SME development - more needs to be done

Katlego Maphai

Specifically, his announcement that resources have been re-prioritised for the Small Business Department (including efforts to strengthen agencies that support small business), the establishment of a fund by the CEO Initiative to support the expansion of small firms, as well as reforms in the financial sector which will see the cost of financial services reduced and made transparent. Pravin noted that "Unduly high costs currently... inhibit access of small business to credit."

Important economy drivers

The South African government identified the SME sector as key to economic growth as far back as 1995. Estimates from a 2010 study of the SME markets in Ghana and South Africa by the University of Ghana’s Joshua Abor and Peter Quartey indicate that 91% of formal business entities in South Africa are SMEs, and that these SMEs contribute between 52% to 57% to GDP and provide roughly 61% to employment.

According to the Banking Association of South Africa: “SMEs are considered an important contributor to the economy as drivers for reducing unemployment, especially since the formal sector continues to shed jobs.”

An NCR paper notes that, “A healthy SME sector contributes prominently to the economy through creating more employment opportunities, generating higher production volumes, increasing exports and introducing innovation and entrepreneurship skills.”

And while this is widely understood in South Africa and globally, a 2013 OECD report highlights that “access to finance remains a key challenge for SMEs and a stumbling block to recovery in most countries”.

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Access to financial services

In addition to having difficulties accessing finance, SMEs also face a challenge in accessing appropriate financial services to enable them to grow. For example, something as basic as credit card machines. While some 75% of South Africans have bank cards, only 6% of merchants can accept card payments. This can drastically impact SMEs’ ability to grow their businesses.

The fees for credit card machines can be prohibitively expensive for small businesses, and machines can often take up to six weeks to arrive. Institutions also place a lot of weight on trading history and steady transaction revenues, something that can take startups a while to establish. This means that many small businesses have the odds stacked against them from the outset, making it hard to grow their business to the next level.

Accepting electronic payments is an important step in the growth of an SME as it creates a digital record of their transactions, enabling them to access to further financial services, such as credit, that they would require in order to grow. Financial technology (fintech) ventures in partnership with traditional institutions have the power to help open up access to electronic payment acceptance for SMEs.

Policy incentivising the traditional finance sector to partner with emerging third parties (who are well positioned to service the untapped and underserved) will help to eliminate these barriers. If not, new ventures and their entrepreneurs will look elsewhere, to get the service and financing they need. That is, after all, part of the entrepreneurial spirit.