A Guide to South African Township Economy

South Africa’s township economy is mostly made up of small and informal businesses, often operating in the informal sector. Estimates by First National Bank (FNB) put the number of businesses in townships at around 800 000 to one million. The majority of these are survivalist businesses that include hawkers, spaza shops, pavement sellers, and street vendors. Also operating in this market hair salons, shebeens, laundromats, and other small businesses run from a person’s home.

These businesses play a major part in any township economy, providing essential goods to large parts of the substantial township population (around 50% of South Africa’s urban population live in townships). They also make a significant contribution to job creation and income opportunities within townships on a large scale. It’s estimated that over three million workers are engaged in the informal economy.

Read: Township Business Ideas and Opportunities

Apartheid’s legacy is still largely evident today with many townships characterised by low levels of commercial investment, high unemployment, low household incomes and poverty.

Even with many obstacles present, the township market presents significant opportunities for entrepreneurs. According to current estimates, the collective spending power of the township market is worth billions of rands. Additionally, there are approximately 8,2 million stokvels, with 11,4 million members who control R 5 billion in savings, highlighting the immense potential for businesses to tap into this market.

Previously, the most favoured industries for starting a business were those with minimal barriers to entry and low capital requirements. This is, however, changing as more entrepreneurs explore untapped sectors. Sectors such as agriculture and food production, tourism, healthcare services and waste management are on the rise.

Read: A Guide to Launching a Spaza Shop Business 

Furthermore, businesses are also launching in response to demand for couriers and delivery following the COVID-19 pandemic in 2020. Ranging from groceries and takeaway delivery to chronic medication delivered on bicycle. This trend is expected to continue as the e-commerce industry continues to grow, and more businesses look to expand their reach to township markets.

Technology is driving new innovations as township innovators and entrepreneurs look to tackle the challenges faced by township-based consumers. In an interview with SME South Africa, techpreneur, Tshepo Moloi, spoke on changing perceptions of township-based businesses as low tech. He has made it his mission to change this with his financial management application for Stokvels, Stokfella, which allows users to keep a record of all financial transactions.

Despite their relevance and importance in the local economy, informal businesses face many challenges.

Limited access to funding and markets are major concerns. Township-based entrepreneurs are often denied financing because of a lack of collateral and the perception that township enterprises are high-risk. As a result, many township businesses struggle to grow. Township entrepreneurs also struggle with access to markets and distribution channels. This is largely because of few opportunities for township entrepreneurs to reach customers and sell their products or services in larger markets beyond their immediate local area.

Additionally, the lack of township infrastructure is also a hindrance to business success. Most business owners are forced to service customers without many of the basic services needed to run a business such as “waste collection, reliable access to water and electricity, street lights, decently maintained roads and pavements, effective storm-water drainage, reliable public transport and community safety.”

Additional factors that threaten township-based businesses are inadequate regulation and high crime levels. In particular, the lack of titling and/or other secure forms of tenure keep entrepreneurs from upgrading business facilities or making home improvements. Similarly, safety concerns in some township areas deter business owners from investing in the area.

Lastly, inadequate business knowledge and skills also adversely affect the success prospects of township enterprises. Many entrepreneurs based in townships lack the essential skills required for running a business. This situation is made worse by the limited availability of education and skills development opportunities in townships.

Read: The Next Generation of Township Entrepreneurs

A lack of collateral, limited credit history, or a shortage of available funding options are some of the biggest barriers township-based entrepreneurs face when accessing financing. These factors, in addition to a lack of finance readiness (i.e. not having financial statements and other documentation), mean township entrepreneurs struggle to access the funds they need to grow their businesses.

To bridge the funding gap, there are several traditional and non-traditional financing options available to entrepreneurs. Among them are government grants and loans which are the most commonly used funding alternatives. These financing options are available to eligible entrepreneurs in township areas.

Below are some of the government funds available for township entrepreneurs.

Township and Rural Empowerment Programs (TREP)

This is a government initiative to support informal micro and small enterprises in township economies. TREP offers township entrepreneurs finance and business development opportunities to help them develop their businesses. The fund is managed by the Small Enterprise Finance Agency (SEFA). TREP schemes include a one-stop-shop business support service, business incubation to help entrepreneurs develop their new ventures, business skills training programs, and product development support.

Read: Township Business Funding Opportunities – TREP 

The NYDA Grant Programme

The NYDA programme provides youth-owned enterprises in the rural and township economy with support, training, mentorship, funding and education. The NYDA supports enterprises across all sectors, from agro-processing to retail. Some of the most common types of businesses supported by the NYDA are – street vendors, small-scale recycling, cleaning services, hair salons, car washes, repair services, plumbers and motor mechanics.

Read: A Guide to NYDA Funding 

Rural, Township and Community Development Fund

This Fund forms part of the National Empowerment Fund’s mandate to provide social and economic upliftment to township and rural communities. It provides funding to aspiring rural entrepreneurs and facilitates skills transfer and operational involvement by community groups. The sectors that are funded include agro-processing and manufacturing, eco-tourism, forestry and fisheries, commercial property, aqua and marine, culture, as well as other non–farm activities (rural-based). To apply minimum black ownership of 25,1% is a requirement and the project must be financially viable.

Read: A Guide to Government Funding in South Africa

There are more new sources of funding being made available to township entrepreneurs. One such example is Zande Africa, a fintech start-up that’s helping spaza shops in the township economy access crucial finance. Zande Africa has signed up more than 1,400 spaza shops, helping them to obtain lines of credit to buy stock in bulk and take advantage of better pricing from manufacturers.

Crowdfunding also gives more entrepreneurs an opportunity to get microfinance. Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. There are various types of models, the most widely used being equity, donation and rewards-based.

The People’s Fund provides a platform for individuals, stokvels and corporations to invest assets into budding black-owned companies.

The same ethos that drives Stokvels is what’s behind their crowdfunding model, says the founder Luyanda Jafta. “We want to demonstrate that between us we can build the economy we want to see, and we can all directly benefit from it.”

The People’s Fund has helped small businesses raise funds, including Walk Fresh, a boutique sneaker cleaning and shoe-care service with roots in the township in Johannesburg. The startup managed to raise R8 500 to go towards improving their security features in order to drastically reduce their business insurance.

Read: This Crowdfunding Platform Wants to Help Black Businesses