Johannesburg — HOW do you allocate capital to stimulate sustainable economic growth in emerging economies? This is a question faced by governments throughout the developing world, and the way it is being answered is increasingly defining the developmental success of nations throughout Africa, Asia and Latin America.

In SA, the focus of this crucial question falls on the development of small to medium enterprises (SMEs), which are widely touted as key to the future success of the domestic economy. However, despite acknowledgement of the benefits of promoting SME development, the South African government has been slow in backing up the rhetoric with pragmatic policies governing the allocation of capital to SMEs and developing institutions .

Except in the rare cases where start-up capital exists from previous ventures, entrepreneurs in SA looking to start their own SME are forced to travel a long and arduous road before being handed a loan by one of the country's risk-averse banks or its hypocritically profit-driven development finance institutions (DFIs), of which the Industrial Development Corporation (IDC) and the Development Bank of Southern Africa (DBSA) are the most guilty.

Even once the coveted loan is secured, interest rates are criminally high and the societal pressure on succeeding so intense that most promising ventures are doomed to fail . The massive profits generated by the IDC last year are proof of how misguided the institution is as the more it makes in profit, the less the SMEs it serves can generate in order to survive.

It would be naïve to criticise the banks for their lending policies to SMEs, but the lending criteria and interest rates of the DFIs in SA is simply inexcusable. SA would do very well to learn from Asia's economic powers rather than adopting a profit-at-all-costs approach so indicative of western Europe and the US. Throughout Asia the model is strongly geared towards the promotion of SMEs, which are driving many of the most sophisticated regional economies .

In Japan, 88% of the economy is made up of SMEs. The figure is even higher in Taiwan, where almost 98% of businesses are SMEs. Malaysia has displayed remarkable success with its SME policies, which were galvanised in 2005 with the opening of the SME Bank, which aims to meet the needs of the country's SMEs and contribute towards the growth of a more robust entrepreneurial community .

Starting and running an SME in China is becoming easier and more profitable. At present, SMEs are responsible for 60% of China's industrial output and employ 75% of its urban workforce. Acutely aware of this dynamic, the Chinese government is making huge efforts to improve the enabling environment for SMEs to sustain economic growth.

In Korea, SMEs represent 99,8% of the 3-million enterprises in the country, with the remaining few being made up by the major conglomerates or Chaebol such as Samsung, Hyundai and LG, while 86,5% of Korea's total workforce are employed by SMEs.

The success of Grameen Bank in Bangladesh in providing microfinance to individuals and small enterprises is well known due to its contribution to improving economic growth . Grameen is also enjoying massive success in India, where SME development is high on the governmental agenda as it aims to capitalise on the country's entrepreneurial spirit and abundant human capital. India also has an array of venture capitalists desperate to invest in promising ideas .

In all of these examples, the governments in question have intervened to ensure that SMEs are afforded preferential treatment by banks and DFIs, with lending rates usually between 6% and 7% below prime. In SA loans are heavily skewed in favour of the lending institution .

The same problem faced by South Africans is faced by similar entrepreneurial hopefuls throughout the continent, where traditional banks have been slow in realising the need for providing affordable financing to SMEs. The difference is that elsewhere in Africa pragmatic moves are being made to alter this imbalance .

In Nigeria the consolidation of the banking sector has seen the growth of lively young institutions, such as Zenith Bank and Guaranty Trust Bank, which have opened up new avenues for entrepreneurs and improved the reputation of Nigeria's previously fragmented banking sector.

In East Africa the developments are even more progressive, with Kenyan authorities recently announcing that the requirements for SMEs to list on the Nairobi Stock Exchange will be significantly reduced to allow them to raise interest-free capital publicly. This will increase the number of trading institutions on the bourse, thereby raising liquidity and providing more opportunities for international investors. The Ugandan and Tanzanian stock exchanges have agreed to follow suit, a move that may well provide a significant economic boost to the region, raising its status in terms of the international community.

The mechanisms for SME support are in place in SA, at least in theory. However, the ultimate factor restricting the theory from becoming reality is inconsistency when it comes to gearing these mechanisms towards the provision of affordable finance. In this sense, thinking laterally and

Simon Freemantle is senior business analyst at Emerging Market Focus.