SME Financial Literacy in South Africa
The Banking Association South Africa contributes to the socio-economic growth and development by facilitating and encouraging member banks to deliver services to a broad spectrum of the population; and catalyses change and transformation. Small and Medium Enterprise (SME) Development and Financial Literacy are strategic objectives of The Banking Association.
The South African Government has prioritised SME and informal sector development for their potential social and economic growth prospects. Vehicles for entrepreneurship and employment opportunities, innovation, competition, integration with the local economy, regional development, supply chain and procurement, SME's face challenges such as access to finance, markets, technology, skills and management. Policy tools vary and can include finance, tax, subsidies, guarantees, information or a mix. Business culture and entrepreneurship that distinguishes between business versus occupation creates a vibrant culture to promote SME development.
Currently, only 13 banks operate in the SME space in an industry that consists of 19 registered banks, 2 mutual banks, 13 foreign banks with local branches, and 41 foreign banks with approved local representative offices.
Implemented in 2004 as a voluntary sector charter in terms of the Broad-Based Black Economic Empowerment (BBBEE) Act (52 of 2003), the Financial Sector Charter (FSC) commits participants to"actively promote a transformed, vibrant, and globally competitive financial sector that reflects the demographics of South Africa, and contribute to the establishment of an equitable society by effectively providing accessible financial services to black people and by directing investment into targeted sectors of the economy".
Black SME Financing was identified as a transformational pillar under Empowerment Financing. Five-year targets were set by the Financial Sector Charter Council, monitored, achieved and exceeded. Still, more room for "downstream" exists in areas of micro-finance, co-operatives and co-operative banking to facilitate greater outreach, access, institutionalisation of transformation and financial inclusion.
USAID’s Financial Sector Program recently completed a comprehensive online survey and study, titled: "Financial Institutions Hurdles to SME Financing". The survey suggests SME Financial Literacy initiatives should be more targeted, strengthened and co-ordinated to have greater effectiveness and efficiency. In addition, the professionalisation and accreditation of Business Advisors or Business Development Support aims to address this market gap.
The Banking Association South Africa commissioned this research to draw on literature, best practices and consultant expertise and experience on SME access to financial services issues and to maximize financial inclusion by proposing a comprehensive framework for SME Financial Literacy development in South Africa. More specifically, the study aims to propose a workable definition of SME Financial Literacy, articulate the building blocks of SME Financial Literacy, and analyse the status of SME Financial Literacy and the related demand and supply gap. The information gathered will be used to propose a national SME Financial Literacy development framework, highlight the strengths and limits of banks’ involvement in SME Financial Literacy activities and shed light on opportunities for banks, and ultimately propose a comprehensive role for The Banking Association to promote SME Financial Literacy in the country.
A financially-literate SME is one who:
(i) has an adequate level of personal entrepreneurial competencies, personal finance skills, and business management skills; has an appropriate level of understanding of functional financial management systems;
(ii) has an appropriate level of understanding of SME life-cycle funding and other financial services needs and options and knows where and how to source and negotiate those funding and service requirements;
(iii) understands and can manage financial risks or seek relevant advice to manage such risks;
(iv) understands legal, regulatory and tax issues as they relate to financial matters;
(v) understands the range of legal recourses it can resort to when necessary, and namely, in case of bankruptcy or other situations of financial distress.
The key building blocks of SME Financial Literacy, which is a multi-dimensional concept, include:
- Entrepreneurial and basic SME management competencies
- Understanding of consumer/personal finance
- Understanding of modern accounting and financial management systems
- Understanding of financial services options, the types of funding options available to SME and access to finance requirements for SME
- Awareness of and decision-making skills on financial risk, capital investment and complex fund raising, corporate restructuring, and financial policy matters affecting SME
- Awareness and understanding of financial regulations, legal and tax issues, and related legal recourses a SME can resort to in a situation of financial distress.
SME Financial Literacy supply-demand gaps remain significant because existing Financial Literacy programmes and services:
- do not have clearly stated or defined objectives, and lack SME profile based contents and important Financial Literacy components
- tend to be provided by professionals with limited background and exposure
- tend to be limited in number and capacity to provide comprehensive training and advisory modules outside major cities such as Johannesburg, Cape Town, Pretoria and Durban
- have mechanisms (web-based portals, proprietary training sessions) with limited ability to maximise reach, especially, to historically disadvantaged SME's and SME owners.
SME Financial Literacy programmes can yield different levels of benefits to banks such as:
Providing vehicles for marketing and customer acquisition, providing opportunity to mitigate credit risk and learn more about the SME market segment, building long-term customer relationships, and providing opportunities for cross-selling and retail service.
Broad-based Financial Literacy services with little customisation for the SME market result in lost opportunity to capitalise on business relationships in an environment where the SME segment represents 30% of South African businesses. This is indicative of South African and global banks that lack integrated "good practice" SME banking strategies, programmes and solutions. Although not the focus of this study, a comprehensive SME access to finance promotion programme for any developing or emerging economy happens on four fronts, namely; the policy framework, the institutional infrastructure, information infrastructure and SME development/SME Financial Literacy.
Based on this background, a comprehensive national SME Financial Literacy Strategy for South Africa should focus on this framework:
- Co-ordinated definition and profiling of SME per homogenous groups
- Assessment of identified SME groups’ Financial Literacy demand or needs
- Co-ordinated definition of SME Financial Literacy
- Articulation of a national SME Financial Literacy Development Strategy as well as its key implementation programme
- Definition of the objectives and intended outputs, outcomes and impact of the respective SME Financial Literacy programme and services per category of SME
- Core curriculum development and standardisation
- Trainers’ and participants manuals development
- Champion implementation and watchdog agencies
- Training of trainers and trainers’ certification
- Outreach strategy and delivery mechanisms
- Monitoring and evaluation framework
- Strategy and programme improvement framework.
The study suggests Government plays a leading role in the championing and actual implementation of the national SME Financial Literacy Strategy, while The Banking Association South Africa facilitates banking industry involvement. The proposed role of The Banking Association would include:
- Championing and driving the banking industry SME Financial Literacy Strategy along with key partners such as the dti, SEDA, Khula and BANKSETA and other financial sector players
- Advocating for banks on SME Financial Literacy and SME access to finance matters; and
- Driving the knowledge management process (research, best practice documentation, expert and consultant database, curriculum development and maintenance), and facilitate its transfer (training of trainers, training bank staff) and sharing (through a comprehensive SME Financial Literacy web-based portal) on SME Financial Literacy and SME access to finance in South Africa.