The Competition Commission of South Africa has initiated a market inquiry into the country's franchising sector. This move comes amid concerns that certain market features may hinder the entry and expansion of small and medium enterprises, particularly those owned by historically disadvantaged persons. The commission's draft terms of reference highlight several issues, including finance and funding requirements associated with acquiring a franchise.
A key concern is that prospective franchisees are often required to have at least 50% of the total investment available as unencumbered funds. This requirement may exclude capable individuals who lack the necessary capital, despite having the skills and commercial ability to operate a successful franchise. The commission has questioned whether such requirements contribute to the slow pace of transformation in the franchising sector.
The funding requirements are not solely imposed by franchisors but also reflect the financing criteria applied by lenders. When assessing the viability and risk of funding a franchise, lenders consider the fixed term of the franchise agreement, typically five years. They must ensure that the debt can be serviced within this period and comply with the National Credit Act. This act requires lenders to undertake a prescribed assessment and avoid granting reckless credit.
The National Credit Act defines reckless credit as credit granted without undertaking the required assessment, where the consumer does not understand the risks, or where the agreement would render the consumer over-indebted. The consequences of granting reckless credit can be substantial, including court intervention to declare the credit agreement reckless and suspend or set aside the consumer's obligations.
Lenders must determine whether a proposed franchise can service its debt and whether the borrower has sufficient financial resilience. The outcome of the market inquiry will be crucial in addressing these concerns. If the commission concludes that existing funding requirements unnecessarily exclude historically disadvantaged persons, it will need to identify alternatives that improve access to finance without increasing lenders' risk.
Improving access to franchising is a significant transformation objective in South Africa. However, any solution must balance access to credit with responsible lending practices. A sustainable approach will need to achieve both, ensuring that lenders do not assume a higher level of risk that could be considered reckless credit.
The Competition Commission's market inquiry aims to promote a more inclusive franchising sector. The inquiry's findings and recommendations will be important in shaping the future of franchising in South Africa, particularly for historically disadvantaged persons.
Key points
- The Competition Commission's market inquiry into South Africa's franchising sector aims to address funding hurdles faced by historically disadvantaged persons.
- The inquiry will examine whether existing funding requirements unnecessarily exclude prospective franchisees and identify alternatives to improve access to finance.
- Any solution must balance access to credit with responsible lending practices to ensure a sustainable approach.
