Access to finance of SMMEs from formal lending institutions in the Free State Goldfields
The Matjhabeng municipality in the Free State Goldfields in South Africa struggles with poor economic growth and high levels of unemployment mainly due to the decline in the mining sector in the region. SMMEs are seen to be a major contributor to address these concerns, but face obstacles hindering them from accessing finance due to reasons such as lenders being risk-averse and poor credit records of the owners of SMMEs. Moreover, the government has several lenders that attempt to assist these SMMEs but have not resulted in tangible benefits that address growing the local industry. This has exacerbated the ability of SMMEs in this region to successfully access finance. This study investigates the factors affecting the access to finance of SMMEs in the Matjhabeng municipal area. By using a mixed-method research design, a quantitative focus on the nature and characteristics of SMMEs is supplemented with a qualitative perspective of commercial banks providing the finance in the region. For the quantitative analysis a sample of 364 was drawn from SMMEs employing 50 or less. For the qualitative analysis 10 bank officials were interviewed employed by the commercial banks dominating the banking sector in South Africa, providing financial services and credit to SMMEs in the Matjhabeng area. The data obtained from SMMEs were regressed to determine significant association between access to finance variables and the characteristics related to the nature of the SMME. Recuring themes and subthemes emerging from the interview data were supplemented with the relationships obtained from the SMME data. The results suggest that the age and size of the business, legal entity, area of operation and business plan all influence the ability of SMMEs to obtain credit and loans. Commercial banks in turn were shown to implement stringent criteria in the granting of loans that by themselves result in loans being rejected on grounds of factors such as poor credit ratings, incomplete information provided, the lack of financial literacy and business management skills, the lack of collateral, and poor constructed business plans. The study provides evidence that the information asymmetry between lender and SMMEs is a particularly pertinent problem in the lending process. More specifically, due to commercial banks being constrained by regulatory and legislative requirements, SMMEs in poorer municipal areas are constrained by both resources (be it capital- or collateral-related) and financial literacy challenges. These challenges re-enforce the importance of building a mutually beneficial relationship between the SMME and commercial bank where the latter can reduce the information asymmetry. The findings propose that soft information needs to be factored into the lending criteria more explicitly when risk assessments are done. Although easier said than done, commercial banks should ideally not be lulled into a mindset that providing access to SMMES be solely based on traditional measures of creditworthiness. This suggests a more innovative approach to the assessment of risk that may include non-traditional techniques related to, for example, the ‘softer’ behavioural characteristics of borrowers. Commercial banks therefore need to reassess the nature and extent of their risk-aversion mindset evidenced in the lending process. In doing this, commercial banks can potentially innovate in ways that contribute to the economic prosperity of not only the Matjhabeng municipal area, but SMMEs in communities outside metropolitan areas across South Africa.