Johannesburg - The South African SME Finance Association (Sasfa) said on Friday that it had undertaken steps at self regulation to isolate unscrupulous players in the industry.
The body has published a code of conduct on its roles and responsibilities in order to protect its customers.
The founding members of Sasfa are Retail Capital, Merchant Capital and Lulalend. The organisations provide financial products to small and medium enterprises (SMEs) to support growth and expansion opportunities as well as emergency or seasonal cash flow requirements.
The organisation’s code of conduct is anchored around four principles.
It requires SME finance providers to fully and clearly explain to the merchant the nature of the products offered.
It then wants the finance provider to implement well-developed underwriting policies and procedures to ensure appropriate credit risk and affordability criteria are met.
It further calls on finance providers to adhere to the rules of the Payments Association of South Africa regarding the processing of debit orders.
And the code of conduct requires finance providers to monitor marketing and sales practices to ensure a transparent, truthful, and fair process.
Retail Capital chief executive, Karl Westvig, said there were many challenges in granting SMEs fair financing products, and the code of conduct would ensure small businesses get a fair deal.
“One of the challenges in this industry is that there are low barriers to entry and it can be a high margin business. It is also a fairly unregulated industry as deals fall outside the National Credit Regulations,” said Westvig.
The Banking Association South Africa a few years back undertook a survey to identify what hurdles finance providers faced when financing SMEs and to propose solutions or interventions.
The survey results showed that the majority of institutions fund all categories of SMEs.
However, unlike lower end SMEs, SMEs with higher turnover required less ancillary support prior to becoming a candidate for finance and enjoyed higher approval rates.
Merchant Capital chief executive, Dov Girnun, said while financing was important to the sector, measures had to be put in place to ensure entrepreneurs did not put their businesses on the line when sourcing funding.
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“It is important that we have best practice guidelines on pricing, disclosure, risk assessment and collection, amongst other things,” said Girnun.
Last month, a group of lenders in the UK came together, the Association of Alternative Business Finance (AABF), which aims to champion and promote best practice in the funding of small businesses.
One of the AABF’s key early initiatives is for members to create and subscribe to a centralised database for personal guarantees, which will prevent borrowers from over committing themselves and help identify potential fraudulent activity.
Lulalend chief executive, Trevor Gosling, said the introduction code of conduct in South Africa would be a shield for SMEs.
“It will put pressure on less scrupulous players to provide a fair and transparent product to SMEs,” said Gosling.