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SMME Credit Support Program(SCSP)

Overview

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Background to this initiative SMMEs play an important role in SAs economy and development, being

an important contributor to both GDP and employment.

Expanding SMME access to financial credit in SA will contribute toeconomic growth, development and prosperity in SA.

The government has targeted the SMME sector as an economicdevelopment and transformation vehicle, governments initiatives in thisregard must be supported and complemented.

The job creation potential of SMMEs, potential to create entrepreneursand enable self employment, is significant

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Taking Cognisance of: SMMEs in South Africa have limited access to financial credit.

Studies have found that insufficient credit and risk data about SMMEsis one of the primary causes of inadequate access to financial credit

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SMMEs Financial Constraints

It is estimated that only about 5% of the worlds 500 million

low-income entrepreneurs have access to financial services.

The Asian Banker (November 2005)

Absence of reliable information

Weak accounting & unreliable financial statements

Lack of sufficient market credibility

Poor historical performance & high transaction cost

High Risk Perception

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Members of the SCSPBody responsible

The Black Business Council (BBC)

Founding Members NAFCOC and FABCOS

Participating Members

NIC, SAMEC, SALTHA, NAFTO,NAFCON, ACHIB

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Objects/Purposes SCSPTo expand SMME access to financial credit by:

Promoting the collection, storage and dissemination of SMME data

Establishing and maintaining a Register of SMMEs that can evolve intothe basis for an smme credit rating agency

Reviewing and making recommendations on existing criteria for SMMElending; with a view to expanding existing criteria

Reviewing the impact of the NCA on SMME lending

Investigating the need for ADR in this context; and recording bona fidedisputes

To co-operate with and form partnerships with organisations withsimilar objectives.

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PRIORITY PROJECTS SCSP

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Priority Project

The Register

A Basis for an SMME Credit Rating Agency

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Inadequate access to financial

creditStudies have shown that

SA has a vibrant SMME market

SMMEs in SA have inadequate access to financial credit

Trade credit transactions account for the vibrancy

Trade credit transaction history and recording more information aboutSMMEs could form the basis for the extension of more financial credit

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Some facts about SMME

access to credit Entrepreneurs, small business owners find it impossible to raise credit

through means used by large businesses

Start ups may have no banking relationship at all

Small businesses do not produce the type of financial statements banksuse

Consequently the personal credit history of the entrepreneur or smallbusiness owner becomes decisive

Small business owners and entrepreneurs may also use personal creditto start a business, smooth cash flow fluctuation, or finance

investments

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Information Asymmetries The borrower (smme) knows its own creditworthiness better than the

lender does, this variance in knowledge is referred to as informationasymmetry.

The ideal, is the lender having all the relevant information about theborrowers (smme) creditworthiness, then all deserving creditworthyborrowers will receive credit.

If the lender has some information but not all then some deserving

creditworthy borrowers may be declined.

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Information Asymmetries By combining a credit rating, with a credit bureau score and its own

analysis, the lender would be better able to determinecreditworthiness.

The more information a lender has about a borrowers creditworthinessthe better informed is its decision about the borrowerscreditworthiness.

Creditworthiness is not a directly observable attribute, it has toestimated from attributes that are observable using variousapproaches.

Multiple approaches will permit the lender to be more confident aboutits conclusions

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Filling the credit and risk

information gapThrough its members the SCSP has a means of reaching out directly to

SMMEs for purposes of creating a Register of SMMEs

For this purpose a national campaign is planned that will:

Introduce the SCSP to SMMEs

Allow SMMEs to register with the SCSP

Explain existing SMME lending criteria and how a record of credit andother information about an SMME can facilitate access to credit

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Dedicated Education and PR

campaignA proper education and public relations campaign will be developed to

educate SMMEs and enhance awareness of SMMEs on:

Criteria for lending risk and affordability

The role of data in facilitating risk and affordability assessment

The concept of reputational collateral

The relationship between the individual owner and the SMME entity

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The SMME Register A response to counteract the information/knowledge gap between

borrowers and lenders by recording all relevant information pertainingto the profile of the smme.

Purpose is to address information asymmetries in the smme lendingmarket.

