The Unseen Sector

07 December 2021 13:00 by John de Villiers

Micro, Small and Medium Enterprises contribute hugely to employment creation and development opportunities in South Africa’s, yet it is in many ways an unseen sector crying out for its potential to be unlocked.

Micro, Small and Medium Enterprises (MSMEs) employ between 50 and 60 percent of South Africa’s workforce, and contribute around 34 percent of GDP,[1] and their contribution to the economy in creating jobs is one of South Africa’s biggest development opportunities. Yet over the last decade, preceding Covid-19, its growth had been stagnant.  With fewer start-ups and a low rate of survival early-stage entrepreneurship is a third of what it should be when measured against international peers. Which is why The Unseen Sector - A Report on the MSME Landscape in South Africa, prepared by the International Finance Corporation, in partnership with Genesis Analytics and the South African Department of National Treasury is a valuable resource for understanding how to unlock the job creation potential of MSMEs and to rebuilding the economy.

Running to over 120 pages the report does not cover all issues as it focusses specifically on those areas which can be influenced by government policy makers and the private sector, specifically: [2]

  1. Size and profile of the MSME market.  Here the presence of a single and trusted data source to profile the size and features of the MSME market is a particular gap. There is no single study that provides a holistic view of public and private sector initiatives or programs that target the MSME market in particular.
  2. Barriers to MSME growth, meaning that MSMEs have to rely on internally generated funds which are typically not sufficient to finance expansion and growth, and
  3. MSME financing availability. Constrained access to finance is especially acute at the lower end of the MSME market where a “missing middle” – those firms too big for micro-finance but too small for traditional institutional financing – leads to MSMEs being under-served

It finds that the only way to shift the MSME sector into a job creating engine will require support during the start-up and growth phases.  Fundamentally a lack of access to finance and to markets are the two main constraints hindering MSMEs evolving from informal operations to becoming established businesses. To this end four key themes with their accompanying recommendations are distilled and discussed.

1. Better data on the MSME sector [3]

An accurate view of the MSME sector and its evolution is critical for the design and monitoring of public policy and private products and services, and it is recommended that:

  • Consensus needs to be achieved among various stakeholders on how MSMEs are defined and measured according to firm size and formality. For a start the National Small Business Amendment Act is too complex with 11 sets of criteria.
  • A need to disseminate public data electronically on MSME characteristics – demographics, access to finance and support services – for example showing the split between MSME segments, such as survivalist and growth-oriented MSMEs and across the value chains.
  • Collect regular and comprehensive updates on the state of the MSME sector in South Africa. This could be achieved by i) collecting a richer set of data from business owners interviewed in regular household surveys such as the QLFS, or ii) a unique nationally representative survey of MSME owners.

2. A sharpened policy focus

Better data and monitoring of public interventions facilitates a sharpened policy focus and improved MSME operating environment.

  • Operationalize better public sector coordination: Recommend that the Department of Small Business Development (BSBD) be the key coordinator of MSME support programs among government stakeholders.
  • Improve public and corporate procurement for MSME access to markets. This includes on-time government payments to MSME contractors and executing the government commitment to allocate a percentage of all contracts to MSMEs.

3. Increased formalisation

Reduction in regulatory red tape and improved opportunities to access government and corporate supply chains improves the rate of formalization which includes:

  • Reducing regulatory red tape to improve the operating environment for MSMEs. This includes the rollout of one-stop-shops and technology-enabled business registration to grow the bankable MSME market segment.
  • Minimizing onerous tax obligations, which is one of the reasons businesses remain informal, by adopting the recommendations made by the Davis Tax Committee to improve small business incentives and encourage more MSMEs to be on the tax radar.

4. Improved financing and support by expanding access to finance and markets

Financial and non-financial support services need to be better designed for different MSME segments and access improves as MSMEs formalize.

Private Sector Initiatives

  • Banks should reform their operating models to increase MSME funding scale and cost effectiveness.  Action areas include: i) Personal and business banking unit integration to use data on entrepreneur’s personal financial activity; ii) Credit scorecards to facilitate unsecured lending; and iii) Product and channel innovations.
  • Banks should increase digital technology adoption targeted at MSMEs in both the formal and informal segments. Includes analytics that reduce the cost of risk assessment and banking services.
  • Form partnerships to expand MSME reach such as with corporate partners that have large supply chains.

Financial Market Infrastructure

  • Improve coverage of credit bureau reporting to cover lending activities of individuals for business purposes, as well as trade credit and other data sources.
  • Develop a movable collateral registry that extends beyond yellow metal assets to help secure lending using asset types that are more prevalent among MSME owners, particularly those that do not have access to traditional forms of collateral.

Public Sector Initiatives

  • Adopt more strategic government funding support to private providers. This includes effective credit guarantees to banks and financial support to alternative financing models such as non-bank financiers and fintechs whose scale is limited by small balance sheets.
  • Regulatory reforms to encourage financing of informal MSMEs. Includes issues around FICA/KYC requirements, which make extending financing to informal/undocumented MSMEs difficult, and onerous Microfinance Institution regulations.

This report undoubtedly provides a platform for further policy discussion that will lead to greater small business financial inclusion, thereby helping to undo a legacy of exclusion.

[1] A Report on the MSME Landscape in South Africa
[2] At 14
[3] At 11 and 114