Khula Enterprise Finance Ltd Corporate Strategy 2011-13

Khula Enterprise Finance LtdCorporate Strategy 2011-13

Economic Development Parliamentary Portfolio Committee

Venue: Parliament: Cape Town

24th August 2010

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Presentation Outline

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SECTION 1: KHULA & THE AREA WITHIN WHICH KHULA OPERATES Khula’s Mandate, Vision and Mission Focused Area Government’s focused area Financing Gap Filled by Khula SME FinanciersSECTION 2: KHULA’S HIGH LEVEL STRATEGIC INTENT Overview of Khula’s Business Operations Khula’s Activities Highlights of Strategic Priorities Strategic Goals: 2011 – 2013 Focusing Financing Programmes Strategic Goals: 2011 – 2013 SECTION 3: KHULA’S PRODUCTS Product offering RFI’s strategic priorities Profile of Existing RFIs Credit Indemnity Utilisation Khula’s Public Sector Funds

Presentation Outline ....(Cont)

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Khula’s Private Sector Funds Impact of Khula Funds Khula’s Products’ historical performance Mentorship Programme Khula Properties Geographic distribution of property Portfolio Properties’ Strategic Intent Corporate Balanced Scorecard 2010/11

Section 1: Khula & the area within which Khula Operates

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Vision

To be the development finance partner of first choice in the field SME development

Mission

Khula’s mission is to provide finance, mentorship services and small business premises to SMEs through a network of

partnerships and to encourage the sustainable development of SMEs whilst ensuring that Khula remains financially viable.

Mandate

To address market failures in the SME finance sector by leveraging and unlocking private sector and other developmental funding for the creation of a vibrant SME sector. Khula’s main focus should be on facilitating access

to finance by SME; maximising development impact and ensuring organisational sustainability

Khula’s Mandate, Vision and Mission

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Khula’s focus areas

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CHALLENGES•The latest stats SA figure on unemployment is 25.3%.•Prior to the economic crisis of 2008 and 2009; SA experienced growth rates that were marked by structural imbalances.•The SA economy still experiences structural constraints that impacts on its ability to generate sustainable growth - - e.g. increases in credit and therefore consumption has led to growth that is not underpinned by production.

• To address these economic growth challenges, government adopted 12 outcome-based targets that were approved by cabinet LekgotlaIn January 2010.

• Output indicators were developed out of the 12 outcomes.• Both the Economic Development Department and the dti are

responsible for outcome number 4 which talk to “Decent Employment through inclusive Economic Growth”.

• From this outcome 7 outputs were developed. All the 7 outputs have a bearing on how Khula conducts its business going forward – but output number 6 is directly relevant for Khula since its on Small Business and Cooperative support

Government’s Focus Areas

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Financing Gap Filled by Khula

Primarily black-owned & owner-managed formal SMEs

SMEs requiring financial solutions between R10 000 and R3

million, with special emphasis on the underserved market

segment of loans below

R250 000.

Start-up and expansions of early stage businesses

Focus on underserved provinces, rural areas and “urban poor”

communities

Focus on women-owned enterprises

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SME Financiers

Source: Roussos and Ferrandi (2008)

Long-term

Short-term

TERM

Micro Medium Large Small

MONEY-LENDERS

STOKVELS, BURIAL SOCIETIES

CONSUMPTION LENDERS

MICRO-FINANCE INSTITUTIONSCOMMERCIAL BANKSCOMMERCIAL BANKS

MORTGAGE PROVIDERSMORTGAGE PROVIDERS

DEVELOPMENT FINANCE INSTITUTIONS

DEVELOPMENT FINANCE INSTITUTIONS

INVESTMENT BANKSINVESTMENT BANKS

CAPITAL MARKETSCAPITAL MARKETS

TRANSACTION SIZE

Medium- term

GAP

Long

Medium

Short

TERM

TRANSACTION SIZEMicro Small Medium Large

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Section 2: Khula’s High level Strategic intent

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Overview of Khula’s Business Operations

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Khula’s Activities …Summarised

Product & Activity

Business loans – Khula gives loans to Retail Financial Intermediaries (RFIs) who further on lend to SMEs. However, through Khula Direct loans will be extended

directly.

Credit indemnities – Khula assists SMEs to access private sector funding (through banks & RFIs) by indemnifying their loans

Joint Ventures – Khula partners with the private & public sector to finance SMEs.

Funds –Khula establishes a Fund that will facilitate loans to SMEs. The fund is managed by an experienced Fund Manager who does not contribute their own

capital to the fund.

