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Transcript of 1 Khula Direct Parliamentary Portfolio Committee on Economic Development Setlakalane Molepo (MD) 22...
1
Khula Direct
Parliamentary Portfolio Committee on Economic Development
Setlakalane Molepo (MD)22 July 2010
2
Contents
• Introduction to the new Khula board• Summary – Khula Direct, the retail business• Progress to date• Capital requirements• Next steps
3
Khula’s new board members
New
Mr M Kekana (Chairperson)
Ms S Rensburg (Deputy Chairperson)
Mr M Ferreira
Mr V Twala
Mr D Jackson
Dr Z Lees
Mr N Swana
Ms D Thabede
Mr M Mohoto (representative of the dti)
Reappointed
Mr I Tayob
Ms N Matyumza
Mr N Greenhill
Mr S Molepo (MD)
Contents
4
Summary - Khula Direct the Retail Business
• Purpose of Khula Direct
• Objectives of Khula Direct
• Outcomes of Khula Direct
Contents
Objectives of Khula Direct
• Address the GAP in the market
• Institutional
• Geographic
• Demographic profile
• Amount lent
• Address problems faced by SMEs (mostly lack of access to finance)
• Address perceived high risk of applicants
• Address low level of non-financial support
5
As a flagship DFI investing in the SME space, Khula has to fill the gap where the market has failed or does not exist
Summary - Khula Direct
Purpose of Khula Direct
6
Khula Enterprise Finance’s business
WholesaleLending via other credit
providers
and supporting SMEs
Retail (Khula Direct)
Direct lending to SME market
Addressing the limitations of the wholesale model
• Credit Guarantees (Banks)
• Loans (RFIs)
• Joint Ventures/Funds
• 3rd Party Managed Funds (LREF)
• Term Loans
• Credit Lines
• Contract Financing
• Etc.
• Mentorship
• Property
Purpose of Khula Direct is to provide finance directly to viable small and medium enterprises (SMEs) that cannot otherwise
attract funding Summary - Khula Direct
7
Position of Institutions
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
The GAP is apparent in the SME space
Objectives of Khula Direct
There appears to be a high demand, and, surprisingly, a high supply of finance, but they are poorly matched
Objectives of Khula Direct
Geographic distribution of Khula offices
Current regional offices (11)
New branch offices (30 – 40)
New SOHO offices (40 – 60)
Demographic Profile
Khula Direct will accommodate a broad risk profile addressing underserviced segments
•Women
•Youth
•Peri-urban and rural
•Environmentally friendly projects
9Objectives of Khula Direct
Amount lent
Micro-financiers Banks VC and PE investors
10
* FinMark Trust report 2009
R100 – R15,000 R50,000 – 525,000* informal
businesses need less than R50,000
110,000* formal businesses need less than R250,000
Khula Direct will aim at the R50,000 to R500,000
range
Objectives of Khula Direct
11
Problems experienced by SMEs
Supply-side Deficiencies (lenders)
Demand-side Deficiencies (borrowers)
• Rigid credit scoring policies• Rigid collateral requirements• Reluctance to provide small loans• Rigid repayment schedules• Development finance institutions
acting like banks• Lack of understanding of cultural
differences on the part of commercial banks
• Poor report-back to applicants on loan refusals
• Poor communication of services offered
• Lack of differentiation of products and approach to clients
• Restrictions placed on lending by the National Credit Act
• Lack of understanding of how to approach financial institutions to apply for a loan
• Lack of business training• Highly competitive and undiversified
markets• Lack of record keeping• Inability to present formal business
plans• Poor credit ratings• Lack of collateral/security for loans• Limited capital base and ability to grow
capital• Misconceptions about the risk analysis
process
There appears to be a high demand, and, surprisingly, a high supply of finance, but they are poorly matched
Objectives of Khula Direct
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Perceived high risk of applicants
No cash to contribute to
business
Khula Direct will have a much higher risk appetite than commercial financiers
Objectives of Khula Direct
No assetsLive far from major town
No experience in running a
business
No contracts from
customersDon’t know the industry
Khula Direct will assess the risk, and adjust the product to suit the level of risk
Bad credit record
13
Non-Financial Support
Khula will support clients through:
• Business support
– Mentors– Consultants
• Training
• Workshops
– Networking in industry or in region– Education and information sharing
• Research
The support won’t be free, but it will be subsidised
Objectives of Khula Direct
Outcomes of Khula Direct
• Number of sustainable SMEs (no. of deals)
• Number of SMEs in perceived high risk category
– No or low levels of security
– No or little contribution into business
– Start-ups
