Khula's grand helping-hand plan fizzles out

Government's flagship small-business finance programme has ground to a halt, writes Barrie Terblanche

Shocking figures released by the state's small-business finance agency Khula Enterprise Finance show that the use of Khula's bank-loan guarantees has practically dried up, dropping to single-digit monthly figures since the end of last year. They represent by far the poorest performance by the organisation since 1996.

And Khula's grand plan to start lending directly to small businesses has been dealt a blow by the rejection of its application to government for R1.6-billion to capitalise Khula Direct, its planned retail bank.

Up till now, Khula has been operating as a wholesale financier, providing bank-loan guarantees on behalf of risky small businesses on the one hand, and wholesale finance to financiers to lend in turn to small businesses on the other.

Khula chairman Malose Kekana says Khula Direct will now be piloted at "two or three sites" instead of there being a nationwide launch. Khula is re-applying for funds in the region of R100-million to start piloting direct lending.

Until recently, Khula's bank-loan guarantee scheme was the only government small-business development programme to provide sustainable help to small businesses at a more or less consistent, albeit low, level.

In the early years it provided security on behalf of about 800 business owners a year who had good business plans but too little collateral to cover a bank loan. The figure later dropped to about 500 a year, or between 30 and 60 a month.

In October last year it slipped below helping 20 business owners a month with bank-loan guarantees, and this year it all but collapsed. In April a mere two bank loans were guaranteed, at a time when small businesses were well placed to help lift the economy from the recession.

Observers and participants give three reasons for Khula's implosion: the global financial crisis, unhappiness on the part of the banks that they are losing money despite the fact that the loans are guaranteed, and management problems at Khula.

Even though South African banks survived the global financial crisis that started in 2008 relatively unscathed, there is anecdotal evidence that they clamped down severely on small-business lending across the board, not just on Khula-guaranteed loans.

George Watson, owner of New Business Finance, a financier servicing high-risk small businesses that banks normally would not touch, says small-business owners who would easily have obtained bank loans two years ago are today knocking on his door in desperation.

If the banks' use of Khula guarantees is in any way a reliable barometer of their willingness to lend to small business across the board, it means that the banks must have virtually stopped lending to the sector altogether in the aftermath of the recession.

Business advisors and finance brokers who point to piles of expansion plans put on hold because bank finance has dried up, tend to agree.

But a banker in the small-business credit division of one of the four retail banks who wanted to remain anonymous, says Khula guarantees are normally applied for by the riskier sub-sector of the small-business community.

These are: micro businesses, start-ups, and entrepreneurs without much business experience.

Bank lending to Khula's target market of businesses seeking loans of below R3-million may have frozen, but finance is still available for larger projects, he says.

Chances are that the Khula figures are worse than the small-business finance picture as a whole because the largest user of Khula guarantees, Absa, has put a moratorium on all further use of the scheme pending an internal review.