The availability of credit from the formal financial sector to small and medium enterprises in South Africa

Abstract

Research purpose: Despite SMEs contributing substantially towards sustainable economic development, they have the highest failure rate in South Africa. Thus, the aim of this research is to explore the availability of credit from the formal financial sector to SMEs from a supply side perspective.Motivation for the study: Research on improving SMEs access to financial capital from the formal financial sector will assist in reducing the failure rate of SMEs and boost economic development in South Africa.Research approach/design and method: Using an interpretivistic research paradigm, data was collected from credit and business managers from eight of the largest formal financial sector using semi-structured in-depth interviews and analysed using content analysis. Main findings:The findings revealed that collateral, annual business turnover and audited financial records are the most important factors influencing the formal financial sector to provide credit to SMEs. The lack of investment capital, collateral and financial records are the main challenges faced by the formal financial sector in approving credit to SMEs.Practical/managerial implications: Implications for government and the private sector in policy development were provided. Contribution/value-add:This research highlights the most important factors and challenges faced by SMES in accessing credit from the formal financial sector. Using a qualitative research design further contributed, from a methodological perspective, to the literature on the financing of SMEs.

A value proposition mix framework of successful foreign-owned small and medium enterprises in South Africa

“…Understanding the value propositions of successful foreign-owned SMEs is a key step towards crosscultural and cross-border knowledge transfer and diffusion and, thus, a move towards international entrepreneurship. This study could provide new insights into the initiatives aimed at addressing the high failure rate among SMEs in South Africa (Asah, Louw & Williams, 2020;Schachtebeck, Groenewald & Nieuwenhuizen, 2019).…”

“…The concept of value propositions can be located within the broader business model literature. Acknowledging that the business model logic consists of interrelated dimensions that reinforce each other, the centrality of the value proposition dimension is undoubted (Amit & Zott, 2012;Osterwalder et al, 2014;Priem, Wenzel, & Koch, 2018;Zott, & Amit, 2013). Priem et al (2018) emphasized that value propositions and the resultant value creation as the conditio sine qua non for value capture is at the heart of any business model research.…”

Formal financial institutions financing of immigrant small and medium enterprises in South Africa

“…Common to both the ETI and RBV theories, the internal environment in a business contributes towards the growth and success of such a business. Therefore, businesses with resources and superior internal capabilities are more likely to achieve a competitive advantage that is sustainable and ultimately, result in a better financial performance as supported by Asah, Louw and Williams (2020), and Radipere and Dhliwayo (2014). However, both studies (Asah et al 2020;Radipere & Dhliwayo 2014) acknowledge the impact of information asymmetry (when capital providers such as FFIs have less information on the financial circumstances and prospects of a business than owners or managers).…”

“…Therefore, businesses with resources and superior internal capabilities are more likely to achieve a competitive advantage that is sustainable and ultimately, result in a better financial performance as supported by Asah, Louw and Williams (2020), and Radipere and Dhliwayo (2014). However, both studies (Asah et al 2020;Radipere & Dhliwayo 2014) acknowledge the impact of information asymmetry (when capital providers such as FFIs have less information on the financial circumstances and prospects of a business than owners or managers). According to information asymmetry theory (IAT) by Stiglitz and Weiss (1981), information asymmetry can impact the willingness of FFIs to finance immigrant SMEs.…”

“…For this reason, Makomeke et al (2016:67) contend that the inadequate financing of immigrant SMEs is largely a consequence of the unfavourable credit requirements put in place by FFIs. A research study by Asah et al (2020) also advocated that FFIs should publish all the credit requirements required from immigrant SMEs instead of indicating that a sound business plan and collateral are the only requirements that impact the willingness of FFIs to finance SMEs in South Africa.…”