Tendai Chimucheka & Ellen C Rungani University of Fort Hare Presentation for the African Development Finance Workshop University of Stellenbosch Business School, Cape Town South Africa , August 7-8, 2012
The S MMEs sector is regarded as the driving force in economic growth and j ob creation. S MMEs play an important role in creating j obs and wealth. According to Visagie (1997), in most areas in S According to Visagie (1997) in most areas in S outh Africa outh Africa, where active where active population is too small to j ustify large enterprises, the only source of economic activity is that provided by S MMEs. Despite support provided by the S outh African government, S MMEs still face challenges. The main problem faced by owners and operators of S MMEs, is the inaccessibility of bank finances (Nieuwenhuizen & Groenewald 2004; Fatoki & Garwe 2010) Groenewald, 2004; Fatoki & Garwe, 2010). In S outh Africa, the act that provides the regulatory and support framework for small businesses, the National S mall Business Act 102 of MME as a “ separate and distinct d di i b business entity, i i 1996, 1996 defines an S d fi S MME “ including cooperative enterprises and non governmental organisations, managed by one owner or more which including its branches or subsidiaries, if any, predominantly carried on in any sector or subsector , f y, p y y of the economy ” . In this study small businesses and, S MMEs will be used interchangeably. 200705925@ufh.ac.za/tenchims@gmail.com;e rungani@ufh.ac.za
Problem statement High number of S Hi h b f S MME MMEs fail during the first few years of operation (Nieman and f il d i h fi f f i (Ni d Nieuwenhuizen, 2009:35). They face various challenges. Inaccessibility of bank finance is one of the maj or challenges that S outh African S MMEs face among others. U Unemployment l t i in the Eastern Cape Province and S th E t C P i d S outh Africa at th Af i t l large is a i challenge and S MMEs can play a maj or role in reducing this problem. S MMEs need to be supported and they also need to access resources they need to survive and grow. Inaccessibility of bank finance is a real challenge faced by S Inaccessibility of bank finance is a real challenge faced by S MMEs and the causes MMEs and the causes needs to be investigated so as to come up with relevant solutions that can contribute to the success of S outh African S MMEs. Obj Objectives ti identify the causes of inaccessibility to finance by small, micro and medium enterprises (S MMEs), to investigate the role of government agencies in supporting small business operators, to assess the extent to which banks support S MMEs and, to suggest solutions to ease the challenge of inaccessibility of finance by S MMEs. Hypothesis H 0: S MMEs in Buffalo City Municipality, S outh Africa find it difficult to access bank finance. 200705925@ufh.ac.za/tenchims@gmail.com; erungani@ufh.ac.za
Inaccessibility of finance is one of the most reported contributors to low firm creation and failure, after education and training in S outh Africa (Fatoki & Garwe , 2010; Herrington et al ., 2009; Cassar , 2004. Most entrepreneurs, specifically S MMEs struggled with accessing finances from banks due to excessive red tape and administrative burden (Naude & Havenga, 2004). Access to finance is not the only challenge faced by S MMEs, Rogerson (2006) in the study conducted in the Free S tate province identified access to finance, inadequate premises, lack of equipment and tools, inadequate markets and marketing, theft, registering and transport challenges as attributes to failure rate k ti th ft i t i d t t h ll tt ib t t f il t in that province.... It is important to note that the impact of most of these challenges can be reduced if the challenge of inaccessibility of finance is addressed. From the findings of Rogerson (2006), inaccessibility to finance is the primary challenge and all other challenges can be said to be as a result of this primary challenge and all other challenges can be said to be as a result of this challenge . Conventional financing mechanisms do not allow for cost effective provision of finance to large numbers of entrepreneurs or S finance to large numbers of entrepreneurs or S MMEs seeking small quantities of MMEs seeking small quantities of finance. Poverty and lack of assets indicate that many people do not have the collateral needed to access formal financing (Mutezo, 2005). 200705925@ufh.ac.za/tenchims@ gmail.com;erungani@ufh.ac.za
The study by Bbenkele (2007) revealed that S MMEs especially those from rural areas have a poor understanding of the services that banks offer and they also lack understanding of understanding of the bank loan procedures the bank loan procedures. .....this lack of this lack of information and information and knowledge leads to S MMEs’ weak bargaining position in terms of interest paid, asset and liability disclosure, misuse of loan funds and generally bad preparedness when applying for business loans. pp y g Other commentators have however refuted this fact and feel that the problem is not really inaccessibility of finance but how S MMEs apply for finances. Fin Mark Trust (2006), finds that only 2%of new S MMEs in S outh Africa are able to access bank loans. According to Foxcroft et al., (2002), 75%of applications for bank credit by new S MMEs in S outh Africa are rej ected. 200705925@ufh.ac.za/tenchims@ gmail.com;erungani@ufh.ac.za
The problem of small business operators failing to access funds can also be attributed to the problem of information asymmetry. when lending to small business operators, the maj or task of lenders in reducing and avoiding credit risk is to overcome the challenge of asymmetric information. This problem occurs when one party to a contract knows relevant information which has a material effect on the contract, but which is not known by the other contracting party (Agyapong et al., 2011:132). g p y ( gy p g , ) When small business operators approach banks for loans, they always have an information advantage over the bankers. This in some cases can lead small business operators to overstate the viability of their businesses in relation to the finances sought (S torey, 1994). ....the activities of most small scale business operators who borrow from banks are rarely monitored and are not directly observable by banks. 200705925@ufh.ac.za/tenchims@ gmail.com;erungani@ufh.ac.za
When loan managers are deciding on whether to accept or rej ect a loan application from small business operators, the intended purpose of the li ti f ll b i t th i t d d f th loan, repayment records or previous loans, repayment schedule, type of business activity, size of loan relative to the size of a business and also the availability of collateral are ranked high on the criteria list also the availability of collateral are ranked high on the criteria list (Agyapong et al, 2011:132). Traditionally, the assessment of credit worthiness of small business borrowers was based on the experience and skills of bankers in applying basic lending principles such as the 5Cs approach or the CAMP ARI approach. h The 5Cs approach considers the character of the borrower, the capacity, capital, collateral and conditions . The CAMP ARI approach involves the assessment of the character of the borrower , ability, margin, purpose, t f th h t f th b bilit i amount, repayment and insurance (Agyapong et al., 2011:133). 200705925@ufh.ac.za/tenchims@ gmail.com;erungani@ufh.ac.za
It however has to be noted that the criteria used by banks to assess credit or loan It however has to be noted that the criteria used by banks to assess credit or loan applications differ from one bank to the other. Factors considered by banks to accept or rej ect loan applications by small business operators include collateral, guarantee, maturity and schedule of repayment (Ulrich and Arlow, 1981); collateral, credit history, initial capital, managerial experience and the bank policy (Jones, 1982); security, financial strength, business ability and honesty (Fertuck, 1982); profitability, financial stability, and liquidity (Berry et al.,1993); trading experience, equity stake, gearing and profitability (Deakins & Hussain, 1994; Fletcher, 1995), and quality of management and risk of default (Rosli, 1995). Berger and Udell (2002) assert that small business lending focuses on three maj or g ( ) g j categories, namely, the financial statement, asset base and the relationships. 200705925@ufh.ac.za/tenchims@ gmail.com;erungani@ufh.ac.za
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