Challenges facing the microfinance “industry” in South Africa

Gerhard Coetzee 2006 MFSA Conference

Outline • • • History Present Future .

Short history • Four phases – Before 1992 – from struggle to financial services – 1992 to 1999 – growth after legislative changes – 1999 to 2005 – era of growth continues in a more regulated environment (MFRC) – 2006 .onwards .

but exception(s) Decline of the parastatal institutions Financial exclusion of majority.1999on mostly NGOs Decline of the NGOs. role of apartheid.Until 1992 • • • • • • • • NGO dominated market Entrepreneurial focus Origins in struggle and non-financial NGOs Difficult to make the change USAID spent $20m between 1988 . distortions due to Usury Act .

1992 to 1999 • • • • • • • • Key NGO’s collapse Exemption under R6000 Micro lenders and consumer finance Consumer protection Credit bureaus Exemption lifted to R10 000 Court case / MFRC Exponential growth .

1999 to 2005 • • • • • • • • Khula failed in it’s mandate. MFRC: – Formalize microlending within Exemption – Consumer protection – Improve information & understanding • More detail coming .. design and …. concept. NHFC looses intermediaries – investigate retail General failure in development finance Consumer Finance Growth continues 2nd Exemption Notice. Land Bank failed in it’s small farmer finance mandate MAFISA. design and …. looses intermediaries APEX concept.

Market „growth‟ in Rand volume 25 Total (Rb) 20 Enterpr. ? Leakage Development 15 10 5 0 1992 1993 1995 2000 2004 2006 .

indebtedness . housing.Assessing MFRC • • Formalize microlending: – ~2200 registered. understanding: – Central role in sectoral data & analysis – Efforts to inform. legal/judicial issues. educate public (?) Pro-active stance: enforcement and beyond Institutional change: NLR. National Credit Act Influencing policy through research: competition. % unregistered ? – Black MLs. complaints & enforcement – Progress on disclosure & reckless lending (?) • • • • Information. but informal township MLs (?) Consumer protection: – Help for borrowers.

evidence of substantial use for developmental purposes (larger volume than DFIs?) Quantum leap in information. impact • • • • • Major change in microlender behavior Influx of banks: lowered reputational risk R22+ billion market.MFRC outcomes. understanding Reinforce regulatory approach .

2006 • • • MFRC ends NCR starts Challenges .

in Africa and beyond . but more focus needed • However. many success stories.heavy burden of “red tape” – Registry of security interests – Explicitly target productive uses of microfinance – Transformation of NGO MFIs – Business Development Services – Commercial banks – already in there.Challenges – Development Finance (“Second economy?”) • • • Understanding of clients – township money lenders example – real market research Expansion of products. expanded options SMME finance – attacking the self employed market – Regulatory environment .

threat of cannibalization – Savings Targets Not Addressed in Anticipated Legislation. minimize risk – Is the banks making money. – Repayment is a combination of amortized principal. raise repayment. insurance. forced saving • Banco Sol model • Accion model • Village Banking Model • • Housing: embryonic township markets Investment products . interest. Charter – Addressing negative real interest rates on savings instruments • Need for bundling lending and saving instruments. investment products (ever mentioned here?) Targeted savings products – Mzanzi experience encouraging – Smooth consumption.Challenges – Asset accumulation • • Savings.

Angola  .Mozambique  Novo Banco .African examples  • • • • • • • • National Microfinance Bank – Tanzania  Amhara Credit and Savings Institution – Ethiopia  Banque du Caire – Egypt  K-Rep – Kenya  Equity Bank – Kenya  CERUDEB – Uganda  Novo Banco .

Bangladesh .Indonesia Banco do Nordeste – Brazil People’s Bank of Sri Lanka Banrural – Guatemala Bank Pertanian Malasia Agricultural Development Kyrgyz Agricultral Finance Cooperation – Kyrgyzstan Land Bank. National Bank – Philippine BancoSol – Bolivia 14 other banks in Eastern Europe Grameen Bank . Development Bank.Other countries  • • • • • • • • • • BRI Unit Desa .

Challenge – Rules and enforcement • • • • NCR Other rules Harmonisation of policy and legislation? Main challenge – enforcement? .

households and firms applying for / using credit for policy development Training and capacity building – Major need. monitoring . no recognition.Challenge – Information • • • • Need for even better data and information – Better credit scoring and pricing models Having better information on individuals. not willing to pay – Short sighted – need to invest in most strategic asset Consumer education – Need for improved outreach – Focus on lower income strata – Distinct lack of innovation – Use of CE as a monitoring tool • Pricing issues. competition.

000 1 month 1 month 1 month 1 month 1 month 259.Short term price comparisons Table 9: Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Cash Lenders 2000 2003 Term APR Institutions Loan amount Term APR Institutions Loan amount Cash lender 2 Cash lender 3 Cash lender 4 Cash lender 5 Cash lender 6 R100-R500 R500 R500 R500 R500 7-25 days 30 days 25-30 days 25-30 days 25-30 days 540-1040% 360% 360-450% 640-780% 540-1040% Bank 6 Micro-lender 1 Micro-lender 2 Micro-lender 9 Micro-lender 3 Micro-lender 4 R100 R100 R100 R100 R100 R100 1 month 1 month 1 month 1 month 1 month 1 month 228% 264% 336% 360% 360% 360% Micro-lender 1 MFRC TCOC 13 lenders 2003 R750 30 days 60-360% Micro-lender 5 Bank 6 Micro-lender 2 Micro-lender 6 R500 R500 R1.000 R1.000 R1.2% 360% 222% 336% 360% .

000 <R6.000 2003 R5000 R8000 R3000 R2000 3-6 6-12 287 78 Micro-lender 7 Bank 2 R2.500-R3.000-R6.000 Term (months) 12 12 12 12 APR (%) 83 155 98 147 Cash lender 7 Term lender 1 MFRC TCOC 23 lenders 21 lenders 27 lenders 7 lenders R1.000 R2.000 <R9.000 APR (%) 45-88 242 57 153 Institutions Bank 5 Micro-lender 8 Bank 1 Bank 4 Loan amount R5.000 R2.000 <R10.000 R1.000 R2.000 9 12 209 112 12 24 12 6 70/95 56/83 80/105 198/209 .Longer term price comparisons Table 10: Lenders Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Term 2000 2003 Term (months) 12 18-24 24 3 Institutions Term lender 3 Cash lender 8 Term lender 2 Cash lender 9 Loan amount >R2.000 R5.

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