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

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 NGOs 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 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

Market growth in Rand volume

25
Total (Rb)

20

Enterpr. ? Leakage Development

15

10

1992 1993 1995 2000 2004 2006

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 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

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 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 R1,000

1 month
1 month 1 month 1 month 1 month

259.2%
360% 222% 336% 360%

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 <R10,000 <R9,000 <R6,000

APR (%)
45-88 242 57 153

Institutions
Bank 5 Micro-lender 8 Bank 1 Bank 4

Loan amount R5,000 R2,000 R1,000 R2,000

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

R1,500-R3,000
R2,000-R6,000 2003 R5000 R8000 R3000 R2000

3-6
6-12

287
78

Micro-lender 7
Bank 2

R2,000
R5,000

9
12

209
112

12 24 12 6

70/95 56/83 80/105 198/209