Development of SME sector critical for economic growth

© Anatoly Maslennikov – 123RF.com

On average worldwide, 50% of formal employment is in the small and medium enterprise (SME) sector, while in developing nations, the proportion can rise to 80-90%.

"The development of the small business sector is critical to economic development and transformation," said DSBD Minister Lindiwe Zulu after her appointment in May. She called for dialogue with SME role-players, to see where the challenges are.

According to the results of a large scale survey undertaken by the South African Institute of Chartered Accountants (SAICA), the minister is sitting on a massive opportunity. Respondents had some clear ideas on how the department could help: reduce government-generated red tape, relax labour law as it applies to SMEs, use tax laws to incentivise SMEs to grow and to employ more people in that order. The difficulty of obtaining finance was cited as the next most important obstacle to business expansion.

The DSBD is in a perfect position to collaborate with the treasury, the unions, SME lenders like SEFA and Business Partners, and SME stakeholder bodies to work out a 'package' that incentivises small business development.

Bold leadership needed

It remains to be seen whether this new ministry will demonstrate the leadership required to balance the needs of the unemployed with the age-old arguments of the unions, and to convince treasury that it would be in the long term interests of the fiscus to grow the SME tax base whilst at the same time reducing the burden of the welfare payments that currently constrain the budget. SMEs attested that they would be willing and able to expand both their businesses and the number of staff they employ significantly, so imaginative and bold leadership is called for.

The general thrust of responses was encouraging - 83.5% believe their profitability will remain stable or increase over the next year, and 86% expect to retain their full staff complement, or increase it over the same period. Optimism is something of a ground state for entrepreneurs, it's true, but their positivity is borne out by other data in the survey that has relevance to the DSBD's deliberations on policy.

The correlation that is apparent is that the number of people employed rises sharply with SME turnover. While most of the SMEs surveyed are well-established and relatively successful - 75% have been in business for more than five years - stability alone is not enough. Most SMEs begin as one- or two-person concerns, where the immediate aim of the business is to support the shareholders' families. Only when that family support is secured, can they think of expanding the business and employing more staff. SME's need the incentive and the capital to grow from small to medium if they are going to become significant providers of employment.

Economic transformation

In short, if we are to fast-track economic transformation, it may be in the DSBD's best interests to focus on encouraging the formation of new SMEs, but more so on fostering growth and expansion among existing SMEs. This second strategy also has a shorter time frame and lower risk levels.

Such a package would focus on established SMEs, which have been in business for perhaps three years or more and are now ready and able to contribute to the objectives of the National Development Plan - GDP growth and job creation. Of course this can only be achieved by working with that most basic of SME needs - the need to grow their own wealth levels.