Formalizing South Africa’s SMEs offers opportunities for jobs, economic contribution, IFC study shows
South Africa’s financial institutions and policymakers have a big opportunity to create jobs by expanding financial services in a stronger business environment for smaller businesses, according to a new study released today by IFC and the World Bank.
Small enterprises employ between 50-60 percent of South Africa’s work force and contribute around 34 percent of GDP. However, the report, The Unseen Sector: The MSME Opportunity in South Africa, finds that only 14 percent of the country’s small businesses are formalized, capping their job creation and economic contribution potential.
“By working together, we can increase the ability of small businesses to access finance and markets, making them visible to the broader economy and thus bigger job creators,” says Kevin Njiraini, IFC’s Regional Director for Southern Africa and Nigeria.The Unseen Sector focuses on three themes: Size and profile of the MSME market, barriers to MSME growth and MSME financing availability. In doing so, it provides a snapshot of the South African small business landscape, where it’s thriving and what challenges need to be addressed by the government and private sector to achieve a stronger MSME ecosystem.
The report makes specific recommendations to expand opportunities for MSMEs:
Build Better Data: A key study recommendation is to collect and digitize more accurate and comprehensive data on the MSME sector that can be easily accessed by all stakeholders.
Sharpen policy coordination: Policy effectiveness requires clarity of definition and a more coordinated approach between government departments. Greater MSME policy coordination will support South Africa’s broad development objectives, such as creating youth employment, by aligning the activities of institutions around MSME support policies.
Increase formalization: The study found that 86 percent of the MSME sector is comprised of informal and survivalist businesses. Businesses struggle to grow out of this classification in large part because of the poor business environment for MSMEs. The constraints can be eased by reducing the cost to formalize particularly around the cost to register a business, to be compliant with regulation, and to access financial services.
The report is part of IFC’s SME Push Program, which is committed to channel up to $3 billion over the next 5-7 years into South Africa to increase lending to small businesses and optimize the job creation potential of MSMEs.
The IFC is forming partnerships with financial institutions in South Africa to expand lending and working in partnership with the World Bank to support building a stronger small business ecosystem.
“To have a strong small business sector we need to support not only access to finance but also opportunities including the tools and information small business owners need to thrive. That’s why the work we are doing together with our partners is so important,” says Paul Noumba Um, World Bank.
Through The Unseen Sector, the World Bank Group aims to facilitate further dialogue and innovation that will lead to greater small business financial inclusion.