OPEN ACCESS
To have a strong small business sector in South Africa, access to finance must be supported
Photo by: Bloomberg
South Africa’s financial institutions and policymakers have a massive opportunity to create jobs by expanding financial services amid a stronger business environment for smaller businesses, according to a new study released in March by global development institution the International Finance Corporation (IFC) and the World Bank.
Small enterprises employ between 50% and 60% of South Africa’s workforce and contribute about 34% of gross domestic product. However, the report, ‘The Unseen Sector: A Report on The MSME (micro, small and medium enterprises) Opportunity in South Africa’, finds that only 14% of the country’s micro, small and medium enterprises, or MSMEs, are formalised, capping their job creation and economic contribution potential.
“By working together, we can increase the ability of small businesses to access finance and markets, making them visible to the broader economy and thus bigger job creators,” says IFC Southern Africa and Nigeria regional director Kevin Njiraini.
‘The Unseen Sector’ focuses on three themes: size and profile of the MSME market, barriers to MSME growth and MSME financing availability. In doing so, it provides a snapshot of the South African small business landscape, where it is thriving and what challenges need to be addressed by the government and private sector to achieve a stronger MSME ecosystem.
The report makes specific recommendations regarding expanding opportunities for MSMEs. A key study recommendation is to collect and digitise more accurate and comprehensive data on the MSME sector that can be easily accessed by all stakeholders.
Further, the report recommends that policy coordination should be sharpened and notes that policy effectiveness requires clarity of definition and a more coordinated approach between government departments. Greater MSME policy coordination will support South Africa’s broad development objectives, such as creating youth employment, by aligning the activities of institutions around MSME support policies.
The study found that 86% of the MSME sector is comprised of informal and survivalist businesses. Businesses struggle to grow out of this classification in large part because of the poor business environment for MSMEs. The constraints can be eased by reducing the cost to formalise, particularly around the cost to register a business, to be compliant with regulation and to access financial services.
The report is part of IFC’s SME Push Program, which is committed to channel up to $3-billion over the next five to seven years into South Africa to increase lending to small businesses and optimise the job creation potential of MSMEs. The IFC is forming partnerships with financial institutions in South Africa to expand lending and working in partnership with the World Bank to support building a stronger small business ecosystem.
“To have a strong small business sector we need to support not only access to finance but also opportunities including the tools and information small business owners need to thrive. That’s why the work we are doing together with our partners is so important,” says World Bank South Africa country director Paul Noumba Um.
Through ‘The Unseen Sector’, the World Bank Group aims to facilitate further dialogue and innovation that will lead to greater small business financial inclusion.
The IFC is a sister organisation of the World Bank and member of the World Bank Group.