Edition 15
BANKER SA EDITION 15
solutt ions FOR SA’s
SMALL BUSINESS SECTOR
PICASSO HEADLINE
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ADVERTORIAL
Making a positive difference Sasbo – The Finance Union is an organisation making a positive difference in the lives of our members by influencing the sector and stakeholders, providing a professional service, protecting members in the workplace and enhancing their lives.
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asbo – the pulse of the finance sector. We care about our members and we care about our sector. Through our dynamic service excellence, professionalism and integrity, we strive to protect our members’ interests and to make a positive difference in their lives. Finance is a global sector and Sasbo is fully engaged as a global player through its membership at international level. We monitor developments in the finance world and we use our influence on the sector and stakeholders to promote a successful, well-run and sustainable financial system. The sector’s strength is also Sasbo’s members’ strength. We are an organisation with solid longstanding experience and in 2016, we will celebrate our centenary – a milestone we are all proud of. Sasbo was established in 1916 by banking-sector employees who needed a voice to enhance their collective goals. Over the years, various finance and banking unions were consolidated into one strong, democratic union, making Sasbo the major player in the finance sector that it is today. With approximately 68 000 members, we are respected throughout the sector for our apolitical views, the protection and benefits we provide to our members, as well as our commitment to our members, South Africa and its economy. We do not promise or promote unrealistic settlements. We promise a negotiated settlement that is fair, equitable and sustainable. Recently, we successfully represented a
‘Sasbo – The Finance Union strives to make a positive difference through responsible, sustainable and healthy labour relations.’
Sasbo – The Finance Union strives to make a positive difference through responsible, sustainable and healthy labour relations. We strongly encourage ALL finance workers – regardless of their seniority, race or political views – to join Sasbo for the benefits of collective bargaining, as well as for their individual protection against any and all unfair labour practices.
senior manager at one of the major banks by not only having him reinstated, but also ensuring compensation to the value of R1.945 million. Through our involvement in the Financial Sector Code, Bankseta, Inseta, Nedlac and other industry bodies, we play a positive role in enhancing our members’ prosperity.
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CONTENTS
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CONTENTS 10
Regulars 06 EDITOR’S NOTE Investigating the state of South Africa’s SME environment 09 MD’S MESSAGE Looking at the importance of SMEs in SA 10 LOCAL AND INTERNATIONAL BANKING NEWS New head at African Development Bank, Kenya sells treasury bonds via mobile, and FNB wins Gauteng government banking tender
Features 14 18 25 26 31
44 TECHNOLOGY Seeking success in migration to cloud
SA’S STARTUP UNIVERSE Insights into SA’s tech startup landscape
46 REPORT BACK Africa is on the brink of a major shift towards mobile banking
TAKING THE LEAP Local entrepreneurs share their business lessons COMPLIANCE FOR SMEs A look at regulatory requirements for SMEs A CALL FOR BOLD ACTION SA’s need for the promotion of strong entrepreneurship
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BEE FOR SMEs What SMEs need to know about the Revised Codes of Good Practice
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SMALL BUSINESS TAX: WHAT YOU NEED TO KNOW Understanding tax implications
54 OPINION Are multinationals at a tax advantage in SA’s digital economy? 57 OPINION Why outplacement is a smart strategy
SME FINANCE: FROM AVAILABILITY TO ACCESS Examining the SME ecosystem and how it can be strengthened
DEVELOPING TOWNSHIP ECONOMICS Are townships the next market for banks?
50 TRAINING Working towards financial literacy for small businesses 53 CHILDREN AND YOUTH Encouraging entrepreneurialism in SA’s youth
INNOVATION IN SME FUNDING REQUIRED How startups can access funding, and what channels are available
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49 INSIGHTS The Banking Association reports back on its study tour to Malaysia, plus lessons for SA
58 OPINION Creating successful customer loyalty programmes 59 CSI Improving corporate social investment practices
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63 CLOSING OPINION Looking back at the global economy over the first half of 2015
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hen we decided to tackle the topic of small and medium enterprises (SMEs) for this edition of Banker SA, we knew we would not be short of content. SMEs are a hot topic globally, but especially in South Africa, where the National Development Plan (NDP) stipulates that 11-million jobs need to be created by 2030 – 90% of these by SMEs. Quite frankly, we are not on track. In fact, earlier this year, local media reported widely on the release of some sobering stats produced by the Endeavor jobs calculator, a global tool developed by the International Labour Organisation (ILO), National Statistics Agencies and Endeavor Insights, which takes into account the different factors that are essential for job creation.
According to the Endeavor calculator, South Africa needs more than 49 000 SMEs growing at a rate of 20% per annum to make the NDP target, or no less than 8.2-million small and micro-enterprises to create the same number of jobs. Sadly, research by the Global Entrepreneurship Monitor (GEM) shows that up to 70% of new businesses in South Africa fail in their first year. The pressure is on to improve our SME success rates. Ultimately, more collaboration is needed between government, financial and academic institutions, business and support agencies to create an enabling environment. In this issue, we look at the challenges facing SMEs and other stakeholders involved in the SME ecosystem, and what can be done to address them. Topics we’ve investigated include funding, economic policy, governance and compliance, tax, BEE and the need for an integrated approach. We’ve also profiled entrepreneurs at various stages of their business journeys, gleaning their lessons and celebrating their successes. It’s been a thought-provoking edition to work on, and my hope is that you find the articles as interesting and challenging to engage with as the editorial team has, and that the content drives us all forward in striving for a more inclusive economy.
PS. Banker SA would like to issue an apology for an error in the closing opinion piece of Edition 13 by George Herman, Head of South African Portfolios at Citadel, titled “2015 local outlook”. Gremlins in our system resulted in the words “external reporting” being added at the beginning of each bullet point. We are sincerely sorry for any confusion caused, and we apologise to the author for the error. Visit www.banking.org.za to view the edited article.
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EDITORIAL
Banking Association Editorial Board Cas Coovadia Thenji Nhlapo Editor Tamara Oberholster tamara@picasso.co.za Content Manager Raina Julies Copy Editor Lynn Berggren Content Co-ordinator Michéle Jarman Contributors Lauren Barbour, Cara Bouwer, Septi M Bukula, Rose Cohen, Cas Coovadia, Trevor Crighton, Charles de Wet, Delia du Toit, Yule Edwards, Lindsay Grubb, Georgina Guedes, George Herman, Fikile Kuhlase, Thami Mazwai, Muzi Mhlambi, Kim Novick, Tamara Oberholster, Rianné Potgieter, Craig Spalding, Helen Ueckermann, Lisa Witepski Head of Design Studio Jayne Macé-Ferguson Designers Anja Hagenbuch, Mfundo Ndzo
SALES
Project Manager Andrew Green andrewg@picasso.co.za Sales Consultants Stephen Crawford, Alec Rompelman, Gregory Sirmongpong Business Manager Lodewyk van der Walt lodewykV@picasso.co.za
PRODUCTION
Production Editor Shamiela Brenner Advertising Co-ordinator Merle Baatjes
OPERATIONS
Senior Bookkeeper Deidre Musha Subscriptions and Distribution Shihaam Adams subscriptions@picasso.co.za General Manager: Magazines Jocelyne Bayer
Copyright: Picasso Headline and The Banking Association South Africa. No portion of this magazine may be reproduced in any form without written consent of the publishers. The publishers are not responsible for unsolicited material. Banker SA is published quarterly by Picasso Headline Reg: 59/01754/07. The opinions expressed are not necessarily those of Picasso Headline. All advertisements/ advertorials and promotions have been paid for and do not carry any endorsement by the publishers.
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SME ecosystem in need of a shake-up
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MESSAGE FROM THE MD
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We must acknowledge the importance of SMEs
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his edition of the Banker SA looks at the importance of the small and medium enterprise (SME) sector in SA. There is a danger that progress towards growing this sector sustainably continues to be clouded by the ongoing commentary on aspects of the challenge, because we talk about it too often. Yet, there can be no doubt that the growth of SMEs is a crucial element in the growth of an inclusive economy that creates sustainable jobs. We must, in order to develop SMEs, agree on the critical ingredients and work together to provide these. There is often a view that the only impediment to the growth of SMEs is a lack of debt finance. However, this is but one link in the chain that must be weaved to support SME growth. Other links are non-financial support, venture capital, own contributions through savings, regulations and markets. All of these must be addressed in a co-ordinated way if we are to make a substantive impact on development of SMEs. The Small Business Project has been tracking a panel of 500 SMEs annually since 2011. The results of the survey in 2014/2015 demonstrate that the SME sector in SA is stagnating. If one compares 2014/15 to the base line of 2011, a further 20% of SMEs surveyed reflected no growth in turnover. The number of businesses reporting a decrease in staff spiked to 21%, the highest since the tracking started. Another startling finding is that 61% of businesses believe the regulatory burden has increased in the last year. If one goes by this data, which is the only set of data derived from a consistent tracking of a panel of SMEs, one must conclude we have a serious problem in
developing SMEs in SA. The data indicates the sector we are relying on to make a significant contribution to economic growth and employment is contracting in these critical areas. It is also evident that the regulatory environment is a critical inhibitor to the growth of SMEs. So what do we do? I would be so bold as to postulate the following interventions: • A clear message from government that it will address, decisively, the critical regulatory issues affecting the growth of SMEs. These include registration of businesses, tax matters, labour issues, guarantees and others. This message must be within the context of a clear indication from government that we will promote a market-based economy in SA. • An appreciation by large businesses that SME growth is critical to inclusive economic growth and the long-term
Cas Coovadia
sustainability of business in SA. Such appreciation must translate into interventions that deliberately include SMEs in the procurement value chains of large businesses and in the enterprise development strategies of large businesses. • Effective and optimal utilisation of government resources and institutions earmarked for non-financial support of SMEs. • Recognition that everybody will not be an entrepreneur. We must be careful not to look at SMEs as the silver bullet for addressing unemployment. Every unemployed person will not be an entrepreneur. We must identify those with the skills and drive to start businesses and develop and support these, while also addressing the broader economic issues inhibiting job creation. • A real partnership between government, the private sector, SME representatives and labour to do the above. A “real partnership” means clear roles and responsibilities, and agreement on objectives and sanctions for not delivering on roles and responsibilities. The Board of The Banking Association SA has identified SME development as one of the National Development Plan deliverables for the sector. We are very keen to work with all relevant stakeholders to ensure SA encourages and grows SMEs. Banks currently finance around 94% of SME financing in the country, so are already doing business in this sector. However, I believe we can make an even greater impact, including in those sectors of the SME environment which have been under-served, if we can collaborate constructively with other stakeholders, particularly with government.
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Adderley Street Standard Bank building becomes home to Cape Town Museum
Capitec tops SA social media scores
The old Standard Bank building in Adderley Street, Cape Town, is home to the new Cape Town Museum, launched by the Department of Cultural Affairs and Sport and the Department of Transport and Public Works on 1 September 2015 to kick off Heritage Month. The building dates back to the 1880s and was known to many as the “Queen of Adderley Street”. It has now been given a contemporary purpose that reflects the diversity of the city and its heritage.
According to the recently released 2014/2015 Ubiquity Social Intelligence Report: SA Retail Banking, Capitec is South Africa’s best bank according to consumer opinion on social media, while Nedbank is the worst. The report measured opinions expressed on social platforms for 12 months ending 30 June 2015, and considered customers’ (and other stakeholders’) opinions across social platforms. It revealed that credit-related issues, followed by customer service, costs and savings, are the most important bankrelated issues, accounting for more than 90% of issues raised by the market. Absa was the only bank to score a net positive opinion on credit-related issues, while Capitec fared best in terms of customer opinions on bank fees. Customer service overtook banking fees and costs in the second quarter of 2015 as the second most prevalent issue, with opinions expressed about customer service being more negative than any other banking issue. Some 59% of all comments on social media were negative about customer service, while only 14% were positive. FNB and Nedbank scored the worst at customer service, while Capitec was the only bank with a net positive rating. Absa, Nedbank and Capitec all scored an overall net positive rating on savings, while FNB and Standard Bank scored an overall negative rating. More FNB customers engage on social media than any other bank, but FNB received more negative recommendations than any other bank in SA, closely followed by Standard Bank and Absa. Yet more prospective customers were looking into banking with FNB than any other bank.
Altech Card Solutions launches MobileForms Altech Card Solutions (ACS) has launched a new tool to eliminate the need for paper forms, aptly called MobileForms. ACS is one of only two South African partners for this UK-developed solution. Derek Chaplin, Managing Director
of ACS, explains that eSAY, the company that developed the MobileForms technology, specifically wanted partners in Africa. “They realised that as we already host banks’ data, this would open doors for them in this highly regulated sector,” he says. MobileForms is currently in pilot phase in various stages of implementation in three of SA’s major banks, although banks were not the first adopters of MobileForms. The solution was first welcomed by the facilities management industry.
Gauteng government to bank with FNB On Tuesday 4 August 2015, Gauteng’s second open tender pilot was finalised, with First National Bank (FNB) beating its three main competitor banks to become the provincial government’s preferred banker. The bank will retain its status as the Gauteng provincial banker for the next five years. The terms of the contract will see FNB administering the payment of salaries to 200 000 staff and paying more than R3-billion a month to suppliers, as well as investing R200-million into township enterprises through its Vumela Enterprise Development Fund. The open tender system is part of an attempt by the Gauteng province to improve transparency, following a report in 2014 that found almost 90% of the province’s residents viewed corruption as a threat to democracy.
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INTERNATIONAL BANKING NEWS
SAA and Ecobank launch travel credit card in Ghana South African Airways (SAA) and Ecobank Ghana launched a co-branded SAA Voyager MasterCard credit card in Accra, Ghana, in August 2015. This strategic partnership offers two credit card options: Gold and Platinum MasterCard credit cards, which include benefits ranging from lounge access to excess baggage allowance, bonus Voyager Miles and premium check-in, among others. SAA Voyager members and Ecobank customers who apply for the card will be able to earn SAA Voyager Miles for everyday purchases by swiping their credit card when purchasing goods or services. They will then be able to use the earned miles to fly with SAA, Star Alliance partners or other airline partnerships. “This customer-value proposition reflects our confidence in Africa, and our resolve to become Africa’s leading world-class loyalty programme,” says Suretha Cruse, SAA Executive for Customer Loyalty. “The SAA Voyager Gold and Platinum MasterCard credit cards will be the catalysts for African growth; strengthening the landscapes for two iconic African leaders within our respective industries here in Ghana and across the continent.”
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Dr Akinwumi Adesina takes the reins at African Development Bank (AfDB) As of 1 September 2015, Nigerian-born Dr Akinwumi Adesina has formally taken up the position of president of the African Development Bank (AfDB). Adesina is a development economist and agricultural development expert with 25 years of international experience and becomes the first Nigerian to serve as president of AfDB. Previously, he served as minister of Agriculture and Rural Development in Nigeria.
Chinese currency payments on the rise in SA
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Kenyan government selling mobile-based treasury bonds In their June 2015/16 budget speech, the Kenyan government announced the launch of the first mobile-based treasury bond, M-Akiba, with a minimum investment of 3000 Kenya shillings (roughly R385). Designed to promote financial inclusion among ordinary citizens, the bond gives purchasers access to government debt securities through their mobile phones. M-Akiba was developed by Kenya’s Capital Markets Authority, the Central Bank of Kenya, ICT Authority and National Treasury.
Recent SWIFT data shows that the number of South Africa’s renminbi (RMB) payments increased by 33% over the last 12 months and by 191% over the last two years. In June 2015, 31.3% of direct payments value between South Africa and China/Hong Kong were in RMB, versus 10.8% in June 2014 and only 4.6% in June 2013. In addition to direct flows between South Africa and Greater China, SWIFT data shows that nearly 70% of the number of payments between the latter is still intermediated by the United States, mainly in
USD. “The rise of RMB usage in South Africa is another good indicator of the cross-border use of the currency,” says Hugo Smit, Head of SWIFT South Africa. “Much of this growth has to do with the strengthened bilateral relations between South Africa and China, which were renewed at the end of 2014 to include trade co-operation and sustainable investment opportunities between the two countries. As a result of this effort, RMB usage in South Africa should continue to grow at a good rate.”
