Non-bank trade finance as a viable alternative to traditional bank funding for internationally trading small and medium enterprises in South Africa

Kwint, Menso

Non-bank trade finance as a viable alternative to traditional bank funding for internationally trading small and medium enterprises in South Africa

Date

2014

Authors

Kwint, Menso

Abstract

This study was conducted to evaluate whether trade finance offered by non-bank financial institutions was a better funding mechanism for internationally trading small and medium enterprises (SME’s) than traditional, and more commonly utilised commercial bank finance. While the two products are similar, non-bank trade finance specifically funds the trade of goods and bank finance incorporates a host of other financial products as well. The topic was deemed relevant at this time for both demand and supply side reasons. From a demand perspective, internationally trading SME’s operating in South Africa list access to enough of the correct type of finance as one of their biggest obstacles to doing business. On the other hand, certain market and structural aspects – affecting both non-bank and bank providers – seem to limit the supply of working capital credit to internationally trading SME’s. A qualitative research methodology was chosen to allow as yet unknown information to possibly come to light. Semi-structured, open-ended interviews were employed to gather data from two sample sets – namely internationally trading SME’s and the providers of trade finance or working capital debt in South Africa. Thereafter, a technique of inductive content analysis was engaged to identify and rank pertinent factors. These factors were then analysed to directly address the topic of the research. What materialised, is that non-bank trade finance is not necessarily a better form of working capital funding for internationally trading SME’s. Traditional bank finance does have its uses and advantages in many respects. However, it was found that non-bank trade finance may be more effectively utilised to raise much needed credit when either bank lending is tight or a business requires additional capital in times of growth. Non-bank trade finance is also often better suited to fund the extended cash flow cycle of an international trade transaction. Therefore, non-bank trade finance should not replace bank finance, but rather be used as a complimentary product in conjunction with bank lending.

Keywords

Small business -- South Africa -- Finance. Business enterprises -- South Africa -- Finance.Financial services industry -- South Africa. Nonbank financial institutions -- South Africa.