The critical need to support and invest in SMEs in South Africa, and Africa as a whole, cannot be overemphasized with the ripple positive effect this will have on the overall economy of a country. The potential these businesses is well known and documented but tied to this is the substantial amount of risk that comes with investing in them (A research paper titled “Barriers to Kenyan SMEs recently showed that SMEs in Kenya close shop within their first three years of operation due to lack of: skills; good governance and limited finance). The challenges identified above makes access by SMMEs to traditional bank and institutional funding difficult and as a result, so the solution has been the growth across the Continent, of the ever-evolving crowdfunding models.
Crowdfunding, a form of alternative finance, is the practice of funding a project or venture by raising monetary contributions (often smaller in size to institutional investors) from a large number of different individuals. The United Kingdom has lead this form of alternative financing for years but a recent study by the University of Cambridge now shows that it is gaining momentum in Africa and the Middle East. Furthermore, the report showed that the third largest model of crowdfunding in Africa is peer-to-peer lending which totaled $16 million in volume between 2014 and 2015. The model, which experienced rapid growth started at a modest $2 million and went on to reach $14 million in 2015. 90% of online alternative finance originated from platforms, which were headquartered outside Africa, which shows that there is a huge gap in the market for similar African platforms. South Africa and Kenya lead the market, having raised $16,7 million and $15 million, respectively but the market is relatively evenly distributed amongst ten core countries namely; Morocco, Egypt, Zimbabwe, Ghana, Nigeria, Senegal and Uganda.
The reason we should be excited about this form of financing gaining momentum is due to the fact that it now means that misunderstood and small township businesses could now be empowered. The Kenyan Research Paper noted that 29% of small businesses get funding from family members, 21% from bank loans and 13% from donations and grants. South Africa, being one of the most unequal societies in the world, means that a number of talented entrepreneurs will not have access to funding due to their businesses being too risky for banks to provide bank loans for or simply not having those family members who are willing to invest in them, which makes our society a perfect fit for this model.
Although crowdfunding is not illegal in South Africa, it lacks a lot of clarity. A lending threshold, which came into effect in November 2016 under the National Credit Regulations, is also most likely to limit the ability of peer-to-peer lending platforms to provide finance to start-ups. It is due to these factors that South Africa’s Financial Services Board, after completion of a significant amount of research into this form of alternative finance, set June 30th 2017 as the date on which they will rule on whether or not to craft specific rules pertaining to equity crowdfunding. The decision is important as it is imperative to remember the vital role SMEs, the main beneficiaries of this form of finance, play in making the economy more resilient against political shockwaves and resultant economic shockwaves. We wait eagerly to hear the verdict.