Just 26% of business loans by SA banks go to SMEs reveals OECD survey

Just 26% of business lending by banks in South Africa go to startups and SMEs, which is lower than in a number of other rich and emerging economies, a survey released by the OECD yesterday revealed.

The finding is one of a number presented by the OECD, which said the country needed to boost entrepreneurship — which is low compared to other emerging economies — if it is to create more jobs.

While South Africa’s level of SME loans as a percentage of business lending by banks is similar to that of Colombia (26%) and higher than the US (22.1%), UK (22.5%) or Chile (18.6%) — it is less than the 39.6% of business loans in Brazil that go to SMEs, 46% in Malaysia, 64% in China, 36% in Turkey and 74% in Korea (see below table).

The OECD said South Africa’s highly unequal distribution of wealth and low employment rate make informal finance – the usual form of start-up capital – less accessible.

“Credit scoring is well developed and formal lending is dominated by banks. Bank lending to small and medium-size enterprises appears low, accounting for 26% of business lending,” it said.

‘Bank lending to small and medium-size enterprises appears low, accounting for 26% of business loans’

The OECD added that the number of microfinance providers has decreased and that a survey last year by the International Labour Organisation (ILO) found that microfinance ranked last of 11 possible sources of finance to start a business.

‘Pre-seed capital shortage’

The OECD added that while venture capital had been increasing until 2015, the country’s suffers from a shortage of pre-seed capital.

The survey said regulation could be adapted to foster the use of financial innovations such as crowdfunding, and regulatory sandboxes could be used to encourage their development.

“India is creating an electronic exchange for trading receivables. Providing access to financial services especially for new and informal entrepreneurs would allow them to build a credit history and support efforts to improve financial inclusion,” the OECD said.

It added that fostering the development of the Alt-X secondary stock exchange, for instance through investor education, would support the growth of venture capital by providing an exit market and benefit the overall financial ecosystem.

‘Red tape a burden’

In the survey the OECD said slowing growth in South Africa (which the country’s Reserve Bank expects to grow at 0.5% this year) has compounded an already difficult environment for new and small businesses.

“Steps have been taken to ease starting a business, but red tape remains a burden. The quality of the education system and lack of work experience contribute to gaps in entrepreneurial skills. There is scope to broaden the sources of finance,” said the OECD.

It added that government policies should provide more financial and non-financial support for entrepreneurs and small businesses, but that a lack of co-ordination and evaluation by the government hampers effective policymaking.