Khula%20Enterprise%20Finance%20Ltd%20Corporate%20Strategy%202011-13

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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

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

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Presentation Outline ....(Cont)

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

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• Section 1 Khula the area within which Khula
  Operates

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Khulas Mandate, Vision and Mission
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. Khulas
main focus should be on facilitating access to
finance by SME maximising development impact and
ensuring organisational sustainability
Vision To be the development finance partner of
first choice in the field SME development
Mission Khulas 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.
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Khulas focus areas
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Governments 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 Lekgotla
• In 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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SME Financiers

   

Long-term
CAPITAL MARKETS
Long
INVESTMENT BANKS
DEVELOPMENT FINANCE INSTITUTIONS
TERM
Medium- term
TERM
MORTGAGE PROVIDERS
Medium
COMMERCIAL BANKS
GAP
MICRO-FINANCE INSTITUTIONS
CONSUMPTION LENDERS
Short-term
STOKVELS, BURIAL SOCIETIES
Short
MONEY-LENDERS
Micro
Medium
Large
Small
Micro
Small
Medium
Large
TRANSACTION SIZE

• Source Roussos and Ferrandi (2008)

TRANSACTION SIZE
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• Section 2 Khulas High level Strategic intent

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Overview of Khulas Business Operations

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Khulas 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 Khulas
  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

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Strategic Goals 2011 2013

• Khula Direct

• 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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Strategic Goals 2011 2013

• 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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Strategic Goals 2011 2013

• 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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Strategic Goals 2011 2013

• 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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Strategic Goals 2011 2013

• 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 stories

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Strategic Goals 2011 2013

• Increase influence of Khula on SME formulation
  policy
• Policy formulation is one of the key drivers of
  the EDDs 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 Khulas Products

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Product offering - Suite of innovative
financing instruments

Khula Products
Financing Instruments
Development Impact
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RFIs strategic priorities

• Khula business loans are done through
  intermediaries (RFIs) who lend further to
  end-users (SMEs).
• Khulas 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 Branches Khula ExposureLoan Book
     
Marang Financial Services GP LP MP EC R30 m
Retmil 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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Khulas Public Sector Funds
Partner / Fund Manager Programme Focus Area Port folio 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

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Khulas Private Sector Funds
Partner Programme Focus Area Comtmnt Rm
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

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Khulas Private Sector Funds .. cont
Partner Programme Focus Area Comtmnt Rm
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
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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 lt R250K 42
Facilities disbursed to priority Provinces 46
Jobs created 2790
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Funds and JVs

• Given the restricted funds at Khulas 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.
• Khulas 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 income

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Khulas Products historical performance
Approvals
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Khulas 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
• A feasibility study that demonstrates the
  viability of the business idea
• A comprehensive and well researched marketing
  plan
• Have some level of experience in the proposed
  business venture
• Have a minimum equity contribution as defined by
  Khulas financing partners.
• POST-LOAN MENTORSHIP - Khula receives the
  intervention request from one of its financing
  partners to
• Provide business support services to enterprises
  at an early stage (introductory/ compliance)
  Expansion or Decline stage (Turnaround) of the
  SMEs lifecycle
• The intervention is only provided to SMEs that
  have benefitted from debt and/ or equity
  facilities provided by Khula through its
  financing partners (Khulas indirect clients)
• The intervention is offered for 48 hours over a
  period of 12 months

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Khula Properties

• Khula took over the Property Portfolio from
  Business Partners in 2001 in order to provide
  businesses with infrastructure and to support
  SMEs.
• 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 Khulas business and goals and also assist
  with local upliftment of the community
• Engage in property transactions that assist in
  promotion of economic development of SMEs in the
  relevant communities

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Corporate Balanced Scorecard 2010/11
ACTIVITY PERFORMANCE INDICATOR TARGET
ACCESS TO FINANCE ACCESS TO FINANCE ACCESS TO FINANCE
Maximising access to finance for SMEs (SME Financing) Value of facilities approved to intermediaries R316 million approvals
Maximising access to finance for SMEs (SME Financing) Value of facilities disbursed to intermediaries R531 m disbursements
Maximising development Impact No. of jobs created/maintained 2 000
Maximising development Impact No. of SMEs financed by intermediaries 1 500
Maximising development Impact Facilities disbursed to end-users located in priority provinces ( value) 40
Maximising development Impact Facilities disbursed to Black businesses ( value) 70
Maximising development Impact Facilities disbursed to women owned businesses ( value) 45
Maximising development Impact 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
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