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Khula Enterprise Finance LtdAnnual Report 2009/10

Economic Development Parliamentary Portfolio Committee

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15 October 2010

Contents

• Khula’s Mandate

• Market position/products and services

• Financial results

• Operational results

• Strategic priorities

• Khula Direct

• Success stories

• Concluding remarks

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Khula’s Mandate

Purpose: Act as a complementary development financial institution that bridges financing gaps that are not addressed by other financial institutions.

The three key focus areas of our mandate as a wholesale financier are:

Promote access to finance

Maximisefinancing for

SMEs

Jobs, BEE, rural development,

women empowerment

Development impact

Long-term objective

Financial sustainability

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Government’s Focus Areas

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

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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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MONEY-LENDERS

STOKVELS, BURIAL SOCIETIES

CONSUMPTION LENDERS

MICRO-FINANCE INSTITUTIONS

MORTGAGE PROVIDERSMORTGAGE PROVIDERS

DEVELOPMENT FINANCE INSTITUTIONS

DEVELOPMENT FINANCE INSTITUTIONS

INVESTMENT BANKSINVESTMENT BANKS

CAPITAL MARKETSCAPITAL MARKETS

Long

Medium

Short

TERM

TRANSACTION SIZESource: Roussos and Ferrandi (2008)

Micro Small Medium Large

SME Financiers

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Business loans - business loans to Retail Financial Intermediaries (RFIs) who on lend to SMEs

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.

Khula’s Products/Services - Summarised

   

Geographic distribution of Khula offices and partners

Khula regional offices

Financing partner location

Financial Results

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Overview of Spending Trends of Khula

KHULA ENTERPRISE FINANCE LIMITED - GROUP Results 2009/10

2009/10 2008/9 2007/8

Operating Expenditure R 60,255,601 R 65,500,810 R 50,944,719

Operating expenditure as % of Operating Income 75% 72% 65%

Capital Expenditure R 252,355 R 1,051,130 R 1,772,465

KHULA ENTERPRISE FINANCE LIMITEDFIVE YEAR SUMMARY

 

2010 -2009 Increase/ (decrease) 2010 2009 2008 2007 2006

Consolidated balance sheet (R'000)  

Capital and reserves 4.9% 1,258,696

1,199,905 1,097,748

1,044,426

1,013,404

Total assets 4.2% 1,370,600

1,315,203 1,258,794

1,167,699

1,113,223

Cash and cash equivalents (4.0%)

540,358

562,838 614,932 661,431 633,844

     

Consolidated income statement (R'000)

Revenue (6.8%)

198,601

213,163 205,298 176,509 140,409

Net profit (61.7%)

10,762

28,077

53,322

31,023

22,001

     

Ratios

Effective tax rate (269.2%)

(24.7%) 14.6% 24.9% 18.9% 22.7%

Return on opening shareholders' interest (64.9%) 0.9% 2.6% 5.1% 3.1% 2.2%

Return on average assets (63.3%) 0.8% 2.2% 4.4% 2.7% 2.0%

Operating expenditure/total income 14.9% 97.1% 84.5% 65.6% 78.3% 79.8%

Net profit percentage (58.9%) 5.4% 13.2% 26.0% 17.6% 15.7%

Bad debts provision percentage (21.7%) 12.7% 16.2% 9.9% 8.6% 2.2%

Debt/equity ratio (7.5%) 8.9% 9.6% 14.7% 11.8% 9.8%

     

Management of Income, Expenditure, Transfers, Cash and Assets. Financial Management Systems

• No significant weaknesses identified by the auditors in terms of Khula’s

financial management and related systems

• Unqualified audit opinion for the last 6 years

• No PFMA contraventions for last 6 years

• Profit realised over last 6 years

• Expenditure contained at acceptable low levels

• Adequate and strict control over cash and resources

• Achieved small growth in capital base over last 6 years

• Capitalisation of Khula remains a challenge in order to achieve maximum

impact.

Input on the Various Sets of Notes

Khula’s main assets are:

• Net loan book of R759m which consists of business loans of R360m, equity

investments of R134m and indemnity book of R265m (the gross indemnity book

of R335m is off-balance sheet and disclosed as a contingency)

• Investment property portfolio of R183m

• Investment in Business Partners of R98m

• Cash of R540m – the entire amount was committed at year end

Khula has no significant liabilities other than its shareholders’ loan of R663m which

represents the government’s investment in Khula.

Overview of the Audit Report

• Unqualified audit report

•No instances of non-compliance with applicable laws and regulations relating to

financial matters as required by the PFMA

•Limited assurance engagement on the key performance indicators reported on

in Annual Report undertaken by auditors revealed no significant findings.

Overview Of The Audit Committee

• Consists of four non-executive directors and an independent co-opted member

•Duty is to review and assess the integrity, quality and effectiveness of risk, internal

control, finance and accounting systems and ensures that the associated risk and

financial policies and strategies are effectively managed

• Committee met four times during the financial year.

Financial Misconduct and Measures Taken Against Officials Guilty of Misconduct

No such cases.

Overspending and Other Poor Audit Outcomes

None.

