What funding model will foster SMME development in South Africa?

Abstract

Literature suggests that the Small, Medium and Micro Enterprise (SMME) sector is important to local economic development. SMMEs can alleviate the problem of unemployment while being efficient and flexible by serving segmented consumer markets. First, this study investigates whether SMMEs have been the key drivers of economic development in South Africa. Second, the role of Development Finance Institutions (DFIs) in the financing of SMMEs and their funding models. Finally, the research presents a case study of a small private financial institution, the Small Enterprise Foundation (SEF), a Micro Finance Institution (MFI) in South Africa and its significant contribution to the SMME sector and economic development. The study found that the SMME sector remains largely under-serviced by the traditional financial institutions and DFIs, due to the reluctance to grant loans as a result of the lack of knowledge on the borrowing behaviour of SMMES. The case study of the SEF also showed significant funding gaps experienced by microenterprises that receive funding from it. The study concludes by making recommendations that the role of DFIs needs to be enhanced by using a key governmental department such as the Department of Small Business Development (DSBD) to be a key coordinator of SMME programmes among DFIs such as the Industrial Development Corporation (IDC).