40. South Africa

Of the estimated 2.6 million micro, small and medium enterprises (SMEs) in South Africa, about 37% are considered formal. Of the total, 54% are micro-enterprises and 15% are located in rural areas. The owners include individuals who have identified a business opportunity as well as those conducting some sort of business because of necessity, and for whom no alternative sources of income are available. Two out of three SME owners run their own enterprises and do not have any employees, while 32% provide between one and ten jobs. While growth in the number of SMEs over the last ten years has been lower than economic growth, the contribution by these SMEs towards South Africa’s gross value-added (which is equal to GDP before taxes and subsidies) increased from 18% in 2010 to 40% in 2020.

Overall, only 34% of the businesses use formal financial accounts in the business’ name. This blend between consumer and commercial credit makes one type of credit indistinguishable from the other. This causes several challenges such as: violations of company law and accounting standards; decline of owners’ ability to borrow; impact on owners’ credit profile and history; take-up of unsuitable products designed for a different purpose; and increase in the risk of excessive personal indebtedness. Borrowing by SMEs is mainly driven by the entrepreneurs’ growth ambitions and prospects, which are partially led by macroeconomic conditions in the country.

According to the South African Reserve Bank (SARB) data on bank statistics, total SME credit exposure to banks was ZAR 631 billion at the end of 2020, which accounts for 25% of total business loans. It is unlikely that the level of funding for SMEs will improve notably without considering other factors crucial to ensuring their success and sustainability, including market access, business and management skills, and financial education. A broader developmental support should be considered, especially to promote the formalisation of SMEs.

SME non-performing loans in the banking sector have declined since 2010, falling from 5.2% to 4.9% in 2020, albeit an increase from 3.1% in 2019 at the back of the global COVID-19 pandemic.

Government funding for SMEs is provided through grants, direct loans and guarantees by development finance institutions (DFIs). While accurate data on this has been difficult to obtain, there are indications of growth in direct government lending to SMEs. Credit guarantees are also in use in South Africa.

The South African Government is also exploring the possibility of developing a business case for the introduction of a movable collateral registry and credit information database. Both initiatives aim to make lending less risky and should therefore make bank financing more widely available. These initiatives will be complemented by another initiative focused on a redesigned partial credit guarantee scheme.

In the fourth quarter of 2019 the South African economy slipped into a recession and was already struggling when it confronted the COVID-19 pandemic in March 2020. The COVID-19 pandemic resulted in the South African government declaring a state of national disaster that led to an introduction of regulations aimed at curbing the spread of the virus. This was followed by the implementation of a strict 21-day nationwide lockdown on 27 March h2020. During the lockdown many businesses, including SMEs and informal enterprises, were prohibited from operating and only a few essential businesses remained operational, albeit under strict health and safety protocols. This reduced consumer demand for goods and forced businesses around the country to lay-off employees, cut salaries, restructure their debt, downsize their businesses or shut down. When the initial hard lockdown was lifted many businesses still remained in a state of partial or full lockdown, particularly those in the tourism, hospitality, beverages and entertainment sectors. The coronavirus pandemic led to the implementation of measures to support SMEs.

a. For SMEs to access debt relief from the Department of Small Business, some qualifying criteria were put in place. These conditions include that a business must have been registered with the Companies and Intellectual Property Commission (CIPC) and it must be registered and compliant with the South Africa Revenue Service (SARS) and the Unemployment Insurance Fund (UIF). This situation resulted in the re-emergence of the issue of formality vs informality in the South African context. In mid-May the SARB/NT launched the SME loan guarantee scheme of ZAR 200 billion in partnership with all South African commercial banks.

b. The Department of Small Business Development (DSBD) also launched a debt relief fund for SMEs directly, or indirectly, negatively impacted by the COVID-19 pandemic. The debt relief finance provides preferential financing (at interest rates of prime less 5%) for salaries, rent and municipal accounts. SMEs can access the resources after registering on the national SME database and they must have also have been registered with the CIPC by the end of February 2020 in order to qualify. Companies must be 100% South African-owned and registered and complainant with SARS and UIF. SMEs can register and apply online.

c. The DSBD further launched the Township and Rural Entrepreneurship Programme (TREP) offering ZAR 740 million in loans and grants targeted at informal businesses and formal micro-enterprises operating in townships and villages in the following sectors: (a) bakeries and confectionaries, (b) clothing and textiles, (c) automotive after-parts support, (d) fruit and vegetable traders, and (e) spaza shops.

The National Development Plan (NDP) places MSMEs at the forefront of addressing poverty and creating the much-needed employment in the country. The Plan envisions that in 2030 this sector will contribute 60% – 80% to GDP growth and employ 90% of the country’s workforce in line with global trends.

