South Africa Poses a Challenging Environment for Entrepreneurship
A study by the Organisation for Economic Co-operation and Development (“OECD”) released in July 2017 revealed that just 26% of business loans from banks in South Africa are granted to SMEs, and that the number of microfinance providers has dropped. This is significantly lower than other wealthy emerging countries. For comparison, banks in South Africa’s BRICS counterparts China and Brazil lend 64% and 40% of their business loans to SMEs respectively.
A study by the International Labour Organisation in 2016 revealed that microfinance ranked last out 11 possible ways to finance a start-up business. The high unemployment rate and unequal distribution of wealth make informal finance less accessible as well.
Venture capital had been increasing until 2015. However, South Africa is in short supply of pre-seed capital. The OECD argued that regulation promoting financial innovations like crowd-funding could increase the supply of pre-seed capital. The development of the Alt-X would also promote venture capital growth as it would provide investors with an effective exit strategy. However, the Alt-X remains less active than “alternative” markets elsewhere in the world.
Fintech lenders such as Retail Capital are helping fill the gap left by the banking sector by providing debt financing to SMEs using innovative products. In Retail Capital’s case, the product is financing for SMEs involved in the retail sector as broadly defined. Verdant Capital is currently closing a wholesale funding round for Retail Capital from international investors.
The OECD called on government to provide greater support for entrepreneurs, both financially and non-financially.