style="font-weight: 400;">awards ceremony in Johannesburg, where MBA graduate Teboho R.F. Nthoana was named the winner and awarded R300 000 for his paper, which has been summarised below. To read the runners-up's papers and an overview of the submissions, click here.
Township entrepreneurs are key to unlocking inclusive economic growth
By Teboho R.F. Nthoana
Informal township economies help to sustain 40% of the country’s urban population – the millions of predominantly black South Africans who live in areas blighted by high unemployment and inadequate services.
Yet, despite the crucial role played by township entrepreneurs as the backbone of economic activity in these communities, their efforts have received little acknowledgement from mainstream economic policy-makers.
This strategic failure, which has marginalised the informal sector, has exacerbated a number of the structural factors that have prevented township businesses from realising their potential. These include:
- Limited access to capital – over 70% of township enterprises struggle to secure financing, largely due to criteria on risk that impede lending by traditional institutions, according to the South African Cities Network (SACN) and the World Bank;
- Inadequate infrastructure – more than 60% of township businesses say their operations are hampered by poor infrastructure; and
- Restricted market reach – only 25% of township businesses have access to markets beyond their immediate geographic area.
In addition, regulatory barriers, which can impede the efforts of local businesses to join the formal economy and expand their markets, were cited as an obstacle by half of township entrepreneurs; and many of these entrepreneurs lack formal business skills and training.
Given the imperative of uplifting the communities in these deprived areas, the government, the private sector and civil society should adopt a multi-faceted approach to supporting township businesses by:
- Forging a micro-investment strategy that addresses the issue of limited access to capital, including by leveraging community funding;
- Supporting entrepreneurial innovation by offering training, facilitating the adoption of new technologies and providing financial incentives and technical assistance as required; and
- Empowering the informal sector by lifting the structural constraints that impede the growth of township enterprises. To this end, the government should streamline business registration processes, and public-private partnerships (PPPs) should invest in local infrastructure.
Research and real-life case studies have indicated the effectiveness of such an approach. For example, small-scale investment initiatives in Khayelitsha, where local entrepreneurs have pooled resources to fund community-based projects, have indicated the transformative potential of micro-investment.
The capacity of spaza shops to adapt to digital platforms, enabling greater market access and operational efficiency, has shown how new technologies allied with innovative entrepreneurship can help to sustain township economies.
In addition, it has been found that formalisation of informal businesses can boost their productivity and access to markets; while the Department of Small Business Development has noted that improved infrastructure reduces operational costs for township enterprises, making them more competitive.
Forging a micro-investment ecosystem
Studies have shown that small-scale tailored investments can catalyse growth and innovation, promoting entrepreneurship and reducing poverty in local developing economies. It has further been found that community-driven funding can enhance the financial resilience of marginalised communities by retaining capital in the local economy, and, in the process, promoting a culture of investment and financial literacy.
For example, the Ekasi Bucks digital currency which was initially launched as a loyalty programme for township and rural retailers has led to significant investment by residents in local businesses, injecting capital into neighbourhood economies and facilitating transactions.
Microfinance instruments can include:
- Crowdfunding which can secure investment for small business in a decentralised, democratic way;
- Peer-to-peer lending under which trust and social capital are leveraged to provide financing free of the stringent conditions set by established lenders;
- Venture capital funds which offer capital and mentorship/expertise;
- Community-based investments organised by trusted local organisations which ensure that the funding is in line with identified community needs; and
- Products provided by micro-finance institutions which aim to help businesses expand in scalable ways that manage risk.
Such instruments – including microloans, tailored insurance offerings, community-based savings, and alternative credit-scoring models – increase financial access, facilitating entrepreneurial activity in townships, and, more broadly, boost financial inclusion, which should be a pillar of the equitable, sustainable growth to which South Africa aspires.
Fostering entrepreneurial innovation
The 2015 volume Kasinomics by South African activist and marketing expert GG Alcock challenges the perception that informal sector activities are relatively unproductive and argues instead that resourceful township entrepreneurs, such as spaza shop owners and street vendors, play a crucial yet widely unacknowledged role in driving local economic growth.
