Mass Banking and the Micro-financing Industry in SA’s Second Economy

Making Finance Work for Africa

7-9 May 2007

Zambezi Sun Hotel,

Livingstone, Zambia

Lumkile Mondi

Chief Economist

Industrial Development Corporation of SA

BackgroundBackground

• ASGI-SA is an attempt at bridging SA’s “two-economies” divide.

• 13 million South African adults do not have access to basic banking transaction facilities.

• Overcoming the two-economies divide requires vast resources and the creation of micro-financing institutions (MFIs).

• Micro-financing is the supply of loans, savings, money transfers, insurance, and other financial services to low-income people for their livelihood and their micro-enterprises.

The Financial Services CharterThe Financial Services Charter

PERCENTAGE OF LSM 1-5 WITH EFFECTIVE ACCESS TO 2008 ACCESS TARGET 2003 ACTUAL USAGE

Transaction accounts 80% 32%Bank savings products 80% 28Life assurance products A percentage to be defined 5%Collective investment savings products 1% plus 250 000 NegligibleShort term risk insurance products 6% Negligible

• The Sector through the Charter is to increase access (effective access) to transaction banking to 80% of the LSM 1-5 population;

• Effective access means access to full banking facilities within 20 kilometers of client location;

• The Sector is also to increase targeted lending to SMMEs, agricultural enterprises, development infrastructure and low – cost housing.

The National Credit Act 34 - 2005The National Credit Act 34 - 2005

• Caters for consumers and credit providers;

• Became effective from 1 June, 2006;

• It provides for the National Credit Regulator and the National Consumer Tribunal to monitor and enforce its application;

• Protection of consumers:

• Debt Counsellors;

• Over-indebtedness and reckless lending;

• Prices of cash versus credit sales;

• Interest rates and other charges are capped;

• SA’s credit industry estimated to total R362 billion.

Micro-lending industry:

• 1 800 businesses, including 9 banks, operating out of 8000 branches and employing circa 25 000 people.

• Totalling an estimated R17 billion, the micro-lending industry represents 5% of the overall credit industry.

• About 83 000 business loans totalling R190 million are provided yearly by NGOs.

• 272 000 micro-consumer loans, valued at R510 million, are issued by “for profit” lenders and utilised by households for business purposes.

• The informal savings market is estimated at R15 billion annually.

SA’s micro-financing industrySA’s micro-financing industry

Pyramid of SA financial institutions

The second economy

Credit Unions Cooperatives

Middle class

Salaried working class and self employed

(small business)

Economically Active Poor (Micro Enterprise)

Very Poor (Survivalist Enterprise)

The ‘Hard Core’ Poor and Destitute

The first economy

Commercial Banks

Commercial Micro-loans

industry

Existing state agencies (Khula,

Umsobomvu)

Developmental Micro-Finance Organisations

(NGOs)

Very few SA MFIs reach the very poor, or seek to do so as a

matter of policy.

• Commercial banking sector

• Non-banking MFIs (e.g. Micro-Finance Regulatory Council, Small Enterprise Foundation, Khula Enterprise Finance, Beehive Entrepreneurial Development Centre, FINCA, Marang Financial Services)

• Savings and credit/financial services co-operatives (e.g. Savings and Credit Cooperative League of SA – SACCOL)

• Savings and credit networks (e.g. SA Homeless People’s Federation)

• Hybrids (e.g. Kuyasa Fund, Teba Bank, Postbank, SEDA, SAMAF)

SA micro-financing industry playersSA micro-financing industry players

• The establishment of the South African Micro-finance Apex Fund (SAMAF), was based in part on the stated challenges in the industry.

• SAMAF, commonly referred to as “the Apex Fund”, has been operational since May 2005 as an autonomous institution operationally independent from Government.

• SAMAF may be seen as the core initiative of the SA Government to support and promote the growth of the micro-financing industry.

• SAMAF aims to address poverty alleviation and to provide sustained, affordable access to financial services for the poor.

• It now has pro-poor micro-financing partner institutions in all nine provinces.

