A review of the effectiveness of development finance institutions in KwaZulu-Natal

Qunta, Nomusa Zethu
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The Development Finance Institutions (DFIs) in South Africa have a mandate to provide finance to private and public sector organizations for investments that facilitate development. The main aim of DFIs is to invest in areas where the market fails to invest adequately and where there are institutional failures. DFIs specialise in offering long-term advances and loans and where defaults are experienced by investors, they are able to re-structure the loans to facilitate easier repayments. However, there are allegations of maladministration and poor management within DFIs as well as a high failure rate of funded enterprises. This study set out to explore the effectiveness of the DFIs by reviewing their contribution to economic growth in KwaZulu-Natal (KZN). This study evaluated the role and effectiveness of four DFIs in the province, namely Ithala; Industrial Development Corporation (IDC); National Empowerment Fund (NEF); and Trade and Investment KwaZulu-Natal.The study attempts to answer the following questions: 1) Have the DFIs made a positive contribution to the economy in KZN based on their performance indicators? 2) How do the DFIs take funding decisions? 3) What is the success rate of the DFIs in creating sustainable businesses? 4) What support and monitoring mechanisms are in place in these DFIs to ensure that funded enterprises succeed? 5) What general performance issues face DFIs? The qualitative research approach was used in this study as the investigation was exploratory in nature. Data was collected using three different instruments: document analysis, structured questionnaires, and face-to-face interviews. The document analysis enabled the design and customization of the questionnaires used to collect data from different DFIs. Organisational effectiveness models and performance management theories were used as a reference to assess the effectiveness (performance) of the DFIs in KZN. The study found that the level of performance of the DFIs varied, as did their capacity and resources. All the DFIs made a positive contribution to the economy of the province, taking into consideration that some of the thriving small, medium and micro enterprises (SMMEs) could not have started without the funding A review of the effectiveness of Development Finance Institutions in KwaZulu-Natal from these DFIs. There is however, massive room for improvement in DFI operations and level of contribution to the economy of the province. The study identified a number of weaknesses in the operations of the DFIs, such as their financial statements, which are characterised by high annual debt write-offs, high impairment rates, and low rates of loans and advance repayments. While there is evidence of job creation by each DFI, the rate thereof may not be commensurate with the costs involved. The study revealed that in some cases, funded enterprises are not supported to ensure that they succeed in creating sustainable businesses. A number of portfolios closed down prematurely leading to the need to write off loans. The yearly performance targets set by the DFIs are mostly not achieved; in some cases, these performance targets do not measure the actual performance towards the achievement of the DFI’s strategic objectives. There are too many DFIs in South Africa, some operational in all the provinces, a number of which were established during the apartheid era and may have been relevant at that time. At a macro level, there is a need to streamline DFIs in order to give relief to the fiscus. Increasing the efficiency of the DFIs would require a culture change with respect to information sharing and reporting to stakeholders. It is recommended that DFIs adhere to the funding criteria for each fund. This capacity to evaluate funding proposals needs to be reviewed continuously to avoid fruitless expenditure emanating from funding unsustainable business ventures. Effective monitoring of funded enterprises and implementation of an early warning system are recommended. Failure to repay loans and advances should have some consequences for enterprises in order to discourage perceptions of entitlement from most SMMEs, while at the same time DFIs should develop a tolerance level (a materiality framework) for non-performance of some of the loans and advances as a cost for creating/promoting entrepreneurship in South Africa.
A Thesis submitted to the Wits School of Governance in fulfilment of the requirements for the Degree of Doctor of Philosophy University of the Witwatersrand Johannesburg 2015
Qunta, Nomusa Zethu (2015) A review of the effectiveness of development finance institutions in KwaZulu-Natal, University of the Witwatersrand, <http://wiredspace.wits.ac.za/handle/10539/21577|>