In the context of South Africa's townships, where traditional business models often falter due to limited resources and inadequate infrastructure, innovative approaches offering creative solutions that address local needs are not merely beneficial – they are entirely necessary. For example, the Vuleka app which connects township retailers with suppliers has streamlined the procurement process for more than 1,000 small businesses, significantly reducing their costs; increasing their operational efficiency; and helping them to compete in a broader market.
Surveying the landscape of enterprises established by township entrepreneurs, a sharp community focus and the deployment of local knowledge emerge as key indicators of success. In particular, it has been found that local ownership and involvement can lead to the creation of products and services with strong market appeal, as illustrated by the achievements of a community development association in Yeoville which has revitalised this neighbourhood in Johannesburg as a hub for business, arts and tourism.
Meanwhile, a number of enterprises, such as Soweto Gold beer, Vuyos catering and Bathu sneakers, have achieved success by deploying innovative business models to leverage and popularise elements of local cultural heritage.
Acknowledgment of the importance of entrepreneurship as a mechanism of sustainable economic advancement in informal settings has led to significant efforts to foster a culture that promotes innovation and resilience in business. For example, the Township Entrepreneurs Alliance (TEA), which was established in 2015, provides mentorship, training and networking that has supported tens of thousands of businesses in the informal sector.
Strategies for fostering entrepreneurial innovation in townships include:
- Business incubators and accelerators which provide business training/mentorship and access to resources to bridge the gap between ideas and market-ready products;
- Innovation hubs which facilitate knowledge-sharing and connect entrepreneurs to expertise; and
- The adoption of digital technologies that can fuel growth, such as through ecommerce.
Policy interventions in support of township entrepreneurs may include the provision of grants, tax incentives and technical assistance in support of innovative business models. They should also promote the establishment of triple-helix partnerships between the government, the private sector and non-profit organisations (NPOs) that can provide entrepreneurship training to boost financial literacy, and digital and business-management skills among workers in the informal sector.
It has been found that such capacity-building can enhance the competitiveness and sustainability of small businesses, creating jobs; jump-starting growth; and fostering resilience in township economies. In this regard, the National Planning Commission (NPC) has noted that effective training equips entrepreneurs with the practical skills upon which the success and expansion of their businesses depend.
Empowering the informal sector
It has been found that formalisation of businesses provides them with legal protection; fosters their stability; and provides avenues for growth through integration into the formal economy, including through access to financial services and government contracts. Accordingly, the government should seek to ease the formal registration and compliance processes for township entrepreneurs.
The operational efficiency and productivity of township businesses would may also be boosted through adequate infrastructural provision. To this end, PPPs, which have a track record of delivering essential infrastructure in under-served areas, could improve energy supply and develop marketplaces, transport links and digital connectivity.
There is also a need to address the organised crime and graft which threaten local economic development. So, the government should strengthen law enforcement in townships, improving community policing and enhancing transparency in business dealings.
The multi-faceted approach proposed here – promoting micro-investment and entrepreneurship and empowering the informal sector – should be enacted in a holistic way with the focus on producing and implementing targeted, actionable policy interventions. In particular, it depends on a proper evidence-based understanding of local contexts, and triple-helix collaboration to leverage the required resources and expertise.
To read the full winning paper, click here.
As Nthoana and the other PSG #ThinkBigSA entrants have demonstrated, there is no shortage of innovative ideas and diverse perspectives on how to steer the country toward a more prosperous and inclusive future.
Building on the success of this year’s competition, PSG will run the competition again next year with the topic: “How Capital Markets Enhance Economic Performance and Facilitate Job Creation” with half a million rand in total prize money. This includes various categories with five prizes of R100 000 each, demonstrating PSG’s commitment to drive serious thinking on improving economic prospects in our country. DM
About PSG Financial Services
PSG is a leading financial services group, listed on the Johannesburg (JSE), Namibian (NSX) and Mauritius (SEM) stock exchanges, with adviser offices in South Africa and Namibia. Listed on the JSE as PSG Financial Services, the company has been in operation since 1998, and offers a value-orientated approach to clients' financial needs, from asset and wealth management to insurance.
About Economic Research Southern Africa (ERSA)
ERSA serves as a nexus between economic research and key policy dialogues. We believe that meticulous, thoughtful, and targeted research, eloquently communicated to policymakers, can catalyse economic progress. We recognise the potential of our researchers to contribute meaningfully to policy and therefore offer them the opportunity to do so.