MSMEs contribute more than 40% of total GDP and account for more than 87% of all employment. Research conducted in 2020 by the FinMark Trust estimates that enterprises grew to over 2.6 million businesses (from about 2.2 million in 2010), employing over 12.9 million workers (from 9.7 million in 2010), with an estimated turnover of around ZAR 3.1 trillion.

Despite the sizeable contribution of SMEs to growth and employment, South Africa has one of the lowest creation rates of successful SMEs. According to the Department of Small Business Development (DSBD), 70% to 80% of small businesses fail in the first year and only about half of the survivors last for the subsequent five years.

The 2020 FinMark Trust MSME survey shows that around 58% of businesses operate as informal enterprises. Surveyed businesses, both formal and informal, operate predominantly in the services and trade sectors. This high prevalence of informality also contributes to the lack of access to funding, as the benefits of formalisation are not always well known and understood by business owners. Informality also contributes to financial exclusion from formal financial services; about 28% of enterprises are informally served while 15% are financially excluded.

The lack of access to finance for SMEs remains a challenge in South Africa, inhibiting their growth and sustainability. Contributing factors to low access to finance include the lack of suitable formal finance products available to small enterprises, the lack of readily available credit information; the perceived riskiness of small enterprise finance; and the apparent lack of appropriate assets available to small enterprises for the purposes of collateral. All of these issues reduce the availability and increase the cost of credit for small enterprises.

According to the South African Reserve Bank data on bank statistics, total SME credit exposure1 to banks was ZAR 631 billion at the end of 2020, which is equivalent to 25% of total business loans. The low level of SME financing can be a result of both supply and demand side issues. From the demand side, the majority of SMEs indicates that they do not borrow from financial institutions. From the supply side, high costs of financing as well as high collateral requirements might have an effect in the low demand of loans.

Government funding to SMEs is provided through grants and financing by development finance institutions (DFIs). Some of these DFIs include the Industrial Development Corporation (IDC), the Small Enterprise Finance Agency (SEFA), and the National Urban Reconstruction and Housing Agency (NURCHA).

Unsurprisingly, firms are more likely to take on debt the larger they are, with the percentage of medium, small and micro enterprises with formal credit reported at 85%, 74% and 26% respectively. This credit is mainly provided by banks and 35% is provided under the owners’ names as personal loans.2

Covid-19 had significant adverse effects on SMEs with only 32% of the enterprises classified as essential services during lockdown, leading to cashflow and liquidity challenges for most, along with limited access to safety nets.

The supply of funding for SMMEs is dominated by banks. While a significant source of funding for the SMME sector, banks are by their nature risk averse and enforce strict underwriting criteria before extending credit to SMMEs, thereby making it difficult for entrepreneurs to access credit. As such, the majority of bank lending is directed at larger and more established businesses rather than the small and micro segment which struggles to meet bank lending requirements.

According to the SARB September 2021 Quarterly Bulletin, loans and advances to companies contracted slightly in the latter part of 2020, and by as much as 5.5% in April 2021, before the pace of contraction moderated to only 1.0% in July 2021 as credit conditions remained reflective of the uncertainties brought about by the COVID-19 pandemic and concomitant subdued economic activity. Early repayments, amid the heightened uncertainty, also contributed to the constrained growth in credit extended to companies.

According to the Southern African Venture Capital and Private Equity Association (SAVCA), the value of venture capital investments during 2020 was ZAR 1.4 billion, up from ZAR 1.2 billion in 2019. The investments were directed to 122 entities. 74% of the investment was classified as new deals. Top sectors by investment value included software, fintech specific, and business products and services. Investment value contributions by stage of the deals were 38% for growth capital, 34% for start-up capital, 20% for later stage funding, 4% for seed capital, 3% for rescue/turnaround, 2% for buyout capital and less than 1% for replacement capital.

According to the South African Reserve Bank, SME non-performing loans in the banking sector increased to 4.9% in 2020, from 3.1% in 2019. This follows a steady decline that was recorded since 2010, falling from 5.2% to 2.9% in 2018 at the back of the economic recovery from the 2009 recession and prudent lending criteria. The ratio of non-performing SME loans remains higher than that of total corporates, which was 2.2% in 2020. However, data on non-performing loans for SMEs that are financed by DFIs is difficult to obtain, as some of these DFIs do not record non-performing loans by firm size. SEFA’s total impairments on loans and advances relating to the direct lending portfolio decreased from 67% in 2018/2019 to 62% in the 2019/20 financial year.

Data from the statistics of liquidations and insolvencies report by Statistics South Africa shows that the total number of liquidations increased by 37,5% in the first five months of 2021 compared with the first five months of 2020. A 48,2% decrease in insolvencies was estimated in the first four months of 2021 compared with the first four months of 2020.

The cash crunch caused by the declaration of a state of disaster and attendant lock down hit SMMEs hardest as they were least prepared for the precipitous drop in revenue and had constrained access to credit facilities to provide working capital to bridge the gap.

