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Minister Tito Mboweni is due to announce his Medium Term Budget Speech and whilst indications are we are likely bottoming out on growth rates and higher rates are to follow, we can’t help but wonder if enough is being done by government to stimulate the SME sector and in turn create jobs.
Much fanfare has surrounded the CEO SME Fund Initiative, but the total value is a paltry - R1.24 billion - in a R5 trillion economy and where government has a budget of R1.4 trillion. That represents 0.1% of the annual budget!
Unemployment is running at almost 30% with unemployment amongst the youth well over 50%. If job creation is a strategic imperative for South Africa and the SME sector is responsible for 60% of jobs, then surely we should be spending more to stimulate this part of the economy?
The private sector, through banks and non-bank financial services companies, lends an estimated R500 billion to SMEs. Most of this is skewed to existing businesses who already have a strong balance sheet and assets that can be used as security. According to the recent Finfind study, the SME funding gap is between R86 billion to R346 billion.
Non-bank financial services businesses that lend to smaller, unsecured businesses or start-ups have an exposure more like R5 billion.
From experience, for every R170 000 lent to an SME, a job is created. Simple maths, if the R1.5 billion is advanced, then 9 000 jobs can be created. A drop in the ocean, when we have a jobless rate closer to 6.65 million people. According to The Southern Africa Labour and Development Research Unit (SALDRU), the median salary in South Africa is R3 300 and each job supports around 3,5 people in a household.
If we could target one million new jobs, a fund of R170 billon should be established. If our government was serious, they could make 25% of that available as guarantees or grant funding. The private sector could fund the 75%,, using the 25% from government as first-loss security, allowing it to raise cheaper funding from asset managers. With this as an incentive, the private sector would innovate to deliver funding at reasonable rates, through new channels and support the growth in the SME sector.
There are other ways for government to stimulate SME growth - reduce the tax burden, the red-tape and provide a Small Business Grant. On registering a new business, tax registration, opening a bank account and a credit-bureau check, each entrepreneur could qualify for a once-off grant, say R10 000. There would be no restrictions as to what it be used for - it could be for stock purchases, a deposit for premises or any other purpose.
The failure rate, or misuse of the funds would probably run at a high rate of over 65%, but the 35% who do use it to create a productive business, would probably each employ 3 people, be formal, registered businesses thereby contributing to GDP and job creation.
For R10 billion, 100 000 new businesses could be created and supported, 35 000 of them would be viable and growing. More importantly it would create jobs for four people (including the entrepreneur), meaning 140 000 newly-employed individuals. A grant with a simple but serious registration process would be a welcome injection to support innovation and self-employment. Think of this as the “Msanzi” account for SME’s with an opening grant.
The time for government to be bold is now.
Karl Westvig is the CEO of Retail Capital. Views expressed are his own.
