Reacting to the calls from business owners for finance, provincial governments have responded by lending out millions of rands in loans. But the drive to hand out more loans is leaving development financial organisations with huge debts as thousands of business owners fail to honour loan repayments.
While government’s national development agencies, like Khula and the National Empowerment Fund write off some bad debt as part of the inevitable risks of lending to small business owners, development agencies, financed by provincial governments, are facing a crisis situation, with crippling bad debt rate of up to 50%.
The problems are so bad that the Eastern Cape Development Corporation (ECDC) recently offered defaulters discounts on the interest owed if they commit to repay outstanding debts.
The ECDC’s CEO, Mxolisi Matshamba, said the corporation’s recent advertising campaign, encouraging business owners to pay loan instalments, was successful in reducing the incidence of bad debt, but he did not provide figures for the amount of bad debt the organisation was burdened with.
In a written response to Bignews’ questions, Matshamba admitted that high defaults would probably persist, but said the corporation chose to engage business owners in ongoing aftercare to ensure that potential problems were detected early. Said Matshamba: “We send in our account managers before we send the sheriff”.
According to its spokesperson Victor Maleeme, the Free State Development Corporation suffers from about a 30% bad debt rate, a level which is similar to KwaZulu-Natal’s Ithala Development Finance.
However, bad debt at Limdev, Limpopo’s development finance agency, has reached 50%. Leo Gama, the media liaison for Limdev, said 1 500 of all business owners currently on the Limpopo agency’s books have outstanding debts of more than 90 days.
A report by FinMark Trust released in November last year which studied examples of small medium enterprise (SME) banks around the world, concluded that SME development finance organisations in which governments were highly involved, were subject to the will of politicians and failed or did not perform well.
The report suggested that government resort to a minority stake in a public-private partnership when financing small businesses.