SME growth and development, both formal and informal, is core to economic development in South Africa and Africa. The economic conundrum is, however, that access to finance to develop their businesses is one of the major obstacles SME’s face.
While SME funding in the form of government grants is sometimes available, the funding often fails to reach the entrepreneurs who could benefit most from this financial support. Likewise, commercial credit is not readily available to SMEs. This is mainly due to financial institutions using traditional credit scoring models to evaluate SMEs credit risk. Rather than considering potential, they consider the applicant’s balance sheet and underlying creditworthiness. This practice makes it near impossible for most emerging businesses to meet the criteria of traditional financial institutions.
In the broader economy, this means emerging businesses are often excluded from the preferred supplier lists of large corporate businesses because they are unable to fund larger transactions. While there are multiple initiatives that aim to involve small business in the supply chain, it is mostly established businesses that benefit from meeting the supply chain needs of large corporate businesses.
As result, the aim to create broad-based economic participation fails. Instead of broad economic prosperity, only a small subset of the population benefits. This leads to stifled economic growth and ongoing pressure on governments to support the poor with handouts and grants.
Many governments in Southern Africa are already under economic pressure. The widespread provision of grants over the long-term will make socioeconomic development unsustainable, especially if these economies are to compete on a global scale.