Evolution of number of RMB payments with South Africa RMB payments sent and received in volumes with rest of world
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+33% campared to June 2014 +191% compared to June 2013
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■ Other countries ■ CN and HK
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SA’s startup universe The Ventureburn Startup Survey, released in June 2015, has added an interesting twist to SA’s entrepreneurship-focused research by focusing on technology startups. By Cara Bouwer
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ccording to Ventureburn’s Jacques Coetzee, the survey defines a tech startup as a company with annual revenue below R20-million and staff numbers between one and 100. The survey sample size assumes a population of 5 000 tech startups in South Africa. The research – undertaken in partnership with First National Bank, investment advisory firm Clifftop Colony and analytics company Qurio – polled just under 200 tech startups. Each firm was asked 42 questions, ranging from funding to founders, revenues and everyday challenges. The data echoes issues raised in terms of the broader entrepreneurial universe, by studies such as the Global Entrepreneurship Monitor, which notes that entrepreneurial activity in South Africa dropped by 34% in 2014, from 10.6% to 7%.
Q&A
with Ventureburn’s Jacques Coetzee Starting with funding, the survey shows most tech startups are looking for R50 000 to R500 000? Most of these IT-based startups usually need startup money for about a year or two. In that time, they can build a viable product and prove the concept. They need roll-out money to burn through. Unfortunately, we find that a lot of companies in our survey don’t make it past the two-year mark; either because they haven’t proved their concept or they don’t have the funding to continue to try and build their product. Those are the companies we need to support. They are the future Facebook companies; because when they make it, they make it big.
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Jacques Coetzee is a Reporter at Ventureburn.
The survey showed that 56% of tech startups relied on bootstrapping to raise initial funds, followed by investments from family and friends (11%). Very few were funded via the banks (2%), venture capitalism (3%) or private equity (1%), and none by crowdfunding (raising monetary contributions from a large number of people, typically via the internet). Why? That was an odd one for me. The local crowdfunding scene is very small. The kind of people who fund like this are more design focused, mainly because a design business can offer perks to those who fund it. So for R200, you might get a copy of a book or something. But a startup that tries to build a payment platform doesn’t have the same incentives to get the public to help it create a product.
to support entrepreneurship, but many aren’t focused on technology. You do see programmes like the Western Cape Premier’s Entrepreneurship Recognition Awards; they are giving away almost R2-million to businesses across categories such as Most Innovative, or Best Social Enterprise, or Best Student Business.
Government funding, at 1%, was also low? There are a lot of government initiatives
What is it about the Western Cape that inspires technology entrepreneurship?
The Western Cape (59%) leads the country in terms of tech startups, with Gauteng at 29%. Do you think the tech focus skews the entrepreneurship picture? I definitely think the statistics would have been different [if the focus was broader], especially in terms of the demographics. The Western Cape is the leading province in terms of tech startups. In terms of overall entrepreneurship, Gauteng would probably have been more.
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There are a lot of theories. One is that the universities (Western Cape University, Stellenbosch, UCT) have a good dialogue and are in close proximity. I think that plays a major role in terms of developing skills and research and development. But also the lifestyle in Cape Town has been compared to Silicon Valley; that laidback culture. And we have programmes like the Silicon Cape Initiative. Plus there’s a lot of money, which also helps! That’s the biggest driver.
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WHAT DO SA’S TECH ENTREPRENEURS LOOK LIKE?
Of course, funding is only one issue. Do startups need to adapt their offerings more? If companies can’t find funding from outside, then one thing we saw in the survey was that more profitable companies were service orientated. So either they are consulting or lending their skills in the business-to-business environment. There is space for companies to realise that they can have a two-pronged business approach in order to keep the engines running. So they have valuable skills to outsource to other companies while, at the same time, they’re working on an product in-house, which they eventually scale and move to market. Finally, 70% of founders had a corporate background, but 66% said they wouldn’t return to corporate. What does that tell you about motivation? A lot of entrepreneurs were motivated by lifestyle choices and personal development, and being their own boss and having a creative outlet. They are forward thinking and innovative. These kind of lifestyledriven individuals would definitely struggle to go back to corporate. ›
Ventureburn surveyed a total of 237 tech startups of which 197 responses are included in the analysis. Assuming that there is a population of 5 000 tech startups in South Africa and that the sample size is random, we believe that we have achieved a 95% confidence level and a 7% margin of error with the remaining responses.
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“The Western Cape is the leading province in terms of tech startups. In terms of overall entrepreneurship, Gauteng would probably have been more.”
WHAT DO STARTUP EMPLOYEES LOOK LIKE?
WHERE ARE SA’S STARTUPS?
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IMAGES: VENTUREBURN.COM IN PARTNERSHIP WITH QURIO, FNB AND CLIFFTOP COLONY
HOW ARE SA STARTUPS GETTING FUNDED?
WHERE ARE THE WOMEN? The Ventureburn Startup Survey highlights, at least within the startup tech sector in South Africa, a worrying lack of female entrepreneurs. According to the research, just 6% of women were founders of nascent technology firms in South Africa, compared with 68% with male founders and 27% for firms founded by both genders. The reasons for this are difficult to answer, says Ventureburn’s Jacques Coetzee. “It comes down to grassroots level and about getting women interested in things like engineering, technology or computers. But you are seeing women making awesome strides in the industry and a lot of the time, it’s them doing so with a co-founder who is male. That combination is significant and it has a lot of impact.” Coetzee points to the case of Aisha Pandor, daughter of Minister Naledi Pandor, as a shining example. “Her company Sweep South (a domestic services and cleaning products company) has been accepted into Silicon Valley’s 500 Startups Accelerator Programme. It’s the first South African company to be picked for that programme. Stories like that should be celebrated.” According to the Global Entrepreneurship Monitor 2014, there was a slight uptick in women’s entrepreneurship in 2014, largely due to greater government support. The survey showed that early-stage entrepreneurial activity among women rose from 64% in 2013 to 71% in 2014. But, as a percentage of the total population, women still lag men. This is reinforced by the findings of incubator Seed Academy’s first startup survey results (2015), which takes a look at business startups in South Africa across the spectrum. The survey said that at 35%, women entrepreneurs “are still in the minority in a largely male dominated startup culture”. It seems this gender bias permeates SA business. While not entrepreneur specific, the 2015 South African Women in Leadership Census, released by the Businesswoman’s Association of South Africa in July, notes that only 8.79% of JSE-listed companies have 25% or more women directors, only 9.2% of women hold chairperson positions and only 2.4% women are appointed in CEO positions.
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Taking the leap Whether you’re founding a start-up or your company has become an international superpower, running a business is never easy. But, as these entrepreneurs in different stages of their business journey can attest, it’s always worth it. By Delia du Toit Dr Thandi Ndlovu, founder of Motheo Construction Group As a young girl growing up in Soweto, Dr Ndlovu couldn’t have imagined that she would one day be the CEO of a construction company. But she’d always shown a desire to help others, and this would become her motivation to leave a successful doctor’s practice and build houses for those less fortunate. “I was running a private medical practice in Orange Farm, an informal settlement South of Johannesburg, before starting Motheo,” she says. “I noticed that a lot of my patients had illnesses that related to poor living conditions, and I wanted to find a way to help.” She partnered with Chris Cudmore and Tim Potter, two seasoned professionals in the construction industry, in 1996. Together, they grew Motheo to what it is today – a hugely successful company that’s seen her winning the Businesswoman of the Year Award in the Entrepreneur Category from the Businesswomen’s Association of South Africa (BWA) in 2013, among a string of other awards. Though she admits taking the leap from medicine to construction was a bold move, she didn’t let fear hold her back. “After running my own medical practice, I had picked up a few business skills along the way. But starting a construction company was obviously out of my scope of expertise. So I surrounded myself with experts and I asked a lot of questions.” The bigger challenge, she says, was being a black woman in a white male-dominated industry. “I was a clear minority and I wasn’t welcomed with open arms,” she
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“I was, and am, 100% equal to any man and have the right to be in the position I am in. I don’t need to apologise for anything.” recalls. “But I didn’t back down, I didn’t try to fit in, and I certainly didn’t try to hide my femininity by dressing like a man. I stood tall and I made my presence known. I did not for one second allow the thought that I did not belong to enter my mind. I was, and am, 100% equal to any man and have the right to be in the position I am in. I don’t need to apologise for anything.”
Her resilience has earned her some serious respect. “Men and women are different creatures – we do life, work and family differently. But we can learn to respect each other enough to play off each others’ strengths. I think we’ve done that well at Motheo.” Making her mark and bringing others into the spotlight too, was her aim from the beginning. “I decided early on to leave a legacy. At Motheo, we’re serious about developing women leaders and have a trust allocated to the training and development of women. I also run a foundation that supports more than 20 students financially.” But, she counsels, even opportunities like these won’t matter if you’re not willing to put in the work on the road to success. “I am where I am today because I put in a lot of effort, but I also started out as a young girl with hope and dreams. Don’t compare someone else’s highlight reel to your own behind-the-scenes reel, and put in the hours to make your business work.”
TOP TIPS It starts in your head. If you don’t believe you’re worth it, how do you expect anyone else to believe it? Know who you are. You will have challenges and you will have to stand firm by reminding yourself who you are. Remember that it’s a journey. It’s not pretty sometimes, and your nails might get chipped while a few wrinkles surface, but when you look back on the struggles and joys, you’ll see it was worth it. Do your job well. Don’t complain about starting out on the back foot, rather prove disbelievers wrong. www.motheogroup.co.za
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Annabel Dallamore, co-founder and CEO of Stock Shop The best ideas are always of the ‘why didn’t I think of that’ variety, and Stock Shop is no different. As the company’s rapidly expanding client base shows, Dallamore’s business model neatly fits into a huge and glaring gap in the financial market. “I was working as a derivative specialist at the JSE, and realised that one of our biggest time drains was the huge number of queries we got from people wanting to get involved in the stock market in their personal capacity, but not knowing who to talk to or trust, where to access information and how to make sense of it.” Stock Shop is the answer to that need – a one-stop portal with loads of useful, well-organised and easy-to-understand information about the stock market and other financial topics. “We’re like a PA to the stock market,” she says, “and [we] ease the process of getting into it. We’re a centralised platform with information about service providers, the products available, and how everything works. We also allow users access to everything in one place, so they don’t have to visit multiple websites and spend hours hunting for the right info.” Dallamore’s own learning curve was much steeper than those who use Stock Shop. “I had absolutely no entrepreneurial experience,” she says. “I literally just left the corporate world one day, and started my business the next, in 2013. But I also
“A startup is like a newborn. It’s never asleep and needs constant attention. So you have to learn to balance your work and personal life.”
did my homework. I used a multitude of tools, books and online information to create a good business plan and to think very hard about the concept and whether it could work.” And, of course, the real work hadn’t even started. “I learned to make the most of every single day, getting the business known, bringing the product to the market as soon as possible and testing it. Time, I soon saw, really is money.” Her more pressing challenge of late is finding the right employees as the business expands. “I think most startups face this problem,” she says. “Few skilled
TOP TIPS Stick to your promises. Have integrity and meet deadlines. It separates good businesses from the bad. Don’t flood yourself. Sure, you want to build the business, but you’ll end up feeling overwhelmed if you take on too much, which is counterproductive. Learn to communicate with clients, and your team. This will help everything in your business run more smoothly. Rely on friends and family. Vocalise your journey so that you don’t feel alone. Just remember that not all advice is good, but sometimes you’ll gain valuable insights from an outsider’s point of view. www.stockshop.co.za
individuals are willing to work for a brand-new company, and even less at rates you can afford.” With nearly 3 000 active users on their site, another 1 000 enrolled in their online academy (which provides beginner and advanced fi nancial courses in text, audio and video format), and their newly launched Daily News section, it’s clear that Stock Shop’s staff of six will need to expand soon. “A startup is like a newborn. It’s never asleep and needs constant attention. So you have to learn to balance your work and personal life,” advises Dallamore. She does this by scheduling time for herself and marking it in her diary, so she sticks to it. “Even if it’s just taking myself out for lunch or going for a walk with the dogs, alone time refreshes you.” No matter how tough the going gets, Dallamore has never looked back. “I’m most proud of having built something that people truly needed. There was a huge black hole in this field and I think we’ve helped a lot of users take control of their fi nancial future, and that’s very rewarding.” ›
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Sanego Motsweni, founder of Fashion Church Even as a small child, it was clear that Motsweni had an entrepreneurial spirit. From selling sweets to his peers in primary school, he upgraded to selling cigarettes in high school, while washing cars on weekends and even selling fireworks around New Year’s Eve and other festivities. “No one in our family had their own business,” he says, “and I would watch them get downtrodden by working for someone else. On some days, they would complain about not wanting to go to work in the mornings, and I didn’t want that for myself. Our neighbour had a spaza shop, though, and I often admired that way of life – doing your own thing and being your own boss.” But tough times would follow. Motsweni, after studying music production, started an events company that would soon go belly-up. “It didn’t work because I had some great ideas, but no experience in the field to back it up, and so clients weren’t convinced to take a chance on me.”
“I met amazing designers at fashion shows and shoots, but many of them were struggling. So I wanted to build a platform to help them – a place where they could sell their products without hefty shop rental fees.” Luckily, it led to him starting an online lifestyle magazine under his company GP Media. “The magazine is still an ongoing passion project, but lately there hasn’t been much time to work on it,” he adds.
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That’s because, while visiting fashion shows for the magazine, Motsweni had the bright idea for Fashion Church. “I met amazing designers at fashion shows and shoots, but many of them were struggling,” he explains. “So I wanted to build a
platform to help them – a place where they could sell their products without heft y shop rental fees.” Fashion Church was called GP Store at fi rst, and the idea even won him R10 000 start-up capital in a YFM competition. He enrolled in business classes to learn the basics, built the platform in two months, and has been playing catch-up for the last two years. “After about a year, it got so busy that I couldn’t keep up. I got freelance contractors to help me and dropped everything else to focus on this. I also rebranded the website and named it Fashion Church, because while I tried to sell other products on the platform in the beginning, fashion was the clear best-seller.” While the focus is still on local designers, Fashion Church has started selling international brands, too. Eventually, the plan is to connect designers from all over the world, he says. Even though the concept was an almost immediate success, he’s had to make a few changes along the way, such as reworking the logistics. “It often happened that designers forgot to tell us when their stock was sold out, and then we had to apologise to customers who had paid for the item on the site. We’ve had to iron out those issues as we went along.” Despite the learning curve, and a few hiccups along the way, Motsweni loves his ‘job’. “Even though I work all the time, there’s freedom in controlling your own destiny, and I love every second of it.”
TOP TIPS Do what you love. When you own a business, you really work all the time, so you have to love it. And don’t do something you don’t understand, because people are attracted to enthusiasm. Never, ever give up. It’s going to be tough, but usually things start happening right when you’re about to throw in the towel. Know that life will change. You won’t have much of a personal life and I’ve lost some friends. But the ones worth keeping will stick around. Understand the business basics. A great idea won’t work if you don’t know the basics of running a business. I hate it, but I make a point of staying on top of financials and admin. www.fashionchurch.co.za
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Ian Lester, CEO of Beyond Wireless After little more than a decade in business, Beyond Wireless, a local specialist wireless machine-to-machine (M2M) communication solutions provider, already operates in 35 countries on four continents. That’s even more impressive when you consider that Lester had no technical background, entrepreneurial experience or startup funding when he founded the company. “I worked for a large mobile network operator before this, and all I knew was that I couldn’t do it anymore,” he says. “I was spending 70% of my time fighting the organisation, and I knew my time could be better used. But I’d been interested in the M2M industry for a while and understood the overall concept of remote monitoring, even though I didn’t have the technical skills. I was really just a regular kid with a matric certificate, but I’d identified a business opportunity and could see the big picture. And I think I had the type of agile personality required to start a business.” He cashed in his pension fund, maxed out his credit cards, took all the available funds from his bond and threw himself
TOP TIPS Abandon all fear of failure. Once you see failure as a stepping stone to success, you’ll embrace it as part of the process. You’ll try things that don’t work every day, and you’ll have to keep trying. But know when to let go. If something doesn’t work despite your best efforts, fail fast, get it done, and move on. Don’t plan too much. Too many people over-plan and go into analysis paralysis. Set your sights on a goal, jump off the cliff, and learn as you go along. Keep an open mind and listen to the market. Find your purpose. Many businesses are only about the numbers, and there’s nothing wrong with that, but purpose drives you more. People today want fulfilment. www.beyondwireless.co.za
“Huge projects don’t need an army of 500 to run efficiently. But it’s been difficult to grow something that started out in my own flat to a business that now operates across multiple time zones.” into the business. “I also had to explain to my wife why I was leaving a well-paying job for poverty! I couldn’t give myself a salary for way too long,” he laughs. But through hiring the right technical experts and offering them shares, the business soon pulled in some valuable clients. Today this list includes names like UNICEF, The International Committee for the Red Cross, The Harvard AIDS Research Institute and the US Government Centre for Disease Control. “At first, we faced an uphill battle to convince the market that remote monitoring wasn’t just science fiction,” he says. “This was 2003 and being able to monitor assets like cold storage or even foot traffic sounded like something from a Terminator movie. But after we landed the South African National Blood Service as a client in 2006, other people started taking us seriously.” Today, the bigger challenge is operational, he says. “We still only have
14 employees, which is a testament to the scalable nature of the technology. Huge projects don’t need an army of 500 to run efficiently. But it’s been difficult to grow something that started out in my own flat to a business that now operates across multiple time zones.” That’s why he believes agility is key in entrepreneurship. “We started out with a solid plan, of course, but we’ve changed it multiple times already. Markets change, technologies change, you make some mistakes along the way, and you have to think on your feet to adapt. There is no paint-by-numbers plan for any business.” Despite the obstacles, Lester couldn’t be happier. “Our temperature-control solutions opened up a massive new world in public healthcare. Kids in third-world countries could get safe vaccines and it’s amazing to know we have a role to play in making the world a better place.” ›
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“I re-evaluated my career to figure out which sectors I wanted to work in. For each idea, I asked myself whether I had adequate knowledge of the field, and what my weaknesses and strengths would be.”
