Effect of development finance on the perfomance of agricultural SME's in the West Rand district municipality
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Date
2018-06
Authors
Sibelekwana, Viwe
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
Globally; Small, Medium and Micro sized Enterprises (SME’s) have become key
components in economic development policies of both developed and developing
countries. This is because they are labour-absorptive, contributors to poverty
eradication and represent equitable redistribution of income and wealth (Dubihlela &
Van Schaikwyk, 2014). In South Africa, the small business sector was overlooked for
many years following the discovery of minerals, such as diamonds and gold and the
establishment of a modern capitalist economy (Mutezo, 2005 & Chalera, 2006). In
addition, the domination by large enterprises and constrained competition practices
perpetuated income and wealth inequalities. Thus, over the past 23 years, central to
South Africa's development policies has been the intention to address the triple
challenges of poverty, unemployment and inequalities and that SME’s have been
identified by the government as catalysts of development and growth of a country’s
economy (Statistics South Africa, 2015).
In respect of the contribution by economic sectors, agriculture has been identified as
one of the key growth economic sector (National Planning Commission, 2012). The
value of agricultural production in South Africa was estimated to be around
R273 344 million in 2016/17, while its contribution to the GDP was approximately
R80 247 million in the same period. The agricultural sector holds an important role in
a developing country’s economy, as in South Africa. Indirectly, agriculture’s role in
the economy is a function of backward and forward linkages to other sectors. For
instance, the sourcing of goods such as fertilisers, chemicals and implements form
backward linkages with the manufacturing sector, while the forward linkages are
established through the supply of raw materials to the manufacturing industry. In
addition, about 70% of agricultural output is used as intermediate products and
usually have a higher per-unit value than bulk commodities. These are partly
processed products not necessarily ready for consumers; such as wheat flour,
vegetable oils, animal fats, hides and skins, sweeteners and others (Department of
Agriculture, Forestry and Fisheries, 2016/17).
In developing economies like South Africa, there are still social and economic
challenges. For instance, in quarter 2 of 2017, the unemployment rate was reported
to be around 27,7 per cent, while the youth unemployment rate was considerably
higher with 32,2 per cent of the youth between the ages of 15–24 years without
employment (Statistics South Africa, 2017a). Part of this problem is due to shedding
of jobs by traditional sectors such as mining and manufacturing. According to
Statistics South Africa (2017b), the proportion of the population living in poverty was
reported to be around 55,5 per cent in 2015, while the number of persons living in
extreme poverty (that is, persons living below the 2015 Food Poverty Line of R441
per person per month) in South Africa stood at 13,8 million in the same period.
Moreover, the report showed that the most vulnerable groups in terms of poverty
were children aged 17 years or younger, females, Black Africans, people living in
rural areas, those residing in the Eastern Cape and Limpopo Provinces, as well as
persons with little or no education (Statistics South Africa, 2017b). Thus, the small
business sector has been identified by the South African government as a catalyst
that can address these challenges, given the failure of the formal sector (Garwe &
Fatoki, 2012).
In the United States of America (USA), for instance, SME’s have managed to create
new additional jobs, introduced innovative products and services, opened foreign
markets - and in the process, ignited the USA’s economy into regaining its
competitive edge in the global economy. Similarly, in both Asia and Japan, the SME
sector accounts for the majority of the country’s business establishments and
provides fundamental support for employment creation. The same can be said of
Taiwan and Germany where there are different financial models driven by national
governments and the private sector to assist entrepreneurs (Mutezo, 2005). In South
Africa, the SME sector is still lagging behind due to, among other reasons, structural
issues of the past. However, the government has committed itself to creating an
enabling environment that seeks to correct the inequalities as a result of structural
reforms that were brought about by the apartheid system whose policies favoured a
minority and marginalised poor communities. Thus, the post-apartheid government
has since introduced inclusive policies and business development support
institutions and programmes that seek to ensure that there is inclusive and
meaningful participation of previously disadvantaged groups in the mainstream
economic activities.
However, although SME’s have been identified as key catalysts in the inclusive
economic growth and job creation, their survival is threatened by a number of
factors. Limited access to finance appears on top of the list. This is due to, among
others, information asymmetries as a result of lack or inadequate financial
statements and other business records making it difficult to assess their viability and
sustainability. The challenge of limited access to finance is followed by a lack of
appropriate infrastructure, low levels of research and development, limited access to
markets, and others (Bureau for Economic Research, 2016). Agricultural SME's are
not immune to these challenges as they operate in a complex and volatile business
environment. Thus, government has intervened through development finance
institutions and other financial intermediaries to try to bridge the gaps and has
introduced a number of small business support programmes aimed at attaining
financial inclusion through promotion of development finance institutions’ microfinance
products. As a result, the sources of finance for SME’s come from different
institutions, such as government and its development finance agencies, venture
capital and the equity market (Garwe & Fatoki, 2012).
Hence, the twofold purpose of this study was to explore the relationship between
access to development finance (finance offered by development finance institutions,
the government, commodity associations, farmer unions and others) and the
performance of agricultural SME’s, particularly those based in the West Rand District
Municipality, Gauteng Province as well as to explore international best practices in
the access to development finance of agricultural SME’s by specifically analysing the
case of Germany. As a result, a purposive sample of 15 respondents, actively
involved in agriculture, who met the criteria of SME, as defined by the Department of
Trade and Industry and had benefited from any type of development finance, was
selected to participate in this research study. An exploratory qualitative research
approach, which is more meaning-based than statistical forms of data analysis, was
adopted in order to gain an in-depth understanding of the phenomenon under study.
Also, given that the West Rand District Municipality is a single community in a
specific location, a case study research design, by way of in-depth semi-structured
interviews and secondary data sources, was chosen as appropriate for detailed data
collection. In analysing the data, thematic analysis - which is one of the most
common approaches to qualitative data analysis - was adopted for this study.
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Keywords
Economic growth, Economic development -- Social aspects, Developing countries -- Economic policy, Dissertation (M.Dev.Stud. (Center for Development Support))--University of the Free State, 2018