Regulatory concessions might be required to ensure SME growth in SA

Given their crucial position in the South African economy, small and medium enterprises (SMEs) in the country require a special regulatory framework that sets a relatively low benchmark for success, according to CEO at Diversiti Management Consulting Richard Andrews.

SMEs are central to South Africa’s economy, given that they constitute a staggering 90% of the total number of businesses in the country, and contribute approximately 60% of the total employment levels. As their revenues grow, SME’s are also becoming the largest contributors to the GDP, currently at 34%.

The segment is also expected to grow rapidly over the next few years. Government schemes such as the National Development Plan are relying on SMEs to drive 90% employment growth over the next decade, something that is increasingly crucial for South Africa in particular.

In addition, a growing number of SMEs are adopting the latest in digital technology, placing them in a strong position for growth in the near future. According to Richard Andrews, however, the current regulatory framework in South Africa is not conducive to growth of this nature.

Despite their small size, low turnover and low asset value, SMEs in South Africa are currently subject to the same labour laws as the largest firms in the country, which acts as a major deterrent amongst SMEs to employ new people. Such a scenario is in direct contradiction with the hopes that they will drive employment growth.

One specific problem identified by Andrews revolves around probation periods. “In general, the probation period is where employers can assess whether an employee is competent and suitable for a particular job. The problem arises however, in that fair dismissal procedures apply even if the employee is on probation,” he says. 

Under this framework, “on top of providing the employee with; 'adequate' training, instruction and opportunity to improve, employers would be expected (looking at the way the provisions fair dismissal procedures are interpreted and applied in practice) to carry out a formal hearing before dismissing an employee that is on probation,” he added.

Alongside the reform of these regulations, Andrews offers a number of other recommendations for the benefit of SMEs, including a reduction of overall bureaucracy levels, tax incentives, and increase in overall funding through private channels as well as financial institutions, and increased investment in education.