SMME Credit Support Program (SCSP)

Overview

Background to this initiative

SMMEs’ play an important role in SA’s economy and development, being an important contributor to both GDP and employment.

Expanding SMME access to financial credit in SA will contribute to economic growth, development and prosperity in SA.

The government has targeted the SMME sector as an economic development and transformation vehicle, government’s initiatives in this regard must be supported and complemented.

The job creation potential of SMMEs’, potential to create entrepreneurs and enable self employment, is significant

Taking Cognisance of:

SMMEs’ in South Africa have limited access to financial credit.

Studies have found that insufficient credit and risk data about SMMEs’ is one of the primary causes of inadequate access to financial credit

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SMMEs Financial Constraints

“It is estimated that only about 5% of the world’s 500 million

low-income entrepreneurs have access to financial services.”

– The Asian Banker (November 2005)Absence of reliable information

Weak accounting & unreliable financial statements

Lack of sufficient market credibility

Poor historical performance & high transaction cost

High Risk Perception

Members of the SCSPBody responsible The Black Business Council (BBC) Founding Members NAFCOC and FABCOS

Participating Members NIC, SAMEC, SALTHA, NAFTO,NAFCON, ACHIB

Objects/Purposes SCSP

To expand SMME access to financial credit by: Promoting the collection, storage and dissemination of SMME

data Establishing and maintaining a Register of SMMEs’ that can

evolve into the basis for an smme credit rating agency Reviewing and making recommendations on existing criteria

for SMME lending; with a view to expanding existing criteria Reviewing the impact of the NCA on SMME lending Investigating the need for ADR in this context; and recording

bona fide disputes To co-operate with and form partnerships with organisations

with similar objectives.

PRIORITY PROJECTS SCSP

Priority ProjectThe Register

A Basis for an SMME Credit Rating Agency

Inadequate access to financial credit

Studies have shown that

SA has a vibrant SMME market

SMMEs’ in SA have inadequate access to financial credit

Trade credit transactions account for the vibrancy

Trade credit transaction history and recording more information about SMMEs could form the basis for the extension of more financial credit

Some facts about SMME access to credit Entrepreneurs, small business owners find it impossible to

raise credit through means used by large businesses

Start ups may have no banking relationship at all

Small businesses do not produce the type of financial statements banks use

Consequently the personal credit history of the entrepreneur or small business owner becomes decisive

Small business owners and entrepreneurs may also use personal credit to start a business, smooth cash flow fluctuation, or finance investments

Information Asymmetries The borrower (smme) knows its own creditworthiness better

than the lender does, this variance in knowledge is referred to as “information asymmetry”.

The ideal, is the lender having all the relevant information about the borrower’s (smme) creditworthiness, then all deserving creditworthy borrowers will receive credit.

If the lender has some information but not all then some deserving creditworthy borrowers may be declined.

Information Asymmetries By combining a credit rating, with a credit bureau score and

its own analysis, the lender would be better able to determine creditworthiness.

The more information a lender has about a borrower’s creditworthiness the better informed is its decision about the borrower’s creditworthiness.

Creditworthiness is not a directly observable attribute, it has to estimated from attributes that are observable using various approaches.

Multiple approaches will permit the lender to be more confident about its conclusions

Filling the credit and risk information gap

Through its members the SCSP has a means of reaching out

directly to SMMEs’ for purposes of creating a Register of SMMEs’

For this purpose a national campaign is planned that will: Introduce the SCSP to SMMEs’

Allow SMMEs’ to register with the SCSP

Explain existing SMME lending criteria and how a record of credit and other information about an SMME can facilitate access to credit

Dedicated Education and PR campaign

A proper education and public relations campaign will be developed to educate SMMEs’ and enhance awareness of SMMEs’ on:

Criteria for lending – risk and affordability

The role of data in facilitating risk and affordability assessment

The concept of reputational collateral

The relationship between the individual owner and the SMME entity

The SMME Register A response to counteract the information/knowledge gap

between borrowers and lenders by recording all relevant information pertaining to the profile of the smme.

Purpose is to address information asymmetries in the smme lending market.

