Microfinance in South Africa UNDERSTANDING THE SOUTH AFRICAN MICROFINANCE SECTOR, THE DEMAND AND SUPPLY DYNAMICS OF DEVELOPMENT MICROFINANCE INSTITUTIONS (DMFI’S) AND THE ASSOCIATED LANDSCAPE

Topics1. Micro-entrepreneurs, their enterprises and their needs

2. Service providers, products and services on offer

3. Impediments that have stymied the development and growth of the sector

What is DMFI?Developmental Microfinance Institution (DMFIs)

◦ Established solely to support informal and microenterprises with a range of financial and non-financial services

◦ Financial services◦ Loans; Savings; Transmission products; Insurance

◦ Non-Financial Services◦ Business and leadership training; Health training; Women empowerment; Peer support

◦ Simple and efficient lending methodologies accessible to those with limited financial literacy

◦ Focus on Financial and social performance

The Microenterprises Landscapein South Africa

CHARACTERISTICS INFORMAL MICROENTERPRISE

1. BSM Level 1 - 3 4 – 6

2. Estimated Numbers 3,348,964 1,676,052

3. Proportion of Females 65% 50%

4. Proportion of Blacks 93% 83%

5. Percentage Finished High School 20% 43%

6. Operational Area Home Garage Home (primarily)

7. Geographical Location Urban 46% Urban 65%

Rural 54% Rural 35%

8. Average Monthly Turnover R4,000 R4,000- R27,500

9. Average age in Business >3 years > 3 years

10. Technology 45% Use Cell Phones 76% Use Cell Phones

11. Business Records

Yes 24% 74%

No 76% 26%

12. Business Sole Source of House Hold Income 64% 72%

13. Employment Creation Negligible Yes (40% have at least 1 employee)

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• Working with Informal and microenterprises

FinScope 2010 figures reorganized by : Centre for Inclusive Banking in Africa (CIBA) , 2011

Common Business Activities

Trade

Spaza and tuck shops

Fruit/veg stalls

Niche products: beauty/health, pyramid schemes

Production

Small-scale agriculture (raising chickens, fruits/vegetables)

Livestock

Manufacturing

Sewing

Pots/ceramics

Service

Taverns/fast food

Catering/events

Hairdressers

Transport

Crèche

Room rentals

Business Characteristics

Often informal◦ Unregistered

◦ Lack of business records, financial statements, etc.

Business and “personal” are linked◦ Financially (lack of separation of accounts)

◦ Joint ownership between spouses, employment of family members, etc.

Access to capital is a challenge◦ High-quality, reliable equipment

◦ Business loans

◦ Resources tend to be sources from internal networks

• Microenterprises characterised by:• Low levels of investment in fixed assets• Relatively high turnover, with regular daily, weekly, or monthly sales

cycles

• Most pressing requirement is access to working capital for stock, labour, or advertising.

• MFIs globally offer short term loans of generally three to six months

• Some specialised programmes which target spaza shop owners or vegetable vendors may offer loans on a daily or weekly basis.

Financial Service Needs Of Microenterprises

Financial Service Needs Of Microenterprises

• Beyond working capital loans:• Unsecured loans of between 6 and 24 months, (for long term asset

investments like premises improvements, or a rental deposits);

• Secured loans of up to 60 months (e.g. bakkie, back room, large equipment);

Microenterprise Classification for funding needs

Rural based ◦ Requiring small amounts of up to R7,500 in loans for business purposes

◦ Needing a place to save small amounts that can be accessed quickly

◦ Needing other smaller loans for a variety of things grouped under emergencies

◦ Sometimes needing advice on microenterprises and markets

◦ Amenable to Centre and solidarity lending methodologies

◦ May require some form of individual loans

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Microenterprise Classification for funding needs

Semi-urban based (Townships)◦ Require loans that are slightly larger than rural based clients (up to

R25,000+)

◦ Need savings facility with ability to move money quickly and inexpensively

◦ Need market access advice and support

◦ Need quick loans to take advantage of opportunities

◦ Amenable mostly to solidarity and individual lending methodologies

Microenterprise Classification for funding needs

Urban Based◦ Require much bigger loans (Up to R250,000)

◦ Need more versatile savings facilities that are relatively inexpensive

◦ Need more market access support and advice

◦ Need different (diversified) loan products

◦ Prefer individual loans

Non-Financial Needs of Micro-Entrepreneurs

Access to markets ◦ Commercial partners

“Nudges” to encourage financial health◦ Tools which make it easier to keep records