Company directors say they are still pessimistic about the economic conditions facing South Africa and are increasingly concerned over a shortage of skilled labour and onerous union demands. This was one of the significant findings in the latest Institute of Directors in South Africa Sentiment Index, which gauges how South African directors view the current operating climate in the country.

The South African Government acknowledges that a lack of access to finance is one of the major constraints for SMEs’ development. As a result, the government is committed to address the structural constraints in the small business market in order for the formal credit market to be more accessible. To achieve this, the government is currently working on implementing the measures detailed below.

  • A Financial Inclusion Policy which has a pillar dedicated to SME Access to Finance

  • Under the FSDRP, South Africa has developed an SME Access to Finance Action Plan, which proposes the introduction of the following initiatives :-

Credit information services for retail and corporate clients are well established and highly developed in South Africa through a range of credit and risk assessment tools. However, they are not as developed for small enterprises, and in general, information asymmetries prohibit lenders from making sound credit decisions in the SME space. Financial institutions are also reluctant to provide their services to SMEs because of higher monitoring costs. To address this challenge, the government plans to support the establishment of a shared information system, which will form the basis for lending criteria to small businesses. The system will include as many relevant data providers as feasible and ensure that access to the information provided by lenders is as unrestricted as possible.

Small enterprises are characterised by a high rate of infant business mortality in South Africa. This high failure rate, coupled with stricter prudential regulations under Basel III after the global financial crisis, results in a cautious approach to extending credit to the SME market. In order to address the high risk of enterprise failure, and start-up failure in particular, risk sharing through partial credit guarantee schemes can be introduced. Under such a scheme, the risk of default is shared between the credit provider and the provider of the credit guarantee, usually the government. The guarantee does not fully cover the default amount, but rather, covers an agreed portion of the default amount. Currently, the IDC and SEFA provide credit guarantees.

SEFA operates the Khula Credit guarantee scheme which issues partial credit guarantees to lenders for SME borrowers whose access to finance is specifically impeded by a lack of collateral. The scheme indemnifies commercial banks and other financial institutions against SME credit defaults, with indemnities of up to 90% of loan amounts. The scheme is fully funded by the government through equity and budgetary appropriations. The scheme currently offers individual, portfolio and supplier credit guarantees. The uptake of these guarantees by commercial lenders has unfortunately been very limited. Consequently, the South African Government is formally assessing the scheme to address constraints underlying its limited usage and address limitations through a redesign of the program’s parameters.

The lack of an adequate range of assets to serve as collateral when applying for credit is a primary financial constraint for SMEs seeking funding from the financial sector. Credit providers generally accept immovable (fixed) assets as appropriate collateral for loans. However, most SMEs’ capital in South Africa is movable in form (livestock, inventory, raw material and equipment). Creditors do not accept movable assets as collateral because these assets cannot be seized easily should the debtor default. It is also very difficult for lenders to ascertain whether these assets have already been taken as collateral by other creditors. The establishment of a movable asset register would allow SMEs to put up these assets as traceable and legitimate forms of collateral, without having to rely on their owners’ fixed private assets (for example an owner’s residence).

A movable asset register would also provide a legal and institutional framework that would record the ownership and use of movable assets as collateral for small enterprise finance and perfect credit providers’ legal claims on such collateral, should debtors default. Lenders’ ability to make legal claims on movable assets used as collateral would lower the risk of lending to small enterprises which would in turn lower the cost of administering credit and increase SME access to loans. By further addressing the development of the financial infrastructure and tools detailed above, credit providers will be in a better position to advance credit to viable enterprises at risk-appropriate prices.

The government through state owned DFIs advances lending to SMMEs. However, the efficacy of government DFIs has been limited and there is scope to advance technical assistance to improve the efficiency of SMME focused DFIs. The intended interventions will be aimed at addressing the identified challenges including:

  • Possibility of cannibalization between some of the grant and debt offers available through DFIs

  • Possible competition for the same clients in the upper ranges of the DFI offer and the lower ranges of the commercial offer.

  • Multiple programs with similar goals and methods that can be merged to increase efficiency and efficacy.

  • There may be a gap at the seed financing stage.

  • Demand analysis and a consistent approach to evaluation of public support to entrepreneurship and micro, small and medium enterprise finance are generally not available.


FinMark Trust FinScope MSME Survey South Africa 2020

Makina et al (2015). Financial Access and SME Size in South Africa. Occasional Research Paper, FinMark Trust.

Southern African Venture Capital and Private Equity Association (2021). SAVCA 2021 Venture Capital Industry Survey.


Statistics South Africa (2021). Statistics of liquidations and insolvencies (Preliminary) May 2021



← 1. Including both off and on balance sheet data

← 2. FinScope MSME Survey South Africa, 2020

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