Challenges for Microfinance in South Africa: Rules and Enforcement

1. Past and present challenges for microfinance in South Africa – rules and enforcement Gerhard Coetzee, University of Pretoria and ECIAfrica Consulting TGIF Conference 2006

2. Outline • History • Present • Future • Challenges • Rules and Enforcement • Final remarks

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 • 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 • Exemption driven by enterprise finance objective • Exemption under R6000 • Key NGO’s collapse • Micro lenders and consumer finance • Consumer protection • Credit bureaus • Exemption lifted to R10 000 • Court case / MFRC

6. 1999 to 2005 • 2nd Exemption Notice, MFRC: • Formalize micro lending within Exemption • Consumer protection • Improve information & understanding • Khula failed in part of it’s mandate, looses intermediaries • SAMAF 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

7. Market ‘growth’ in Rand volume

8. Assessing past legislation – and 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 • But scratched the surface

10. 2006 • MFRC ends and NCR starts • Market “ripe” for changes and wide interest • Commercial banks, insurers • Microlenders • SMME financiers • International development financiers (IFC, IFI…) • Funds (Investment and guarantee) • Donors • Challenges

11. Challenges – Development Finance(“Second Economy”) • SMME finance – attacking the self employed market • Regulatory environment - heavy burden of “red tape” • Collateral substitutes • Explicitly target productive uses of microfinance • Business Development Services • Transformation of NGO MFIs • Commercial banks – if they can grasp the market, they can make a contribution, but… • Understanding of clients • township money lenders example • real market research • Real product development • Expansion of products, expanded options • However, many success stories, in Africa and beyond

12. Examples  African  Other continents  • 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  • 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 – The Philippines • BancoSol – Bolivia • Grameen Bank - Bangladesh • 14 other banks in Eastern Europe

13. 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 • BancoSol model • Accion model • Village Banking Model • Housing: embryonic township markets • Investment products

14. 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 Consumer Education as a monitoring tool • Pricing issues, competition, monitoring

15. Challenge – Rules and enforcement • Back to basics • Types of legislative instruments • Harmonisation of policy and legislation? • Main challenge – enforcement? • Monitoring Impact

16. Rules and enforcement - basics • Back to basics • Conduct legislation • Usuary Act • Exemptions and MFRC • NCR • Prudential legislation • Dedicated Banks Bill • Cooperative Banks Bill • Banks Act (sell by date!) No examples in rest of Africa Examples in rest of Africa

17. Rules and enforcement – enforcement? • Harmonisation of policy and legislation? • Very little harmonisation • Challenge to coordinate was rejected • New TOR for looking at National Development Finance System • Main challenge – enforcement? • Strategic legal action • Demonstration effects • Continuous effort • Informed customers the best monitoring system

18. Rules and enforcement – impact? • Before • RIA before the promulgation? • Any “what if” modeling? • After • Measuring market functioning • And how it impact on access • Current study that will follow proxies for main objectives of Act (also NCA requirements)

19. Rules and enforcement - evaluation? • Comprehensive evaluation includes: monitoring, process evaluation, cost-benefit evaluation, and impact evaluation. Yet each of these components is distinctly different. • Monitoring assesses whether a program is being implemented as was planned, programme monitoring system enables continuous feedback on the status of program implementation, identifying specific problems as they arise • Process evaluation is concerned with how the programme operates and focuses on problems on delivery side • Cost-benefit or cost-effectiveness evaluations assess programme costs (monetary or non-monetary), in particular their relation to alternative uses of the same resources and to the benefits being produced by the programme • Impact evaluation determines more broadly whether the program had the desired effects on individuals, households, and institutions and whether those effects are attributable to the programme intervention. Impact evaluations can also explore unintended consequences, whether positive or negative, on beneficiaries

20. Final Remarks • Expectation is that if you cap rates, you will get rationing • But expect only short to medium term effect • Overall good outcomes expected • Implementers have experience • Development lending and poor need focused attention, separate sub-unit • Consumer financial education non-negotiable • Too early to say much more