The SA Micro-Finance Apex Fund (SAMAF)The SA Micro-Finance Apex Fund (SAMAF)

• South Africa’s largest retail bank;

• Capitalised on the JSE at R80 billion; made R5.5 billion

in headline earnings as at 31 March 2005;

• A co – signatory to the Financial Services Charter;

• Usage of bank accounts among poorer people (LSM 1-5)

stands at 32%, committed to ensuring that 80% have

effective access to bank accounts by 2008;

• ABSA has FlexiSelect a unique product that now

gives people earning as little as R2 000 per month access

to a range of banking facilities, including investment and

savings products, overdrafts, small loans, housing loans,

vehicle finance, credit cards, wills and a range of insurance

products

ABSA – A case studyABSA – A case study

• Transaction banking;

• Money Transfer Facilities;

• Micro – Credit Financing;

• Micro – Savings;

• ROSCAS; - These are Rotating Savings and Credit Associations also known as Stokvels. There are about 2.3 million stokvel members out a total adult population of roughly 29 million. An estimated R5 billion flows through stokvels every year

• Burial Societies; and

• Retail savings Bonds.

Industry products and servicesIndustry products and services

• A lack of skilled and experienced staff for MFIs at the start-up stage.

• Rapid labour turnover and limited resources for capacity development.

• SA’s micro-credit MFIs have the highest ‘salary burden’ in the world.

• Structural obstacles to micro-enterprises, as well as obstacles to productivity in micro-credit delivery.

• A challenge in the NGO sector is the extent of donor or subsidy dependence.

• The dual problem of high interest rates and high administration costs of lending out SMME and other loans.

Challenges facing SA’s micro-finance industryChallenges facing SA’s micro-finance industry

• Unsecured loans to clients are by their very nature risky, and there is a need to develop a culture of trust within communities.

• Social intermediation methodologies (SIMs) may not work in where mistrust within communities is pervasive.

• Lack of skilled professionals for the micro-finance industry.

• High illiteracy levels play a significant role in limiting the growth of the micro-finance industry.

• High salaries demanded by micro-finance professions inhibit institutional sustainability.

• High crime levels mean that rural populations remain vulnerable and MFI operational costs are negatively impacted.

• Poor infrastructure (e.g. road networks and communication facilities) in rural areas hinders industry outreach both in terms of breadth and depth.

SA micro-finance industry risks SA micro-finance industry risks

Some of the developmental returns to be realised from involvement in the micro-financing industry:

Socio-economic development Socio-economic development impactimpact

• Elevating the standard of living of people in rural areas, townships, as well as semi-informal and informal settlements.

• Raising disposable incomes, which leads to higher effective demand in the economy and accelerated economic growth.

• Increasing demand for goods and services from the SMME sector, which will translate into growth opportunities within the sector itself and supplier industries.

• Employment creation.

• Poverty alleviation.

• Main emphasis of Transport, Financial Services & Other SBU is to address the issue of access to business-oriented financial services by unbanked entrepreneurs and second economy participants.

• Current strategy includes mainly acquisition-type transactions in financial services arena.

• Future strategy to include provision of business-oriented financial services to unbanked emerging entrepreneurs in the LSM 1-5 band.

• Focus on the provision of financing mainly for entrepreneurial purposes in conjunction with or via established institutions in the financing/banking arena.

IDC strategic orientationIDC strategic orientation

The IDC’s African portfolio (outside SA)

•Over 85 projects under implementation or consideration in 26 African countries (excl. SA)

•more than 40 purely export finance applications approved or under consideration

•Around US$1.3 billion approved to-date for African projects (outside SA)

D R C

Nigeria

Angola

NamibiaBotswana

Mozambique

Malawi

Zambia

Tanzania

Kenya

Uganda

Ghana

Lesotho

Swaziland

Algeria

Guinea

Cote

d’ivoir

e

Mau

ritiu

s

Mauritania

Gabon

Mad

agas

car

Mali

D R C

Nigeria

Angola

NamibiaBotswana

Mozambique

Malawi

Zambia

Tanzania

Kenya

Uganda

Ghana

Lesotho

Swaziland

Algeria

Guinea

Cote

d’ivoir

e

Mau

ritiu

s

Mauritania

Gabon

Mad

agas

car

Mali

IDC Portfolio on the African continent

Country PerspectiveApprov

edValue in US$ million

Mozambique 785

Nigeria 69

DRC 70

Swaziland 56

Zambia 54

Ghana 53

Algeria 39

Lesotho 31

Mauritius 16

Namibia 5

Total 1 177

Click to edit Master title styleThank you

www.idc.co.za

lumkilem@idc.co.za

Tel: +27112693682