Determinants of credit risk mitigation in lending to Black Economic Empowerment (BEE) companies, from a banker's perspective

Abstract

The previous political dispensation limited black people’s participation in the South African economy. Poor credit records, lack of training, resulting in skills and capacity gaps further limited entry into the lending market. These aspects are considered the main limitations in obtaining finance for the Small, Medium and Micro Enterprises (SMMEs). This research report focuses on how credit risk can be mitigated by commercial banks in lending to Black Economic Empowerment (BEE) companies in the medium to large market. Exploratory research was conducted using various methods to achieve methodological triangulation. These methods consisted of a literature review, interviewing experts in the field and case studies. A qualitative research approach was followed. It was found that the lack of own contribution and security were still prevalent in the medium to large market, but the quality of management (little training and skills) was deemed not to be a limitation as suitable credit risk mitigants were identified. No credit risk mitigants were identified to mitigate poor credit records. It is postulated that by adopting and applying the identified credit risk mitigants, commercial banks can increase their success rate in lending to BEE companies. It will further assist in the transformation of black people and compliance with the Financial Services Charter. It is recommended that a similar study be conducted in the agriculture, hunting, forestry and fishing industry. The reasons why BEE companies applications are declined could also be investigated. Further studies could also explore other external factors such as economical, legal and social that could have an influence on the funding of BEE companies.