• Number of jobs created (total, women, youth, disabled)
• Contribution to under-serviced regions (peri-urban, rural)
• Sustainability of retail lending business
– Bad debts and impairments
– Profitability
– Size of reserves to absorb economic shocks
14
The overriding outcome is a reduction in poverty
Summary - Khula Direct
Progress to date
• Cabinet gave approval to extend the Khula mandate, to include direct lending, on 3 December 2008
• Project so far has accomplished:
• local and international research conducted, study visits (USA, Mexico, Brazil, Taiwan, Malaysia)
• products designed
• distribution channel designed
• stakeholders engaged
• risk model built – used to adjust pricing and product parameters
• credit management framework designed
• customer relationship management process designed
• new organisation designed
• budget and business plan finalised
• board oversight committee in effect
• applications for funding in progress (National Treasury, IDC, PIC)
• Currently in detail design phase – creating blue-print of procedures, policies, job descriptions and technical specifications for building operational environment
15Contents Progress since March
16
Lessons learnt – not to be repeated
• Don’t provide free/cheap finance (local provincial DFIs)• Don’t provide capital holidays, especially for contract finance
(international and local counterparts)• Avoid complicated collection and lengthy legal processes (FinMark
Trust)• Avoid using other organisations to sell your product (Khula -
government needs to be seen as being active in the market, also international counterparts - avoid brand and loyalty confusion)
• Don’t use inferior IT systems (local RFIs and provincial DFIs)• Do not purchase systems without fully understanding requirements
(local Banks and provincial DFIs)• Don’t go to market with insufficient capital (local RFIs)• Don’t centralise customer-facing staff (trend in local DFIs is to build
branch infrastructure, international counterparts – all recommend extensive rural penetration)
17
Lessons learnt – to be employed
• Build strong relationship with clients (Grameen Bank, failure in Banks’ relative anonymity, international counterparts)
• Hunt for deals, as opposed to walk-ins (local private equity firms, international counterparts)
• Rapid turnaround for smaller repetitive applications, e.g. contract finance (Mexico)
• Price for risk (international counterparts)
• Use simple products (FinMark Trust, van Aardt Smit, international counterparts)
• Use flexible approach to credit scoring (FinMark Trust, USAID)
• Consider flexible collection tolerance (local RFIs)
• Use competent “banking” staff (international counterparts)
• Extensive financial education/literacy (USAID)
Progress to date
Progress in relevant key strategic priorities (as presented in March)
Strategic Priorities Strategic Initiatives
Re-engineering operations to ensure maintenance of existing commitments and effective support to Khula Direct
Agencies to provide field staff services. – no suitable agency identified, now using employeesSystemise retail processes, incl. IT systems – in detail designGear up Regional Offices to manage field operations – being planned
Direct lending that focuses on specific sectors – completed, as per business model
Consolidate well performing current RFIs whilst gradually phasing out the non-performing ones. – strategy approved by board, about to be implemented
Re-alignment of human capital intervention to ensure maintenance of existing commitments and effective support to Khula Direct
Re-align company structure to meet the demands of Khula Direct – planned, in process
Skills audit & training of staff personnel to ensure that their skill s are relevant to the new business model – in process
Recruitment and retention of key and relevant staff that meet the requirements of the new model. – using top down approach, seeking executive staff at present
Progress in relevant key strategic priorities (cont.)
Strategic Priorities Strategic Initiatives
Seeking commitment/buy-in from key stakeholders (overarching)
Seeking Khula Board; the EDD support + parliamentary presentation – board on board, EDD supportive, National Treasury supportive, parliamentary presentation in progress
Ensuring Core knowledge in Risk and Credit Management
Acquire expertise – currently seeking CRO and credit analystsEducation – in process of researching service providersConferences – MFI summit in May, others to come in Aug and Sep
Ensuring appropriate research
Research Hub – commissioned, to come on stream later in 2010RFI & bank visits - completedPrior knowledge – docs/consultants – researched, completedExternal input – absorbing in current detailed design phaseResearch to feed into policy formulation – in process.
