CCRED: THE NATURE OF FUNDING MATTERS – MAKING DEVELOPMENT FINANCE WORK FOR SOUTH AFRICA’S SMES IN THE COVID-19 CRISIS

The COVID-19 pandemic is an unfortunate wakeup call regarding the state of enterprise funding in South Africa, although the crisis also presents a unique opportunity for development finance to play a critical role in reviving economic activity and achieving structural transformation in the economy. To do this, the forms and nature of funding need to change to align with what the evidence suggests businesses actually need to be sustainable. Indeed, while a lot of funding has been put on offer by private and public sector funders, it may amount to a waste of resources if the types of funding on offer and conditions of access are poorly aligned with the reality of barriers faced by firms. In our view, while there is a high cost of funding various initiatives proposed here and by government to sustain existing businesses, such as a credit guarantee scheme, the cost of completely rebuilding lost productive assets and capabilities will be far more severe and long term.

There has typically been a lack of sufficient patient and effective concessional funding to develop new entrants and SMEs to become effective participants in the mainstream economy. In the context of a concentrated economy such as South Africa’s, concessional enterprise funding is critical and necessary to level the playing field and ensure that entrants and SMEs are not only sustainably integrated into different stages of value chains in the economy, but that they become effective competitors to large incumbent firms, many of which received substantial concessions pre-1994.

Concessional funding comes in various forms, including patient capital, grants, complete interest-free loans and below-market interest rates. Patient capital typically constitutes longer-term maturities on loans and moratoria on loan repayments for new entrants (including for distressed enterprises as is the case with many during the State of National Disaster). Patient capital can also be thought of in terms of equity, where ‘long-term’ is typically understood to mean that the investor intends to hold the investment for a multiyear or an indefinite time period, and maturity of equity is effectively unlimited.[3] This brief proposes a number of practical ‘patient’ funding measures that South Africa’s development finance institutions (DFIs) could immediately implement to respond meaningfully to COVID-19, drawing lessons from underlying research on barriers to entry and access to finance in South Africa.

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This policy brief is part of a series developed for the Industrial Development Think Tank (IDTT).

You can find more information about the IDTT here.

You can download this policy brief here.

For more information regarding this brief contact the author (tebohob@uj.ac.za)

by the CCRED, University of Johannesburg – https://www.competition.org.za/ccred-blog-thinkingaheadsa/2020/4/30/the-nature-of-funding-matters-making-development-finance-work-for-south-africas-smes-in-the-covid-19-crisis

Teboho Bosiu