A narrative analysis of formal financial institutions’ financing of new enterprises in South Africa

Background: South Africa needs more than one million new small and medium enterprises (SMEs) that can create approximately 10 million new jobs to reduce the unemployment rate below 10%, as new SMEs significantly contribute to economic growth. Aim: This study explored how formal financial institutions (FFIs) perceive financing new SMEs, the credit approval rate for new SMEs, the credit criteria that influence the willingness of FFIs to finance new SMEs and the challenges experienced by FFIs in financing new SMEs. Setting: This study focused on the eight largest FFIs in South Africa. Because external equity and venture capital are expensive and seldom available to new SMEs, new SMEs tend to rely on cheap debt from FFIs. Methods: A qualitative research approach positioned in the interpretivist paradigm was used to achieve the research objectives. Data were collected from 16 participants using semi-structured in-depth interviews and analysed using the five-step process of content analysis by Terre Blanche, Durrheim and Kelly. Results: The findings revealed that although FFIs perceive new SME financing to be highly risky, SMEs also provide potential business opportunities. In addition, equity contribution and credit profiles of new SME owners are the most important criteria that influence the willingness of FFIs to finance new SMEs. Conclusion: With sufficient financial support from FFIs, South Africa’s development issues can be addressed since the creation and sustainability of new SMEs is vital to the country’s economic prosperity. Contribution: This study contributes to the knowledge base on new SME financing in South Africa from a supply-side perspective.