Mentorship Programme - Mentors are used for both pre- and post loan interventions as well as capacity building to the RFIs.

Currently Khula has entered into an agreement with Institute of Business Advisors of Southern Africa (IBASA) – to manage the mentors’ database.

Properties - is mostly located in previously disadvantaged areas. It provides operating space for small entrepreneurs at discounted rates. It encourages entrepreneurs to move away from operating in informal set ups to a much more formal environment.

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Highlights of Strategic Priorities

Re-engineering wholesale model: To grow Khula’s outreach and impact

thus fulfilling our mandate as the flagship development finance institution

for small business

Khula Direct: Commence with the initial stages of establishing direct

lending operations to complement the wholesale model.

Recapitalisation & cost efficiencies: To build an effective institution

that achieves its SME development mandate in a financially sustainable

manner.

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Highlights of Strategic Priorities .. cont

Human Capital alignment: To invest in the development of our people

to create and retain high performance teams

Operational efficiencies: To establish effective and efficient processes to

support operational activities –

Position Khula Brand: To increase awareness of Khula and its products

within its target market and achieve high client satisfaction levels

Increase influence of Khula on SME formulation policy: Establish

research unit through which knowledge management on SMEs can be

improved.

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Strategic Goals: 2011 – 2013

• Re-engineering of the wholesale model

• Focusing SME Financing Programmes into distinct offerings.

• Review and redesign of existing products ( ; LREF;

Business Loans)

• Improved service delivery channels through regional offices and

closer collaboration with funding partners

• Improved monitoring and evaluation

• Alignment of human capital

• Position Khula as a Fund Manager for SME development funds

Credit Indemnity

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Focusing Financing Programmes

SME Niche Finance Programme

Focus Areas

Partner with institutions that provide niche SME financing products

EDD’s jobs growth drivers

- Minerals & beneficiation- Manufacturing activities

Khula Products/Partners- Anglo Khula Mining Fund- Enablis Khula Loan Fund

- Entrepreneurial Growth Fund

- Commercial Banks

Rural & Community Development Programme

Focus Areas

Develop and promote sustainable SMEs in rural and

targeted communities-

EDD’s jobs growth drivers- Rural, agriculture & agro-

processing sector- Socio economic development

- Tourism and business services- Regional economic development

Khula Products/Partners

- SEF- Marang- Identity Development Fund-- Local Economic Funds- Land Reform Facility- MAFISA

Supply Chain Finance Programme

Focus Areas

Partner with institutions that provide supply chain finance to the public and private sectors

EDD’s jobs growth drivers- Infrastructure Development- Public sector growth

Khula Products/Partners

- Khula Emerging Contractors Fund

- NBF- Supplyfin

- Mettle Factors

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• Khula Direct

Detail Design Build Phase 1 Phases 2 & 3

• Processes

• Policies

• Blueprint

• Secure funding

• Credit scorecard

• Convert regional offices

• Set up first branches

• Hire field staff

• Build IT system

• Organisation redesign

• Capacitate head office

• Open first branches

• Appoint key strategic partners

• Launch SME development campaign

• Test model

• Acquisitions

• National expansion

• Review model

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• Recapitalisation

Establish a corporate affairs function to raise funding

and liaise with donor and investor organisations such

PIC, IFC etc to leverage funding for Khula

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The Human Capital Management (HCM) of the new Khula

Structure

will designing organisational structures that supports both the

re-structured wholesale model and Khula Direct. Activities that

the HCM department will undertake include:

Conducting skills audits with current staff

Developing and implementing a change management programme

Recruiting new staff

Upskilling current staff

Redeploying staff

HCM will recruit competent staff to strengthen its legal

compliance and monitoring and evaluation capabilities


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• Improving operational efficiencies

In line with the EDD growth path; Khula intends improving operational efficiencies through:

General costs reduction measures through stricter budgetary controls and other measures

Reducing red-tape - e.g. Decentralising some business activities to regions and allowing them to take key business decisions.

Improving turnaround time – measures such as completing forms electronically; reducing the length of time in approving loans; automated reporting tool

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• Branding and positioning of Khula

Launch of the June and Andrew Mlangeni SME Support Programme

Increase access to financial and non-financial support to SMEs

Mobilise public and private sector organisations to implement

best practices in their programmes dedicated towards supporting

SMEs

Contribute towards increase entrepreneurial activity amongst

South Africans especially historically disadvantaged people

Increase linkages between large enterprises and small business for

procurement and enterprise development opportunities through corporate

affairs

Profile Khula success stories21


• Increase influence of Khula on SME formulation policy

Policy formulation is one of the key drivers of the EDD’s growth path.