After working as an advocate at Absa, Standard Bank and Transnet, among other large companies, Advocate Hassan realised that she needed to do something different with her life. “I was very young when I decided to go into the legal profession and soon realised that what you see is not what you practice,” she says. “It certainly isn’t like the TV shows! I’d become passionate about entrepreneurship as a career choice, and about growing women and empowering them, and knew I had to make a change.” She’d built a solid understanding of the worlds of finance, project management, mining and logistics as an advocate, which equipped her with the right kind of knowledge to investigate entrepreneurship in these fields. “These are all environments that are traditionally male dominated, and I wanted to change that. I re-evaluated my career to figure out which sectors I wanted to work in. For each idea, I asked myself whether I had adequate knowledge of the field, and what my weaknesses and strengths would be.” She started WOA in 2003 in KwaZuluNatal, at fi rst focusing on logistics. It was a roaring success and with WOA as the holding company, the group has since expanded into fuel and oil, mining, pharmaceuticals and even construction. For Hassan, timing – particularly in the South African context – was allimportant when she decided to embark on her new career path.
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“It was still a relatively new democracy at the time and people were actively trying to create new opportunities. I think we had great timing, and that was part of our success. But after that, we made sure to constantly grow our skills and explore new opportunities to ensure we keep that competitive edge.” But, as in any business, there were numerous challenges and obstacles to overcome along the way. “Access to funding was, and remains, the biggest challenge,” she says. “And, unfortunately, no matter how badly you want to make a difference, leave a legacy or build a brand, initially a business is about profit. You can’t help anyone else unless you’re fi nancially stable yourself.” She was turned down again and again when she fi rst applied for fi nance, but she did not give up on her dream to make a difference. “I had so many doors slammed in my face,” she recalls, “but I never stopped knocking on them. And, fi nally, I got what I needed.” And now, Hassan is making the same happen for countless other women around the country. “My biggest achievement is our Future Leaders development workshops, which we’ve been running for nine years. The women who attend often come from truly impoverished backgrounds and are despondent about their futures. When they walk out of the workshops, they feel powerful and hopeful about the future. It’s wonderful to see someone’s outlook change like that. Having a purpose and helping others is what drives your own success.”
TOP TIPS Have a solid plan. Women often set out in business and think they’ll nurture it as it goes along, but you need to have an idea of how you’ll develop and expand it. I still make a vision board every year for this reason. Never compromise on integrity. It’s so easy to trade your values in for money, but it’s essential to remain true to who you want to be. Sometimes, when your bank account grows, your passion stops. Know that failure is the price of success. Never apologise for failing. It’s not about how many times you fall, but about how many times you start again. Don’t try to do it all at once. Don’t feel guilty about not being able to be everything to everyone at the same time. You can’t be the best wife, daughter and mom and run a successful business every day. Sometimes some areas of your life will fall behind, but balancing it out again is key. www.woaonline.com
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Advocate Pria Hassan, CEO of Women of Africa (WOA) Group
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“When wireless is perfectly applied the whole earth will be converted into a huge brain.… We shall be able to communicate with one another instantly, irrespective of distance... and the instruments through which we shall be able to do this will be amazingly simple… A man will be able to carry one in his vest pocket.” Nikola Tesla, Inventor and Visionary Predicted the smartphone and the Internet in 1926
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Compliance for SMEs To minimise the risk of damage to an SME, all stakeholders, employees and employers need to be kept up to date with regulatory requirements. By Rianné Potgieter
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ver the past few years, the business world has seen various financial crises, corporate collapses, scandals and an increase in regulatory activities, followed by a barrage of new legislation. These important drivers led to a heightened interest in formalised frameworks and codes relating to corporate governance, risk management and compliance, albeit mainly focused on large corporations or listed entities. However, the expectation is that SMEs should also be managed and operated on good business practice and ethical principles corresponding with their larger counterparts. Having said that, it is commonly acknowledged that the implementation of these principles may be difficult, cumbersome and costly for an SME. Compliance should then be tailored to the SME’s particular circumstances.
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Existing frameworks and leading practice Some of the current leading practice frameworks from which SMEs could take guidance are: • King Code of Governance Principles and the King Report on Governance (King III) – a non-legislative code on principles and practices by which organisations are controlled and directed. • Generally Accepted Compliance Practice framework of the Compliance Institute Southern Africa, which sets out a riskbased approach to compliance. • ISO standards (the world’s largest developer of international standards). • ISO 9001 – Quality Management Systems. • ISO 19 600 – Compliance Management Systems. • ISO 31 000 – Standard on Risk Management.
RIANNE POTGIETER is Director at EXP Regulatory Compliance Consulting (Pty) Ltd.
Common challenges The above frameworks are an overkill for many SMEs, but SMEs are subject to the same laws and regulations as similar larger companies. Ignorance of the law is no excuse for breaking it. Penalties and other sanctions (such as imprisonment) for non-compliance have an adverse effect on the SME. SMEs may have acute shortages of knowledge, experience and capabilities in governance, risk and compliancemanagement practices. Employees are typically required to perform a range of tasks, including looking after governance, risk and compliance, which leads to a loss of independence, but it is almost impossible to keep up to date with legislation and to ensure compliance thereof. Additionally, while risk management may be embedded in day-to-day processes, it is often informal and unstructured. SMEs also often lack transparency and frequently do not disclose financial and tax information. The knowledge of accounting procedures, accountability and responsibility may also be very limited.
Benefits of a structured compliance programme Implementing a risk and compliance programme protects directors against personal liability and helps the SME to comply with legislation. Good business practices, such as formalisation of governance and compliance, lead to employee, client, regulator and other stakeholders’ satisfaction, and make SMEs more ‘bankable’ and credible. Good business practice also allows SMEs to strengthen their marketing pitch – customers know and understand that the SME is working to high standards, providing quality products and services.
How banks and financial institutions can assist Financial institutions can incentivise customers’ adoption of corporate governance principles by making it a condition for financial support and linking transactions and risk-adjusted pricing to such principles. They can also educate SME customers on accounting standards to ensure transparency and the availability of financial statements, and develop awareness programmes regarding their compliance responsibilities.
What SMEs can do SMEs need to create a culture where governance, risk and compliance are all-important. The next step is to identify and prioritise risk. Compile a risk register highlighting the top 10 risks facing the SME. Once identified, SMEs need to manage these top risks, build risk-management capacity in employees and add it to their performance contracts. SMEs should also report on risk by ensuring the top risks are a standing item at senior management meetings, and allocate sufficient time for discussion and review.
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A call for bold action South Africa, with its high unemployment level, should be courageously stepping into business creation and promoting strong entrepreneurship to boost the economy. By Septi M Bukula
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im Clifton has laid down a challenge that demands that leaders everywhere pay careful and urgent attention, and respond with equal urgency. In his book, The Coming Jobs War, the CEO and chairman of global performancemanagement consulting company, Gallup, boldly asserts that job creation and successful entrepreneurship are the world’s most pressing issues, ranking ahead of what most consider the top-ranking threats of today: excessive government spending, environmental degradation, and even the threat of global terrorism. Promoting entrepreneurship and job creation, Clifton asserts, must be the sole mission and purpose of leaders everywhere. “Winning the jobs war requires all hands on deck, and failure is not an option,” he says. We in South Africa should have no difficulty at all relating to this call and
SEPTI M BUKULA is the Founder of Osiba Management.
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responding to it with the urgency and seriousness it demands. With one of the world’s highest unemployment and inequality rates, South Africa needs to take bold and courageous actions to stimulate much higher levels of entrepreneurship and business creation. Since 1995, when the post-apartheid government introduced its comprehensive White Paper on Small Business Promotion, significant strides have been made to create a policy and supportive environment that encourages and enables entrepreneurs to start and grow successful businesses. A number of institutions and programmes have been introduced across the country to lend a helping hand to those who want to venture out on their own. It is generally acknowledged that compared to its peers, particularly on the African continent, South Africa has an advanced and comprehensive support system for entrepreneurs. Much progress has indeed been made since the dawn of democracy, and the nation’s entrepreneurs are generally much better for it. This progress should be acknowledged. However, the country faces a paradox. With an entrepreneurial support system that is on par with those of many of its peers around the world, by available statistics, South Africa still ranks poorly when it comes to many measures of entrepreneurial performance. In its 2013 Entrepreneurship Report, the South African Institute for Professional Accountants (SAIPA) shows that on three important measures of the entrepreneurial environment, the majority of respondents
rated the country’s performance poorly (see figure 1+2). The Global Entrepreneurship Monitor (GEM), which has conducted annual entrepreneurship studies for 16 years in more than 100 countries around the world and has been conducting similar studies in South Africa since 2001, has consistently shown that the country rates poorly compared to other nations on several key measures of entrepreneurial activity. Its 2012 study, specifically, compared South Africa with several SubSaharan countries, and the results were far from encouraging. In its 2014 report, GEM reveals that compared to Sub-Saharan Africa, which performed at an average of 58% over the same 11-year period, a rather dismal number of South Africans reported future entrepreneurial intentions, the highest being in 2010 when 19.6% of respondents reported positive entrepreneurial intentions. The report concludes, rather sombrely, that “South Africa’s rate of entrepreneurial activity is very low for a developing nation – a mere quarter of that seen in other SubSaharan African countries.” Some dismiss the GEM reports by raising questions about its methodology. This is not helpful and does not address the real issues raised by GEM’s research. It amounts to shooting the messenger, which is unfortunate. The fact remains that over many years, researchers in the small business field have been raising concerns about the poor data on entrepreneurship and small business in the country. Without such data, it does not help shooting down the only credible source of information we have.
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What accounts for this poor performance? In my view, several key factors explain why we consistently turn out such a disappointing showing. First, with all the efforts by various actors in both the public and private sectors, our field still lacks clear thought leadership. Fields of practice that make advances do so because there are clear thought leaders who shape the direction of the field through analysis, challenging existing paradigms and pursuing system-wide innovation. The field of entrepreneurship and small business promotion has no clear thought leader in South Africa. There is a lot of activity, but no thought leadership. Hopefully the relatively new Department of Small Business Development will step forward and provide this much-needed leadership. But leadership is urgently needed not just from government alone but from other players too, particularly in the business and academic sector. I often hear from leaders in the private sector that there is no meaningful conversation among them on what it will take to move entrepreneurship forward in South Africa. Many are quick to point accusing fingers at the government. This is not helpful. The entrepreneurship promotion field will be much better off with clear leadership coming from all players that matter – government, business, academia, sector education and training authorities, and organised business formations. The latter, in particular, which should be leading efforts to drive entrepreneurship and small business growth in the country, have been largely silent. It does not help that they are so divided and can hardly speak with one voice on any issue. Second, for reasons that are hard to fathom, the different actors in the field find it incredibly difficult to work together. This has created a collaboration gap that weakens the entire support system. In an effective support system, different players in government, academic institutions, business, and various support agencies and intermediaries work together in a connected
system where each part reinforces the rest, resulting in what I call whole-system success. The World Economic Forum (WEF) has offered a useful framework to depict an effective entrepreneurial support system (see Figure 3). The core emphasis of the framework is on the importance of multi-stakeholder partnerships. In South Africa, the system operates in a highly fragmented manner, with very little effective collaboration. Many across the support system have lamented this problem, but still little progress is being made in resolving it. Somehow there appears to be a multiplicity of invisible barriers that prevent the types of partnerships envisaged by the WEF from coming into existence.
Figure 1
Figure 2
These barriers exist within government, horizontally and vertically, and between government and its agencies and the rest of the players in the business and academic sector. Perhaps we are all too focused on achieving individual success instead of ploughing our collective energies into ensuring whole-system success that will make the country achieve more. Third, in a country where the majority of would-be entrepreneurs have not had much exposure to entrepreneurship early on in their lives, either within their communities or through the formal education system, strong mentorship is an absolute requirement for business success. There have been a few false ›
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procurement and access to starts in attempts to get Individuals & finance. For many years, there significant, high quality Intermediaries has been ongoing wrangling and sustainable mentorship Entrepreneurs Business Entrepreneurial Champions over the constitutionality schemes off the ground. Those Entrepreneurs Academic Foundations SMEs Insitutions of small business-specific programmes that have managed NGOs and others High-growth Schools procurement by the state, a to survive have either suffered companies Higher Education Large companies Informal Education practice that is followed in many from quality challenges or lacked economies around the world, the scale necessary to reach a including industrialised ones. A large number of entrepreneurs considerable amount of time was lost on Figure 3 who sorely need them. South Africa needs arguments about this instead of searching a large-scale, professional and sustainable for innovative solutions to resolve the issue and the fourth point above, in mentorship programme that reaches issue. Now, finally, the government’s plan order to formulate and implement entrepreneurs and business owners, not to direct 30% of its procurement to small effective entrepreneurship policies and just in urban and metropolitan areas, but businesses is a salutary step. We just took programmes, South Africa needs to in smaller towns and rural areas as well. unnecessarily long to get here. address the ongoing problem of poor data Notable examples of existing programmes On the issue of access to finance, on entrepreneurship and small business. include Shanduka Black Umbrellas, South Africa is world-renowned for the The problem has been identified and Business Partners Mentors and ORT JET, sophistication of its financial-services lamented by many, but to date no concrete but these programmes are still limited in industry. Yet the problem of access to scale compared to the need. A much larger, action has been taken to resolve it once finance for small businesses, particularly and for all. high-quality and professional programme new ones, persists. There are practical The National Development Plan is urgently needed. captures the situation thus: “State efforts to small business challenges, for sure, that Fourth, our small business development explain the problem of access to finance. assist the [small business] sector have had efforts somewhat lack power because they But how can such a sophisticated industry limited success. Moreover, partly due to are not sufficiently focused on growth not be able to look beyond whatever the lack of robust data, the debate around sectors and industries, and are not barriers exist and innovate new solutions small and medium-sized enterprises adequately intelligence driven. I recall to respond to what is clearly a real need and their ability to assist in employment visiting an institute in Italy many years that holds so many small businesses back? growth has become heavily weighted with back whose sole focus and specialisation Is it perhaps due to lack of interest? How ideology, assumptions and anecdotes.” was on gathering intelligence on can that be the case in a country with such This cannot be a correct path to success. emerging fashion trends around the high levels of unemployment and poverty? Lastly, innovation within the support world, packaging and disseminating How can we not put aside whatever system has fallen short of expectations, that intelligence to the region’s small differences we may have on what we may although there have been instances of it businesses, and then providing specialised consider the best approach, and work to here and there. A leading US expert in technical assistance to these small find a solution that will help the country the field of innovation and technology businesses to become leaders in the move forward? commercialisation, who spoke at an fashion field globally. Our efforts need South Africa has achieved much in the international small business conference to be guided by a clear understanding of field of small business development over held in Cape Town in May this year, growth opportunities across our national the past 20 years. We have much to be observed that it was difficult to explain economy and globally. This requires a grateful for and to celebrate. What is now how South Africa, with its well-developed thorough analysis of where real growth required is to correct the deficiencies in small business support system compared opportunities exist, packaging that order to close the gaps that continue to to many countries with similar levels of information and making it available to socio-economic development, had what he hold back the progress of our collective entrepreneurs in a cost-effective manner. efforts. We have what it takes to succeed. saw as a relatively under-developed small Then customised support programmes We know what is holding us back from business sector. can be crafted and implemented to enable achieving what we are capable of as a Part of the answer clearly lies in entrepreneurs to take advantage of the nation. Let us close these gaps and see our limited innovation in addressing the identified opportunities to start and grow efforts soar to greater heights and deliver most pressing challenges facing small successful businesses. the results we all aspire to. businesses. Take the examples of state Fift h, picking up on the GEM research
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Government Funding and Transport
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Rural Housing Loan Fund – the muscle behind incremental housing finance What is the Rural Housing Loan Fund The Rural Housing Loan Fund (RHLF) is a South African government-owned entity, established in 1996 by national government. The RHLF was established to empower people in rural areas to maximise their housing choices and improve their living conditions through access to housing credit and government housing-subsidy funds.