Operational Results

Khula’s Products’ Historical Performance

Marginal decrease in loan book from R985m in FY2009 to R977m in FY2010

Business loans increased by 28% year on year

Funds increased by 13%

Credit indemnity decreased by 25%

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

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

Credit Indemnity Utilisation

Khula Products’ Historical Performance

Approvals

• Level of approvals lower than budgeted largely driven by:

o Stricter lending criteria of the commercial banks;

o Poor economic climate;o Risk aversion by financing

partners and o Reduced funding from

shareholder

Impact of Khula Funds – JV 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

Developmental Impact of Khula Funds - Consolidated

Key Priorities:• Investments in low economic areas • Increasing access to women - owned businesses

Total No. of disbursed facilities: 6446

Property Portfolio

• Provide development properties for

largely black entrepreneurs

• Large number of properties located in

underdeveloped areas requiring larger

maintenance budgets

• 53% African tenants

• 96% SME tenants

• Property portfolio increased from R138

million in 2005 to R192 million in 2010

• Average return in the last 2 years 9,5%

• Current total number of properties is 50

• Employment opportunities estimated at 6

396 jobs

Suppliers used

41%

26%

5%

28%

African Coloured Indian White

OPERATIONAL CHALLENGES AND OPPORTUNITIES

• Impact of the global economic crisis

• Reduced allocation of capital by the shareholder

• Reduced lending through Khula’s intermediaries saw applications falling far below

the business enquiries received in Khula during better times.

• Higher than normal bad debt provision across the sector

• Deliberate shift to focus on target market rather than volume

• Better strategic alignment with channel partners

• Balance between financial sustainability and development impact

• Move away from grant-dependent RFIs to commercial entities

• Lack of financing partners in some of the provinces.

Factors Influencing Performance

• Upgrade network and server

• New Khula Information Business System enhancements in

development/testing

• Implementation of Client Care/CRM module

• Implement mentorship customer support services module (management of

mentors, consultants etc)

• Develop portals for financing partners (RFIs, JVs, Banks and other relevant

stakeholders)

Creating an Enabling Environment

RFIs Future Positioning

• 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.

KHULA STRATEGIC PRIORITIES

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.

Highlights of Strategic Priorities Cont’d

• 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.

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

Plan

• Deliver financial products that meet financial needs of SME entrepreneurs• Accessible via Khula “agents” - deep penetration in target markets at

community level• Face-to-face interaction

o Customer Relations System - closer to our customero Marketing and sales o Deal origination and assessmento Disbursementso Monitoring ; post-investment support

• Improved operational efficiencies - fast turn around times, almost automatic approvals

• Sustainable operations• A project team is operational• Khula Direct pilot in two provinces in early 2011.

SUCCESS STORIES

Thando Sibindi Bosch Fitment and Service Centre

• Thando Sibindi identified a market for a Bosch fitment and service agency in the Fourways area in Johannesburg

• Khula provided him with a credit guarantee to start the business

• He used his mechanical engineering background to get to grips with the service offering

• Thando has created jobs for 10 people in the business

• He sees opportunities to expand his business nationally.

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David Ndlovu

Sugar Cane Farmer

• David Ndlovu began cultivating his dream for greener pastures while working in the sugar cane fields in the early 1990s

• David wanted to start his own sugar cane farming business

• The Khula Akwandze Fund, a joint venture between Khula and Akwandze Agricultural Finance (Pty) Ltd, were able to assist him with a loan

• The purpose of the Fund is to provide agricultural development loans to small and medium scale sugarcane growers and contractors in the Nkomazi region of the Mpumalanga Province

• David is planning to expand his business and will seek further help from Khula Akwandze to support his expansion plans.

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Nonku Ntshona

Quantity Surveyor

• Nonku Ntshona started her Quantity Surveying business , Nonku Ntshona and Associates in 2007

• Through the Khula Credit Indemnity scheme she was able to get a loan through one of the commercial banks

• With the Khula loan she has been able to properly start her business and move to bigger premises

• She wants to be a change agent and a catalyst for the participation of women in the construction industry

• Nonku now employs 15 staff, her business has tripled from where it was in 2007 • She has plans to expand her business outside Gauteng.

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Dexter Letele

Dexter’s Meat Market and Dexter’s Hyper Meat Market

• Dexter Letele is the owner of Dexter’s Meat Market and Dexter’s Hyper Meat Market outlets• He opening his first small butchery in Katlehong, after having worked in his father’s ‘spaza’

business• later stage, the meat industry became the focus of my skills,” remembers the conscientious

businessman• He then approached Khula to help him with the establishment of his first Hyper store which

required a substantial capital outlay to set up• Dexter obtained a loan through the Khula Credit Guarantee Scheme• Subsequently opened a second Hyper outlet in 2009• He now employs 44 people.

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Concluding remarks

• Focus has been on increasing outreach and impact while managing risk

• Bolder investment is required to sustain momentum

• Closer working relationship with our partners/intermediaries

• Andrew Mlangeni Foundation /Khula/Business Unity SA - SMME Support

Programme; Andrew Mlangeni to be the chief patron of the programme

• Khula Direct business model has been developed

• Wholesale model will continue to be constrained - Khula Direct will bring

some reprieve

• Khula needs to be recapitalised in order to support growth strategy and

effectively deliver on mandate.

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Thank You

08600 54852helpline@khula.org.za

www.khula.org.za

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