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9 June 2022: According to a report by McKinsey, South African small businesses represent over 98 percent of business and employ between 50 and 60 percent of the country’s workforce. Collectively, this business activity accounts for 34 percent of GDP. In an unstable economic environment with rising unemployment, particularly among the youth, one of the cornerstones of South Africa’s economic development is the SME sector and collaboration of all players in the sector from government, the private sector to civil society is required now more than ever.

Jeremy Lang, Chief Investment Officer, of small and medium-sized enterprises financier, Business Partners Limited, comments: “The time has come for us to reframe the South African narrative to reflect the opportunities that exist for entrepreneurs despite our unique challenges. Today’s small businesses are tomorrow’s private sector leaders. When we take a longer-term view of how the SME sector can dig South Africa out of the trenches, the private and public sectors will realise its incredible economic potential.”

 The SME sector and its role in job creation

 The role that small and medium-sized enterprises (SMEs) play in developing the South African economy is intrinsically linked to their ability to serve as engines for job creation. Research published in the Mediterranean Journal of Social Sciences points to the fact that South African SMEs absorb the majority of the country’s workforce and emphasizes the importance of providing both financial and non-financial support to entrepreneurs. Lang asserts: “Youth entrepreneurship must become an important part of public discourse, in urban centers, rural areas and townships – each of these ecosystems are vital to the sustainability of the sector.”

 Use technology to transform the SME sector

 Lang adds that technology should be used to transform the SME eco-system for the better and create new businesses. An example of what is possible is the number of South African start-ups in the Fintech, Healthtech and Edutech sub-sectors who are demonstrating how small businesses have the unique ability to use the tide of digitization to tap into opportunities that previously did not reach the African continent. Foondamate, Go1 and Smartpozi are great examples of SMEs contributing to remote learning in the Edutech sub-sector.

With smartphone penetration having reached unprecedented heights during the pandemic, service providers and innovators in the mobile technology space are positioned for success. Lang argues that the agility of SMEs gives them a competitive edge. “SMEs are often the first to market in the arena of digital innovation, something investors look for. Businesses that harness the power of technology to transform the way we live, whilst ultimately solving some of our country’s most pressing socioeconomic problems, are geared for success.”

 SME sector growth as crucial to macroeconomic development

 A study entitled, The Small Matters: Global Evidence on the Contribution to Employment by the Self-Employed, Micro-Enterprises and SMEs argues that supporting small economic units should be a central part of economic and social development strategies. This was found to be particularly relevant in low- and middle-income countries.

The public sector has employed various methods to incorporate this objective into its development plans. Initiatives such as the SA SME Fund and the newly appointed red tape committee; established with the purpose of reducing the administrative barriers to entry for aspiring entrepreneurs, are good examples of these efforts.

Collaboration is crucial for success

 Lang predicts that collaborations between government, the private sector and civil society are going to become increasingly crucial in determining the future of the SME sector. “These collaborations need to work towards raising awareness and education around the opportunities that exist in the sector, how to go about raising capital and topics like tax administration and leadership training.”

South Africa is particularly unique given the size of its informal ‘unseen sector’ sector, which has the potential to boost job creation and provide opportunities for aspiring entrepreneurs to enter the business world as powerful contenders. In these cases, technology is a powerful enabler of change and presents multiple solutions in terms of training and education, business administration and strategic business growth.

In line with this challenge, Lang says one way that the public and private sectors can accelerate the change the SME sector so desperately needs is to increase formalisation of small businesses. In an environment where 85 percent of the SME sector are informal and survivalist businesses, we require a concerted drive to welcome these SMEs into the fray of economically active businesses.

“The SME sector, both formal and informal, has enormous potential to propel the economy forward and increase South Africa’s tax base, what we need is collaboration of all of us as different contributors to the SME sector to make this happen,” Lang concludes.

About the Author: Jeremy Lang

New Asset- and Short-term Finance solutions to cater to the need for growth-stage funding
Jeremy Lang is our Chief Investment Officer and has been with our company for more than 15 years and is our go-to-spokesperson for all things business finance and business leadership.