NBFI MAPPING STUDY: Understanding the Universe and Absorptive Capacity of Non-Banking Financial Institutions (NBFI) Supporting SME Lending Activities in South Africa

SMEs provide approximately 66% of employment opportunities in developing countries and up to 78% in low-income countries. However, they suffer from lower rates of productivity and sales growth due to a lack of access to finance, a need for business development services, and policy barriers. The United States Agency for International Development's (USAID) Financial Sector Program (FSP) has addressed various levels of the problems faced by SMEs, including reforming the legal and regulatory framework affecting the financial and business environment, providing business development and technical services to improve the capacity and commercial viability of SMEs, and expanding SME access to a range of high-quality and affordable financial services. In its work to increase access to affordable finance, USAID and the FSP made available a Global Triple A-rated DCA credit guarantee facility to certain Non-Bank Financial Intermediaries (NBFIs) who on-lend to SMEs. However, this program did not meet with much success due to the aversion to perceived risk in the underlying SME portfolios of NBFIs on the part of the banks and the disregarding of the track record of the NBFIs themselves as the key managers of risk and on-lending practices. To explore the options and appetite for a debt fund to address the barriers to credit and investment capital flows for NBFIs to on-lend to SMEs, the FSP commissioned a body of research to look at the appetite for a debt fund amongst fund managers, the nature of the structure that could most effectively address the barriers to credit and investment capital flows, and the appetite for credit amongst NBFIs given the activity and demand of their underlying investment pipeline. The research involved desk-based research on the current SME finance landscape in South Africa, face-to-face in-depth interviews with various NBFIs and Business Development Support Providers (BDSPs) as well as directly with SMEs, and a series of surveys with a broad array of stakeholders supporting the growth and development of SMEs in South Africa. The research received a 15% response rate from the initial survey and additional engagement was sought with NBFIs from other sources. The study sought to answer the following key questions: how many NBFIs are engaged specifically in providing finance to SMEs in South Africa and how many SMEs do they support, what is the absorptive capacity with respect to the SMEs in their pipeline and specifically the capital requirements that these SMEs have in the next 12 and 24 months, and what are the key challenges that NBFIs face in working with SMEs. The research found that there is a significant market for capital allocation, with a small sample of NBFIs indicating an ability to relatively easily absorb more than R2 billion within 12 months. The study also found that the key challenges faced by NBFIs in working with SMEs are not necessarily a lack of capital, but rather a lack of quality SMEs in their investment pipeline. The study's findings have implications for the development of a debt fund to address the barriers to credit and investment capital flows for NBFIs to on-lend to SMEs. The research suggests that a debt fund could be an effective way to address the barriers to credit and investment capital flows, but that it would need to be structured in a way that takes into account the specific needs and challenges of NBFIs and SMEs in South Africa. The study's recommendations include the development of a debt fund that is specifically designed to provide for SME on-lending, with a focus on addressing the barriers to credit and investment capital flows faced by NBFIs. The study also recommends that the debt fund be structured in a way that takes into account the specific needs and challenges of NBFIs and SMEs in South Africa, and that it be managed by a team with expertise in SME finance and NBFIs. Overall, the study's findings suggest that a debt fund could be an effective way to address the barriers to credit and investment capital flows for NBFIs to on-lend to SMEs in South Africa, but that it would need to be structured in a way that takes into account the specific needs and challenges of NBFIs and SMEs in the country.