By: Anna Majavu
The Industrial Development Corporation (IDC) is poised to channel R3 billion in loans to SMMEs, but the money will be paid via private “non-bank intermediaries” (NBIs) who will be able to set their own charges and interest rates. The IDC has given NBIs, also known as fintech companies or financial intermediaries, until 29 September to apply to be on-lenders. Each NBI could qualify to be given a credit line of a minimum of R50 million if it just has a three-year track record of lending to SMMEs and meets other IDC criteria.
The National Student Financial Aid Scheme (NSFAS) appointed four NBIs in July to start paying students an estimated R1.2 billion per year in NSFAS allowances. But it has already launched an investigation after its CEO Andile Nongogo was alleged to have done business with one of the NBIs at his previous job. In June this year, the Small Enterprise Finance Agency (Sefa) was forced to launch a forensic investigation into an NBI it had appointed to disburse funds to SMMEs. This was after Parliament’s Small Business Development Portfolio Committee found that the NBI may have been channeling public money to ghost beneficiaries who did not exist.
The committee found that other NBIs appointed by Sefa were charging SMMEs 29% interest rates on public funds. The IDC did not respond to questions from Vutivi News asking why it was outsourcing the payment of such a huge sum instead of loaning the funds to SMMEs directly. Ubuntunomics owner and sustainability practitioner Sibusiso Nyathi described the initiative as “a result of the failure by the South African government to initiate tailor-made and cost-effective SMME funding models to deal specifically with micro-enterprises which make up the bulk of start-ups”.
Nyathi said that using NBIs to on-lend the public funds would mean that the cost of borrowing would increase from the current favourable IDC loan rates which could be as low as 3% interest, or prime less than 3% to businesses that operated in industries falling within IDC’s mandate. While using NBIs to on-lend money could help speed up lending for the IDC, the inevitable non-performing-loans, impairments, and write-offs “could pose systemic risks to the IDC’s balance sheet and cause disruptions to the financial system, because of the formalisation of ‘shadow banking’ operations”, Nyathi said.
Independent political analyst Dr. Dale McKinley said offering R3 billion to NBIs was “pouring fuel on a fire”. “There can be political and factional bias in this process. With the national elections looming, all of a sudden the IDC is offering R3bn to BEE companies. But why would it be that the IDC does not have the capacity to set up its own programme for the funds to go directly to the neediest and smallest businesses?” McKinley asked.
But Rhodes University Business School director Prof. Owen Skae disagreed. “There is always potential for corruption, but in this case, my view is that there are sufficient checks and balances to at least ensure that the NBIs have a track record”. Ensuring that the NBIs provided audited statements, and were registered and accredited with the National Credit Regulator and Financial Sector Conduct Authority, should ensure “that these are not ‘fly by nights’”, Skae said, adding that the IDC project would hopefully trigger the much-needed impetus for SMME development.
Saul Levin, executive director of the economics think tank Trade and Industrial Policy Strategies, also welcomed the move, saying it would improve finance for small business and that NBIs which lent money to SMMEs were an important component of the business lending landscape. “They fill a gap where banks are unable to provide business finance. They can offer a more targeted, specific sector or niche type of finance. (The) IDC would no doubt undertake proper due diligence on the non-bank intermediaries that they agree to finance to avoid instances of corruption and institutions that are exploitative,” said Levin.