When the Register evolves into an smme credit rating agency it will assist in providing independent opinions about (smme) borrowers’ creditworthiness.

The greatest reductions in information asymmetry comes from multiple, independent, and objective opinions.

The idea is for conclusions about creditworthiness to be drawn from a variety of factors.

Proposed data categories for the SMME Register Demographic and identity information about the smme Type of entity, sole prop etc Type of Business (differentiation on the basis of industry and

sector) Owner / Shareholders Info about business sophistication, offices, VAT registration etc Annual turnover Assets and Liabilities Trade Credit Suppliers Trade Credit Transactional history Personal loans for commercial purposes

Suggested Roadmap Year 1 - Establishment of the Register

Months 1-3 Determination of data categories per sector in consultation with

stakeholders, and appropriate thresholds Data Quality procedures and processes: verification procedures,

data validation rules, rules re: matching and merging data Data security procedures and processes Input file format design

Month 4 – Education and public relations campaign to encourage smmes to register and submit their data

Month 5 to 12 – national registration process and establishment of the Register, with an ongoing education and public relations campaign.

Suggested Roadmap Year 2 Ongoing population of the Register, and enhancing its

credibility, reliability and quality.

Year 3 Analytics to determine what solutions can be built off the data

to contribute to a complete business credit rating. Conceptualising and developing products that can be offered

by an smme credit rating agency using solutions built off the Register. Including processes and methodology for weighing diverse factors, that contribute to the creditworthiness of a borrower.

At the end of the first three years the program, located within a voluntary association not for gain, will be dissolved, and a for profit company will be formed, to host and maintain the Register, and provide specialized credit rating products

Role of an smme credit rating agency

Rating agencies originally emerged to assist dispersed investors in assessing and monitoring issuers of debt instruments in the debt capital markets, reducing information asymmetries between investors and borrowers.

Credit ratings can have narrow specialized functions within the debt capital market or broader uses.

India for example, ratings are used to facilitate access to bank credit by smmes.

Initially our focus will be to provide reliable ratings that facilitate a greater and easier flow of credit from the banking sector to smmes’, thereafter the agency can as the sector evolves provide more specialized functions.

Ultimately it should inform both credit and investment decisions, becoming a reliable second opinion for both investors and lenders.

SMERA India Primary objective is to facilitate access to bank credit by smmes.

Rating methodologies for the manufacturing and non manufacturing sectors, with specific criteria for various industries

Its rating methodology framework addresses industry risk, business risk, management risk, financial risk, new projects risk.

Considers overall financial and non financial performance of the smme vis-à-vis peers in the industry of the same size and same line of business.

Provides ratings to banks for smmes that apply for credit for the first time or apply for a credit limit increase.

Ratings from SMERA have benefited smmes’ by ensuring more favourable borrowing terms such as: lower collateral requirements; reduced interest rates; simpler lending practices; shorter turnaround time in processing credit applications from smmes’

Incidental ProjectsWithin

The Program

Reviewing criteria and policies for SMME financial lending Engaging with the major financial institutions to do an

evaluation of SMME lending criteria and practices

Engaging with developmental funds to do a similar evaluation

Conducting research on international SMME lending criteria and practices

Making recommendations on how existing lending criteria and practices can be expanded to enable greater access to financial credit by SMMEs’

The NCA

An analysis of whether or not the NCA takes cognisance of how start-ups,

entrepreneurs and small business owners access credit

The impact of the NCA on such practices

Recommendations on how the NCA could better support such practices

Representing SMME’s that have been denied access to credit

Within the first year where an SMME has been denied access to credit and there are reasonable grounds to believe that credit has been unfairly denied, the SCSP will investigate the matter and seek to resolve it.

Will keep a record of cases where an smme has been unfairly denied access to credit, to be submitted to government to inform future policy

By taking on such matters the SCSP will do an objective evaluation for the need for ADR in this context.

Benefits of a complete program

Expanding SMME access to credit is a challenge that should be met by a holistic rather than a fragmented approach

The SCSP encompasses such a holistic approach by addressing, data gaps, law, lending criteria and ADR