SA’s job problem can be fixed by small business
The government and private sector need to work together to increase access to markets and finance
SA has a jobs problem. Despite impressive economic growth, unemployment reached a 10-year high of 28% last year. The country needs to create at least 11-million new jobs over the next decade just to absorb its currently unemployed population and keep pace with demographics.
The country can make a significant contribution to employment creation by engaging its nearly 6-million micro-, small-, and medium-sized enterprises (MSME). Currently, small businesses employ between 50% and 60% of SA’s workforce and contribute about 34% of GDP.
Yet a recent study by the International Finance Corporation (IFC), “The Unseen Sector: A Report on the MSME Opportunity in SA”, reveals that more than 85% of the country’s MSME are not formalised, which means they aren’t registered enterprises nor registered with Sars.
Reaching the informal can change the small-business job creation dynamic. Regulation and financial services should become fit for purpose for the informal market to stimulate entrepreneurial activity, business growth and job creation. At the same time, when businesses aren’t a part of the formal economy their potential to grow and create jobs can be hindered.
Many small businesses are creating opportunities for self-employment, while a smaller number of medium- to large-sized enterprises have the capacity to employ more people, thus capping job creation and economic contribution potential.
How can these informal businesses be brought into the formal economy and begin to deliver on their promise as job creators? Two things need to happen. First, the visibility of small business needs to improve. In other words, banks must be able to identify and locate small businesses to extend banking services. Digital financial services are key here, enabling small businesses to move from the informal cash ecosystem to electronic payments.
Access to data
Fintech firms and financial players have an important role to play in this process by tapping into the prevalence of mobile devices and electronic payment platforms. One of the greatest consequences of informality is a lack of data, which inhibits small business lending. Personal credit bureau data and personal payment profiles should be harnessed to inform risk assessments for small businesses and spur increased access to finance. Better reporting and improved data are critical success factors to reach more small businesses.
Second, the government and private sector need to work together to increase access to markets and finance. To do this, the cost of formalisation has to decrease substantially, and the benefits of formalisation should increase. This includes the cost of registering a business, compliance with regulation, and access to financial services.
Formalisation enables business protection, contract enforcement, and the opportunity to access markets and participate in the government, as well as domestic and global, corporate supply chains. Formalisation creates better employment; it enhances the business ecosystem and it promotes the enforcement of law.
Building small businesses that contribute to the economy and create jobs is one of SA’s biggest development opportunities. Our findings provide a roadmap for helping SA curb the groundswell of informality and unleash the small-business sector’s job-creation potential by collaborating with our public- and private-sector partners.
• Njiraini is IFC regional director for southern Africa & Nigeria, and Botha is senior SME banking specialist with the IFC, part of the World Bank Group. The report can be downloaded from the IFC website, ifc.org.