Research centres and academic institutions in the country have done

extensive on SMEs. However, there is a need for a government agency

that plays in the SME space – agency that understands and relate to

the dynamics and challenges of the sector.

Khula plans to establish an SME research unit that can influence

government SME policy formulation.

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Section 3: Khula’s Products

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Product offering - Product offering - Suite of innovative financing instrumentsSuite of innovative financing instruments

Khula

o Business Loans

o Credit Indemnities

o Equity funds and Joint-Ventures

o Pre- & post Loan Mentorship

o Business Premises (Retail & Industrial)

oManage third party funds

Wholesale

SMEs

o Asset accumulation

o Job creation

o Rural development

o Economic transformation

End-user

Financing Partners[Banks, RFIs, Corporate Sector Partners, Public

Sector Partners]

o Working Capital

o Guarantees

o Equity Finance

o Bridging Finance

o Asset Finance

o Invoice Discounting & Factoring

o Group lending

Retail

Khula Products

Financing Instruments

Development Impact

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RFI’s strategic priorities

Khula business loans are done through intermediaries (RFIs) who lend further to end-users (SMEs).

Khula’s focus will be strengthening those RFIs who grow their outreach – especially to rural areas (talks to spatial dimensions of the growth path).

Focus will be on those RFIs that provide niche products in areas such as manufacturing; minerals & beneficiation; the green economy etc.

Khula to facilitate collection of current book

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Profile of Existing RFIs

RFI BranchesKhula Exposure

Loan Book Marang Financial Services GP; LP; MP; EC R30 mRetmil Financial Services (Pty) Ltd FS R46 m True group(Pty)Ltd (EEIF) EC R55 m True group (Pty) Ltd(EGF) EC R4 m New Business Finance (Pty) Ltd WC R36 m Vengrow Capital (Pty) Ltd WC; GP R10 m Supplyfin(Pty) Ltd LP R5 m Small Enterprise Foundation LP R16 m Business Finance Promotion Agency EC R19 m

Regent Factors (Proprietary) Limited KZN R107 m R 329 m

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Credit Indemnity Utilisation

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Credit Indemnity Scheme

Uptake of the scheme has decreased in the recent past due to stricter lending criteria adopted by banks due to recession.

Scheme will be repositioned & customised such that administrative burdens associated with managing the product will be reduced.

Take repeat borrowers who want to expand their businesses.

In the past participating partners to the scheme were commercial banks only. Henceforth Khula will promote Institutional credit indemnity to allow deserving RFIs to benefit from the scheme.

Scheme will be used as an incentive for private sector that wants to operate in the green economy – portfolio indemnities.

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Credit Indemnities

• The loans to be indemnified must range from a minimum of R10k to a maximum of R3m

• The indemnity cover will range from a minimum of 50% to a maximum of 90% depending on the loan amount and the developmental impact bestowed in the SME project

• Khula charges an annual indemnity fee ranging between 2% and 3.5% depending on the loan amount

• own contribution in cash or assets towards the financial structure of the business ranging between 2.5% and 10% depending on the loan amount

• Maximum facility term is 60 months

• The turnaround time is a maximum of 5 (five) working days

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Partner / Fund Manager

Programme Focus Area

Portfolio

No. of

Projects

Business Finance Promotions Agency

KHULA Emerging Contractors Fund

Construction R20m 35

Akwandze KHULA Akwandze Fund

Agriculture R28m 29

Absa Bank LREF Agriculture / Eco-Tourism

R42,6m 20

Standard Bank LREF Agriculture R40,8m 9

First National Bank LREF Agriculture R13,8m 4

Nedbank LREF Agriculture R4m 1

Ithala LREF Agriculture R30,6m 5

IDC LREF Eco-Tourism R5,2m 2

Total - - R185m 105

Khula’s Public Sector Funds

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Partner Programme Focus AreaCom’tmnt

R’m

Business partners Ltd

Business Partners-Khula Start-Up Fund

• Start-up & early expansion capital

• Black SMEs, rural areas & women-owned businesses

• 120

Anglo Zimele Empowerment Initiative Ltd

Anglo – KHULA Mining Fund

• Junior mining projects• Pre-feasibility

• 100

Enablis Entrepreneurial Network SA

Enablis KHULA Loan Fund

• ICT-focused• Guarantees up to 90% of

loans to SMEs

• 20

Enablis Entrepreneurial Network SA

KHULA Enablis SME Acceleration Fund

• Supports all sectors • 25

Entrepreneurial Growth Fund

KHULA SME Fund

•Early Stage Funding • 25

Khula’s Private Sector Funds

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Partner Programme Focus AreaCom’tm

