Loan products to manage liquidity stress when broad-based black empowerment enterprises invest in productive assets

Investments in productive assets by broad-based black economic empowerment (BEE) enterprises in South Africa (SA) during the 1990s have been constrained, in part, by a lack of access to capital. Even if capital can be sourced, BEE businesses often face a liquidity problem, as conventional, equally amortized loan repayment plans do not take into account the size and timing of investment returns, or there are lags in the adjustment of management to such new investments. This paper describes five alternative loan products to the conventional equally amortized loan: the single payment non-amortized loan; the decreasing payment loan; the partial payment loan; the graduated payment loan; and the deferred payment loan. Recent SA experience with the graduated payment loan and the deferred payment loan suggests that there is scope to alleviate the liquidity problem if a wholesaler of funds can offer such terms to private banks and venture capital investors who then on-lend to finance BEE asset investments that are otherwise considered relatively high credit risks. This would shift the liquidity problem away from the client to the wholesaler of the funds, but requires access to capital at favourable interest rates. Such capital could be sourced from empowerment funds earmarked by the private sector, donors and government.