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) – onwards

Until 1992 NGO dominated market Entrepreneurial focus Origins in struggle and non-financial NGOs Difficult to make the change USAID spent $20m between on 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 R 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 2 nd Exemption Notice, MFRC: –Formalize microlending within Exemption –Consumer protection –Improve information & understanding More detail coming

Market ‘growth’ in Rand volume

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 InstitutionsLoan amountTermAPRInstitutionsLoan amountTermAPR Cash lender 2R100-R days %Bank 6R1001 month228% Cash lender 3R50030 days360%Micro-lender 1R1001 month264% Cash lender 4R days %Micro-lender 2R1001 month336% Cash lender 5R days %Micro-lender 9R1001 month360% Cash lender 6R days %Micro-lender 3R1001 month360% Micro-lender 4R1001 month360% Micro-lender 1R5001 month259.2% MFRC TCOC2003Micro-lender 5R5001 month360% 13 lendersR75030 days60-360%Bank 6R1,0001 month222% Micro-lender 2R1,0001 month336% Micro-lender 6R1,0001 month360%

Longer term price comparisons Table 10:Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Term Lenders InstitutionsLoan amount Term (months) APR (%)Institutions Loan amount Term (months) APR (%) Term lender 3>R2, Bank 5R5, Cash lender 8<R10, Micro-lender 8R2, Term lender 2<R9, Bank 1R1, Cash lender 9<R6, Bank 4R2, Cash lender 7R1,500-R3, Micro-lender 7R2, Term lender 1R2,000-R6, Bank 2R5, MFRC TCOC lendersR /95 21 lendersR /83 27 lendersR /105 7 lendersR /209