Government’s announcement that it has allocated just short of R700m to support small and medium enterprises (SMEs) in the informal township and rural economies should be welcomed. It is a clear indication that our government acknowledges that this sector has not had the support it needs, and that it appreciates the importance of informal businesses for the overall wellbeing of the country.
As we battle the Covid-19 third wave and pressure grows on government to expedite the vaccination rollout, we must look forward to a post-pandemic time where we can take advantage of the inevitable global economic rebound and consider the possibility of finally fulfilling the immense potential of South Africa’s SME sector in its entirety.
The Township and Rural Entrepreneurship Programme (TREP), if implemented effectively, is a good step in supporting the informal sector. While no one knows for certain the exact size of this segment of the economy – precisely because it is informal – it is clear it holds immense potential for job creation and prosperity.
The interventions, while different in size and with differing formats per industry, aim to provide support for investments such as equipment, working capital and credit facilities. We all know that a lack of access to finance is the single-biggest obstacle to SME growth worldwide, and one of the primary reasons small businesses fail.
However, applauding the initiative is not enough. We must acknowledge the hesitancy and fear within this sector to move from a cash basis into the formal economy. There is a fear of being overtaxed and overburdened by regulation. And so, while the TREP initiative is a good step, it won’t be nearly as effective as it could be if government doesn’t take the opportunity to relook at the regulations and policies that affect micro and small enterprises. They must be incentivised to formalise their operations.
Without that, we are missing the single-biggest opportunity to unleash the sector’s potential. If entrepreneurs in townships and rural areas fear regulatory red tape and the tax burden, they will continue to be hesitant in adopting digital and cashless practises.
Without a concerted overall to be more business friendly there will never be a mass migration from informal to formal. Why does this matter? How would the businesses themselves, the communities where they operate, and the economy as a whole benefit from the sector being formalised?
To answer those questions, one must understand the reality of many informal businesses and clear up a potential misconception. Retail Capital, and our partners, interact with an array of different businesses in the sector. These range from owner-run sweet shops all the way to wholesalers. While these businesses are cash operations, they are profitable and well-run. Some businesses in this sector are doing turnovers far higher than SMEs we service in the formal sector.
It’s just that they are cash operations, and so it is difficult to quantify the size of the sector. What is clear, though, is that the sector holds immense potential and can play a massive role in job creation and the economic prosperity of the country.
If an informal business, for instance, digitises and makes the move to being formalised, several benefits immediately become apparent. The first is that it gets access to a wide pool of formal private sector consumers who bring significant buying power to the table.
As the businesses build a track record, they can access an increasing suite of financial services, from working capital loans to more elaborate products. This, alone, could finally see these enterprises break through their glass ceilings and grow into larger businesses employing more people.
Perhaps the most understated, but a crucially important, benefit of formalising their businesses would be access to more mainstream suppliers and skill sets. This would result in better products and allow them to compete directly with the formal private sector.
However, none of this will happen unless government directly addresses the informal segment’s fear and distrust of going formal. Red tape, labour laws, taxation – complementing the TREP programme with a comprehensive overhaul of the conditions to do business would go a long way toward steering the country into unchartered growth territory.
By Miguel Da Silva, MD at Retail Capital