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Development 4 July 2022

Township businesses missing link in SA growth puzzle

Growth demands closer links between core and periphery economies

Small businesses operating in historically designated townships on the periphery of the country’s developed urban economy are as much a part of our economy as large national companies or home-grown multinationals operating out of Sandton.

Simone Cooper, Head of Business Clients at Standard Bank, believes that township enterprises are the missing link required to get South Africa onto a higher and more inclusive growth path.

“South Africa’s small business sector is critically important because they can unlock growth, inclusion and long-term social stability – everything that has been eluding South Africa for so long. Far from being peripheral, small businesses are central to building the economy and society we all want,” says Cooper.   

Whether one looks at established economies like the United States, newly arrived economies like China or other successful emerging economies like Rwanda or even rapidly growing frontier economies like Ethiopia, small businesses account for the greatest segment of GDP, employment and innovation. In China, for example, more than 98% of all firms are small businesses with 300 or fewer employees. These small businesses contribute over 60% of China’s total GDP, 50% of China’s tax income, 75% of China’s jobs and 68% of China’s exports.

In short, “globally, small businesses are the economy” says Cooper.

A diverse, vibrant and growing small business segment drives the growth, broad-based employment and innovation that expands inclusion, builds general prosperity and maintains social stability.

“Given the very large role small businesses play in employment and GDP growth around the world, if South Africans are puzzled by lackluster growth and the inability of our economy to provide employment, we need look no further than how we support, develop and include our small - and especially our small periphery or township business segments - in the formal economy,” argues Cooper.

South Africa’s small business segment is characterised by a divide between more formal urban enterprises located closer to developed business and financial hubs - and less formal peri-urban or peripheral enterprises located in townships, informal settlements or amongst rural communities.

While South Africa has a raft of legislation designed to bridge this divide and grow the country’s small business segment, interventions to date have not been coordinated. The result is fragmented initiatives that do not adequately address the pain points of small enterprises, especially amongst township or rural businesses located on the periphery of our economy and urban settlements

Enterprises in this sector require support in three critical areas to enable them to start, manage and grow their businesses.

Access – SMMEs require easy market access through effective and simple onboarding and vetting. Payment terms favorable to small enterprises – especially being paid on time – can also make or break a business. Moreover, inadequate infrastructure ensures that many peripheral small businesses remain isolated in disconnected, economically peripheral and poorly serviced areas with little local business activity, consumer buying power or broader market access.

Skills and resources – SMME owners are often the Chief-Everything-Officer in their business. Small businesses do not have the luxury of hiring skilled resources across multiple departments. Instead, business owners often find themselves doing tasks that are neither their forte nor within their skills sets.

Finance – the financial sector generally struggles to understand and serve the needs of SMMEs, especially small township or periphery enterprises. Information asymmetry in financial markets has left many small enterprises knowledge and access poor. Lack of collateral or cash flow data means that formal financial service providers often view SMMEs as too risky.

Standard Bank has developed a range of solutions designed to bridge the distance between small and peripheral township enterprises and the formal economy. Most of these revolve around addressing informality – by, for example, assisting small emerging enterprises with formal business registration, building adequate payment channels, and developing business capabilities by providing access to technology and advice. The bank also creates links to other small enterprises that provide the skills and services they need.

“All these services combine in a small business development ecosystem that links peripheral small businesses to the established economy, driving the growth of individual business clients as well as the general economy. And we know this business support ecosystem works,” says Cooper”.

In one example, Standard Bank partnered with a township-based fresh produce aggregator, Spinach King, growing the small business into a multi award-winning company supplying more than 150 retail stores, including Spar group, Pick N Pay, Wellness Warehouse and various delis in the Western Cape, Gauteng and KZN. Standard Bank also supported spinach King build its own branches in Khayelitsha and Phillipi while developing its own central production plants in Cape Town and Johannesburg.

By necessity, Standard Bank’s small business development ecosystem is extremely flexible and agile.

To assist KZN and Gauteng small business clients impacted by the 2021 July riots, Standard Bank piloted a crowdfunding initiative in partnership with Thundafund, one of Africa’s leading crowdfunding platforms. The collaboration has since evolved into a permanent alternative funding mechanism, allowing small enterprises to create promotion campaigns and receive crowd-funded contributions from the public.

“By looking beyond just banking and partnering with clients to deploy the bank’s end-to-end business support ecosystem, we are able to say to yes to businesses more often because we’re intimately involved in their success – far beyond their banking” says Cooper. 

A larger and more robust small business segment in South Africa will dramatically increase employment, enabling more South Africans to support themselves and their families. The result will be fewer people relying on national government for welfare grants and other social services. A thriving small business sector will broaden the tax base and increase national revenue. All this will free the government to focus funding on maintaining and expanding the social and economic infrastructure to drive growth and expand inclusion.