ntR’m

Metropolitan Life Ltd & Median Fund (Pty) Ltd

Izibulo Fund •SME venture capital finance

•Debt and/or equity facilities

• 22

Identity Development Fund Managers (Pty) Ltd

Identity Development Fund

•Start-up & early expansion capital

•Women & youth-owned enterprises

• 75

Fabvest Investment Holdings Ltd

Small Business Growth Fund

•Start-up & early expansion capital

•Rural areas & townships

• 70

Khula’s Private Sector Funds .. cont

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Impact of Khula Funds

Actual

Total facilities to end users 334

Facilities to women entrepreneurs 25%

Facilities to Black entrepreneurs 89%

Facilities < R250K 42%

Facilities disbursed to priority Provinces

46%

Jobs created 2790

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Funds and JVs

Given the restricted funds at Khula’s disposal; and the fact that funds have a time lag before returns are realised; Khula will limit the establishment of new funds in the period under review.

New funds that will be established in this period must meet the following criteria:

The applicant must have a proven track record and be able to deliver scale development impact.

Khula’s investment should have the potential to yield good financial returns to encourage cross-subsidisation (ie financial returns from profitable investments will be used to support projects that have scale development impact).

The applicant institution (ie management expertise, systems, prudent policies and processes) must manifest appropriate capacity.

Funds will be considered only for niche markets and sector-specific projects

The applicant must be able to co-invest with Khula. Khula will act as an implementing agency for SME development

funds – thus diversifying its income34

Khula’s Products’ historical performance

Approvals

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Khula’s Products’ historical performance

Loan Book

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Mentorship Programme

PRE-LOAN MENTORSHIP: SMEs will be assisted with the development of

business plans if the meet the following conditions:

o A feasibility study that demonstrates the viability of the business idea

o A comprehensive and well researched marketing plan

o Have some level of experience in the proposed business venture

o Have a minimum equity contribution as defined by Khula’s financing

partners.

POST-LOAN MENTORSHIP - Khula receives the intervention request from one of its financing partners to:

o Provide business support services to enterprises at an early stage (introductory/ compliance); Expansion or Decline stage (Turnaround) of the SMEs lifecycle

o The intervention is only provided to SMEs that have benefitted from: debt and/ or equity facilities provided by Khula through its financing partners (Khula’s indirect clients)

o The intervention is offered for 48 hours over a period of 12 months37

Khula Properties

Khula took over the Property Portfolio from Business Partners in 2001 in order to provide businesses with infrastructure and to support SME’s.

This was a contribution in part towards the recapitalisation of Khula - the total number of properties were 100.

The properties were valued at R129.8m when taken over and currently are valued at R192m

Current total number of properties is 50

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Geographic distribution of property Portfolio

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Properties’ Strategic Intent

To earn a reasonable rental income return and sell non aligned properties

Retain and refurbish properties identified for retention Portfolio is currently split as follows:

Retain - 26 Sell Immediately - 21 In transfer – 13

Empower tenants - Selling properties to them – Installment Sale Agreement Scheme & Private sales.

Provide mentorship to small businesses with potential to grow

Identify properties to be developed in synergy with Khula’s business and goals and also assist with local upliftment of the community

Engage in property transactions that assist in promotion of economic development of SME’s in the relevant communities

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Corporate Balanced Scorecard 2010/11

ACTIVITY PERFORMANCE INDICATOR TARGET

ACCESS TO FINANCE

Maximising access to finance

for SMEs (SME Financing)

Value of facilities approved to intermediaries

R316 million approvals

Value of facilities disbursed to intermediaries

R531 m disbursements

Maximising development Impact

No. of jobs created/maintained 2 000

No. of SMEs financed by intermediaries

1 500

Facilities disbursed to end-users located in priority provinces (%

value)40%

Facilities disbursed to Black businesses (% value)

70%

Facilities disbursed to women owned businesses (% value)

45%

Facilities below R250 000 disbursed to end-users (% value)

40%

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Concluding remarks

The strategic plan focuses on consolidation of existing strategies and

structures to optimise service delivery and dedicated SME finance

The wholesale financier model has limited the ability of the institution to

make optimal impact and will be re-engineered

The key strategic thrust, in order to raise delivery to the next level and thus

make more meaningful impact to SMEs, is the design and implementation of

KhulaDirect

Khula has built a strong delivery platform to increase access to finance to

SMEs

Bolder investment required to sustain momentum

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Thank You

Documents

Khula Enterprise Finance Ltd Corporate Strategy 2011-13