Table of contents
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1. THE PROBLEM AND ITS SETTING 1
1.1 Historical development of small businesses in South Africa 1
1.2 Problem statement 3
1.3 Reasons for the study 4
1.4 Aim and objectives of the research 4
1.5 Hypothesis and research questions asked 5
1.6 Research methodology 6
1.7 Deployment of the study 6
2. THE RELATIONSHIP BETWEEN SMALL BUSINESSES AND COMMERCIAL BANK FINANCE – THEORETICAL APPROACH 9
2.1 Introduction 9
2.2 Categories of small businesses 9
2.3 Advantages of small businesses for the economy 14
2.4 Challenges facing small businesses in the economy 16
2.5 Types of financing available to small businesses in developed and developing countries 20
2.6 Characteristics of the financial sector in South Africa 24
2.7 Reasons for disapproval of loan applications from small businesses 26
2.8 Financial risks facing commercial banks 28
2.9 Selection criteria of loan requests by commercial banks 32
2.10 Types of collateral required by commercial banks when providing loans 35
2.11 Characteristics of loans from commercial banks 37
2.12 Selecting appropriate financier by small businesses 40
3. SMALL BUSINESS DEVELOPMENT POLICY FRAMEWORK IN SOUTH
AFRICA 47
3.1 Introduction 47
3.2 Small Business Development Policy in South Africa 47 3.3 The functions of the small business support institutions in
South Africa 48
3.4 Evaluation of small business support programmes 54 3.5 Commercial banks and their support to small businesses in South
Africa 64
3.6 Black Economic Empowerment (BEE) and small businesses 67
3.7 Summary of the main findings 68
4. MEASURING THE EFFECTIVENESS OF FINANCE TO SMALL
BUSINESSES IN THE GAUTENG AREA 72
4.1 Introduction 72
4.2 Working definition of a small business by business chambers and
commercial banks 73
4.3 Standard of the financial sector 73 4.4 Standard of small business sector 75 4.5 Challenges facing small businesses 76 4.6 Risks posed by small businesses to commercial banks 81 4.7 Selection criteria of commercial banks 83 4.8 Trend of commercial bank loan applications from small businesses 84 4.9 Reasons behind commercial banks’ disapproval of loan applications 86 4.10 Collateral requirement for small loans 90 4.11 Effect of loan requirements on the performance of small businesses 91 4.12 Impact of the Small Business Development Policy of 1996 and
Financial Services Charter on the performance of small businesses 92 4.13 Alternative sources of funding for small businesses 94 4.14 Other business related services to small businesses 95 4.15 Summary of the main findings 96
5. SUMMARY OF THE MAIN FINDINGS, CONCLUSIONS, AND TENTATIVE
RECOMMENDATIONS 99
5.1 Introduction 99
5.2 The relationship between small businesses and commercial banks –
theoretical approach 99
5.3 Small business policy framework in South Africa 103 5.4 Measuring the effectiveness of finance to small businesses in the Gauteng
Area 104
5.5 Conclusions and tentative recommendations 106
5.6 Areas of further research 107
Bibliography 109
List of tables
______________________________________________________________ Page Table 2.1 Classification of SMMEs in South Africa 12 Table 3.1 The use of DTI programmes 54 Table 3.2 The use of Ntsika/Khula programmes 56 Table 3.3 Employment features, March 1996 to March 2001 61 Table 3.4 Rural versus urban breakdown & household support 62
Table 3.5 Loan features 62
Table 4.1 Standard of the financial sector 74 Table 4.2 Standard of the small business sector 75 Table 4.3 Assignment of scores for rankings 77 Table 4.4 Ranking of each challenge to small businesses by respondents 77 Table 4.5 Number of times each challenge to small businesses was ranked
number one 78
Table 4.6 Overall ranking of challenges to small businesses 79 Table 4.7 Ranking of risks by respondents 81 Table 4.8 Risk type as a first ranking 81 Table 4.9 Overall risks ranking by all respondents 82 Table 4.10 Selection criteria and percentage vote 83
Table 4.11 Trend in loan applications 84
Table 4.12 Rankings by individual respondents 87 Table 4.13 Number of times the criterion was ranked first 87 Table 4.14 Overall ranking by respondents 88 Table 4.15 Collateral requirement ranking 90 Table 4.16 Loan requirements and small business performance 92 Table 4.17 Impact of Small Business Development Policy of 1996 on the
access of small businesses to financial resources 93 Table 4.18 Impact of Financial Sector Charter on the access of small
List of abbreviations and acronyms
ABSA: Amalgamated Banks of South Africa BDS: Business Development Services BEE: Black Economic Empowerment BMF: Black Manager’s Forum
BMR: Bureau of Market Research BPP: Business Protection Plan
BRAIN: Business Referral and Information Network CGIC: Credit Guarantee Insurance Corporation CSIR: Centre for Science and Industrial Research DBSA: Development Bank of Southern Africa DTI: Department of Trade and Industry
ECFIR: Export Credit and Foreign Investment Re-insurance EEN: Enablis Entrepreneurial Network
EESa: Emerging Enterprise Scheme EESb: Economic Empowerment Scheme
EMIA: Export Marketing and Investment Assistance Scheme FDI: Foreign Direct Investment
FNB: First National Bank
FSC: Financial Services Charter GDP: Gross Domestic Product
GEAR: Growth, Employment and Redistribution Strategy HOC: House Owner’s Insurance
IDC: Industrial Development Corporation IFS: Import Finance Scheme
KEF: Khula Enterprise Finance KELF: Khula Enablis Loan Fund KZN: Kwa-Zulu Natal
MAC: Manufacturing Advice Centre MBI: Management Buy-In
MBO: Management Buy-Out MCO: Micro Credit Outlets
NAFCOC: National African Federated Chamber of Commerce NAMAC: National Manufacturing Advice Centre
NCD: Negotiable Certificate of Deposit NEC: National Empowerment Corporation
NEDLAC: National Economic Development and Labour Advisory Committee NEF: National Empowerment Fund
NFS: Normal Finance Scheme
NSBC: National Small Business Corporation
NSBSS: National Small Business Support Strategy PDI: Previously Disadvantaged Individual
PMSI: Purchase Money Security Interest
RDP: Reconstruction and Development Program RFB: Reference for Business
RFI: Retail Finance Intermediaries
SACOB: South African Chamber of Business SAP: Structural Adjustment Program
SARB: South African Reserve Bank
SBDA: Small Business Development Agency SBDC: Small Business Development Corporation SCGS: Standard Credit Guarantee Scheme SEDA: Small Enterprise Development Agency SLFBS: Standard Leased Factory Building Scheme
SMEDP: Small and Medium Manufacturing Development Programme SMME: Small, Micro, and Medium Enterprises
SSACI: Swiss South Africa Corporation Investment SSP: Skills Support Programme
TA: Training Assistance TAC: Tender Advice Centres TCB: Training Capacity Building
TIPS: Trade and Industrial Policy Strategy RFB: Reference for Business
UFFTAF: Umsobomvu-First Rand Foundation Technical Assistance UNECE: United Nations Economic Commission for Europe
UNIDO: United Nations Industrial Development Organisation UNISA: University of South Africa
USSBA: United States Small Business Administration VAT: Value Added Tax
VCS: Venture Capital Scheme WC: Western Cape