By Dr Gloria Kiondo

South Africa does not lack Small and Medium Enterprises (SME) funding programmes. What it lacks is a financial system capable of recognising and financing the entrepreneurs who drive local economic activity. South Africa has more than 117 distinct public funding programmes intended to support small businesses. Township economies generate close to R900 billion in economic activity every year. Yet many township enterprises still cannot access a single rand of formal finance.

If capital exists, why can’t entrepreneurs access it? The uncomfortable answer may be this: the real constraint is not only capital — it is how the system is designed — often failing to recognise the diversity of businesses and the contexts in which they operate. South Africa has built dozens of disconnected solutions to what is fundamentally a systems problem. Entrepreneurs exist at scale. Capital exists at scale. Public programmes exist at scale. Yet the system connecting them remains fragmented.

This creates a deeper paradox. Despite more than 117 SME funding programmes available in South Africa, the country’s Micro, Small, and Medium Enterprises (MSME) sector still faces a financing gap estimated at more than R350 billion. The challenge is therefore twofold: while numerous funding mechanisms exist, they are often inaccessible to the very businesses they are intended to support, and collectively still fall short of the scale required. In a country where small businesses generate the majority of jobs, this misalignment is not just a financial problem; it is a structural constraint on inclusive economic growth. 

When capital cannot effectively see entrepreneurs, it cannot finance them.

When the System Cannot See the Economy

MSMEs contribute roughly 40% of South Africa’s GDP and employ more than 60% of the workforce. Yet the smallest firms, those with turnover below R1 million, generate the majority of jobs while remaining the least likely to access finance. This situation creates a structural contradiction at the heart of the SME financing system: the businesses that create the most employment is often the least visible to the financial institutions expected to fund them.

Across township economies and informal settlements, economic activity is vibrant and adaptive. Informal retailers manage complex supplier relationships, rotate stock daily, and increasingly accept digital payments. Community supply chains move goods efficiently across neighbourhoods. Yet much of this activity still sits outside what formal financial systems recognise as “bankable, measurable, or investment-ready.” 

When enterprises do not fit the profile embedded in financial risk models, compliance frameworks and reporting templates, they are simply excluded. The result is a structural mismatch between where economic activity actually happens and how economic systems are designed to recognise it. The question, then, is not whether these businesses generate economic value, but whether the financial system is using the right tools to recognise it.

Why Current Risk Metrics Fail SMEs

One of the most persistent barriers lies in how financial risk is measured. Most lending frameworks rely on indicators designed for large and formal enterprises:

• audited financial statements

• traditional collateral

• long credit histories

• standardised balance sheets

These metrics work well for established firms. But they often fail to capture the realities of micro-enterprise activity. For example, across South African townships and villages, spaza shops - small, informal convenience stores often run from homes, serving as essential, community-based retail hubs - are a prime example of how lending frameworks overlook them. A township spaza shop with reliable daily turnover may appear invisible within conventional credit models simply because it does not produce the documentation those models expect.

The consequence is predictable. Capital intended to support small businesses often circulates back to the same limited pool of enterprises that already meet traditional criteria. Meanwhile, thousands of economically active businesses remain excluded. This reflects what might be called a risk metrics paradox: the financial system relies on tools that struggle to interpret the economic signals generated by micro and informal enterprises.

What Experience Is Teaching Us

Recent initiatives offer useful lessons, not because they are perfect solutions, but because they reveal how systems shape outcomes. The Digital Innovation for Modernising the Independent Economy (DIME) initiative showed what becomes possible when systems are designed around real economic behaviour — enabling visibility, digital integration and formalisation. However, it also exposed a key constraint: without alignment to finance, data infrastructure and institutional pathways, even strong interventions struggle to scale. 

This insight became even clearer during a joint United Nations Development Programme and United Nations Capital Development Fund (UNDP–UNCDF) baseline assessment mission examining SME financing constraints in South Africa. Despite large COVID-era loan guarantee schemes and multiple SME funding initiatives, a significant portion of available capital remained under-deployed, with only R35 billion of a R200 billion scheme being utilized. The constraint was not capital availability. It was the absence of risk models that understand the economic signals coming from these businesses.