◦ Savings encouragement

Non-Financial Products and Services

Financial education and peer support ◦ Group-lending programmes

Products and Services Available to Micro EntrepreneursS E R V I C E P R O V I D E R S

P R O D U C T A N D S E R V I C E O F F E R I N G : F I N A N C I A L , N O N - F I N A N C I A L

L I M I TAT I O N S O F P R O D U C T/ S E R V I C E O F F E R I N G TO M I C R O - E N T R E P R E N E U R S

Microfinance Service ProvidersDMFIs

• In June 2013 there were 14 MFIs employing approximately 700 staff and servicing just over 111,500 active loans (Slight drop on the 2009 figures of 120,000 active clients)

• Of the fourteen institutions,• 7 employed a group based lending methodology; and,

• 7 employed an individual based methodology.

• Only 2 group lenders, had more than 2,000 active loans, with the Small Enterprise Foundation (SEF) at 96,000 and Phakamani Foundation at 8,000. • Over 90% of clients were women

• Average annual loan loss rates were below 5%.

• individual micro-enterprise lenders:• not reached scale or self-sufficiency

• Struggled to achieve an acceptable level of portfolio quality.

Other Financial Products and Services Providers

• Co-operative Financial Institutions (CFIs)

• Alternative Banks• banking institutions targeting entry level or lower income markets (e.g. African Bank, Capitec

Bank, Ubank, and Post Bank.)

• offer unsecured micro-loans but primarily for individuals with a salary or pension.

• Primary Banks• Offer entry level accounts with low fees.

• Also offer unsecured personal loans, insurance, and money transfer services.

• Absa Bank and Standard Bank attempted more than one pilot in microenterprise lending (These lasted no longer than three years.)

Funding Gap for Microenterprises

The Unseen Sector: A Report on the MSME Opportunity in South Africa (IFC), 2019.

The IFC estimates the value of South Africa’s formal MSME credit gap to be $30 billion.For the informal sector, the IFC estimates the potential credit demand to be $24 billion.

Are We Meeting The Demand?JUNE 2020

Total branches / staff 159 / 1 369

Total active clients 252 930

% Female 99%

Total loan portfolio R 720 million

Average loan size R 2 845

No. loans since inception

4.4 million

Value loans since inception

R 11.5 billion

Loan loss rates < 5.0%

By 2020 – Microenterprise Credit and Service providers reflected by the DMA membership:Four Active Members:• Small Enterprise

Foundation• Phakamani Foundation• Siyakhula Microfinance

Institution• Akanani Finance

CHALLENGESMicroenterprises do not find it easy to secure start-up and/or growth capital

(especially those in rural areas far away from any financial services) due to the

following:

◦ Inability of financial institutions to assess the viability of informal-businesses

(Information asymmetry)

◦ Perception that micro entrepreneurs lack business and other skills.

◦ Lack of understanding of informal sector by government and other stake

holders

◦ High cost of lending to microenterprises

◦ High cost of mentoring 7

Impediments that have Stymied the Development and Growth of the Sector

Threat to the Sector: Registration• Government push for formalizing the informal sector is a large threat

to microenterprises

• Benefits of registration to the micro-entrepreneur are minimal (or non-existent) while the cost (in both time and resources) is high

• MSME policy from the government must aim to be a benefit to growth of the sector, not a barrier

Inadequate Support From Apex• Operational and capacity building grants strictly limited, far below

requirements.

• Short-term funding commitments.

• Delays in disbursements created liquidity problems.

• Five-year term loans meant repayments had to be refinanced.

• At times DMFIs were encouraged to expand to underserved provinces, without commensurate financial support.

• When a DMFI was struggling, the agencies did not stick with them.

• Pressure on agencies to achieve sustainability themselves.

Impediments to Micro-EntrepreneursAccess to financeRegulatory red tape

Business registrationLabour law

Skills gapsManagement skillsSkilled employees

Access to infrastructureIncreased transport and communication costs

“The SMME industry faces four main structural constraints: a costly and difficult regulatory

framework a lack of skills the challenge of accessing credit

and markets crime and corruption.” Mr Kganki Matabane, Black Business Council CEO

RecommendationsMinimal securitisation

◦ Collateral and personal guarantees can be major impediments

◦ Capital to buy stock

◦ Refinancing of the business

◦ Reduce regulatory red-tape

Relaxed loan evaluation process◦ Agents who are willing to travel and accept informal business records

Flexible products◦ Such as emergency loans and revolving/

Top-up loan facilities