMEs) are the reason they are currently employed.

This vast network of entrepreneurs, representing 98.5% of South Africa’s commercial enterprises, contribute 40% of the country’s Gross Domestic Product (GDP). With the right support, local businesses can rise to, and even surpass, the numbers produced by their global peers – as around 55% of the world’s GDP is produced by SMEs.

There’s a reason global consulting firm McKinsey & Company labelled SMEs the lifeblood of South Africa’s economy, yet also the organisations at the greatest risk. Their report, “how local SMEs can thrive following the COVID-19 pandemic”, shows that a key constraint for most of these enterprises was limited access to affordable finance . It’s a trend that has continued, across the continent, and the rest of the world and to resolve, will require a uniquely collaborative approach.

The South African government has spent decades implementing SME support initiatives – with some incredible success stories and incubation programmes – though there is so much more to small business development than government funding. The corporate sector, for example, must play their part in skill-building, especially concerning digitisation and the inevitable environmental transition many businesses will have to implement – alongside helping SMEs to secure alternative forms of financing.

Similarly, Development Financial Institutions (DFIs), must not only help secure capital on international markets for development initiatives, but also provide the advisory services to ensure South African business owners have the tools and knowledge they need to flourish.

However, what is often lacking is collaboration between all these entities, particularly DFIs and the corporate sector, whose partnerships could be the key to unlocking inclusive finance opportunities countrywide. DFIs already know the value of effective collaboration – especially at an international scale. We saw this last year when DFIs in Asia including the Pacific and the Southern African Development Community DFI Network signed a memorandum of understanding (MoU), in a bid to accelerate socio-economic development in both regions.

The MoU allows the parties to leverage their services – including sources of funding – and will bolster both entities’ ability to secure more effective development assistance. So why couldn’t such an agreement work at a local level between a DFI and a corporate entity to develop the SME landscape? Through a collective effort between DFIs and corporates, SMEs could access multiple sources of finance through the introduction of alternative forms of debt, crowdfunding, and hybrid tools a strategy recommended by the Organisation for Economic Co-operation and Development when diversifying opportunities for SME development. So, in the event a DFI/Corporate SME development fund is established, SMEs that are not able to qualify for financing through traditional channels will be able to access loan funding through this model of funding at preferential interest rates. We’ve already seen this working at a corporate level, as Absa approves more than 90% of development loan applications received.

So as these two entities leverage their respective balance sheets and skillsets to provide lending opportunities to SMEs, that’s where a banking partner can play a pivotal role to administrate these development funds – ensuring proper governance and improving audit outcomes. Lenders can share the risks associated with the financing while also extending financial inclusion opportunities for a wider range of SMEs. Meanwhile, the potential risks are also mitigated through a bank’s collection capabilities, ensuring that more of the SME loans are repaid, and that funds can be secured for future SME borrowers.

But there are also major benefits for the SMEs being supported by such a fund, as they would be able to access the bank’s other services. These borrowers will also be able develop their credit profile, which will allow them to access more traditional bank lending in the future.

A banking partner with comprehensive reporting capabilities ensure that all metrics of the fund’s success can be measured and shared with all stakeholders, improving transparency and accountability through tailored reporting metrics. Because nothing is more important than ensuring that such a fund continues to grow, and financing reaches the businesses that need it most.