Our mandate The mandate of the RHLF is to facilitate access to incremental housing finance for low-income earners, in order to enable them to improve their housing conditions in rural areas and small towns in South Africa. The RHLF operates as a wholesale finance institution and achieves its mandate through retail financial intermediaries, who then access funds from the RHLF and lend them to individual borrowers.
• To improve sanitation conditions; • To purchase residential land for building a home; and • To fence homes.
How we deliver on our mandate We work with microfinance institutions that are registered with the National Credit Regulator, and are willing and able to grant incremental housing loans to the general public in our target market. We also work with community-based organisations that operate along with stokvel or co-operative principles by granting funds to enable them to lend to their members only. Using both types of intermediaries, we are able to deliver incremental housing loans in all provinces of South Africa.
Our achievement The RHLF has built a long track record of delivering incremental housing loans to
low-income earners. For the year under review: • Cumulatively, since inception in 1996, just over 455 319 loans have been disbursed nationally for incremental housing as of the end of March 2015. • 40 185 incremental housing finance loans were granted to our end users through our intermediaries as of the end of March 2015. • We have disbursed more than R1.3 billion since inception to deliver on our mandate. If you want to become a Rural Housing Loan Fund approved partner, contact us: Postal Address: Rural Housing Loan Fund PO Box 645 Bruma 2026 Tel: 011 621 2500 Fax: 011 621 2520 Email: mmothobi@rhlf.co.za Website: www.rhlf.co.za
Accepted usage of our funds The RHLF loans can be used for the following mandated purposes: • To build a house, in most cases after adding a loan to personal savings; • To improve the quality of a home; • To extend existing homes; • To connect to services, such as electricity and water;
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Innovation in SME funding required The funding is out there. Startups just need the support to access it, and funders need to find new ways of supporting them in the realisation of their ideas. By Georgina Guedes
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ccording to the Global Entrepreneurship Monitor (GEM), as many as 70% of small businesses fail in their first year. Research conducted by the Seed Academy has shown that in addition to this, very few businesses survive more than five years. At the same time, the National Development Plan (NDP) demands the creation of 11-million jobs over the next 15 years, and expects 90% of new employment to be created by small, medium and micro-enterprises. According to the Seed Academy’s First Startup Survey, released this year, “job creation should be a key outcome of entrepreneurial activity”, but the results highlight “the proportion of businesses that employ five or more employees are still in the minority”. “South Africa does not currently feature the levels of innovation, knowledge and R&D supported by a healthy triple-helix relational ecosystem, which is typically associated with the type of sustained, longterm economic growth and competitiveness the NDP’s targets require,” states a report by SiMODiSA (a collaborative research, stakeholder engagement and policy design effort by stakeholders from both the public and private sector in South Africa) titled, “Accelerating the growth of SMEs in South Africa”.
It is clear then that the country has big expectations of small businesses, but the support and funding seems to be lacking. The Seed Academy report also showed that only a small percentage of entrepreneurs have funded their businesses from vehicles formally established to support them. Of the respondents, 83% were self-funded, while 4% accessed a bank loan, 3% secured funding from a development funding agency (DFI), 2% from angel investors and 1% from venture capital.
Innovative solutions necessary In light of these figures, it is evident that the South African startup funding ecosystem needs innovative solutions to provide startups with the funding that they need, but also awareness of that funding. “Government has the funds to support startups,” says Donna Rachelson, Chief Catalyst at the Seed Academy. “It is within their interests to look at incubation. They just need the right funding and the right approach to get a real return on investment.” She says that many incubators and funds only provide support for small businesses in certain stages of their life cycle, without providing the necessary support to get them to the next stage. “We see serial incubatees who jump from one incubator to another, instead of getting the support that they need to help them to scale their business.”
“Government could encourage angel investors to support small businesses by providing them with tax breaks for doing so.”
She also believes that while government has many programmes in place to support entrepreneurship, there are some approaches that they could take that would significantly benefit the ecosystem. “Pension and provident funds contribute nothing to startup funding, and there is no legislative imperative to force them to do so. Can you imagine the impact on the economy if they were mandated to put a portion of their 10% of allowable funding towards venture capital?” In addition, she says, government could encourage angel investors to support small businesses by providing them with tax breaks for doing so.
Bridging the startup support gap According to McLean Sibanda, CEO of the Innovation Hub, there isn’t a solid pipeline of funding in the startup space. “Where the money is missing is the smaller amounts,” he says. “So if you’re looking for anything from R50 000 to R1.5-million, you’ll struggle. If you’re looking for more than that and you have a good value proposition, you will get the money, but it will take longer.” He says that in addition to the good pipeline, the ecosystem lacks entrepreneurs with the skills to package their ideas so that the value proposition is highlighted.
The crowdfunding challenge in SA For companies in this boat, he raises crowdfunding. “We’re seeing this coming up internationally, but also within the African continent, largely in Kenya,” he says. Startups that require R100 000 to R1-million in funding can use a crowdfunding platform to approach ten ›
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people, who could come in with R10 000 to R100 000 each, and with proper marketing, easily fund their businesses. For example, a Kenyan initiative called Farm Capital Africa won second place in the Innovation Prize for Africa this year with its risk-sharing, agri-business funding model that draws in investors for a share of farming profits. It identifies, screens and shortlists full-time farmers with smallholdings and helps them devise farming plans to attract potential investors who earn profit over time. This both supports small-scale African “agripreneurs” and benefits investors who can realise returns from this untapped market. However, there is a snag standing in the way of widespread adoption of this funding mechanism in this country. “It’s questionable whether it’s legal in South Africa,” Sibanda says. He explains that
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“We’re seeing the rise of competition entrepreneurs who win one, then go on to win the next one, but their business doesn’t really grow.” once you are opening a company up for public investment, it is regarded almost as if the company is a listing, and in his understanding of the law, this then requires that the call for investment is carried out in accordance with how a listed company would do it. Nonetheless, he believes ways around this can be found.
The drawback of competitions Another innovative mechanism that Sibanda has observed in the funding ecosystem for startups is competitions. However, despite the fact that they provide finalists with publicity and winners with funding, Sibanda believes that the competitions are causing their own problems. “There are far too many and we’re seeing the rise of competition entrepreneurs who win one, then go on to win the next one, but their business doesn’t really grow,” he says. Added to this is the fact that a lot of the competitions are internationally run, and the local winner goes on to compete in the global competition. While this presents an incredible opportunity for the winner, it doesn’t keep the entrepreneur in South Africa, delivering local solutions.
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Trying out new approaches
“It seems that while there are great expectations on entrepreneurs, and the funding exists to support their enterprises, what continues to hold them back is that the dots are simply not being joined.” needs to provide more, readily accessible funding through various mechanisms, with funding earmarked for research and development and tech funding, and with mandates put on corporate social investment initiatives to fund startups. “They should be looking at the ideas that no one else wants to fund because the returns aren’t that great. But if it’s going to depend on government funding or ongoing grants, it’s just not viable,” he says. It seems that while there are great expectations on entrepreneurs, and the
funding exists to support their enterprises, what continues to hold them back is that the dots are simply not being joined. They are unaware of funding, unable to access it, it takes too long, or they are unable to present their idea in a consumable business plan. At the same time, there is an abundance of incubators out there, and entrepreneurs must look for those that provide the services that they need. If South Africa is to get the growth it wants out of this segment of the market, those dots need to be connected pretty quickly.
IMAGES: SEED ACADEMY; STARTUP SURVEY RESULTS 2015
Another innovative approach Sibanda has been seeing is the provision of services in lieu of funding. “Someone I know is developing an application in the medical sector, but he is not a techie himself – he’s a medical specialist – but he’s teamed up with a group of techies, raised money to fund himself, and has got to a point where there’s a proof of concept before someone else can put in the money.” He says that this approach is useful as it’s important to have “skin the game”. “This way, it’s structured. The group of developers invest their time in the development, so that they can become part of the team. I believe that what they are doing is strengthening the proper value of the team. Investors look at the idea, but also at the team: does the team have what it takes to take the idea forward?” Broadly speaking, Sibanda agrees with Rachelson when he says that government
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BEE for SMEs
Positive takes for small businesses from the Revised Codes of Good Practice. By Lindsay Grubb
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he Revised Codes of Good Practice (RCoGP) have set off alarm bells for many SMEs which are concerned about the impact that these codes will have on their businesses, most notably the controversial compulsory minimum ownership score. In terms of ratings, the Exempt Micro Enterprise (EME) will receive an instant Level 1 status for 100% black ownership, Level 2 for 51% and Level 4 for all others. The Qualifying Small Enterprise (QSE) requires significantly more changes, as ownership is just one element out of five against which they are judged. Amanda Dambuza is the CEO of Uyandiswa Project Management Services.
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Deciding whether to look at potential partnerships, and giving up a percentage of their company could be daunting for SMEs and QSEs, but there are many enterprises who have successfully transitioned.
A successful partnership In 2014, Johannesburg Stock Exchange (JSE) listed company, Adapt IT, acquired a 49% stake of Uyandiswa Project Management Services, a 100% black woman-owned, project-management consultancy founded by CEO Amanda Dambuza. Dambuza says her company shares similar values to those of Adapt IT. Prior to the 49% acquisition by Adapt IT, she says she had made a personal choice to partner with an entity. “I believed there was strength in having a more established partner,” she says. “Majority ownership was, of course, very important for me in order to still retain elements of independence and credentials as a black women-owned enterprise.” The acquisition formed part of Adapt IT’s commitment to enterprise development. CEO Sbu Shabalala said at the time that there were excellent synergies between the two businesses, both of which were firmly established and committed to being leading Broad-Based Black Economic Empowerment (B-BBEE) companies. Adapt IT retained its Level 3 B-BBEE status and is ranked as the 28th most empowered company on the JSE, and ranked sixth within the Information and Communications Technology (ICT) sector. Uyandiswa is a Level 1 black
woman-owned company, which favourably influences its customers’ B-BBEE scorecards. Dambuza says there has been a big shift in the way Uyandiswa operates today, compared to before the acquisition. “We are operationally more structured and more astute,” she says. “We have a competent team of shared-services people who take the load off the executives of the company. They help us with proper governance and adherence to the Companies Act. We can therefore focus on building a commercially viable and sustainable business. We have been afforded the opportunity to focus on attracting the right talent and giving them exciting employment opportunities.” She says the real value realised thus far is the level of governance that Adapt IT brings to Uyandiswa. “As an experienced business, they lead the way for us and we are learning through this,” she says. “Furthermore, the association with an established JSE-listed company affords Uyandiswa the opportunity to be seen as a stable entity, albeit a fairly new one.” Dambuza says Adapt IT benefits from doing business with highly networked professionals who come from established corporates, adding to the strategic thinking and operational efficiencies. Adapt IT has also been able to positively influence its B-BBEE scorecard through this partnership with a majority black women-owned entity. Her advice for SMEs who are looking into potential BEE partners in order to become compliant with the new codes comes from personal learning. “It is very important to understand you will struggle to be successful on your own, regardless of your B-BBEE status,” she warns. “There are so many operational and governance matters that need to be taken care of that you only learn on the job. Also, you need to have access to investment funding and working capital for growth if you are to achieve anything worthwhile. When you have made the decision to partner, choose your partners very carefully. Make sure you share similar values and that there are real synergies between your companies or complementary service offerings.”
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“When it comes to skills development requirements, there are interesting options for those SMEs that are in a position to capitalise off this requirement.”
IMAGES: UYANDISWA PROJECT MANAGEMENT SERVICES, TRANSCEND CORPORATE ADVISORS
The compliance journey While owners of EMEs and first-year startups might not be ready to look into BEE partnerships just yet, there are other ways to ensure that their organisation is more appealing to their customers and current and potential employees. Dr Robin Woolley, Transformation Facilitator at Transcend Corporate Advisors and author of Everyone’s Guide To Black Economic Empowerment And How To Implement It, says that successful growth in the SME sector will all depend on how companies work with the tools. He believes that if companies seek ways to ensure their business is in strategic symbiosis with the environment of business, then everyone will be better off. The key, however, is for business owners to understand their options. When it comes to skills development requirements, for example, Woolley says there are interesting options for those SMEs that are in a position to capitalise off this requirement. He says there is a need for SMEs to significantly invest in not only current employees, but future employees or future customers. The main challenge for many SMEs appears to be that they are in survival mode and not able to plan ahead. In his guide, Woolley states that there is a desperate need to develop the broad base of skills in the country. He says the issue South Africa faces in many ways is opposite to that of the advanced economies, where there are not enough people to fill the skills gap. “In South Africa’s case, we have too many people and too few jobs,” he says. “This is exacerbated by the fact that many South Africans are structurally marginalised as a consequence of a lack of basic skills training. The focus is therefore not just on employment per se, but rather on employability. This is where the skills development section of the transformation
scorecard can now have a big influence on the future of the South African economy. It just makes business sense to equip your resources with the skills and ability to do their jobs. The shift in the RCoGP to include non-employees opens up this opportunity and is a positive and interesting development in the country’s journey, given the size of the education crisis we’re currently facing as a nation.” Woolley suggests that learnerships form an ideal mechanism for developing a career path where there is a scarcity of skills, and act as a structured approach for vocational competence through ‘learning while you work’. While companies will be responsible for a sponsored salary (stipend), training fees, coaching fees and administrative costs for the learner, they will be able to receive government grants for undertaking the learnership, which takes the form of a tax incentive and placement incentive (depending on the SETA). SMEs should treat learnerships as an important business tool in talent attraction and retention, as there are five bonus points awarded for the retention of learners, if the company fully intends hiring the learners that they take on, if the courtship process works and if their performance is at the desired level. Woolley shares a number of critical success factors, but recommends starting the process by being clear on your organisation’s business needs by identifying where the specific skills gaps occur. Then ensure your development strategy is clearly linked to your organisational strategy. “The human capital section requires a long-term strategy of talent attraction and retention, and not just a quick fix,” he says. The question that companies need to be asking is: How can I influence these attraction and
retention factors to ensure my organisation is the best place to be? It will be those SMEs that look at their business holistically and take concrete steps to comply with the revised codes that will catch the eye of the bigger corporates, who are looking to expand their list of current suppliers to include new ones. Companies in the past might have used specific suppliers due to a common shareholder, regardless of whether they were the best option for them or not. This makes it difficult for new suppliers to get a foot in the door and it means there might be less competitiveness and growth within the supply chain. Supplier development is used to drive change in this area. It is focused on the development of the capacity of black companies, and contributions to these companies are measured based on a target of 2% of net profit after tax, invested annually. The aim is not simply to expose these organisations to a structured development programme, but to support them in the future.
Dr Robin Woolley is the Transformation Facilitator at Transcend Corporate Advisors.
