Unlocking Economic Growth Through SME Financing
In South Africa, the SME sector is estimated to contribute between 35%-45% to the Gross Domestic Product (GDP) and 50%-60% to the labor force, according to research from the Global Entrepreneurship Monitor and The Banking Association of South Africa. This makes it clear why SMEs are seen as a key driver for economic growth. However, one of the biggest challenges facing the SME market is access to finance.
An active SME sector not only stimulates production and creates employment but also uplifts communities. It's ironic, then, that there's a gap in the South African lending market for small business funding, especially considering one of the country’s National Development Plan (NDP) goals is to create 90% of new jobs through SMEs.
Many traditional financial institutions remain hesitant to lend to SMEs due to perceived risks and high costs. However, the good news is that some lenders, including unconventional ones, have started focusing on this sector. This has led to alternative financing options becoming more accessible for small businesses. While this is positive for SMEs, it also brings risks. Some alternative lenders do not operate in the best interest of SMEs, highlighting the need for standards that encourage transparency and responsible lending in the currently unregulated SME finance sector.
South African SME Finance Association (SASFA)
This is where SASFA comes in. Established in 2017, SASFA aims to set industry standards that ensure SME customers are treated fairly and that the SME finance sector remains reputable and sustainable. SASFA promotes a Best Practices Framework based on principles of Transparency, Responsible Lending, and Fairness. It encourages businesses seeking financing to verify that their lenders are SASFA-approved and adhere to the code. This ensures SMEs understand the type of finance product they are receiving, the repayment mechanisms, and the associated risks and benefits.
SASFA’s goal is to instill confidence among SMEs, reassuring them that they are working with alternative lenders who follow responsible lending practices. From the lenders' perspective, SASFA seeks to collaborate with other finance associations to create a centralized database that fosters a healthy market while protecting against bad transactions.
The success of SMEs is crucial to South Africa’s economic future. Introducing a standardized marketplace that encourages transparent and responsible lending is essential for promoting sustainable business practices and facilitating growth.
As traditional barriers to financing evolve, embracing alternative financial resources alongside entrepreneurial spirit can help unlock the potential for economic growth.
