Revenues at 60-70% of pre-Covid level for informal sector entrepreneurs

SA’s informal sector is the last stop saloon for those who have lost their jobs in the formal sector or are simply unable to find formal sector work.

Research by the Development Microfinance Association (DMA), an umbrella body for several microfinance organisations with a combined clientele of 580 000 outstanding loans, shows R3.1 billion for small business and low-cost housing loans in the 12 months to March 2021.

Bad loan write-offs, however, have hit an all-time high of 4-5%, according to Evans Maphenduka, DMA’s executive coordinator.

“We’ve also seen a deterioration in on-time collection rates, which were at about 99% before the Covid lockdowns, to the current rate of about 88%.”

These are loans, usually, just a few thousand rands, extended to micro-entrepreneurs for the purchase of stock and other essentials.

Also keeping an eye on the state of its membership is the Small Enterprise Foundation (SEF), which was founded in 1992 and has extended more than R12.5 billion in small loans to informal sector operators across the country, creating more than 200 000 jobs in the process.

Covid devastation 

Colin Rice, social performance manager at the SEF, says most members went into complete shutdown at the start of the Covid lockdowns between March and May 2020, but have since resumed operations, albeit at reduced capacity.

A recent survey of SEF members gives a glimpse into the devastation caused by the lockdowns.

The informal sector is a giant safety net that supports somewhere between 2.5-3 million people directly, probably more, and millions more family members. These are the poorest of the poor, relying on a mix of social grants from the state and whatever supplementary income they can make in the informal sector.

This is perhaps the most invisible segment of the SA economy, given the difficulties of measuring and tracking activity among those who operate below the radar of officialdom. Many of those operating in this sector do not want to be hounded by Sars or any of the alphabet soup of agencies supposedly set up for their benefit.

We now have a better idea of conditions in the informal sector, thanks to the work of organisations such as the DMA and the SEF.

Not depending on the state

When the Covid lockdowns were imposed in March 2020, the Department of Small Business Development offered financial relief to micro-entrepreneurs, provided they obtain permits to operate from the local municipalities and register with SA Revenue Services (Sars), the Companies and Intellectual Properties Commission (CIPC), and for the payment of unemployment insurance for workers.

The take-up of the government’s Covid financial assistance was miserable.

A 2020 survey by the SEF among its members found just 12% willing to formalise their businesses in return for cash assistance. The vast majority decided to tough it out without government largesse.

Maphenduka says members businesses that did not register with CIPC, Sars and UIF have not received any Covid business support from the government.

“This has robbed the microenterprise owners of the help and support they would have received if they were recognised as legitimate and treated like in other developing countries by the government. It has further made it difficult for the Development Micro Finance Institutions (DMFIs) to access government grants to further subsidise client costs.”

Could not operate 

Adds John de Wit, CEO of the SEF: “These Covid lockdowns hit out members particularly hard. In the initial two months, only those with permits from the local municipalities, such as spaza shops, were able to operate.

“When the lockdown restrictions were eased, our members started to operate once again, but our survey data tells us that conditions have not returned to pre-Covid levels. Activity is improving but revenue among these micro-entrepreneurs is at best 60-70% of pre-Covid levels.”

South Africans ply their trade in the informal sector, a loose and broad term meaning virtually anyone making a living outside of formal employment.

This can cover street vendors, hair stylists operating from home or makeshift premises, spaza shop operators, garbage collectors, those renting rooms in their homes, taverners, taxi operators, domestic workers and gardeners, to name a few.

The SEF provides micro-loans to informal sector entrepreneurs across the country, and has disbursed R2.1 billion in the last 12 months, and more than R12.5 billion to some 650 000 entrepreneurs, most of them women, since it was launched in 1992.

Write-offs double 

De Wit says one way to measure the impact of the Covid lockdowns on micro-entrepreneurs is to look at SEF’s bad debt ratio.

“In a normal year, we would write off 1% to 1.5% of our outstanding book due to bad debts. This year, that figure is closer to 3% which is still quite low by normal banking standards, but it tells us that our clients are feeling pain.”

This is slightly below the 4-5% write-offs reported by DMA members. Several microfinance organisations granted borrowers a repayment holiday at the start of the lockdowns and, while the pace of loan repayments has picked up in recent months, entrepreneurs are still left with a backlog that has to be serviced.

These microfinance organisations have succeeded where banks and government bodies have failed.

Borrowers are introduced by existing and trusted clients, which serves as the first line of credit defence. They are then allocated to a cell of five or six other borrowers. Every member of the cell undertakes to cover the loan repayments of the others. This peer pressure keeps cell members honest and ensures loans are recovered.

These organisations target not just the poor, but the ultra-poor: those who live below the poverty line.

Rice says one of the biggest challenges faced by micro-entrepreneurs – quite apart from the lockdown – is the increased competition that comes with more people losing their jobs as a result of lockdowns.

“Not only is there less cash going around, but there is also more competition from informal traders for that cash. Some 25-30% of our members say they are selling different items or have moved locations. Some have started selling from home, and have changed product lines – for example, to selling face masks and sanitisers, to respond to the changing market dynamics.”