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SME finance: from availability to access Muzi Mhlambi, drawing from a recent study commissioned by The Banking Association South Africa, examines the South African SME ecosystem and the challenges it faces. SME accessing finance: lack of collateral; poor financial management/lack of proper financial records/poor record keeping; lack of required management competencies/ lack of business skills; and lack of access to markets/poor linkages to market access. There is nothing new in the above, yet we continue to decry the lack of finance. Although some effort has been made to address these issues, the problem with current efforts is that they are fragmented and fail to take a holistic approach.
Muzi Mhlambi is Manager Programmes: Financial Inclusion Division at The Banking Association South Africa.
FACTORS INHIBITING SME ACCESS TO FINANCE
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Some suggested interventions are SME risk self-assessment tools and partnerships with corporate/government procurement programmes to offer supply chain finance. Encouragingly, National Treasury is also working to improve credit infrastructure aimed at closing information asymmetries between banker and entrepreneur.
SOURCE
ACCESS IMPEDIMENTS IDENTIFIED
2014 GEM South Africa Report
• A lack of sufficient collateral on the part of the entrepreneur • The inability of the entrepreneur to produce a business plan that is acceptable to the financial institution • Poor market research and the absence of a viable business idea that has demonstrable benefits • Lack of access to markets
Financial Sector Program Survey
• Financial status / cash-flow • Accurate financial records or statements • Collateral • Over-indebtedness • Business plans and business skills
Tendai Chimucheka and Ellen Rungani study 1
• Lack of financial deposit (17%) • Lack of collateral (37%) • Poor business plans (7%) • Business idea not viable
USA study
• No relationship with lender (14%) • Weak / missing financial documents (14%) • Weak business performance (23%) • Insufficient collateral (30%) • Low credit score (35%)
African Development Bank East Africa study
• Lack of quality information • Business informality • Inadequate guarantees / collateral
Small Enterprise Finance Agency 2
• Lack of required management competencies • Poor financial management • Poor linkages to market opportunities
INFOGRAPHIC: THE BANKING ASSOCIATION OF SOUTH AFRICA
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he issue of access to finance tends to dominate the talk on barriers limiting SME success. This challenge is not limited to the South African market, but is a global phenomenon. The Banking Association South Africa recently commissioned Osiba Management to look at the SME funding ecosystem to understand where the gaps are, identify the stakeholders and, if possible, quantify the amount and type of finance available. In total, 85 institutions were identified with an array of products targeting SMEs. While it was not possible to quantify available funding (as organisations do not specify the size of their funding pools), it is safe to estimate the collective funding pool could be several billions of rands each year. It would seem, therefore, that there is a surfeit of funding available to SMEs. If you consider that enterprise development and supplier development have been designated by the Broad-Based Black Economic Empowerment Act 2013 (Act No. 46 of 2013), with Codes of Good Practice as one of the priority elements, this funding pool is about to get much bigger. If funding is not in short supply, then why is access an issue? Research indicates various factors are to blame and attributable to the SMEs themselves, providers of finance, and the business environment, particularly government regulation. According to the study commissioned by The Banking Association, the issues of SME access to finance seem to be similar around the world. Across all studies, these are the most persistent issues that are obstacles to
“The impact of inaccessibility to bank finance and lack of financial management knowledge to small, medium and micro enterprises in Buffalo City Municipality, South Africa.” African Journal of Business Management Vol. 5(14), 18 July, 2011, pp. 5509-5517. Small Enterprise Finance Agency, “Request for proposal: Evaluation of Khula Credit Guarantee Limited”, May 2014
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ADVERTORIAL
Ké Concepts unlocks MFI growth in Africa
Using creative partnering to boost scalability “MFIs generally score high on their agility and understanding of markets and their needs, but they often lack the ability to scale,” explains Green. “As competition Gary becomes Green is Managing Director at Ké Concepts.
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increasingly fierce, keeping ahead of the curve and speed to market becomes crucial.” Fortunately, technology can enable smaller players to operate responsively. Softwareas-a-service offerings and cloud-based, hosted solutions are easy to scale up or down as the business requires. They also free up time and capital for product development and improved service delivery that would otherwise be invested in IT. “We’ve been operating a hosted service out of Johannesburg almost since our inception 15 years ago,” says Green. “We enable microlenders to focus on what they do best, while we use our technology savvy and scalable skills to tackle challenges such as managing big data, evolving analytics, creating an intuitive user interface and reporting. It’s a win-win all round.”
Do more with less Africa poses some obstacles that first-world operators would not have encountered on their home turf, including less than optimal connectivity and a shortage of financial and technical skills. “Doing more with less takes on a whole new meaning in Africa,” says Green. “Innovation needs to be tempered with relevance and that is exactly Ké’s approach.” In emerging Africa, 99.99% of uptime is elusive and costly. “Although greatly improved,” says Green, “connectivity remains a key inhibitor to service delivery in remote areas. We’ve explored a number of workarounds when it comes to tricky connectivity and infrastructure. Our offline functionality is geared to reduce reliance on uninterrupted connectivity. We also create clearly defined, pre-determined, workflow-based processes that require very little technical or financial skill to navigate. This means MFIs can tap into an
existing skills pool, lowering the cost of entry and presenting an attractive case for social upliftment.”
Driving down cost to serve while boosting engagement Creating an offer that is attractive yet still financially viable is a precise art – particularly in riskier frontier markets. “Although microlending is perceived as offering high returns, the monetary value earned per transaction is low,” explains Green. “This makes the cost of acquisition an important variable. Unwieldy processes, tedious administration and growing data requirements hinder growth. Our automation, particularly of origination, disbursement and rehabilitation processes drives these costs down significantly.” While MFIs leverage tech for a leaner business model, intelligent automation and the operationalisation of credit policies also build in fail-safes and address governance requirements. Not only can MFIs process more volume in less time, but they will also experience fewer errors and lower overall risk. Finally, engaging with clients on their terms has become critical. The only thing growing faster than digitisation in Africa is consumer awareness. “Technology is making services more accessible and financiers need to do more than offer a range of instruments if they hope to be competitive,” says Green. “We work with our clients to ensure they are equipped to offer a choice of distribution channels that goes beyond the branch network: mobility; agents in the field; or through the web.” Contact Details: Gary Green Tel: 011 514 5900 Website: www.ke.co.za
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inancial inclusion should be about reaching as many individuals as possible, regardless of geography or economic standing. This is no small feat in Africa, where each of its 54 nations presents a rather unique landscape. And while microfinance institutions (MFIs) enable much-needed business development and personal upliftment, they are often exposed to all manner of risk. South African-based Ké Concepts has been enabling a growing base of clients to gain a foothold in Africa for more than a decade. Its credit-management solution, CreditEase, has been successfully deployed across a number of African countries. Managing Director Gary Green explains how Ké Concepts leverages technology to assist MFIs in competing successfully on the continent. “Our solutions are developed specifically for Africa,” says Green. “This means we keep prevailing technological and economic conditions top of mind. Flexibility is the key. We continually reassess client needs and seek workable solutions that incorporate world-class microlending technologies, yet remain relevant and applicable within the African context.”
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Small business tax: what you need to know Small business owners may find themselves at a loss when it comes to tax, especially the when and – most importantly – how much. Here’s a simplified guide. By Lisa Witepski
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tiaan Klue, Chief Executive of the South African Institute of Tax Professionals, agrees that paying tax can be a baffling matter. “Often, business owners aren’t aware of the laws, or they don’t understand them,” he says. “They may also be unsure of the types of tax they should be pay.” Making the situation more complicated are the varying time scales for different types of tax, with SMEs required to submit returns monthly, bimonthly and annually. Acknowledging these difficulties, SARS established specialist desks to assist SMEs. Klue says these structures help SMEs ensure tax compliance, and because they have specific knowledge and experience in the small business arena, they are able to educate and empower business owners appropriately. Madelein van der Watt, Development Manager at Sage Pastel Payroll & HR, agrees that these desks are a valuable resource for business owners who are unable to afford an in-house tax practitioner, or even a professional who can give regular assistance. What are the basics an SME owner needs to know about paying tax? For a start, Van der Watt explains that different tax brackets may apply to small businesses. “If your business has a turnover of less than R1 million per annum, you should register for turnover tax with SARS. In this case, the first R335 000 of your annual turnover will be tax exempt, and thereafter you can expect to pay 3% of your annual turnover in tax, instead of having to administer multiple tax obligations like VAT, income tax, provisional tax or capital gains tax,” she explains. On the other hand, if your business is classified as a small business corporation
Madelein van der Watt is the Development Manager at Sage Pastel Payroll and HR.
(SBC), clearing a maximum turnover of R14-million per annum, you should expect to pay 28% of taxable earnings. But the first R73 650 of your earnings will be tax free. It’s therefore important that SME owners investigate the types of tax they are required to pay. Unless they qualify for turnover tax, as Van der Watt suggests, they will have to comply with several other tax types, depending on the type of business they own. These tax types range from VAT (because if a business owner’s company delivers goods and services at an annual turnover of at least R1 million, he or she will have to comply with periodic reporting requirements) to PAYE, UIF and SDL. These latter three tax types are paid by people with employees who earn above the annual tax threshold – and this is where things start to get complicated. PAYE must be deducted, reported and paid on a monthly basis, and annual and biannual reconciliations must be submitted to SARS. Meanwhile, UIF and SDL contributions are made at monthly
intervals. If a company has shareholders that earn dividends, it will also be required to withhold an amount for dividends tax, which will be paid over to SARS. And, if a business operates in the import/export space, it will need to comply with customs and excise regulations. Transfer duties must be paid by companies that acquire or dispose of properties. Finally, a company may also be liable to pay income tax. Although these may seem like an onerous burden for a small business to bear, Van der Watt notes that small businesses are given some relief. “Where companies with large turnovers have to pay a flat rate of 28% of their taxable earnings in income tax, SARS has provided a different tax scale for SMEs,” she explains. Turnover tax is another solution offering SMEs relief. As Van der Watt points out, it enables business owners to pay a low rate calculated on annual turnover, instead of paying many different types of taxes – plus, rates are more favourable in order to accommodate a lower annual turnover.
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Developing township economics
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he focus on township economies provides new and expanded markets for banks. Given the emotions involved, however, traditional banks will face more intense pressures to assist, where in reality they might prefer to do otherwise. This is an unintended consequence of the expectations created by the hype around the initiative. The focus on township economies is most welcome as it directly stimulates local economic development (LED) in township and rural communities. Stimulating economic activity gives them the wholesomeness found in other areas. LED is also educative as it results in local communities being more au fait with entrepreneurship and economic realities. The elephant in the room is that townships were a direct creation of a carefully and ruthlessly thought-out policy of apartheid; it made them hostels in which black people sleep and then work in the towns. In a Pavlovian sense, we are still gripped in the tentacles of this design. Communities usually have two types of entrepreneurs: opportunity entrepreneurs, who identify an opportunity in the market; or necessity entrepreneurs, who are forced by circumstances to become entrepreneurs. Our environment is pockmarked by necessity entrepreneurs, the ‘forced by
DR THAMI MAZWAI is the Executive Chairman at Mtiya Dynamics.
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circumstances’ elderly entrepreneurs, and are direct victims of the system. Hence the burgeoning informal sector. Worse still, these entrepreneurs are still affected by inner processes in the human mind that have been inculcated by our past. Apartheid resulted in the current entrepreneurial destitution in many communities. While this destitution is a global phenomenon, as not everyone responds to entrepreneurial stimuli in the same manner, in our situation it was enforced. Black people could not, by law, be entrepreneurs, nor did their education drive them in this direction. This is today staring at us in the face and will affect strategies to revitalise township economies. The recent xenophobic attacks on foreigners are an expression of the entrepreneurial destitution, as our informal businesses come second to foreigners. This is aptly put by Gordon Institute of Business Studies academic, Tashmia Ismail, who points out that the economic migrants from Pakistan, Ethiopia, Somalia, Mozambique, Zimbabwe and Bangladesh have long histories and cultures as traders in stark contrast to locals who, under apartheid legislation, experienced severe restrictions on commercial activity. As the demise of apartheid meant a reversal of the economic discrimination of the past in terms of business loans, rightly or wrongly, black people now believe that getting loans should be much easier. Thus, when anybody wants to be an entrepreneur, he or she will be assisted even if the idea is simply not viable. On the other hand, black people or communities cannot be blamed as the struggle against apartheid was about eradicating apartheid. As apartheid denied
people access to banks as entrepreneurs, its removal must make that access much easier. Thus, when banks assess individuals and reject applications for loans, it becomes a sore point. The sins of the past are still with us, yet there is no doubt that banks have moved away from where they were in 1995. Banks have bent over backwards and virtually changed the way they do business. They account for 95% of loans in the small business world, despite the presence of state agencies. But still, they are constantly under fire. And this is only going to worsen as the revitalisation of township economies gains momentum. To overcome this, banks must find ways to participate in the “valleys of death” when it comes to entrepreneurship in the townships and rural areas. The first valley of death is the post-startup phase in which entities that barely survive want funds to grow. The second is mostly in the R500 000 to R3-million demand for loans bracket. The third valley is in the informal sector – the micro-loans sector. A period of innovation and creativity must now come into play in the banking sector. The re-emergence of the new institutional economics has ushered in new economic analysis: that it is not only exogenous factors that drive economic behaviour; but endogenous pressures also play a part. An understanding of these pressures enabled Muhammad Yunus to create the Grameen Bank in Bangladesh. Perhaps the time has come for our institutions to move away from their Eurocentric traditionalism and operate in terms of local systems and understandings. Lending is not new in black communities. It is as old as the hills and people understand the surplus and deficit units interaction. It is time for banks to leverage on this understanding in the townships.
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The township economy has been touted as a new market for banks. By Dr Thami Mazwai
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ADVERTORIAL
Reducing economic crime through integrity tests
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he use of psychometric assessments for the selection and development of talent is a billion-dollar industry globally. In the war for talent, organisations need to ensure they select the ‘best’, and that the ‘best’ will stay and add value to the organisation for many years to come. The most widely assessed psychological constructs are cognition, personality and emotional intelligence. While these are vital constructs, there has been a substantial increase in the assessment of candidates’ ‘integrity’, as a part of the pre-selection screening process. Most organisations have created a set of core values, which help drive their organisational culture. More and more we are seeing the value of integrity on this list. Additionally, integrity has made its way into many organisational and leadership competency models, according to which these companies systematically select and develop their talent. While it has been acknowledged that high levels of organisational integrity are critical to long-term organisational success, a lack of integrity, which can result in a number of counterproductive work behaviours (CWBs) such as theft, fraud, unproductiveness, absenteeism, vandalism, and even violence, is no less important. In fact, research has revealed that CWBs cause significant financial losses. The situation in South African organisations is comparable to the global trends and, in many cases, is a lot worse. Specifically, the PwC Global Economic Crime Survey 2014 revealed that South African organisations experience high levels of economic crime, including fraud, bribery, corruption, misappropriation of
assets and financial statement fraud. The bottom line is that economic crime poses a serious challenge to organisations. According to PwC South Africa Director Louis Strydom, several respondents to their survey reported a loss of more than R1-billion each through fraud. The statistics are alarming and, importantly, not restricted to any specific industry, though research does reveal that economic crime is most prevalent in the financial services, retail and consumer and communications sectors. So how do organisations reduce the risk associated with CWBs? One solution is through the use of a holistic approach to integrity assessment. This means using integrity testing from three perspectives: 1. Pre-employment assessments to ensure that one reduces the risk of employing the ‘wrong’ people. 2. Post-hire assessments to assess reliability, personal values and organisational commitment among employees, pre-promotion or job transfer. 3. Organisational development assessments to identify counterproductive behaviours and weak links in the organisation at group level.
This approach is not only preventative, but also corrective. It acknowledges that economic crime is perpetrated internally and that while screening out ‘bad apples’ is critical, it is not sufficient, given that the Global Economic Crime Survey reports that 56% of fraudsters are already on the inside. Additionally, it sends a strong message to both internal and prospective employees that the organisation values integrity and that CWBs will not be tolerated. Further, it helps build a culture of integrity, which goes a long way to reducing the perpetration of economic crime.
