Finance for SMEs and its effect on growth and inequality: evidence from South Africa

Abstract

In this paper, we analyse the effects of relaxing financial constraints on economic growth, total factor productivity and inequality, using a micro-founded general equilibrium model and firm-level data for South Africa. The results show that relaxing participation constraints, along with a marginal reduction in collateral requirements and monitoring costs, increases GDP by 3% points, while TFP increases by 2%. Inequality reduces by up to 3% points, driven by improvements in intermediation efficiency. There is, however, minimal participation by wealth-constrained firms either due to lack of information about available finance or preference for internally generated funds.

Keywords:

• Financial inclusion
• SMEs
• talent
• growth
• inequality
• general equilibrium

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Dabla-Norris et al.’s (2015) model assumes that only entrepreneurs invest and thus participate in the credit regime, while workers do not invest, so they only participate in the savings regime.

2 This figure is comparable to, say, India where MSMEs contributed up to 17% (FY11). See https://www.ibef.org/download/SMEs-Role-in-Indian-Manufacturing.pdf

3 See www.idc.co.za. See also www.sefa.org.za

4 See www.vocational.co.za for more on the various SETAs and their roles.

5 The latter group comprises of workers from the original model and would thus participate only in the savings regime, but we relax that assumption and allow households to demand credit for talent/skills development, such that talent is a function of credit extension.

6 This type of joint distribution function allows us to integrate talent in the model as a function of the loan.

7 Figures for Malaysia, Philippines and Egypt were obtained from Dabla-Norris et al. (2015)

8 Results, though not shown here, indicate that a decline in participation cost by 0.03 leads to an increase in wages by 0.1%.

Additional information

Funding

We wish to express our deep appreciation to the African Economic Research Consortium (AERC) for the financial support to carry out this research under Grant No. RC16511. We are also grateful to the resource persons and members on AERC’s collaborative research for various comments and suggestions that helped the evolution of this study from its inception to completion. The findings made and opinions expressed in this paper are exclusively those of the authors. The authors are also solely responsible for content and any errors.

Notes on contributors

Lwanga Elizabeth Nanziri

Dr Lwanga Elizabeth Nanziri is a Senior Lecturer of Development Finance and the Director of the African Centre for Development Finance at the University of Stellenbosch Business School. Her research revolves around financial inclusion; remittances and domestic resource mobilisation; financial sector development and financial markets in Africa.

Peter Simiyu Wamalwa

Dr Peter S. Wamalwa is an economist in the Research Department of the Central Bank of Kenya. His research interests include monetary policy, financial inclusion, deficit financing, entrepreneurial finance, financial markets and stability.