Challenges facing the microfinance “industry” in South Africa

Challenges facing the microfinance “industry” in South Africa

Gerhard Coetzee

2006 MFSA Conference

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

Until 1992

• NGO dominated market

• Entrepreneurial focus

• Origins in struggle and non-financial NGOs

• Difficult to make the change

• USAID spent $20m between 1988 - 1999on mostly NGOs

• Decline of the NGOs, but exception(s)

• Decline of the parastatal institutions

• Financial exclusion of majority, role of apartheid, 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, looses intermediaries

• APEX concept, design and …..

• Land Bank failed in it’s small farmer finance mandate

• MAFISA, concept, design and ….

• NHFC looses intermediaries – investigate retail

• General failure in development finance

• Consumer Finance Growth continues

• 2nd Exemption Notice, MFRC: – Formalize microlending within Exemption

– Consumer protection

– Improve information & understanding

• More detail coming

Market ‘growth’ in Rand volume

0

5

10

15

20

25

1992 1993 1995 2000 2004 2006

Total (Rb)

Enterpr. ?

Leakage

Development

Assessing MFRC• Formalize microlending:

– ~2200 registered, % unregistered ?

– Black MLs, but informal township MLs (?)

• Consumer protection:– Help for borrowers, complaints & enforcement

– Progress on disclosure & reckless lending (?)

• Information, understanding:– Central role in sectoral data & analysis

– Efforts to inform, educate public (?)

• Pro-active stance: enforcement and beyond

• Institutional change: NLR, legal/judicial issues, National Credit Act

• Influencing policy through research: competition, housing, indebtedness

MFRC outcomes, impact

• Major change in microlender behavior

• Influx of banks: lowered reputational risk

• R22+ billion market, evidence of substantial use for developmental purposes (larger volume than DFIs?)

• Quantum leap in information, understanding

• Reinforce regulatory approach

2006

• MFRC ends

• NCR starts

• Challenges

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 - 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, but more focus needed

• However, many success stories, in Africa and beyond

Challenges – Asset accumulation

• Savings, insurance, investment products (ever mentioned here?)

• Targeted savings products

– Mzanzi experience encouraging

– Smooth consumption, raise repayment, minimize risk

– Is the banks making money, threat of cannibalization

– Savings Targets Not Addressed in Anticipated Legislation, Charter

– Addressing negative real interest rates on savings instruments

• Need for bundling lending and saving instruments.

– Repayment is a combination of amortized principal, interest, forced saving

• Banco Sol model

• Accion model

• Village Banking Model

• Housing: embryonic township markets

• Investment products

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 - Mozambique

• Novo Banco - Angola

Other countries

• BRI Unit Desa - 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, Development Bank, National Bank – Philippine

• BancoSol – Bolivia

• 14 other banks in Eastern Europe

• Grameen Bank - Bangladesh

Challenge – Rules and enforcement

• NCR

• Other rules

• Harmonisation of policy and legislation?

• Main challenge – enforcement?

Challenge – Information

• Need for even better data and information– Better credit scoring and pricing models

• Having better information on individuals, households and firms applying for / using credit for policy development

• Training and capacity building– Major need, no recognition, 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, monitoring

Short term price comparisons

Table 9: Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Cash Lenders

2000 2003

Institutions Loan amount Term APR Institutions Loan amount Term APR

Cash lender 2 R100-R500 7-25 days 540-1040% Bank 6 R100 1 month 228%

Cash lender 3 R500 30 days 360% Micro-lender 1 R100 1 month 264%

Cash lender 4 R500 25-30 days 360-450% Micro-lender 2 R100 1 month 336%

Cash lender 5 R500 25-30 days 640-780% Micro-lender 9 R100 1 month 360%

Cash lender 6 R500 25-30 days 540-1040% Micro-lender 3 R100 1 month 360%

Micro-lender 4 R100 1 month 360%

Micro-lender 1 R500 1 month 259.2%

MFRC TCOC 2003 Micro-lender 5 R500 1 month 360%

13 lenders R750 30 days 60-360% Bank 6 R1,000 1 month 222%

Micro-lender 2 R1,000 1 month 336%

Micro-lender 6 R1,000 1 month 360%

Longer term price comparisonsTable 10: Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Term Lenders

2000 2003

Institutions Loan amountTerm

(months)APR (%) Institutions

Loan amount

Term (months)

APR (%)

Term lender 3 >R2,000 12 45-88 Bank 5 R5,000 12 83

Cash lender 8 <R10,000 18-24 242 Micro-lender 8 R2,000 12 155

Term lender 2 <R9,000 24 57 Bank 1 R1,000 12 98

Cash lender 9 <R6,000 3 153 Bank 4 R2,000 12 147

Cash lender 7 R1,500-R3,000 3-6 287 Micro-lender 7 R2,000 9 209

Term lender 1 R2,000-R6,000 6-12 78 Bank 2 R5,000 12 112

MFRC TCOC 2003

23 lenders R5000 12 70/95

21 lenders R8000 24 56/83

27 lenders R3000 12 80/105

7 lenders R2000 6 198/209