From Potential to Preformance
For further information, please contact: Paul Leibowitz Tel: +27(0) 11 450 2434 Cell: 083 262 7230 Email: info@bioss.com Website: www.bioss.co.za
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Not all clouds are created equal Agility, flexibility, cost-saving and standardisation – why wouldn’t you opt for a cloud-based platform for your business? By Trevor Crighton
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he single biggest reason for failure in cloud services is not the software – it’s the person operating it,” opined Darrel Orsmond, Industry Head Financial Services at SAP Africa, at the recent Banking Tech conference in Johannesburg. “The average person inside an organisation’s sole obligation is to make the software behave like the thing they’re doing today. They try to remove the constraints they have and deliver the upside they desire – and that’s not the reason you buy software.” Orsmond believes that the key to successful migration to cloud services is the acceptance that all the hard work has already been done by a team of developers, and that organisations simply need to plug into the existing functionality. “There have been 100-million man days put into the
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development of our software, utilising best practices from all the organisations that SAP works with around the world,” he says. “The chances are pretty good that your origination process for a savings account is no different to the 200 000 other processes developed in conjunction with our partners around the world. Pricing structures for South African banks – ad valorem, e-wallets, prepaid services – are similar to those in the rest of the world and it’s unlikely that any bank will have a unique pricing permutation that doesn’t fit. And yet, I’ve never met a bank that doesn’t think their processes are absolutely unique!” Organisations still want new soft ware that does what their current soft ware does, which Orsmond cites as worst practice. “The thing you’re doing evolved over 40 years of incremental amendments to processes which weren’t standardised,
were never documented and not maintained properly – with permutations overseen by an actuary who is probably no longer with the organisation,” he says. “Thinking about cloud is the same as thinking about industrialising an organisation. It’s not about maintaining code and upgrading, it’s about standardising processes for efficiency.” The mindset change required to go for a ‘vanilla’ product is the biggest stumbling block – an industry driven by business cases means that negotiation is required every step of the way, which is something cloud minimises, due to that level of standardisation. As it is, every single transaction via SWIFT, InterBank, ATM or through MasterCard and Visa goes through the cloud, so it makes sense for the processes that enable those transactions to be based on the same system. Cisco’s Global Cloud Index forecasts that the Middle East and Africa are expected to have the highest cloud-traffic growth rate – a 57% combined annual growth rate – from 2012 to 2017. Global cloud traffic is expected to increase four-and-a-half times over the same period.
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TECHNOLOGY
This standardisation allows product managers to generate business cases far more rapidly. “We had one client who made a business case on one deal in a matter of months – the complete standardisation of the required processes made it easy to adopt and match the procurement requirements, delivering an immediate upside,” says Orsmond. “It almost completely removes the intricacies like payment and disbursement processes, and the integration of paper flow. As the cloud grows, investments in legacy systems will shrink and banks will focus on reducing the costs associated with hardware, infrastructure and other legacy technologies that consume resources but don’t drive innovation.” He also says the uptake of cloud products is normally implemented in lower-risk areas such as procurement and HR, rather than critical areas where it could make a major impact. “It’s seen as a hassle, rather than a value-add – which is a major mistake,” says Orsmond. “Procurement processes in financial institutions are extremely customised and have evolved with their organisational structure and requirements for accountability and governance. Everything is managed by the bank in the back office, and reported on. On the flip side is fraud; many banks actually don’t know how much downside risk they’re carrying.” The shift to not having a machine in the building to run processes is also a big leap for some organisations. “A major advantage to not having to maintain your own backend is that you can move people into more productive areas or allow them to focus on more important things, meaning your company can innovate and evolve instead of getting bogged down in the details,” says Orsmond. “And obviously, there’s no comparison between the overheads associated with running a cloud service versus maintaining your own software. The SAP software is cheap compared to in-house development and comes with the benefit of best practice on the back of international experience, and the shared knowledge gained across clients and industries.”
Another SAP innovation which removes many traditional barriers is FSN – a system that allows one corporate to pay another, anywhere in the world, without software. “The payment is generated in the banking system and delivered to any other corporate client’s bank without a cent of development,” says Orsmond. “It’s currently a P2P solution in use by companies like MTN, FNB and Standard Bank. Normally every single step in that process is customised and unique, but the cloud option has changed the business model completely.”
“A client needs to calculate whether they’d be better off doing it themselves, which is where cloud always wins.” SAP itself has had to completely reinvent its pricing model to keep up with cloud. “When you’re using software that’s based and maintained somewhere else, you have someone else managing it and making tradeoffs on usage and volume against other users, which also saves costs,” says Orsmond. As an example, organisations have to structure and budget for peaks in usage requirements – the 31st and 1st of the month when most transactions take place, for one. “You have to fund that in development costs and ROI over time – but in cloud, none of that applies. Usage models allow you to incur costs as you incur volume – it’s a shift from a Capex to an Opex model. If you need more, you pay more – and if you need less, you pay less. Having a server installed in an IT shop can take forever – you need to order it, install it and configure it before you start working. With cloud, everything is ready to go immediately.” The shift means that product managers don’t have to secure a set budget, and the risk trade-off comes right down, too. It comes down to a decision between the
cost of licensing software versus the cost of the institution’s individual back-end. “A client needs to calculate whether they’d be better off doing it themselves, which is where cloud always wins,” says Orsmond. “If it wasn’t cheaper, we wouldn’t have a product!” He says that for any period over two years, cloud will always be the preferred option because the development cost is distributed across the platform, rather than incurred by one entity. “The development is documented, constantly upgraded and complies with security and regulatory requirements,” he says. “Your banks don’t comply with all those things – I promise you!” Cloud has also opened new business opportunities on the back of ease of use, lower implementation time and cost savings. “People who want to get into the business can do so really easily without a massive outlay on premises or equipment – it gives startups the opportunity to try something and see if it works,” says Orsmond. Banks like Atom and CivilisedBank in the UK are the latest challengers to the establishment, making use of cloud and mobile technologies to deliver a different customer experience. Atom exists solely as an online and mobile service and relies on biometric security measures. A partnership with an as yet unnamed traditional bank will open up ATM access to clients and customer service will be run via telephone, email and social media. CivilisedBank will also operate as an online-only service, but will utilise a network of local bankers to serve small- and medium-sized enterprise customers, using a cloud-based technology backbone. Orsmond says that the choice to make the switch to cloud from the traditional model lies with the organisation, and should be based on the organisation’s business case. “What was true is true and it’s their choice to play it out or not,” he says. “Cloud offers you the flexibility of pricing and usage-based fees, as well as license-exchange options for migration from existing products. You’re not starting again when you make the shift to cloud or incurring upfront costs. You already own licenses and have incurred a cost, so a good provider will build a pricing structure that helps you.”
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Ready for a surge in mobile banking
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obile banking will soon enable millions of financial institution customers to conduct a number of digital banking transactions, including account balances, transferring funds between accounts, pay bills and locating ATMs by simply using a smartphone or another cellular device such as a tablet. Gary Allemann, Managing Director of Master Data Management, says the shift to digital is more pronounced in central Africa than in South Africa, mainly due to a combination of convenience and cost. “Mobile allows banks to franchise their services to individuals who, armed with a mobile phone and a small cash float, can act as the bank branch for their village or region. This allows banks to offer banking services at a far lower cost than that required to cover a branch infrastructure, and allows banking services to penetrate into previously unbanked communities,” Allemann says. Mobile banking solutions targeting Africa need to be different to those targeting Europe or the US. Mobile in Africa is not the same as internet banking on a smartphone. Successful approaches make use of technologies, such as Unstructured Supplementary Service Data (USSD), which are available on any feature phone. The African middle class is defined as a segment of the population spending between US$2 and US$20 a day. These are not wealthy people, Arthur Goldstuck is the CEO of World Wide Worx.
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and cost is very relevant to them. “One model to overcome the cost factor is to look at a transaction-based approach to mobile banking – this may suit unbanked consumers who are happy to pay a relatively high fee for convenience for once-off transactions like transferring funds to a distant family member,” says Allemann. “An alternative approach is to provide banking transactions at a low cost in exchange for the customer keeping deposits with the bank. The bank then makes its profits off the investment of capital.” The African banking market is ripe for consolidation. Mobility may well contribute to that drive, as only the larger banks can scale to handle the volumes of transactions that are generated by mobile. However, the surge in mobile banking is also contributing to an increase in the number of parties entering the formal banking sector. Allemann says banks will have to invest in IT infrastructure to support the growth in customers as well as transaction volumes. Mobile operators do not require a banking licence and therefore, in most cases, see themselves more as a middle man. “Mobile operators see mobile banking as an opportunity to drive network traffic, and possibly to take a fee for each transaction. But they are not typically trying to establish themselves as banks, and the majority of the processing burden will sit with the bank. Therefore the biggest investment must come from the banks,” he says. Arthur Goldstuck, CEO of World Wide Worx, says
mobile service providers, banks and other role-players are up for the challenge. The banks have been driving the mobile banking revolution for almost a decade now, starting with FNB and its cellphone banking in 2005, and evolving to the current situation where the big four (as well as Investec) have full mobile banking capability on smartphones and tablets. It’s one sector where the industry has led the consumer rather than the other way around, he says. Goldstuck also doesn’t view transaction security as a problem. “Mobile banking is one of the safest forms of mobile activity, and certainly safer than using ATMs in isolated areas or carrying money around,” he says. “There are very few cases on record where mobile banking itself has been compromised by hacking… But we have always had equivalents of those kinds of fraud, and it has not been exacerbated by mobile banking.” Allemann says while mobile banking is creating new revenue opportunities for both banks and mobile operators, the question is: who will own the customer? “I believe that the organisation that owns the customer data will ultimately gain the most from these new revenues,” he says. “Banks, on the other hand, typically hold far more information about their customer – information that can be used not only to sell transactions, but to add additional revenue streams such as loans and insurance. We are seeing mobility drive an investment in data management from those organisations that want to dominate in this space.”
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With more cellphones than people in Africa, it should come as no surprise that the continent finds itself on the verge of a seismic shift towards mobile banking. By Helen Ueckermann
Gary Alleman is the MD of Master Data Management.
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ADVERTORIAL
Taking the fire out of fraud: the credit card of the future As ecommerce grows, so does online fraud. The new Dynamic Code Verification solution from Gemalto, with its ever-changing security code, is set to quell cyber theft.
IMAGE: SUPPLIED, JEAN-NOËL LANTHIEZ @GEMALTO 2015
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hink back to your last online purchase. You probably invested quite some time picking out the perfect clothes, the perfect books, or the perfect electronics. You painstakingly put together a shopping cart, and then proceeded to check out. Time to enter your card details. Did you hesitate? Did you think to yourself, I really don’t want to put my card details online, and ditch your cart all together? If you did, you’re not alone. The shopping cart abandonment rate worldwide is impressive: 68.53% of online transactions initiated are not completed. The reason? Well, some just get distracted or find other offers, but most of us are worried about online fraud. These fears are hardly unfounded and the latest survey conducted by PricewaterhouseCoopers showed that 38% of South Africans did not want to transact online because of a lack of trust. Still, ecommerce presents a tempting prospect – do all your shopping with a few simple clicks, gain access to shops nestled in the far reaches of the globe, and get everything conveniently delivered to your doorstep. Ecommerce in South Africa grew by more than 34% last year and although it is only representing less than 1% of total retail in the country as of today, a recent report by McKinsey & Company revealed that it could account for 10% of retail sales in the African continent’s largest economies by 2025.
Fortifying the weakest link “Unfortunately, with the increasing volume of online purchases and the beefing up of card-present security using smart
The new Dynamic Code Verification card.
FRANÇOIS CHAFFARD
technology with a PIN code, it is only natural that payment fraud is migrating to the next most rewarding and weakest link in the chain: card not present, or CNP, transactions,” said François Chaffard, Director Banking Solutions and Services for Middle East and Africa at digital security firm Gemalto. “In South Africa, the South African Banking Risk Information Centre (SABRIC) reported a +21% increase in CNP fraud committed within South Africa, jumping from R56.7 million in 2013 to R68.9 million in 2014.” He added: “This is where the Gemalto Dynamic Code Verification smart card comes into play. Instead of a printed card verification value or CVV code – also known as ‘the three-digit number on the back of your card’ – this solution features an embedded chip that will display this code, and change it at pre-selected intervals. Because of the frequency of the Dynamic Code Verification changes, capturing one static CVV wouldn’t help thieves.” Chaffard further noted that by virtue of
its heightened security levels, the Dynamic Code Verification solution could boost the volume and value of CNP transactions, and help build both the average transaction value and the number of transactions per user per year. This solution also has the potential to help issuers instantly cut the cost of managing CNP fraud. Another attractive feature of this solution is its ease of implementation: there is no merchantside integration and cardholders will continue to go through the exact same steps they always did when making a purchase online or over the phone. “The introduction of this technology should severely cut down CNP fraud, which, incidentally, is set to rise by 20% this year globally,” asserted Chaffard. “The enhanced security level reduces costs associated with CNP fraud management and delivers higher customer retention. The Dynamic Code Verification card helps banks maintain their digital vision, while ensuring ease of deployment and minimising impact on existing infrastructures.” Essentially, in the online payment world, the Dynamic Code Verification card has become a key weapon against fraudulent transactions that might otherwise deter this growing payment technology.
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INSIGHTS
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What SA can learn from Malaysia’s SME support Facilitated by the SA High Commissioner to Malaysia, Ms Samkelisiwe Mhlanga, The Banking Association’s May 2015 study tour proved an insightful experience. By Fikile Kuhlase The Association of Banks in Malaysia The Banking Association South Africa’s counterpart in Malaysia, the Association of Banks in Malaysia (ABM), has 27 member banks and is currently chaired by Maybank. Lobbying is the main role of the ABM. Its cornerstone is the tripartite partnership between regulators, member banks and consumers. The SME agenda is driven by all banks and it is estimated that 80% of SME financing comes from banks. With 97.3% businesses in Malaysia being SMEs (about 90% in the services sector), SMEs truly are the backbone of the country’s economy. The key driver of SME development in Malaysia is SME Corp, which reports into the prime minister (PM), but falls under the International Relations Ministry. We have learnt that SME Corp and the ABM have come up with a simplified version of financial statements and that the Credit Guarantee Corporation (CGC) in Malaysia works very well.
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SME Masterplan 2012 to 2020 Malaysia expects SMEs to assume a greater role in the economy, not only as enablers, but as key drivers of inclusive and balanced growth as well. In Malaysia, 15 ministries and 65 agencies deliver on SME development. The institutional framework that ensures all these entities cohesively pull together is the National SME Development Council, chaired by the PM with SME Corp as the Secretariat. The SME Masterplan has been formulated to accelerate the growth of SMEs and to take SME development to the next level. It is anchored on the national
Malaysia’s SME Bank The SME Bank of Malaysia is 100% owned by the Ministry of Finance, and a member of the ABM. Eligibility for finance from the SME Bank is 51% or more ownership/Malay equity. The role of the SME Bank is to provide finance and provide advisory services to its unserved or underserved target markets.
SMEs in the ASEAN region
FIKILE KUHLASE is the Senior General Manager, Financial Inclusion Division at The Banking Association South Africa.
policy goals as articulated in Vision2020, the New Economic Model and the Economic Transformation Programme. Malaysia’s Vision 2020 aims for a more enhanced contribution of SMEs to GDP, employment and exports, mainly through a new breed of innovative and globally competitive SMEs. The Masterplan adopts an outcome-based approach to SME development, monitoring and evaluation (M&E), private and public sector partnerships, and an enabling environment and ecosystem that allow SMEs to thrive through entrepreneurship, innovation and investment. The key challenges faced by SMEs in Malaysia are innovation and technology adoption, human capital development, access to finance, market access, legal and regulatory environment and infrastructure. These challenges are similar to those faced by SMEs in South Africa.
The Association of South East Asian Nations (ASEAN) SME Conference in May 2015, themed “One Business One Community”, hosted the ten ASEAN member states and other stakeholders. It focused on efforts towards better regional economic and financial integration and the role of SMEs. The ASEAN SME Portal was launched at the conference – a robust directory of ASEAN SMEs. There is also talk of an ASEAN bank to address the challenge of financing.
What SA can learn from Malaysia Malaysia’s population size is 28-million and South Africa’s is 52-million. South Africa would gain a great deal in learning from the enabling institutional framework and ecosystem of SME development in Malaysia by locally customising the Business Accelerator Programme (BAP) and Enrichment Enhancement Programme (E²), and favourably considering SME Corp’s SCORE rating tool. An ongoing partnership and knowledgesharing with SME Corp would go a long way in deepening and strengthening SME development efforts and frameworks in South Africa.
