Too many SMEs are choosing to remain unregistered in South Africa to avoid onerous business registration requirements and out of fear of triggering tax obligations.
Andiswa Bata, managing executive for business and commercial banking at Nedbank, said because of the high cost of compliance, many small businesses were choosing to remain unregistered as they mainly transacted in cash to service their customers.
She acknowledged that not all businesses will end up being formalised due to the costs associated and administrative burdens. “I don’t think we will get to a point where we say all operating businesses are registered. I don’t think it does suit all business models to be formalised, particularly because there’s a cost to being formalised.”
However, formalisation brings benefits, including access to bigger markets and supply chains. Remaining in the informal market means those SMEs stay under the radar with lower market access.
She said the cost of compliance was high for many small businesses, hence the choice to remain informal.
“If you are simply selling fruit on the side of the road, the cost of complying repeatedly and renewing a certificate every year when your customers are passengers using taxis to work buying R5 fruit, I don’t think we will ever reach the last mile. I think there is a level of informality that we must live with, and I think it is fine.”
Nedbank restructured and separated its retail, business banking, and wealth divisions, resulting in the establishment of a new personal and private banking division and a business and commercial banking unit that takes care of SMEs, commercial and mid-corporates clients.
Bata said the business and commercial banking unit focuses on small businesses, all the way to mid-corps, which are businesses on the way to becoming listed, where they get migrated to the corporate and investment bank.
She said while Nedbank had a strong market share in the mid- to larger corporate segment, it was “underweight” in the small- to medium-business segment, or businesses with a turnover of less than R50m per annum.
In 2024, the bank’s small-business bankers helped 318,000 clients with payment, transactional, investment, and financing needs. It cleared the way for R5.4bn in asset payouts for small-business development in 2024. It has also made it easy for small businesses to conduct their transactions on the bank’s MoneyApp.
Bata was recruited from FNB, where she was CEO of the business banking segment, and started her new role in August. She stressed the importance of SMEs in job creation, saying that unlike bigger listed firms, small and medium-sized businesses were more diverse, and tend to be run by females and younger people, thus having a higher impact on inequality.
“This is one of the segments of the market where companies are net employers; they are growing. We have to support these SMEs, not only does it help with inequality, but it stimulates the site where employment has a place to grow,” she said.
While it is relatively easy to issue identity documents in South Africa, banks and the market need to evolve to allow other forms of proof to be admitted when verifying the people who want to open bank accounts. “For example, one way I have seen fintechs make “proof of address” work is the use of geolocation to verify someone’s physical address. I see the world blend in a way that starts to meet entrepreneurs where they’re at."
But it was still difficult for people to prove ownership of assets such as houses where businesses are conducted.
Meanwhile, Nedbank has its sights set on becoming a leading business and commercial bank in East Africa, where economic growth is expected to surge on infrastructure and manufacturing investment.
In August, it announced a R1.8bn sale of its 21.2% shareholding in the West African financial institution, Ecobank Transnational Incorporated, to Bosquet Investments to focus on Southern and Eastern Africa.
Bata said the product offering in South Africa had not yet been replicated in the rest of the continent, and they were seeing room for growth, citing similarities between South Africa and the East African market. “As a bank, we are really excited about the East African market,” she said.
“For example, a lot of those economies are projected to grow at a very decent growth rate over the next few years. It is a similar time zone, [and] there are a lot of English-based [markets].”
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