Availability and distribution of risk capital: how stokvels can help fill the financing gap for SMMEs in South Africa

Abstract

Small, Medium and Micro Enterprises (SMMEs) in South Africa operate in an environment where access to finance is severely lacking, particularly in the start-up and growth phases of these businesses. Formal financial markets continue to exclude SMMEs from accessing finance due to collateral constraints and credit histories requirements. These small businesses often resort to the informal finance sector as an alternative for much needed finance; however, this sector is synonymous with exorbitant rents that often cripple many of these SMMEs.

Within the informal market in South Africa exists an enormous capital source in the form of Stokvel savings. Therefore, the first question examined by this study is whether it is the availability of risk (venture) capital or its distribution thereof that results in this funding gap. The second question is the feasibility of Stokvels in South Africa being able to mobilise their savings pools into affordable loans to members for small business activities and through which fit-for-purpose vehicle (i.e., financial contracts and/or institutions) this could be facilitated. Cooperative Financial Institutions (CFIs) as formal regulated bodies that facilitate channelling savings into credit to its members were considered an appropriate vehicle to facilitate this flow of funds for the purposes of this study. The study used an inductive approach to gain an understanding of how CFIs have facilitated the flow of savings into investments for members. The study used both qualitative data, through interviews with CFI representatives, and quantitative research methods to collect and analyse assembled relevant data. A questionnaire was used to collect quantitative data from members of Stokvels.

The study found that owning a small business is not a factor in deciding whether or not to join a Stokvel that provides loans; thus, perpetuating the notion of informal savers’ insistence on the traditional practices (emphasising social capital). It was also found that small business owners who are currently members of Stokvels, be it for social or savings reasons, welcome the idea of being members of a formal savings vehicle that would provide access to finance. CFIs are found to be successful at mobilising member savings, providing affordable and suitable financial products, enabling ownership of factors of production, and providing access to member small business loans that otherwise would not have been provided by traditional banks. These vehicles have the potential to significantly contribute to reducing the funding gap experienced by SMMEs, by redirecting a supply of capital that already exists within the system. However, the main constraint in setting up this vehicle was found to be the requirement of getting 200 members that share a common bond. Interestingly, this study looked at a ‘formal’ vehicle that may facilitate the intermediation of this flow of funds, and deemed such model to be successful in the intermediation of member funds to the benefit and improvement of members’ financial needs, but not necessarily the regulatory structure within which they operate. Therefore, this study provides a framework through which small businesses could mitigate or overcome this situation of lack of access to venture finance.