The role of the DFIs in financing small businesses in South Africa.

Abstract

This study explored the role of the development finance institutions (DFIs) in financing small businesses as a strategic tool for growth and development of the small business sector in South Africa. Although much research has been done and many debates have been argued around the problem of access to finance for small businesses, much of the documentation focuses on commercial lending and little attention has been devoted to development financing. Therefore, this study focused on the role of the DFIs in financing small business, in addition to studying the extent to which development financing narrows the financing gap and impacts on the growth of small businesses. Along with an extensive literature study, this thesis adopted a sequential exploratory mixed-methods approach consisting of two phases. Phase 1, a qualitative approach, through in-depth face-to-face interviews with the DFIs at both national and provincial level, was carried out to explore the existing programmes at the DFIs and to determine the extent to which the DFIs impact on the growth of small businesses. Phase 2, a quantitative approach, was based on a survey to investigate the perceptions of the entrepreneurs in Tshwane regarding the extent to which the financing by the DFIs, as identified from Phase 1, impacts on the growth of their businesses against business growth strategies; how it bridges the financing gap; and how the concept of development finance is constructed from the entrepreneurs’ perspective. The results from the literature study show that as an important strategic growth tool, development financing should be aligned to the growth plans of small businesses. Small businesses should therefore understand their position in the industry life cycle, which along with strategic growth and financing options available for the particular position, will allow them to make informed decisions on business financial needs. The findings of Phase 1 of the empirical research illustrate that the DFIs have both financial (in the form of asset finance, grants, loans and procurement finance) and non-financial programmes aimed at the development of small businesses. The results further show that the DFIs consider the number of employment opportunities created; skills development and business survival as measures of growth and development. Through the use of businesses support services, the DFIs help small businesses to establish banking relationships with financial markets, which can later benefit small businesses for relationship lending. The results from the Phase 2 investigation indicate that small businesses perceive financing by the DFIs as an alternative financing option. However, loans provided by the DFIs are perceived, like commercial loans, as too expensive and negatively affect cash flow. The results further show that stokvels, although informal, are used as a development financing platform by SMMEs. Entrepreneurs would prefer the establishment of a small business development bank that will work exclusively with the SMME sector and that understands the needs thereof – as per the stokvel model. The results further show that there is a perception among entrepreneurs that development finance from the DFIs is not easily accessible to the entrepreneurs. The findings of both Phase 1 and 2 show that both the DFIs and the entrepreneurs do not share a common understanding of business growth strategies and the financing options suitable for the growth stages of the business life cycle.