Progress to date
Product Design
20
• Products are designed to meet the SME financing needs
• Using risk management to adjust the details – but products remain generic:– Term Loans
– Short term facilities
• Grow product range and reach over time, in line with government’s priorities:
– Industry-specific products / programmes like Malaysia’s “Green Industries” priority responded to by CGC
– Demographic-specific products/programmes
Emphasis on simplicity, ease of understanding
Progress to date
Distribution Channel
21
Head Office - Regional Office - Branch Office - Field Office
Customer-facing staff will be out in the field
Progress to date
Roles performed
• Define products• Define risk model• Manage portfolio• Set policies and procedures• Centralise:– Marketing– Financial management– Credit Decisions– IT system– Intelligence and Knowledge Management– Document storage– Collection process• Call-centre
Khula Direct to be accessible within 50km of most people, either atown office or via partners
Roles performed
• Manage the field staff (via SLAs)• Process applications all the way to
submission for approval• Perform verification/due diligence• Copy, file and store documents relating to the
application• Inform customer of progress• Ensure customer signs legal documents• Ensure money is disbursed to customer• Monitor customer periodically• Visit customer regularly• Manage business support to customer• Follow up on arrear amounts – collect, if
necessary• Gather market intelligence• Liaise with strategic local partners
Roles performed
• Market Khula Direct on a 1-on-1 basis• Gather market intelligence• Gather KYC information about customers and
potential deals• Aid customer in understanding Khula Direct• Assist customer in completing application forms• Aid regional office in gather all necessary
documents from customer• Submit applications to regional office• Aid customer in completion of CPs• Liaise between customer and regional office• Aid regional office in monitoring customer,
including visits• Identify business support needs, and monitor
implementation on behalf of regional office
Head Office
22
Roles performed
• Define products
• Define risk model
• Manage portfolio
• Set policies and procedures
• Centralise:
– Marketing
– Financial management
– Credit Decisions
– IT system
– Intelligence and Knowledge Management
– Document storage
– Collection process
• Call-centreDistribution Channel
Regional Offices
23
Roles performed
• Manage the field staff (via SLAs)
• Process applications all the way to submission for approval
• Perform verification/due diligence
• Copy, file and store documents relating to the application
• Inform customer of progress
• Ensure customer signs legal documents
• Ensure money is disbursed to customer
• Monitor customer periodically
• Visit customer regularly
• Manage business support to customer
• Follow up on arrear amounts – collect, if necessary
• Gather market intelligence
• Liaise with strategic local partners
More authority will be delegated over time
Distribution Channel
Field Staff
24
Roles performed
• Market Khula Direct on a 1-on-1 basis
• Gather market intelligence
• Gather Know Your Customer (KYC) information about customers and potential deals
• Aid customer in understanding requirements
• Assist customer in completing application forms
• Aid regional office in gather all necessary documents from customer
• Submit applications to regional office
• Aid customer in completion of Conditions Precedent (CPs)
• Liaise between customer and regional office
• Aid regional office in monitoring customer, including visits
• Identify business support needs, and monitor implementation on behalf of regional office
Field staff remuneration is performance based – motivating for quality deals and repayment of loans
Distribution Channel
Risk Management Process
25
All performed in-house
26
Risk Mitigation
• General entrepreneurial education - constant marketing message– improve attitude towards paying money back– specific training for entrepreneurs– sponsorship of/linkages with training opportunities outside of Khula
• Specific intervention for Khula entrepreneurs– access to information regarding trading environment
• Khula magazine
• research hub
• networking fora
– specific training for entrepreneurs– sponsorship of events/linkages with industry opportunities
• Mentoring– Increased intervention and support of customers in trouble
• Monitoring– Increased activity when customer approaches or is in arrears
• Risk-based pricing
• Call for additional security when behavioural scoring decreasesProgress to date
27
Pricing
Input factors considered
• Cost of capital (nil)
• Risk (price rises as risk increases)
• Expected losses (price rises as collateral decreases)
• Stress scenarios (reserves built up over time)
• Discounts (can be considered, but increases prices)
• Operating costs
• Business Support (not included)
• Profit (enough to cover a nominal return on assets)
Progress to date
Proposed Portfolio – Regional Variation
28
GP WC KZN EC MP NW FS LP NC TOTAL
Size of market
credit line deals < R 50,000 23% 16% 15% 13% 8% 7% 7% 6% 5% 100%
credit line deals < R 250,000 35% 18% 12% 9% 6% 6% 6% 4% 4% 100%
term loan deals < R 250,000 30% 20% 11% 9% 7% 7% 7% 6% 3% 100%
term loan deals < R3,000,000 40% 25% 10% 7% 4% 4% 5% 3% 2% 100%
credit line deals < R 50,000 74 750 52 000 48 750 42 250 26 000 22 750 22 750 19 500 16 250 325 000
credit line deals < R 250,000 87 500 45 000 30 000 22 500 15 000 15 000 15 000 10 000 10 000 250 000
number of credit line deals 162 250 97 000 78 750 64 750 41 000 37 750 37 750 29 500 26 250 575 000
term loan deals < R 250,000 30 000 20 000 11 000 9 000 7 000 7 000 7 000 6 000 3 000 100 000
term loan deals < R3,000,000 4 000 2 500 1 000 700 400 400 500 300 200 10 000
number of term loan deals 34 000 22 500 12 000 9 700 7 400 7 400 7 500 6 300 3 200 110 000
Even though 48% of all SMEs are in Gauteng, we will only have 23% to 40% of our portfolio there as Gauteng is already relatively well serviced. With less than 1% of SMEs in NC we will have 2% to 5% of our portfolio there to stimulate economic growth
Outcomes
29
Capital RequirementHow Much • When • For What
Deals in year 1 (example) 500 @ R250k ea = R125m 125 @ R1m ea = R125m
625 deals for R250m
Total funds required for Khula Direct:
•Investment (shareholder loan)
•Business support (grant)
R 1 100m
R 100mR 1 200m
Recapitalisation of Khula wholesale R 400m
Total Capital Required R 1,6 bn
Years
Rands
250m
600m
1,1bn
1 2 3
R250m
R350m
R500m
Contents
Next Steps
• Processes
• Policies
• Blueprint
• Secure funding
• Credit scorecard
30
Detail Design Build Phase 1 Phases 2 & 3
• 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 and Take-overs, e.g. Seda, Samaf, RFIs, etc
• National expansion
• Review model
31
Thank Youwww.khula.org.za
08600 KHULA (54852)