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Financial literacy for SMEs
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overnment has recognised the importance of SMEs by creating the Department for Small Business Development in 2014. Since its inception, Minister Lindiwe Zulu has highlighted the need for entrepreneurs to be guided and supported. One key focus point is that of financial literacy. The National Development Plan proposes that 10-million jobs should arise out of entrepreneurial business models by 2030. This is a tall order and can’t happen if small businesses are not sustainable. Ben Bierman, CFO at Business Partners Limited, says financial literacy is a critical component if this target is to be met. “A strong correlation exists between low levels of financial literacy and poor financial management, therefore it’s essential to have sound knowledge of broad financial concepts.” Bierman points out that financial literacy implies both awareness and an attitude that informs behaviours required to ensure financial wellbeing. “Adequate financial knowledge does not guarantee prudent financial management; the right kind of prudent decisions and prudent attitudes are essential too,” he says. Indeed, many small businesses in SA fail due to poor financial knowledge and planning. Annette Francke, of Nedbank Retail Relationship Banking, says new entrants often lack understanding of the key financial elements of running a business. “These include basic financial tools such as VAT, cash-flow management, costing, and various financial controls required when running a business,” she says. Bierman says the financial literacy required to successfully manage an SME is more onerous than personal financial literacy. “It requires an understanding of a
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Lindiwe Zulu, Minister of Small Business Development.
range of additional financial concepts, such as the particular business’ cash conversion cycle, working capital management, the effects of gearing, foreign exchange-rate movements etc.,” he says. To this extent, in South Africa, there has been increased focus on financial literacy over the past decade. Initiatives include the National Youth Financial Literacy Day, organised by the JSE, the National Credit Regulator and the Reserve Bank, where youth are provided with sound financial literacy education. Several financial and business institutions have developed mentorship programmes of this nature. Last year, the Gordon Institute of Business Science (GIBS) launched the GIBS Enterprise Development Academy (GIBS EDA), a centre of excellence for the growth of new and existing SME businesses. One of the key components of this programme is the involvement of multinational organisations, including Massmart, Transnet, GlaxoSmithKline, SAB and the National Home Builder Registration Council (NHBRC). These organisations bring a wealth of knowledge to SMEs, with the aim
to set them up to operate successfully in both local and global markets. Financial institutions have a particularly important role to play in assisting SMEs. Currently, only about one third of South Africa’s financial institutions operate in the SME space. This means that fewer points of learning and access to SMEspecific information are available. “Clearly, improving the client’s knowledge of financial concepts and products as well as assisting in making financial decisions will enhance the core components of financial literacy,” says Bierman. Franke says Nedbank invests a considerable amount in initiatives assisting SMEs. “We have the SimplyBiz Seminars, a flagship offering that spans over 10 years and provides training, practical advice and financial education to over 30 000 small business owners across the country,” he explains. “In addition, the Enterprise Development programme assists qualifying black-owned enterprises with financial and non-financial support, both in urban and rural areas, to grow sustainable businesses.” Nedbank offers supportive tools including the Simplybiz website to network and access useful articles, and the free financial management tool, Money Manager, for budgeting and preparing basic financial statements. Supporting small businesses with necessary and practical skills like financial literacy is undoubtedly a national imperative. South Africa needs creative young guns to bring their brilliant ideas to the market, and simultaneous support to keep translating those ideas into workable businesses. As Minister Zulu has stated, if South Africa is to make an impact on the job creation front, the common problems faced by SMEs must be addressed.
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SMEs are a key component to developing business opportunities and job creation in South Africa, and financial literacy plays an important role in their success rates. By Kim Novick
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Ensuring that our clients make better informed financial and credit decisions. To download the information go to www.bankseta.org.za
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CHILDREN & YOUTH
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Encouraging young entrepreneurs Upskilling South Africa’s youth is vital if we are to move forward in the global economic climate. By Yule Edwards
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espite being a developing nation with an alarming 40% adult unemployment, our entrepreneurial activity is disturbingly low, and decreasing. South Africa has 75% less entrepreneurs than other Sub-Saharan African countries and although there was a slight increase over the last 10 years, numbers dropped by 34% in 2014 (from 10.6% to 7%). This is according to the Global Entrepreneurship Monitor (GEM). Poor education has been blamed for our high level of youth (between 14 and 24 years old) unemployment, which is sitting at around 60% and third highest in the world, says the World Economic Forum 2015 Youth Unemployment Survey. The economic future is not bright and the only way to ensure growth is to focus on the development of our youth, in particular to give them the practical skills to become employable or entrepreneurial, preferably both, says Dr Taddy Blecher, CEO of the Community Individual Development Association and Maharishi Institute and Chairman of the government’s task team on entrepreneurship, education and job creation. “The future of any country will be determined by how well the youth are able to think on the higher levels of Bloom’s Taxonomy, because the world needs people who can create,” he says. Bloom’s Taxonomy divides educational objectives into three domains: cognitive (knowing/head); affective (feeling/heart); and psychomotor (doing/hands) respectively. Within the domains, learning at the higher levels is dependent on having attained prerequisite knowledge and skills at the
Dr Taddy Blecher is the CEO of the Community Individual Development Association and the Maharishi Institute.
lower levels. For example, the lowest form of learning would be recalling information; followed by understanding; then applying knowledge; analysing and evaluating patterns and recognising trends; followed by design and invention; and finally, assessing theories, problem-solving and judging. GEM says that globally youth are 1.6 times more likely than adults to want to start a business, placing youth in the ideal position to be developed into entrepreneurs. The government recognises this, as well as the urgent need to develop young entrepreneurs, and is assisting a number of initiatives. Blecher is working closely with the Department of Basic Education on a 15year programme to create an entrepreneurial culture in South Africa, in which all schoolleavers will be employable, studying further or equipped to start their own business. “Furthermore, it aims to create a culture of empathy and social responsibility, in which school-leavers are actively concerned with
engaging South Africa’s socio-economic problems on multiple levels,” says the blueprint document, which has been drawn up to define the practical steps of rolling out the programme. The idea is certainly not to interfere with the matriculation process, says Blecher. “Literacy and numeracy skills are vital and need to be systematically and urgently strengthened. Over and above the basic skills, from a pedagogical approach, we need to ensure relevance to the students’ real lives, by teaching kids how to address community issues through creative problem-solving and through the disciplined implementation of solutions. It’s not about getting it right, but rather, about trying creatively to solve problems.” Part of this initiative, which has already been incorporated into the curriculum, is that Grade 7s have to develop an assignment that will leave a legacy or gift for their primary school. The students are teamed up and need to generate ideas for a suitable project, such as painting the school hall, creating a feeding scheme or raising money to buy IT equipment. The plan is that eventually this will be a nationally run, televised competition to be piloted next year. “This will be the first of many such competitions to generate excitement across South Africa around entrepreneurship and the brilliant application of the programme.” Blecher’s team is involved in research to find the best ways of putting this programme into practice. “Our aim is to reach 12-million learners … providing them with experiential learning to ensure they go into the world and are able to think creatively and solve problems critically,” he says.
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Multinationals have the edge in SA’s digital economy
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s it becomes increasingly possible for banks to outsource various functions to offshore service providers, and indeed to provide financial services to ‘out of region’ clients through better technology, questions arise about where such revenues should be taxed, and which party should pay. Filling the gap between technological advances and existing domestic tax legislation in South Africa requires the implementation of tax laws that are malleable enough to keep up with technology and associated developments in the banking industry it seeks to tax. Marking a significant change in South Africa’s approach to taxation, National Treasury introduced legislation on 1 June 2014 to levy value-added tax (VAT) on foreign entities providing ‘electronic services’ to local consumers within the South African marketplace. In order to achieve this, the VAT Act was amended to require foreign entities providing certain electronic services to register for and charge VAT. Currently, the scope of the legislation is limited to a handful of electronic services listed in accompanying regulations to the VAT amendments (e.g. educational services, games, auction services, e-books, audiovisual content, still images, music and subscription-based services). It has, however, been proposed that these regulations be expanded to include software. Although the introduction of the legislation has resulted in additional revenues to National Treasury and, to some extent, a ‘rebalancing’ of the South African marketplace as local and foreign suppliers of these services now compete on equal terms,
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CHARLES DE WET is Head of Indirect Tax at PwC Africa.
the application of the regulations raises many questions for various industries, most notably the financial services space. The supply of many financial services is currently exempt from VAT under the VAT Act. Prior to amendments to the VAT Act, members of the financial services industry receiving services from foreign suppliers were required to self-account for the VAT on the imported services acquired from foreign service providers, where such services were used for purposes other than making taxable supplies. The introduction of the electronic services provisions, however, has resulted in shifting the burden of levying VAT from the recipient (i.e. self-accounting) to the supplier in respect of certain, but importantly not all, electronic services. Where applicable, the financial service recipient in South Africa would then be able to claim an input tax deduction for the VAT paid to the extent that such electronic services are used for the purpose of making taxable
supplies. Examples of services supplied by foreign businesses not currently subject to the legislation include software, online advertising, information system services and maintenance services. While in the past, financial services organisations could set up their accounting and other systems to appropriately identify and self-account for VAT on foreign imported services, in the current mixedtreatment environment, more rigorous identification measures and controls surrounding such transactions need to be implemented to ensure that VAT is correctly accounted for, and not overpaid. Another aspect worth considering is whether National Treasury could, or indeed should, include financial services within the ambit of electronic services, such that foreign businesses supplying financial services to SA consumers should also be required to register and pay SA VAT in line with local providers. The introduction of the legislation was intended, at least in part, to protect SA suppliers in the SA marketplace, and to address the perception that services could be acquired more cheaply from abroad. As banking becomes more global and the need for traditional branches in-country dissipates towards electronic-banking platforms, it may be worthwhile to address the need for such legislation to protect the South African financial-services industry. While the industry itself seeks to keep pace with the shifts in technology and how its customers interact with these advances, the introduction of tax legislation for electronic services that affect the financial services industry is something the industry urgently needs to come to terms with.
IMAGE: SUPPLIED
The growth of the digital age has given rise to a number of complex tax issues in this environment. By Charles de Wet
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ADVERTORIAL
Certified to protect Altech Card Solutions safeguards its customers against fraud
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larming statistics recently released by the South African Banking Risk Information Centre (SABRIC) indicate that credit card fraud is on the rise locally, resulting in losses of R454 million to the banking sector in 2014 alone. A portion of this fraud is as a result of increasingly sophisticated cyber attacks. According to Verizon, a global leader in wireless telecommunications, many criminals still rely on techniques such as phishing and hacking to steal and utilise the personal information of cardholders. Recognising the danger that fraud brings to its customers, Altech Card Solutions (ACS) has proactively embarked on renewing its Payment Card Industry Data Security Standard (PCI DSS) V3 certification, in an effort to position the company at the forefront of card fraud prevention. According to Attie van der Linde, General Manager: Integrated Transaction Solutions at ACS, it has become an operational and strategic imperative to invest in becoming PCI DSS certified in order to protect cardholders against fraud.
IMAGE: SUPPLIED
What is PCI DSS? The Payment Card Industry Data Security Standard (PCI DSS) certification is a protective measure to optimise the security of credit and debit card transactions, and to protect cardholders against the misuse and abuse of personal information. The PCI Security Standards Council was launched in 2006 by the five founding global payment brands, namely American Express, Discover Financial Services, JCB International, MasterCard and Visa Inc., and is a requirement for all paymentsolutions providers.
Managing Director: Altech Card Solutions Derek Chaplin, General Manager: Integrated Transaction Solutions at Altech Card Solutions Attie van der Linde, and Deputy Managing Director: Altech Card Solutions Keith Wrede.
As one of South Africa’s leading providers of payment acceptance terminals, card personalisation and financial transaction services, ACS has supplied payment terminals to the banking and retail industries since 1993, and undertakes regular internal policy and procedure audits to ensure the company is able to mitigate the level of fraud attempted against its customers. “Our foremost priority is to protect the sensitive payment-card information of the cardholders by equipping ACS’s systems with the correct software to safeguard against vulnerabilities such as malware or spyware,” says Van der Linde. To gain certification, ACS was required to undertake specific measures such as: • Ensuring the networks used in the production and processing of card transactions are protected with reputable firewalls. • Encryption of cardholder information, including sensitive personal data such as
a user’s name, address, phone number and date of birth. • Restricting and monitoring access to the system internally. • Ensuring a formal IT security policy is instituted, revised and circulated among all employees to ensure compliance. “Receiving the certification demonstrates that we embrace compliance. Our customers can trust us with the sensitive information and trust means our customers have confidence in doing business with us,” concludes Van der Linde.
Contact Details: Attie van der Linde General Manager Integrated Transaction Solutions Tel: +27(0) 11 879 5700 Direct: +27(0) 11 879 5712 Email: attiev@acs.altech.co.za
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OPINION
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Why outplacement is a smart strategy Developing a strategy to assist retrenched employees could go a long way in protecting a company’s brand equity and reputation. By Craig Spalding
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ew could argue that today’s world of work is radically different to what it was even 10 years ago. Sophisticated technology, shifting demographics and tighter margins are forcing business leaders to change their strategies. In South Africa, while small- and medium-sized businesses are transforming within our financial services sector, the rapid changes are unfortunately having the largest impact on the large corporate structures and business models that exist, which are being forced to make some radical shifts. Ironically, these are the very organisations that have pioneered innovation and have been recognised globally for excellent governance. They have also in the past presented attractive employee value propositions (EVPs) to top talent, both at senior and graduate levels. Sadly, this shift is often translating into higher rates of retrenchment. While retrenchments used to be a fairly rare occurrence in major South African financial services organisations, it is becoming far more commonplace. This trend is impacting senior and highly qualified professionals, although junior employees are also facing the threat of retrenchment more often than before. There have been several high-profile examples of widespread retrenchments in recent months. Worryingly, many companies implementing cuts are neglecting to put processes in place that take into account the needs and wellbeing of the outgoing/retrenched employees. Often, these processes are simply seen as compliance to Section 189 of the Labour Relations Act, in order to mitigate the
risk of legal action by employees. As a result, major brands within the highly competitive financial services industry are being tarnished by severe reputational damage as retrenched staff members go out into the world armed with a negative sentiment towards their former employer. In addition, the media picks up on stories of unfair dismissals and current employees start to fear for their own futures, further impacting the internal EVPs. This is not only a great pity, but a critical business risk that requires a lot more attention than it’s currently being given. Although retrenchments cannot be avoided in today’s corporate world, there are strategies that can mitigate the negative side effects – for both the departing staff members and the company doing the retrenching. One strategy is the implementation of an outplacement programme. Outplacement is essentially the provision of assistance to retrenched employees in finding new employment. It is important to note that the public and press only hear about retrenchments within a company when they have been poorly managed. Business leaders often don’t recognise that it is far more difficult to repair a tarnished reputation as an employer than it is to plan ahead and protect their brand equity. Outplacement initiatives can be invaluable with regards to this. From a commercial point of view, an outplacement programme also reduces the cost of labour action through the CCMA and large out-of-court settlements. It must be stressed, however, that it is the longer-term impact that needs to be the focus. Smart outplacement initiatives can also
help people to understand and recognise the need to reinvent themselves in the workplace, and how to go about doing so. They also provide invaluable feedback to an organisation about culture, values and its leadership practices. Our advice is also to pay attention to the feedback received and start implementing changes immediately, instead of waiting for the dust to settle. The key elements of a successful outplacement programme will thus include: • A formal debriefing, during which the retrenched worker is encouraged to take stock of his career; • A profile assessment, covering technical skills, experience and personal factors; • A re-evaluation of goals and ambitions; • An understanding of what drives change and new ways of working; • A focused plan, which could include acquiring new skills/education, personal branding, CV writing, interview and negotiation training; • Learning effective career management; • Doing what you want to be doing – because it inspires you; and • Doing what you should be doing – according to your strengths. While it should be one element of a larger strategy, effective outplacement can provide companies with a valuable way in which to nurture trust and spread goodwill among both former and current employees – as well as within the broader business community. CRAIG SPALDING is the Director at Tuesday Consulting, an executive search firm.
