I’ve been reading an interesting World Bank report on finance for small and medium enterprises (SMEs) in South Africa (the only link I found online is here). There is an interesting passage on how the Black Economic Empowerment (BEE) program has (not) changed the bank’s behavior towards SMEs:

In contrast to the economic drivers, political economy considerations appeared to play only a marginal role in determining bank strategies toward the small enterprise sector. For example, most banks said that in the absence of the Financial Sector Charter (FSC), under which the banking industry agreed to lend R5bn to Black- and women-owned SMEs between 2003 and 2008, their lending to SMEs would stay the same.

Their response does not suggest that banks were unaware of the developmental importance of small enterprises in South Africa but, rather, that the market-based incentives shaping bank strategies were comparatively stronger. Banks generally were well attuned to the opportunities generated by the structural changes taking place in the country’s economy and responded accordingly—but in a commercial way rather than out of any sort of societal or political obligation. This commercial orientation is borne out by the fact that banks’ utilization of the Khula guarantee scheme was very low. In most cases, less than 5 percent of their total small enterprise loan book was covered by a Khula indemnity. It could be surmised that if the banks felt the political pressure to lend more to small enterprises, they would have made more active use of the Khula indemnity scheme, even if they had felt it needed reform and did not operate efficiently. As mentioned above, the banking industry generally was happy to go along with government calls for them to adopt a more lenient stance toward small businesses that were struggling during the downturn. The banks did react more leniently, not because they wanted to please the government but because it made business sense for them to do so.