Effect of development finance on the perfomance of agricultural SME's in the West Rand district municipality
MetadataShow full item record
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.