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Customer intelligence refuels retention and loyalty As the banking industry pursues improved customer engagement, unlocking the value of data becomes critical in designing a successful loyalty programme. By Lauren Barbour
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Four factors for success When we look at the leaders in loyalty in South Africa, we can see that there is no single secret recipe to success for driving retention and loyalty. However, there are some distinct commonalities among the most successful loyalty programmes, with the highest satisfaction, engagement and retention rates forming the basis of a successful model. It is interesting that despite these programmes operating across vastly different industries, these traits remain consistent, indicating a must-have list for creating customer loyalty.
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They build a consistent customer experience. Their data-derived customer insights and understanding are used to consistently provide customers with experiences that are relevant, timely, convenient, and seamless across all channels.
LAUREN BARBOUR is Head of Customer Engagement Solutions at Principa.
The four things successful loyalty programmes all share are: They commit to data-derived customer intelligence and decision-making. According to a recent Harvard Business Review paper, businesses have 95% of the data that they need to build a robust understanding of their customers, but only 36% of businesses have any idea of how to extract any value from this data. Building your business proposition and strategy based on data-derived customer insights that reveal customers’ needs, motivators and expectations allows you to prioritise and invest in what is most important to your customers. It also allows you to accurately predict what your customers will do in the future. They have a business-wide commitment to data-driven customer centricity. For the leaders in loyalty, factual understanding based on data forms the basis of everything they do, and this leads to shared vision, top-down commitment, customer-centric KPIs that drive customerengagement improvements, and a common understanding of their customers.
They innovate. There is another significant benefit to better understanding your customers and being able to craft experiences based on their needs: it creates an environment that supports and fosters innovation.
Data-driven decisions drive profitability A focus on understanding, connecting with and engaging customers in a relevant and personalised manner has an impact on a company’s bottom line. Multinational management consulting firm McKinsey & Company states in its research that businesses that are considered customer analytics champions improve profits by 126% on average compared to their competitors. They are also over seven times more likely to up-sell and cross-sell to existing customers, and 21 times more likely to migrate an above-average share of customers to profitable segments. The winners of the battle over customers will be won by banks that successfully make the mind shift from relying on traditional marketing methods to investing in customer analytics and datadriven marketing. The speed and accuracy through which banks can derive and action data-derived customer intelligence will soon mean the difference between a market leader and a follower.
IMAGE: SUPPLIED
ccording to leading industry analysts, Forrester Research, we are in the age of the customer. What customers expect, how they want to be serviced, what information they are prepared to share, and how loyal they are have all changed radically. This realisation has led successful banks to drastically change the way they do business. The most significant and most successful change is undoubtedly the growing focus on extracting value from their most valuable commodity – their data – in order to extract value from their most valuable assets – their clients. This is both a science and an art, which we refer to as ‘customer engagement’, or the deliberate efforts of a business to sustain positive customer experiences with their brand, in order to drive behavioural changes. Regardless of whether this is driven through a loyalty programme or more subtly through client-experience optimisation strategies, it is no longer a differentiator for banks, but a table stake to remaining competitive.
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How can banks be better at corporate social investment? When it comes to effective CSI, there are no easy answers on what to do or how to do it. Rose Cohen tackles these tough questions.
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hat we know is that approaching CSI as a feel-good or quick-fix exercise runs the risk of missing out on opportunities for both business and society at large. In Trialogue’s primary research – undertaken with 100 companies – corporate respondents were asked to share their experiences and advise on how to better contribute to sustainable social and economic growth. What emerged were some basic, but astute, suggestions on implementing, communicating and monitoring CSI practices, regardless of industry.
To improve CSI implementation: • Make resources (people and time) available. • Collaborate with reputable organisations already established in the geographical or developmental areas you are interested in. • Ensure that the skills of your implementing team correspond with the project and beneficiary requirements. • Establish a strategy to guide implementation. • Encourage ownership and accountability among implementers and beneficiaries alike. • Approach CSI with the same businessdriven mentality as is common in other corporate functions.
IMAGE: SUPPLIED
To bolster CSI communications: • Communicate openly and encourage beneficiaries to communicate for you. • Communicate honestly – don’t take credit for changes that aren’t attributable to you.
• Leveraging existing communication channels can be effective within budget constraints. • Make success stories and case studies part of your ongoing practice to ensure that you have intent to communicate and don’t underestimate the importance of powerful images for your projects.
Monitoring the effectiveness, effectively: • Define and communicate metrics with implementation partners and beneficiaries at the project’s outset. Review and update key performance indicators (KPIs) as required. • Identify your goals and objectives from the beginning. • Securing independent verification from specialist agencies can add cost but it improves the quality of information. • Quantitative data is important, but qualitative information such as scale studies is also valuable. • Ensure monitoring and evaluation is proportionate to the level of investment and strategic value of the project. • Ad-hoc donations are unlikely to require the same oversight as flagship projects. • Ask only for what you need. Do not overburden your partners or beneficiaries with unnecessary requirements. • Communicate findings transparently.
and future generations: “We look for CSI programmes that have a track record of sustainable impact – particularly programmes that go beyond strong skillsbased training interventions – and link these interventions with an opportunity, for example, working with organisations that place individuals in their first job or internship.” As a leader in wealth creation and protection, Sanlam’s CSI vision aligns with their business vision to support people to live their best possible life. The Sanlam Foundation implements CSI initiatives that aim to facilitate equitable participation in the economy by those communities that have previously been prejudiced. Old Mutual looks to do business in a way that can also grow societies. Staff volunteering is seen as an important way to integrate the company and its employees into the social fabric of local communities. The ethos is embedded in the culture of Old Mutual, with approximately 35% of staff actively engaged in one form of volunteering or another. * As shared in The Trialogue 2014 CSI Handbook, 17th edition.
CSI and financial institutions A few financial institutions share on the subject of their CSI practices*: Barclays Africa notes that becoming the ‘go-to’ bank means facilitating greater, more inclusive prosperity for current
ROSE COHEN is Managing Editor at Trialogue.
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How do apps, authenticated early debit orders (AEDOs), application program interfaces (APIs) and BlockChain fit together? Mobile apps for retail and business banking have now been around for a few years and the catch-up game is pretty much over. One of the areas still to mature is mobile point-of-sale (POS) apps and the use case of these devices. We believe that the business of payments and collections is going to see some new applications that do much more than just take a payment. This factor is our critique of the current app payment space – they just do the payment. It’s great for consumers, but ‘meh’ for merchants. To quote my favourite coffee shop: “Zapper is just another card for me.” Our view, tested with customers during the last 12 months, is that payment collection via card on mobile needs to do more than just take the payment. It needs to serve up product and price information on the mobile device, record the sales person doing the transaction, and capture the information of the customer. Why? Well, because this is all broken from a digital perspective currently. We are taking mobile payments from consumers, but are still doing manual reconciliations and using paper for invoices and receipting! Sound complicated? For sure, as it requires
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a system and application architecture that combines data from the merchant’s enterprise resource planning (ERP) or customer relationship management (CRM) software, mobile applications and the banking back-ends for payments. These worlds are still separated, giving one receipt from the POS and another from the card machine and so forth. So integrated payments, stock and ERP will take a combined effort from banks, integrators and merchants, and it will require more creative use of the API technology.
What is an AEDO*? According to the PASA site: “An authenticated early debit order enables the accountholder to mandate the contracted, future-dated early debit orders through the use of their bank card (e.g. debit card) and PIN.” The coming regulations around AEDOs are due in February 2016. This provides more fuel for the argument that the use of secure APIs between the seller and bank will be needed, including collection of customer mandates to protect debit order integrity. It will also need chip and PIN and card-present systems to be used over the quick payment wins seen by the QR code payment crowd. It will not be feasible for conventional card machines to be used in all collections
What is BlockChain? BlockChain is the underlying system of transaction technology behind the world’s most famous crypto-currency, Bitcoin. The Reserve Bank has apparently been quite clear with our local banks that Bitcoin is a no-go area due to its FICA and AML issues, but we’re looking at BlockChain and capability in this area very closely, expecting new key technology pieces to be built in this area by new FinTech start-ups, both here and offshore. Our prediction is that SA will embrace BlockChain for non-payment transactions, contracts and store credit, or loyalty rather than via Bitcoin usage.
How it all comes together All of the above rests and relies on better and more elegant use of APIs. APIs are just ‘geek speak’ for how systems talk to each other. Enterprise organisations from Amazon to banks and payment processors have long realised they have to open up their value chain to developers and integrators to build new systems that connect their stakeholders. The ability to extend and build value for merchants via an API is something we are working on with MasterPass, which will soon pop onto the consumer radar and offer improved security and counter fraud for mobile payments. * AEDOs are supported by many banks. Mandates are registered on the AEDO database using a card and PIN authorisation from issuing banks. These authorisations may not be disputed by account holders. AEDO collections greatly assist in reducing the risk of fraud for the merchant.
For more information, contact Email: TalkToUs@ovationsgroup.com Tel: +27(0) 11 658 8500 Website: www.ovationsgroup.com
TEXT: CRAIG LEPPAN, OVATIONS DIRECTOR OF BUSINESS DEVELOPMENT; IMAGE: DUKELONG.COM
Apps, AEDOs, APIs, BlockChain…
and debit order transactions, and the ability of a connected PC/tablet or phone to provide a managed experience for the seller and purchaser will be a key differentiator. Again, from our view, new systems will emerge to address this space and it will be in mobile devices for collections, sales and payments.
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CLOSING OPINION
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Half-time report
Globally, this has been an interesting year. George Herman looks back at the first half of the year, the lessons it has yielded and what they mean for the financial climate.
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he first half of 2015 can best be described as a period of scepticism. Many were dubious about economic growth in the United States, China and (in what now seems a customary concern) Europe. During this period, the sentiment of most investors in financial markets also turned sceptical. In light of this, the returns achieved by most asset classes can be described with a single digit. The mantra ‘low rates for longer’ seems to have given way to ‘a low-return environment’. But is this true? Have all the potential negatives caught up with us and are we really in for a prolonged period of low returns? Let’s look at the regions one by one and then decide.
The United States of America The United States started 2015 off slowly due to a variety of reasons. Some of these impediments had a more significant impact on growth than was originally anticipated. That caused many to suddenly doubt the virility of the United States’ recovery and, in turn, the ability of the Federal Reserve (the Fed) to hike interest rates as expected. This caused the US dollar to take a breather from the phenomenal bull run it has been experiencing since the middle of 2014 and, in the process, allowed some commodity prices to lift their heads. However, don’t underestimate the United States’ recovery for one moment! Jobs have been created for three years on the trot, and consumers are in a healthy position due to growing incomes, low debtservice costs and lower energy costs. GDP growth will be in excess of 3% early in 2016 as job creation, the housing market and earnings growth all expand in sync. Housing
Jiang Jianqing is the Chairman of the Industrial and Commercial Bank of China.
data has improved materially and new and existing homes are trading at volumes last seen in 2008. Look for a resurgence of the American consumer and remember the old adage: “As goes the United States consumer, so goes the global economy.”
“Bond yields have brought an age-old debate to the fore. What moves first: the economy or the bond market?” The Eurozone As the end of June rolled around, the world again feared that Greece would quit the euro currency (and thereby exit the Eurozone). Since this ‘Grexit’ tragedy has been on the horizon for three years, how, you may ask, did it manage to cause such jitters and concern around the
negative effects of such a move? Certainly, despite all the naysayers, Europe is well prepared for this crisis – both mentally and practically. Unfortunately, the only real victim is Greece, as the country faces a very uncertain and extremely difficult period ahead. That said, with all the energy and focus going into preventing the weakest link from breaking, the overall European chain has not been able to gain in strength. Economic growth, although positive, is tepid and bound to stay that way for some years to come. There are positives to the European story, however, including: the unity created by the Greek crisis within the Eurozone; the strength of the United Kingdom’s economy; and the European Central Bank’s (ECB’s) monetary stimulus. The negatives are: the uncertainty around the Greek fallout; high unemployment; rising political instability; differences around handling of immigrants/ refugees; and rising bond yields. Bond yields have brought an age-old debate to the fore. What moves first: the economy or the bond market? Ten-year bond yields in Germany suddenly rose from 0.06% to 0.85% very soon after the ECB announced its quantitative easing (QE) programme. This is not a textbook reaction and caught many off guard, despite every man and his dog calling the bond market a bubble. What caused this rise in yields? 1. A belief that the European economy would speedily gain traction post-QE? 2. Fears of inflation? 3. Doubts about a Grexit? 4. Valuation normalisation? Probably all of the above, but the fact is the bond market moved first, as it usually does. Look for any or all of these four factors to come into play in the near future. ›
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The Japanese economy is growing; although at a slower pace than was hoped for. While the economy still requires immense monetary stimulus, for once it’s not detracting from global growth. Look for further stimulus measures to try and maintain this positive momentum.
China The best way to describe the Chinese situation currently is that Beijing is on an economic diet. Balance is currently the name of the game. After gorging on fixed investment spending to induce and support growth, China’s policy makers now need to pull back state intervention and let the consumer economy develop and maintain itself. This is a multi-decade process, which requires major adjustments to the economy. Being as strict as the regulators are, and with central government firmly in control, China is much better equipped and more likely to succeed than any Western nation attempting the same feat. China is managing down the excesses in credit growth and the housing market, while selectively supporting other industries to keep the economy expanding. The country’s growth slowdown to 7% is seen as catastrophic by many but, in reality, this growth should decline to no more than 5% over the next few decades. The world and specifically commodity markets are not yet on this page; hence there’s quite a bit more pain ahead for those who are dependent on Chinese infrastructure spending. The Chinese Lesetja Kganyago is the stock market Governor of the doubled South African between late Reserve Bank. 2014 and June 2015. The
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market showed signs of obvious bubbling behaviour as retail investors piled into the market in the absence of institutional support. This market was thus perfectly set up for the spectacular 40% decline that ensued during the third quarter. The country’s central bank, the People’s Bank of China, was quick to respond by reducing interest rates and also devaluing the currency peg against the United States dollar. This action caused the world to suddenly doubt the veracity of Chinese growth, which then caused global financial market turbulence. Commodities linked to China, as well as all other emerging markets, were sold off aggressively. The question now is: how weak or strong is Chinese growth really? In the meantime, the markets got caught in a snowball of weaker Chinese expectations, leading to weaker global markets, resulting in weaker Chinese expectations.
South Africa There’s no different way in which you can pronounce ‘current account deficit’ that could soften the issue or detract from the discussion around its existence and the strategies for reducing it. Therefore, in true head-in-the-sand style, no discussion is taking place. International investors don’t care about pronunciation, but they do care about political risk and deteriorating relative competitiveness. South Africa has declined in – and even dropped off of – some global ranking lists of competitiveness and ease of doing business. These factors, combined with unique new visa regulations which are decimating our tourism industry, are eroding the investor base
supporting the rand. The latest current account data showed that the deficit decreased somewhat, but this was on the back of interest flows, not trade flows. In fact, exports declined further during the last quarter, according to the South African Reserve Bank (SARB) Quarterly Bulletin. Even with the Reserve Bank actively intervening in the currency to lend support – something they haven’t done for a long time – the rand weakened. This poses significant second-round inflation risks to the SARB as consumer price index (CPI) is expected to be well above 6% early in 2016. Look for the SARB to hike the repo rate regularly into the latter part of 2015 and 2016, despite being caught in a stagflationary bind.
Outlook The world is totally focused on two unknowns right now: 1. When will the Fed hike interest rates for the first time? 2. How low will Chinese growth go and what will the knock-on effects be? The onset of rate normalisation poses a severe risk to countries dependent on financial flows to support their deficits, countries such as Turkey and South Africa. As the global interest rate universe starts rising, but at different speeds, expect major dislocations in many markets that previously basked in the comfort of cheap capital. Uncertainty regarding China has unsettled the markets, but those fears are exaggerated as the Chinese slowdown is now seven years in the making. Commodity, bond and currency markets are bound to experience further turbulence during this period of interest rate normalisation. Equities won’t escape the volatility, but they don’t carry the same level of overvaluation and hence risk as bond markets do. This period should provide many opportunities for long-term, well-diversified investors to add beautiful assets to their portfolios. George Herman is Head of South African Portfolios at Citadel.
IMAGES: RUSSELL ROBERTS, ©FINANCIAL MAIL, ERIC FEFERBERG
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