South Africa has sophisticated and globally well-respected financial markets, yet institutional capital remains under-allocated to the small business sector. In his 2026 State of the Nation Address, President Cyril Ramaphosa again placed micro, small and medium enterprises (MSMEs) [and Cooperatives], collectively referred to as small businesses at the centre of South Africa’s economic future and supporting the country’s job creation and inclusive growth agenda.
As crucial as the small businesses are to South Africa as a developing country, they find it very difficult to access different forms of finance, including debt. According to a World Bank Enterprise survey, although 98 percent of registered MSMEs in South Africa have a bank account, only a third have a loan or line of credit. There are also differences in access to credit depending on firm size: a small percent of firms with 5-19 employees has a bank loan or line of credit, compared to 40 percent of firms with more than 100 employees. These numbers point to the difficulty in accessing credit for productive purposes, compared to the relative ease of obtaining credit for consumption purposes, such as salary-based loans.
Based on an analysis of the current access to the finance landscape; the funding constraints faced by small businesses, and lessons from other developing countries, policy interventions have been identified as anchors to promote financial inclusion in economies with market disparities that exclude certain groups of the population from economic participation.
One of the proposals contained in the Cabinet approved MSMEs and Co-operatives Funding Policy, developed by the Department of Small Business Development in conjunction with National Treasury, is ‘de-risking MSMEs’ finance through credit guarantee’. A key impediment to the extension of credit to the small business sector is that commercial lenders consider these businesses to be high-risk borrowers, particularly because many entrepreneurs have few or no assets to pledge as collateral to back their loans. In addition, few small businesses keep financial records, indicating that underdeveloped financial management controls dominate the financial performance of the business and the sector.
One mechanism to reduce the risk faced by lenders, and thus making small business lending more attractive, is to mitigate the credit risk in part by providing a guarantee in the case of loan defaults to the lender for loans extended to small businesses. The guarantee can be offered provided that certain guidelines for the assessing and monitoring of the loan process are met.
Previous efforts at a credit guarantee scheme in South Africa have been peripheral at best and under-utilised by the commercial banks and other qualifying financial intermediaries. Alternatively, they have been focused on supporting existing clients and not offered as a generalised product especially for small businesses.
Such a measure, credit guarantee scheme, if effectively implemented could unlock and crowd significant private sector investments and flows into the real economy; and would contribute to stimulating economic growth and job creation.
In South Africa, the Khula Credit Guarantee scheme seeks to achieve this goal of implementing guarantees. The scheme is run by Khula Credit Guarantee (SOC) Limited (KCG), a wholly ownedsubsidiary of the Small Enterprise Development and Finance Agency (SEDFA). It is a licensed non-life insurer authorised by the Prudential Authority under the South African Reserve Bank (SARB) and is open to all commercial banks and qualifying financial intermediaries.
The Khula Credit Guarantee addresses the market failure emanating from lack of funding by commercial banks by providing commercial lenders a guarantee in the case of loan defaults for loans made to qualifying small businesses and in the process making lending to small businesses less risky for creditors. KCG increases access to and provides finance to MSMEs and co-operatives that are perceived to be high risk and do not ordinarily qualify for finance from commercial banks.
Internationally, in developing and developed countries, there has been significant use of credit guarantees as a measure to support small businesses. In India, they have a Credit Guarantee Fund Trust for Micro and Small Enterprises. In Malaysia, it is the Credit Guarantee Corporation Berhad, a premier financial institution designed to bridge the financing gap for micro, small, and medium enterprises. The United Kingdom has the Capital for Enterprise Limited and the United States has the Small Business Administration, which provides loan guarantees amongst other forms of assistance to small businesses.
South Africa has experience in running Credit Guarantee Schemes but for various reasons, the schemes have not achieved the performance and impact of other countries. Consequently, it has not resulted in unlocking private sector financing particularly for small businesses as credit markets are constrained.
Therefore, there is a need to require the banking sector and other qualifying financial intermediaries to utilise the scheme at large and to inform small businesses about the existence of the scheme.Remember, every successful business starts with an opportunity and access to finance is one such opportunity for many South African entrepreneurs. Through innovative credit guarantee solutions and a shared commitment to enterprise development, as ecosystem coordinators and role players, we would unlock opportunities for entrepreneurs, empower them and drive inclusive economic growth.This would contribute to the development of small businesses and a broader transformation agendaof the country.
Mr Letlatsa Lehana, Head of Department, Khula Credit Guarantee, a subsidiary of Small Enterprise Development and Finance Agency
