Entrepreneur Sipho Mdanda knows all about banks’ collateral requirements for getting a loan, having been a banker for 12 years. But he never expected to be turned down by his bank when he sought a R41m loan to buy a capital equipment supplier. Mdanda, the chair of Smith Capital Equipment, is one of thousands of black business owners who struggle to access bank loans because they lack sufficient collateral.
In his case, he couldn’t provide an own contribution of 40% that his bank demanded and turned instead to the National Empowerment Fund (NEF), where he only had to front 5% of the loan’s value. Since the loan was approved in 2015 he has upped turnover by 6% and been able to add 20 new jobs to grow to 93 employees.
Yet while Mdanda may have been turned down, banks say they have used innovative ways to fund black business owners who lack collateral while increasing lending to black SMEs, defined as black-owned firms with an annual turnover of up to R50m.
The financial sector code compels banks to invest a collective R48bn between 2012 and the end of 2017 in various targeted investments, including black farmers, black SMEs, transformational infrastructure and affordable housing. Banks have far exceeded this. Between 2012 and 2015 banks lent out more than R209.3bn, the Banking Association of SA (Basa) said in March. Of this, R41bn went to black SMEs.
Between 2012 and 2015 banks lent out more than R209.3bn, much of it going to black SMEs
FNB head of enterprise & supplier development Heather Lowe says the bank has increasingly made use of behavioural scoring on loans smaller than R5m. The one constraint, she says, is the absence of more bankable businesses. Despite this the bank advanced R1bn in credit to black-owned firms last year. About a third of all SMEs that get credit approvals now are black-owned.
Lowe attributes the growth in finance for black SMEs to the increased importance, for corporates, of carrying out enterprise and supplier development under the BEE codes.
KeaObaka Mahuma, Barclays Africa head of enterprise & supply chain development, says this has generated more work for black businesses from corporates and created a more predictable cash flow for these firms. This has allowed the bank to rely less on collateral-based lending for some loans.
The total funding disbursed by the bank to black SMEs grew at a compound annual growth rate of 94% between 2012 and 2015 (from R156m to R589.1m).
Though the bank last year said it funded only about 200 black SMEs in 2015, Mahuma says the figure includes just those that were able to provide BEE certificates or affidavits.
Meanwhile, Standard Bank has used a trust to leverage the collateral required from some black entrepreneurs. Bank spokesman Ross Linstrom says the bank last year capitalised the trust with R16m, which was a portion of its R27.5m commitment to enterprise development.
“We then leverage the capital that sits in the trust to facilitate the loan that would otherwise not be possible. In 2016 this innovative solution allowed us to facilitate R90m in lending to black SMEs via the trust, which in turn allowed us to mitigate risk and provide a total of R461m to black businesses,” says Linstrom.
He says the bank then used these funds to partner with other companies in their supply chain, using this collaboration to finance black entrepreneurs in their value chain. This helped the bank extend an additional R41m in loans to black suppliers in 2016.
This, he says, essentially turned R27.5m into R502m in lending to black business.
He says the bank has had a 100% success rate on the performance of these loans since its implementation in 2014. Funds can also be recycled when loans are settled.
“None of the deals has gone bad and there hasn’t even been a single missed payment, thereby dispelling the myth that small black business is high-risk business,” says Linstrom.
Black business, however, is not satisfied. While the targets for the new code have not yet been finalised, Black Business Council secretary-general George Sebulela wants banks to ring-fence at least R50bn for black SMEs, which could be geared four or five times.
He argues that such a vehicle is necessary to ensure that banks are able to relax funding criteria, particularly for collateral, when dealing with black businesses.
The new draft code, which has yet to be gazetted by trade & industry minister Rob Davies, will also introduce a black industrialists’ fund, following a proposal made by the Association of Black Securities & Investment Professionals (Absip).
Absip president Sibongiseni Mbatha says the idea is that those financial sector companies where black shareholders have recently exited can opt to either carry out another empowerment deal or invest in a risk capital fund of between R25bn and R100bn.
The fund would have separate criteria to the bank’s lending criteria, and could lend to black SMEs and industrialists.
Basa has argued that if banks were to lend money to BEE consortiums to buy shares in banks, this would be at the expense of more broad-based initiatives such as investing in affordable housing or black SMEs as it would mean capital would have to be tied up.
Thabo Tlaba-Mokoena, Basa general manager of socioeconomic growth & development, believes banks should focus more on funding small black businesses and on the financial sector code’s other targeted investments, rather than on specific black industrialists. “We will be leaving many of the people out if we just concentrate on these black industrialists,” he says.
Yet when it comes to jacking up lending to black businesses, many are quick to acknowledge that just getting the banks to lend more is not the solution.
Mbatha, a former banker himself, says in trying to advance more lending to black entrepreneurs, who often lack collateral, the current banking model — which relies on generating shareholder returns — remains “problematic”. He says development finance institutions should collaborate more with banks to fund black businesses.
In March, NEF CE Philisiwe Mthethwa told parliament that the funder gets about 1,000 applications per year and could easily disburse R5bn per year to black entrepreneurs if it had more capital.
The agency has approved R7.6bn to 770 black businesses since inception in 1998.
Government announced in February that the agency would merge with the Industrial Development Corp to ensure it is better capitalised. No date has been set for this.
“[Banks]need to have more collaboration [with government]to make these things work,” says Kershini Govender, Nedbank executive head for transformation.
While Nedbank’s loans to black SMEs increased from R1.5bn in 2012 to R4.5bn last year, the number of firms financed fell from 4,300 to 2,500 – a sign, says Govender, of the slowing economy.
This is sure to worry black business. With SA’s low-growth outlook, more innovative financing models will have to be sought.