First published in the Daily Maverick 168 weekly newspaper.

These days, you cannot pick up a newspaper or magazine or read an online article without hearing about the financial impact of Covid-19 on big and small businesses alike.

The unfortunate consequence of the crisis is that millions of people across the African continent have lost and will lose their jobs. This is a bitter blow in a context where the creation of jobs – particularly in the emerging entrepreneurial business environment – has been driven hard by governments and development finance institutions. If we are going to rebuild the entrepreneurial sector, we need to be thinking very differently about how we will achieve this.

New terminology for blacklisting

The financial sector – banks in particular – is incredibly risk-sensitive and has historically been reluctant to lend money to small businesses since the risk associated with start-ups (even pre-Covid-19) has been extremely high. Over the years, creative solutions have been constructed to mediate the gap between the formal financial sector and the financial needs of start-up businesses. These solutions have taken the form of mechanisms such as non-collateral-based lending, matching guarantees and a few others.

However, when an entrepreneur has been recorded by a credit bureau as being a bad or delinquent payer, he or she is blacklisted. Such entrepreneurs then find it almost impossible to raise finance – even through the more recently developed “creative” solutions. Their only alternatives become the three Fs (borrowing from friends, fools and family which is an avenue they have likely already exhausted), taking up employment or joining the ranks of the unemployed.

An entrepreneur’s inability to pay their debt is interpreted as being either the result of them possessing a questionable character or not possessing the appropriate skills to run a business. Funders use these interpretations to justify rejecting them from the possibility of future lending since the associated risk of funding a dodgy character or a bad businessperson is seen as high and irreversible.

In other words, the interpretation is that if you are of questionable character, you will always be of questionable character, and if you don’t have the business skills, you are unlikely to gain them in future. And because little genuine investigation is undertaken into the reasons behind the failure of a business, the entrepreneur is for all intents and purposes barred from the formal financial borrowing sector for the next five years.

But in this time of Covid-19, a huge swathe of entrepreneurial businesses will fail, simply because they happen to have been in the wrong business at the wrong time.

If a highly experienced restauranteur, who has run a successful restaurant for many years, files for bankruptcy or becomes delinquent with payments, he or she theoretically could and probably would be categorised with entrepreneurs of questionable character or weak business skills, and therefore be blacklisted from future funding.

I contend that the term “blacklisting” is not correct for such entrepreneurs, since their capabilities and characters are not the actual issue. They represent a much lower risk profile than those who truly should be blacklisted. Perhaps a more appropriate term for the restaurant owner would be “financial flu”.

The most important thing for any government to do after the current crisis is to rehabilitate as many small businesses as possible, and ensure that entrepreneurs have every means available to restart their businesses and start employing people again. If our banking system is not redesigned to distinguish between those who should be blacklisted and those who are merely suffering from financial flu, then we will be shooting ourselves in the foot by killing the very resources needed to save our economies.

The banking system and financial lenders need to seriously consider refining their categorisations of delinquent payers and create new products for those suffering from financial flu that are not priced at a premium as if they are the same risk profile as other delinquent payers. This is a massive opportunity for the banking industry not only to open up new markets for themselves, but also to contribute to the rehabilitation of our entrepreneurial economy. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.