Rethinking Risk: The Township Spark Lesson

The financing paradox requires rethinking how financial systems assess and profile different types of businesses, and the UNDP in South Africa, jointly with UNCDF and other partners, is testing this through the Township Spark Facility, which aims to test alternative credit pathways for township enterprises. Instead of relying solely on conventional lending metrics, the facility explores ways of incorporating alternative indicators of economic activity, including digital transaction records, supplier relationships, and enterprise performance signals.

The goal is not to weaken financial discipline but to develop alternative risk frameworks that reflect how micro-enterprises actually operate. Without this, the outcome will remain the same: capital will struggle to reach the businesses it was intended to support.

Why Data Is Economic Infrastructure (reintegration)

Another constraint often overlooked is data. When economic activity is under-measured, it is under-financed. When it is under-financed, it is treated as marginal. And when it is treated as marginal, financial and policy systems continue to be designed around a narrow set of formal assumptions.

Digital infrastructure matters because it creates the transaction histories, identity trails and business records that allow lenders and public systems to recognise enterprises that would otherwise remain invisible. According to the Consultative Group to Assist the Poor (CGAP), Kenya's mobile money infrastructure shows that small businesses using mobile money are more likely to obtain loans and lines of credit. That does not mean mobile money alone solves the finance gap, but it does show how digital payment rails can generate the visibility and data footprint that improve access to finance.

The World Bank notes that in Brazil, small business owners use an instant payment platform, Pix, to accept customer payments, pay suppliers, and expand their businesses. This kind of instant, low-cost payment infrastructure lowers the barrier to digital transactions for small merchants, which in turn helps create the data trails needed for broader financial inclusion

Local and international experience shows that when small enterprises are connected to digital payments, trusted identity systems and secure data-sharing frameworks, they become easier for markets, regulators and lenders to recognise. In India, consent-based financial data-sharing is enabling cash-flow lending for MSMEs. In Kenya, mobile money usage has been associated with greater access to loans among small firms. The lesson is clear: digital infrastructure is not only about efficiency; it is what makes enterprise activity visible, verifiable and, therefore, financeable.

Digital infrastructure — identity systems, payment platforms and enterprise data — can change this dynamic. When designed well, these systems make previously invisible economic activity legible to financial institutions. In other words: data is not just a reporting tool — it is economic infrastructure.

From Programmes to Systems Reform

If funding alone were enough, South Africa’s SME sector would already be scaling. Enterprise growth depends on the interaction of four elements: finance, digital infrastructure, market access and enterprise capability. When these elements remain disconnected, entrepreneurs will remain invisible to capital. 

Finance must understand SME realities. Digital infrastructure must make enterprises visible. Markets must connect entrepreneurs to stable demand. But entrepreneurs must also have the capability to engage these systems: financial literacy, business management skills, digital capability and affordable connectivity. Without these capabilities, even well-designed systems will struggle to reach the businesses they are meant to support.

The Opportunity Ahead

South Africa does not lack entrepreneurs, policy ambition or funding programmes. What it lacks is a system that connects these elements. The opportunity therefore is not to invent another funding programme. It is to redesign a system where these elements can operate as one interconnected framework. A system that can finally see, finance and grow the enterprises that already power South Africa’s economy.

Because ultimately, if the system cannot see the entrepreneur, it cannot finance them — and until we redesign how the system sees this economy, thousands of viable businesses will remain invisible to capital.

About the author

Dr Gloria Kiondo is the Deputy Resident Representative at UNDP South Africa, with over 15 years of international development experience across Africa, Asia, and the Arab States. She has held senior leadership roles in programme oversight, risk management, institutional strengthening, and resource mobilization across multiple UNDP country and regional offices, including assignments in Somalia, Tanzania, Kenya, Eritrea, Laos, Addis Ababa, and Bangkok.