When the Register evolves into an smme credit rating agency it willassist in providing independent opinions about (smme) borrowerscreditworthiness.

The greatest reductions in information asymmetry comes frommultiple, independent, and objective opinions.

The idea is for conclusions about creditworthiness to be drawn from avariety of factors.

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Proposed data categories forthe SMME Register

Demographic and identity information about the smme

Type of entity, sole prop etc

Type of Business (differentiation on the basis of industry and sector)

Owner / Shareholders Info about business sophistication, offices, VAT registration etc

Annual turnover

Assets and Liabilities

Trade Credit Suppliers

Trade Credit Transactional history Personal loans for commercial purposes

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Suggested Roadmap

Year 1 - Establishment of the Register

Months 1-3 Determination of data categories per sector in consultation with

stakeholders, and appropriate thresholds Data Quality procedures and processes: verification procedures, data

validation rules, rules re: matching and merging data Data security procedures and processes Input file format design

Month 4 Education and public relations campaign to encouragesmmes to register and submit their data

Month 5 to 12 national registration process and establishment of theRegister, with an ongoing education and public relations campaign.

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Suggested Roadmap

Year 2 Ongoing population of the Register, and enhancing its credibility,

reliability and quality.

Year 3 Analytics to determine what solutions can be built off the data to

contribute to a complete business credit rating. Conceptualising and developing products that can be offered by an

smme credit rating agency using solutions built off the Register.Including processes and methodology for weighing diverse factors, thatcontribute to the creditworthiness of a borrower.

At the end of the first three years the program, located within avoluntary association not for gain, will be dissolved, and a for profitcompany will be formed, to host and maintain the Register, andprovide specialized credit rating products

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Role of an smme credit ratingagency

Rating agencies originally emerged to assist dispersed investors inassessing and monitoring issuers of debt instruments in the debtcapital markets, reducing information asymmetries between investorsand borrowers.

Credit ratings can have narrow specialized functions within the debtcapital market or broader uses.

India for example, ratings are used to facilitate access to bank creditby smmes.

Initially our focus will be to provide reliable ratings that facilitate agreater and easier flow of credit from the banking sector to smmes,thereafter the agency can as the sector evolves provide morespecialized functions.

Ultimately it should inform both credit and investment decisions,becoming a reliable second opinion for both investors and lenders.

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SMERA India Primary objective is to facilitate access to bank credit by smmes.

Rating methodologies for the manufacturing and non manufacturingsectors, with specific criteria for various industries

Its rating methodology framework addresses industry risk, business risk,management risk, financial risk, new projects risk.

Considers overall financial and non financial performance of the smme vis--vis peers in the industry of the same size and same line of business.

Provides ratings to banks for smmes that apply for credit for the first timeor apply for a credit limit increase.

Ratings from SMERA have benefited smmes by ensuring more favourableborrowing terms such as: lower collateral requirements; reduced interestrates; simpler lending practices; shorter turnaround time in processingcredit applications from smmes

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Incidental Projects

Within

The Program

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Reviewing criteria and policiesfor SMME financial lending

Engaging with the major financial institutions to do an evaluation ofSMME lending criteria and practices

Engaging with developmental funds to do a similar evaluation

Conducting research on international SMME lending criteria andpractices

Making recommendations on how existing lending criteria and practicescan be expanded to enable greater access to financial credit by SMMEs

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The NCA

An analysis of

whether or not the NCA takes cognisance of how start-ups,entrepreneurs and small business owners access credit

The impact of the NCA on such practices

Recommendations on how the NCA could better support such practices

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Representing SMMEs that havebeen denied access to credit

Within the first year where an SMME has been denied access to credit and

there are reasonable grounds to believe that credit has been unfairlydenied, the SCSP will investigate the matter and seek to resolve it.

Will keep a record of cases where an smme has been unfairly denied accessto credit, to be submitted to government to inform future policy

By taking on such matters the SCSP will do an objective evaluation for theneed for ADR in this context.

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Benefits of a completeprogram

Expanding SMME access to credit is a challenge that should be met bya holistic rather than a fragmented approach

The SCSP encompasses such a holistic approach by addressing, datagaps, law, lending criteria and ADR