SA has various development finance institutions (DFIs) mandated to contribute to economic development. The Industrial Development Corporation (IDC), the Development Bank of Southern Africa, the Land Bank, the National Empowerment Fund, and the Small Enterprise Finance Agency were geared to promote economic inclusion but have failed to produce a sizeable number of black entrepreneurs.

The Land Bank was established by the Land Bank Act of 1912, before the Land Act of 1913 was promulgated to extend credit support to Afrikaner farmers and commercialise farming co-operatives. The government created this mechanism to ameliorate harsh conditions visited upon many Afrikaners by the Anglo-Boer War and ensuing drought conditions. Heavy requirements for capital to engage in commercial farming was a challenge, as it is with black farmers today.

With the deregulation of agriculture in the early 1990s and consolidation of small farming units into large enterprises, the role of the Land Bank became more like a commercial bank. Government subsidies were dismantled owing to SA’s accession to the General Agreement on Trade and Tariffs (GATT) in the 1990s.

Monetary policy reforms that oriented financial services to the market led to the reduction of interest-rate subsidies from the Land Bank. The strategy of the SA Reserve Bank to defend price stability resulted in a rise in interest rates. The Land Bank became tied to the interests of legacy farmers, who had now consolidated into large, commercial farming groups. The Land Bank’s lending practices contributed to structural inequalities between smaller black farmers and larger commercial farmers. 

Despite the Land and Agricultural Development Act of 2002, which sought to align the Land Bank to the government’s socioeconomic goals, it still behaves more like a commercial bank than a DFI in risk management and credit criteria. On paper, the Land Bank has structured its mandate along three pillars: transformation, growth and integration. The latter two are alive. Today, more than 80% of its loan book consists of established commercial farmers. From 2018 the transformation component in Land Bank finance is 12%, up from 4% in 2012. In short, the Land Bank’s lending practices are still anti-developmental.

The IDC is a national public company established under the Industrial Development Act of 1940. Its main purpose was to industrialise SA by pioneering synthetic fuels and chemicals industries, more so when SA experienced economic isolation and sanctions in the 1970s. The IDC became more instrumental in developing a domestic industry outside the mining sector to create a new crop of Afrikaner industrialists and set the economy on a manufacturing path. It was a key pillar of apartheid’s version of a developmental state for bolstering Afrikaner entrepreneurs and serve as a bulwark against the English-centred Anglo-American. 

Anecdotal evidence from black entrepreneurs suggests the IDC behaves like commercial banks with similar interests to them, making it difficult for the IDC to fulfil its mandate to empower black entrants into the economy

Commercial activities, such as Sasol, Foskor and Iscor, benefited from the IDC’s largesse. It was instrumental in venture creation through building partnerships with domestic or foreign companies. It behaved like a state bank and state-backed venture capital to accelerate development of Afrikaner capital.

Post-apartheid, the IDC was retained as a state-owned DFI to advance transformation objectives — particularly black business players. The Industrial Development Act was amended in 1997 with a mandate to expand to the rest of Southern Africa. The mandate was further expanded by an amendment in 2001, extending the geographical area that it could invest in to include the rest of the continent.

The IDC was also tasked in the amended act to support the BEE agenda. It provides development finance, project development, non-financial forms of business support, capacity building, research and policy inputs. Anecdotal evidence from black entrepreneurs suggests the IDC behaves like commercial banks with similar interests to them, making it difficult for the IDC to fulfil its mandate to empower black entrants into the economy.

Since 2011 it has been guided by the strategic objectives of the department of economic development, and had to respond to the imperatives of the national industrial policy framework. The IDC’s activities are significantly directed to large companies. Collateral requirements are high for small and medium enterprises (SMEs) and interest rates are prohibitive. Its role in stimulating demand in the economy, especially under current low-growth conditions, has been absent. It can also play a role in the restructuring of the state-owned Eskom and inject equity in exchange for assets that are slated for disposal.

SMEs will continue to struggle to secure finance for activities or growth as DFIs are not geared to support them. Lessons can be learned from South Korea, which has, since 1979, supported its SMEs as a growth engine in the economy with public funds and guaranteed loans from private financial institutions. Lack of collateral, short credit history and lack of expertise needed to produce financial statements are among the factors that necessitated government support in South Korea.

Credit guarantees and funding by the Korean Finance Corporation through on-lending mechanisms are the means used to support SMEs. The Korean government has also created the Korean Venture Investment Corporation (KVIC) to provide equity funding to SMEs. Through its funds, KVIC participates with other private-venture capital to invest in new venture creation. It set up the foreign venture capital investment fund as an internationalisation fund to support entry of start-ups in international markets.

In an economy that is not growing and has high levels of unemployment, existing DFIs need to pursue measurable transformative outcomes.

• Fredericks is the Public Servants Association of SA GM.

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