| OPINION | Excluding struggling SMMEs from Covid-19 aid is like banning the sick from healthcare

  • Excluding SMMEs with pre-existing financial challenges from financial assistance is like banning people with comorbidities from healthcare, says Mncedisi Xego.
  • The fact that the precarious financial health of SMMEs could be caused by a lack of access to finance or late payments from clients, appears irrelevant.  
  • The exclusion of struggling businesses from Covid-19 relief funds appears particularly harsh when juxtaposed with repeated efforts to save ailing state-owned entities.

Imagine a decision that people with pre-existing conditions such as HIV/AIDS, tuberculosis and diabetes will not qualify for any of the Covid-19 relief programmes. There would be widespread condemnation.

Yet, this is exactly what has happened to SMMEs with pre-existing financial health challenges prior to the Covid-19 pandemic. They are required to prove that they were either in good financial health or good standing before Covid-19 struck. All SMME relief programmes are unanimous in this regard. The fact that the precarious financial health of SMMEs could be caused by a lack of access to finance or late payments from clients, appears irrelevant.  

Excluding others or imposing very archaic requirements has marred what should have been an effective lifeline to SMMEs during the worst socio-economic disaster of our lifetime. This is more so regarding the R200-billion government backed guarantee scheme that was exclusively reserved for banks and their clients in good standing.

The scheme also limits the use of funds to operational expenses such as salaries and rent, thereby effectively limiting the use of funds to pivot a business. 

Figures released by the Banking Association of South Africa show that there has been limited uptake of the funds by SMMEs. Just over R10 billion funding of the initial R100 billion tranche has been approved. The scheme was launched on 22 May 2020.

The exclusion of struggling businesses from Covid-19 relief funds appears particularly harsh when juxtaposed with repeated efforts to save ailing state-owned entities. We are also aware of major corporates that have been saved from near collapse as they were deemed too large to fail. Sadly, it would appear that SMMEs are judged by higher standards.

No doubt, funding and supporting SMMEs is generally a very expensive and daunting proposition. This is made all the more challenging by the widespread abuse of loans, fraud and blatant refusal to repay loans. Sadly, this is fast becoming a new normal within our SMME landscape. Impairment charges are unjustifiably high, at times reaching unstainable levels of close to 50%.

Strategic enterprises

At face value, this would seem to justify the view that supporting struggling SMMEs is throwing good money after bad. As tempting as it is to jump on the bandwagon and lose empathy for SMMEs based on the behaviour of a few bad apples, we must remind ourselves of both the strategic importance and promise these enterprises hold for our future. Despite their challenges, SMMEs employ between 50 and 60% of the country’s work force and contribute approximately 34% of GDP. The World Bank reports that globally SMEs represent about 90% of businesses and more than 50% of employment worldwide.

According to an IFC report, of approximately 5.78 million SMMEs in our country, only 14% are formalised. This provides considerable scope to develop more SMMEs to achieve inclusive economic growth and create jobs. The National Development Plan pins its hopes for a better and inclusive South Africa on SMMEs and projects that they will contribute 60 – 80% to GDP growth and create 90% of the projected 11-million jobs by 2030.

In light of the importance of these enterprises to our socio-economic wellness, a more innovative approach must be adopted. Plans are already afoot to review the criteria for the R200 billion guarantee scheme and to extend it to non-bank SMME funders.

However, Covid-19 provides us with a major opportunity to fashion an inclusive and sustainable recovery and growth path for our SMMEs beyond Covid-19.

Commercial considerations, not ideology

First, the new path should be based on sound, realistic and sustainable commercial considerations, and not ideology.

Second, there must be a genuine attempt to assess current SMME programmes in the three spheres of government and to streamline them to ensure alignment, standardisation and optimal resource utilisation. Through various interventions, the government spends approximately R16 billion per annum on SMMEs.

Third, the new path should recognise that SMMEs are not one homogenous group. A differentiated approach must be adopted and interventions must be customer-centric, taking into consideration the stages of business growth, sectoral and geographic nuances.

Fourth, resource mobilisation from both public and private sectors must take place to create a large fund to provide a fully integrated solution for SMMEs.

At present, the B-BBEE framework provides for a plethora of SMME funding interventions that operate in silos and remain largely ineffectual – there is a lack of common purpose. There is an opportunity to pivot our B-BBEE policy and, for example, to utilise the “once empowered always empowered” principle to create a major 5-8 year SMME fund to provide a fully integrated solution (financial and non-financial) to SMMEs and achieve inclusive economic growth for the benefit of all South Africans. This can be done borrowing some features of the Equity Equivalent Programmes for multinationals, the President’s Infrastructure Fund and the Solidarity Fund to create a trustworthy and mutually beneficial partnership between government and the private sector.

The silver lining in Covid-19’s dark cloud is proof that government can conceive programmes with agility, even though implementation remains the Achilles’ heels. Approximately R210 billion worth of funding has been made available through various Covid-19 schemes to assist SMMEs; a feat achieved in less than two months. Sadly, only R10 billion of these funds has been taken up by the SMMEs, mainly due to the exclusionary nature of some of these schemes and their stringent requirements.

Last words

A final word on struggling businesses: This is a matter that can be resolved with adequate capital allocation (say 10 – 20% ) of the Covid-19 relief funds. But the funds must only be made available to those businesses screened and determined to possess sound business models that can be saved. Additional criteria can include the number of jobs to be saved. 

With regards to the rest of the struggling businesses, at the least they should qualify to apply for Covid-19 relief assistance so that credit screening is performed and a diagnostic report issued. Such a report can lay the foundation for a fully integrated intervention. More importantly, the report will provide SMME owners with an insight to what financiers look at when assessing their applications and what they can do to improve their chances of accessing credit in the future. In deserving instances, they should be referred to incubators for the much-needed business support. 

Lest we forget, the majority of our SMME owners are victims of our systemic racist past. They do not have generational wealth to capitalise their businesses and also lack the requisite business skills and networks critical for business success. Let us therefore not behave as if we have a choice whether to support them or not. Frankly, ranking as the most economically unequal country in the world and with a dangerously high unemployment rate at 30.1%, we have no choice.

Mncedisi Xego is a SMME finance and development specialist, and founder and CEO of Royal Fields Finance. He writes in his personal capacity. Views expressed are his own.

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