There is no doubt that interest rate cuts this year have provided some relief to South African businesses. The most recent decision by the South African Reserve Bank (SARB) to lower the repo rate to 7.00% was a positive step. The SARB has also indicated that it is open to revisiting its inflation-targeting policy, which could create further space for rate reductions.
However, even with these developments, South Africa still has some of the highest real interest rates in the world. With inflation hovering at around 3%, the real cost of borrowing remains above 4%. This is a significant burden for small and medium-sized enterprises (SMEs) that are expected to be the growth engine of our economy.
In other countries with thriving entrepreneurial activity, SMEs can access credit at far lower real rates. In the United States, for example, small business loans often carry rates well under 5%. In many other competitive markets, SME borrowing costs typically sit between 6% and 11%. By comparison, working capital facilities in South Africa frequently fall in the 18% to 35% range.
When the economy is growing at roughly 1% per annum, expecting SMEs to deliver 20% or more growth while carrying that kind of debt load is unrealistic. As a result, many promising businesses are forced to scale back their ambitions or decline potentially transformative opportunities because the financing on offer is simply too expensive to be viable.
The issue is not just about interest rates. South Africa still faces an estimated $80 billion trade finance gap across the continent. Venture capital remains underdeveloped, and too many entrepreneurs are left navigating a funding landscape that rewards already cash-rich businesses while penalising those that most need capital.
From my perspective as a CFO, I understand that SME lending carries higher risks. It is natural for banks to prioritise clients with stable cash flows and strong balance sheets. However, if a business already had that profile, it would be less likely to require financing in the first place. Too often, SMEs are turned away by banks, only to seek non-bank alternatives that push the cost of capital even higher. In these cases, the so-called “rocket fuel” of lending is used not to accelerate growth, but simply to service expensive debt.
It is time to rethink how we approach SME finance. My challenge to lenders, both banks and non-banks, is clear:
- Take a longer-term view of the SME’s growth potential rather than focusing solely on short-term lending margins.
- Recognise that algorithms and automated credit scoring cannot replace a proper understanding of the business owner’s capability, track record and market.
- Build specialist teams who understand the realities of operating and growing an SME in the current environment.
- View CFOs and finance teams as genuine partners who can help structure and manage capital effectively, not just as conduits for deal flow.
If we are serious about economic growth, we need to ensure that SMEs have access to finance at rates that make expansion possible. High interest rates may protect lenders in the short term, but they constrain the very economic activity that will ultimately create a healthier and more sustainable lending environment for everyone.
This article is part of Rowan De Klerk’s monthly newsletter, offering insights for business leaders. Rowan is the CEO & Founder of The CFO Centre South Africa. Subscribe to Financial Edge to keep receiving fresh perspectives.