ACCESS TO FINANCE OF SMES IN MAURITIUS

Prema Kinita SHIBCHURN

Kusmani SEETLOO

Ashvin RAMGOOLAM

1

BSc. (Hons.) Management with Law

(2012)

Out l ine

• Abstract

• Background Study

• Introduction

• Literature Review

• Methodology and Research Design

• Data Analysis

• Recommendations

• Conclusions

Out l ine

• Abstract

• Background Study

• Introduction

• Literature Review

• Methodology and Research Design

• Data Analysis

• Recommendations

• Conclusions

This study investigated the determinants of capital structure of small and medium enterprises (SMEs) in Mauritius.

Bring forward hypothesis which are related to the sources of finance (retained profits, bank loan and Grants or Subsidised Bank Loan) of the SMEs to that of their age, size and profitability.

the study recommended that SMEs, commercial banks and the Mauritian government take measures to improve access to capital by SMEs.

Abst rac t

Out l ine

• Abstract

• Background Study

• Introduction

• Literature Review

• Methodology and Research Design

• Data Analysis

• Recommendations

• Conclusions

■ In 2009, it now amounted to some 100,000 enterprises and employs some 45 percent of the workforce

compared to 36 per cent in 2005.

■ In 2007, the number of small production units (establishments and itinerant units) operating in the

Island of Mauritius and Island of Rodrigues was estimated at 91,980, compared to 74,930 in 2002, that

is an increase of 23%. 

■ 17% of small business owners have registered businesses

■ 79% of small business owners are traders (sell products)

o Of these, 62% sell their products in the same form they bought it (they do not add any value)

■ 21% of small business owners are service providers. Of these, 5% render professional services (e.g.

accountants, doctors, lawyers, etc.)

Two-thirds of small business owners needed start-up money and most of these funds came from

own sources, with 37% claiming to borrow from other sources. Only 5% percent of small business

owners claim to have current borrowings or loans for their business and 39% claim to save for

business purposes.

Awareness of support for small business owners is extremely low with 74% of business owners

unable to name any organisation that gives help and advice to small businesses

P r o fi l e o f S M E s i n M a u r i t i u s

Despite their significant importance and contribution of SMEs to economic growth, SMEs face numerous challenges in accessing credit facilities from commercial banks.

Access to loans among SMEs has become a serious constraint towards the development of SMEs in Mauritius. This results in high rates of business failure.

This study investigates the extent of access to credit and support by SMEs in Mauritius.

B a c k g r o u n d S t u d y

Medium

enterprises

Small enterprises

Micro enterprises

Survivalist enterprises

• Corporates

• Banks/Financial Institutions

• Private Equity/Venture Capitalists

• Khula, IDC, NEF

• Own resources

• Banks & Corporates

• Khula & PDCs

• Own & family resources

• Microlenders & Banks

• SAMAF & PDCs

• Own & family resources

• Microlenders

• SAMAF

Medium

enterprises

Small enterprises

Micro enterprises

Survivalist enterprises

Financing Needs - Supply

SME Financing Landscape …Supply

8

   

SME Financiers

Source: Roussos and Ferrandi (2008)

Long-term

Short-term

TERM

Micro Medium Large Small

MONEY-LENDERS

STOKVELS, BURIAL SOCIETIES

CONSUMPTION LENDERS

MICRO-FINANCE INSTITUTIONSCOMMERCIAL BANKSCOMMERCIAL BANKS

MORTGAGE PROVIDERSMORTGAGE PROVIDERS

DEVELOPMENT FINANCE INSTITUTIONS

DEVELOPMENT FINANCE INSTITUTIONS

INVESTMENT BANKSINVESTMENT BANKS

CAPITAL MARKETSCAPITAL MARKETS

TRANSACTION SIZE

Medium- term

GAP

Long

Medium

Short

TERM

TRANSACTION SIZEMicro Small Medium Large

9

SMME Business Confidence Index

Q3-06

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

0

10

20

30

40

50

60

70

80

64.89

71.01

66.3763.71

51.5951.21

47.03

56.6555.76

40.5540.43

48.9

52.8452.4350.79

55.28

Source: South African SMME Business Confidence Index Report

• Business Confidence among owners and managers of South Africa’s SMMEs remains fragile, although there was a slight in the 3rd of the year.

