Challenges facing the microfinance industry in South Africa

1
Challenges facing the microfinance industry in
South Africa

• Gerhard Coetzee
• 2006 MFSA Conference

2
Outline

• History
• Present
• Future

3
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

4
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

5
1992 to 1999

• Key NGOs collapse
• Exemption under R6000
• Micro lenders and consumer finance
• Consumer protection
• Credit bureaus
• Exemption lifted to R10 000
• Court case / MFRC
• Exponential growth

6
1999 to 2005

• Khula failed in its mandate, looses
  intermediaries
• APEX concept, design and ..
• Land Bank failed in its 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

7
Market growth in Rand volume
8
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

9
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

10
2006

• MFRC ends
• NCR starts
• Challenges

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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

12
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

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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 ?

14
Other countries ?

• BRI Unit Desa - Indonesia
• Banco do Nordeste Brazil
• Peoples 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

15
Challenge Rules and enforcement

• NCR
• Other rules
• Harmonisation of policy and legislation?
• Main challenge enforcement?

16
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

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Short term price comparisons

18
Longer term price comparisons