How big is the township economy in South Africa?

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Standard Bank is the latest company to tout the potential of South Africa’s township economy, joining a host of companies including banking, grocery and telecommunications.

Small businesses operating in townships historically designated on the periphery of the nation’s developed urban economy are as much a part of our economy as large national companies or local multinationals operating out of Sandton, the lender said.

Simone Cooper, head of commercial clients at Standard Bank, believes that township businesses are the missing link needed to put South Africa on a higher and more inclusive growth path.

“South Africa’s small business sector is critically important because it can unlock long-term growth, inclusion and social stability – all of which has eluded South Africa for so long. Far from being peripheral, small businesses are central to building the economy and society we all want,” Cooper said.

In May, MTN South Africa announced it would increase its investment in Gauteng to R2.2 billion to meet growing demand, while the group said it would also expand its reach in areas of the cantons, to fuel growth and stimulate participation in the digital economy. This includes several digital wallet solutions.

A diverse, vibrant and growing small business segment drives growth, widespread employment and innovation that expands inclusion, boosts overall prosperity and maintains social stability, Cooper said.

“Given the very important role that small businesses play in employment and GDP growth around the world, if South Africans are confused by lackluster growth and the inability of our economy to provide jobs, we need to look no further than how we support, grow and include our small – and especially our small periphery or township business segments – in the formal economy,” said the head of company.

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South Africa’s small business segment is characterized by a divide between more formal urban businesses located closer to developed commercial and financial hubs – and less formal peri-urban or peripheral businesses located in townships, informal settlements or among rural communities.

Standard Bank said it has developed a range of solutions designed to bridge the distance between small businesses in outlying townships and the formal economy.

Most of them focus on tackling informality – for example, helping emerging small businesses to register formally, creating adequate payment channels, and building business capacity by giving them access to technology and advice.

In one example, Standard Bank said it partnered with township-based fresh produce aggregator Spinach King, growing the small business into a multi-award-winning business supplying more than 150 retail stores, including the Spar group, Pick N Pay, Wellness Warehouse and various delicatessens in the Western Cape, Gauteng and KZN.

The lender said it also helped Spinach King build its own branches in Khayelitsha and Phillipi while developing its own central production plants in Cape Town and Johannesburg.

How big is the township’s economy?

The financial services company, Investec, says around 17% of the country’s total employment comes from the informal economy or the so-called township economy.

“Informal businesses operate in a multitude of industries and provide goods and services that meet diverse social and economic needs within township communities. Retail trade dominates the townships’ informal economy, with spaza shops, fast food outlets, bakeries, shebeens and hawkers.

“Additional businesses include back office rentals, minibus taxi operators, panel mechanics and beaters, metal fabricators, child care services, barbers and hair salons, among others. “, did he declare.

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And while informal businesses contribute a growing share of GDP (6% in 2017), many pay no taxes, despite paying VAT on their purchases. Many informal operators simply earn below the income tax threshold set by the South African tax authorities.

“The typical earnings of employees in the informal sector are less than half those in the formal sector. According to Stats SA, the median income of workers in the informal sector is around R2,000 per month, compared to R4,300 in the formal sector. The self-employed, especially men, earned more – R6,700 per month, on average.

South Africa is said to have more than 500 townships, of which Soweto, in Johannesburg, is the largest with more than 1.3 million inhabitants. It is followed by Tembisa in Kempton Park, with around half a million inhabitants, and Katlehong in Germiston, with over 400,000 inhabitants.

The FNB has said in the past that with up to half of South Africa’s urban population living in townships, the ecosystem that sustains these communities warrants much greater attention from the banking industry.

Statistics show that there are approximately 30 to 40 companies per 1,000 inhabitants in the cantons. FNB estimates this translates to around 800,000 to one million businesses. The majority of them are survival businesses, with around 300,000 representing entities employing three or more people, the lender said, although before the pandemic.

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The South African Townships Marketing Report 2021 published by RogerWilco revealed that spaza stores contribute up to 5.2% to South Africa’s GDP, employing 2.6 million people. This would put the broader economy of these informal convenience stores around R600 million in constant GDP figures.

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The report notes that these stores are under pressure from large retailers.

Pick n Pay noted in a December 20021 annual report that the country’s food and grocery sector comprises a modern formal sector and a large informal sector. The total market was estimated to be worth R900 billion in 2021, with around 60% of the market considered formal and around 40% informal.

The formal South African food and grocery market is highly competitive. Four major distributors, including our Group, represent approximately 50% of sales. With revenue of R900 billion in its South African segment in FY21, Pick n Pay estimated it had nearly 10% of the total market and around 16% of the formal market.

The scale of retail businesses in the townships varies widely, according to Reuters, citing FirstRand. The lender reportedly discovered that the scale of unbanked businesses is much larger than they thought.

It found much bigger cash wholesalers than expected, with some making sales of up to 40 million rand, Reuters said. “Even very small township shops typically turn over R2m a year,” he said.

“A larger and more robust small business segment in South Africa will significantly increase employment, enabling more South Africans to support themselves and their families. The result will be fewer people depending on the national government for social benefits and other social services. A thriving small business sector will broaden the tax base and increase national revenues,” Standard Bank said.

“All of this will free up the government to focus its funding on maintaining and expanding social and economic infrastructure to drive growth and expand inclusion.”


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