• The country is still recovering from the effects of the global economic crisis and the look for the future looks positive

Outline

• Introduction

• SMME financing landscape

• Factors inhibiting small business growth

• Access to finance challenges – lender’s perspective

• Role of Development Financial Institutions in Financing SMEs

• Bridging the Gap

• Concluding remarks

Source: FinScope South Africa Small Business Survey 2010

Factors inhibiting small business growth

Space to operate

Access to/cost of finance

Competition

Crime and theft

Transportation

Electricity

Business licensing

Weather/natural disasters

Harassment by officials

Customs/trade regulations

Skills and education

Access to land

Corruption

Lack of customers

Other

Don’t know

None/nothing

16%

14%

13%

7%

4%

3%

3%

3%

2%

2%

2%

1%

1%

1%

1%

5%

19%

Outline

• Introduction

• SMME financing landscape

• Factors inhibiting small business growth

• Challenges in Financing SMEs– lender’s perspective

• Role of Development Financial Institutions in Financing SMEs

• Concluding remarks

Challenges in Financing SMEs – Lender’s perspective

• Unclear Business Strategy

• Lack of Entrepreneur /Business Skills

• Inability to provide proper financial records of business

• Viability of business

• Insufficient Information

• Integrity/Credit Worthiness of Entrepreneur

• Application falls Outside Investment Criteria of Funding Institution

• Weak capability among SME entrepreneurs in managing functional areas of business

• Size of Deal

• Acceptable assets for collateral are limited

• Lack of owner’s contribution

• SMEs do not prepare financial statements or if any, are not acceptable to creditors

Outline

• Introduction

• SMME financing landscape

• Factors inhibiting small business growth

• Access to finance challenges – lender’s perspective

• Role of Development Financial Institutions in Financing SMEs

• Concluding remarks

Role of DFIs in financing SMEs

State-owned development finance institutions exist in order to address specific market

failures, by taking higher levels of risk (lower return for a specific level of risk), “crowding

in” the private sector and moving on to new neglected territories once the gaps have been

narrowed.

DFIs have to balance their development focus with commercial reality because they have

to be financially sustainable in the long term. This has implications for their investment

criteria, pricing, portfolio mix, risk management, systems and skills.

Rather than just driving volume, DFIs have to focus on the sustainability of the enterprises

they support, not only to preserve their own sustainability but also to ensure that the jobs

created are sustainable and the entrepreneurs supported thrive, thus contributing to

general economic prosperity.

Bridging the Gap

Create a One-Stop-Shop for SMEs to access services (business registration, tax

clearance certificates etc)

Promote business linkages between SMEs and large corporations towards integration

into national and global value chains

Business incubation

Strong networking amongst entrepreneurs

Conducting regular training seminars for creating awareness and capacity building of

SME entrepreneurs

Khula Background

Khula, is a development finance institution (DFI) reporting to the Department of Trade and Industry

(the dti), with an independent Board of Directors

Khula was established in 1996 and its mandate derives from the dti White Paper on the National

Strategy for the Development of Small Business (1995).

The decision to establish Khula as a wholesale rather than a retail institution was taken after

considering the following factors:

• The role of the State is to create an enabling environment rather than to participate

directly.

• Government backed guarantees would assure Commercial banks and other financial

institutions and get them to participate in the SMME sector.

• As a wholesale financier; Khula works through a network of partners inter alia

Commercial Banks; non-bank RFIs; and other partners – to ensure that SMMEs have

access to finance.

3

Khula’s Mandate is focused on three key areas …

Long-term objective

Access to finance for

SMEs

Create sustainable SMEs; in the

mainstream economy, thereby contribute to

economic development

Promote access to finance

Financial sustainability

Development impact

6

Khula’s Activities …Summarised

Product & Activity

Business loans – Khula gives loans to Retail Financial Intermediaries (RFIs) who further on lend to SMEs. However, through Khula Direct loans will be extended directly.

Credit indemnities – Khula assists SMEs to access private sector funding (through banks & RFIs) by indemnifying their loans

Joint Ventures – Khula partners with the private & public sector to finance SMEs.

Funds –Khula establishes a Fund that will facilitate loans to SMEs. The fund is managed by an experienced Fund Manager who does not contribute their own capital to the fund.

Mentorship Programme - Mentors are used for both pre- and post loan interventions as well as capacity building to the RFIs.Currently Khula has entered into an agreement with Institute of Business Advisors of Southern Africa (IBASA) – to manage the mentors’ database.

Properties - is mostly located in previously disadvantaged areas. It provides operating space for small entrepreneurs at discounted rates. It encourages entrepreneurs to move away from operating in informal set ups to a much more formal environment.

12

Financing Partners

13

Concluding Remarks

Khula is a development finance institution dedicated to the needs of small business

Primary role of DFIs is to address specific market failures and “crowd-in” private

sector

There is a need to bridge the information gap between lenders and SMEs

Prospects for SME sector are good and there is renewed focus on SMEs by both the

public and private sector

Future of the financing needs of the SMEs lies with strong public-private sector

partnerships

Khula is always looking for corporate partners who provide the opportunity to finance

SMEs

THANK YOU

Khula Client Liaison Centre number

08600 KHULA (54852)

Website - http://www.khula.org.za

Email - helpline@khula.org.za