South Africa’s Path to Growth and Prosperity is Through Hidden Champions and Community Banking
Every day we hear about the low growth rate in South Africa. We hear about our high unemployment numbers and that no job opportunities are being created for the youth. We hear about how our best exports are taxpayers. The wealthy are leaving, and there is no capital inflow into South Africa. This environment has been created by the ANC government and their central planning socialist ideology.
There is a path out of this socio-economic place of doom and gloom. Unfortunately, the status quo bureaucracy will never find that path. Our government is incapable of looking beyond its borders for proven solutions that have worked elsewhere. As service delivery continues to decline and communities refuse to hand over money to bankrupt municipalities, independent enclaves will take matters into their own hands. These enclaves are communities that choose to isolate themselves from the failing state. These communities will form parallel services that the government is failing to deliver. The irony is that the ultimate failure of the state might be the burning ember that lights the path to recovery.
Countries like Germany, Japan, and China have, at different times, experienced significant and sustainable growth because of “Hidden Champion” type businesses. A Hidden Champion is an SME business that has very little recognition outside of its market. These companies are not multi-national businesses with globally recognised brands. Hidden Champions are well known to their customers and suppliers and often specialises in niche markets where they are top 3 competitors in their markets. These types of businesses produce products and services that are highly valued in their communities. They innovate to stay ahead, and they regularly invest in new technology to remain relevant. Many successful Hidden Champion businesses are family-owned, export their products and are highly specialised. Hidden Champions are often integrated into their customer’s supply chain to mitigate the risk of being single-product businesses.
Hidden Champion businesses often pose an excessive risk to the large commercial banks. Risk-averse commercial banks would rather finance the purchase of existing assets which can act as security for loans. Family-owned, specialised SME businesses that create products and services present a level of risk to banks that require specialist skills to understand the risk. Hidden Champions have been most successful in environments where there are small, specialist community banks to support their growth. Germany, Japan, and China come up top of this list. The correlation between Hidden Champions and community banking is high, suggesting that the two go hand in hand.
The barriers to entry in the banking sector in South Africa are extraordinarily high. Hence the market is dominated by a few big players. In the context of community banking, this is not about transactional service but local community lending to SME businesses. This is a form of banking that doesn’t require a traditional banking license. This type of community banking requires specialist business acumen and risk mitigation lending skills. Of course, community banks need capital too. They also need capital providers who understand the context of community banking.
The are many government policy barriers to building community-based banks and businesses. A brave few will embrace a decentralised community (or enclave) style of business investment without supporting government policy. Even a Hidden Champion that sells exclusively to foreign markets needs electricity and water that can only come from the government monopoly supply source. If our decline into the socialist malaise continues, we will have to stand up and embrace the enclave mentality. The only other alternative is that the last one out turns the lights off if they are still on.
Justin Spencer-Young
