THE ROLE OF MICRO FINANCE IN MEETING SA’s HOUSING CHALLENGE

1. THE ROLE OF MICRO FINANCE IN MEETING SA’s HOUSING CHALLENGE

2. Introduction Access to Finance key to debate since 1994 The 1994 RoU between Banks and Government: • Delivered R10bn+ new mortgage loans under MIF cover; • Proved unsustainable as underlying risks prevailed Less than 5% of 1.9m Government subsidized units since 1994 linked to home loans Underlying reasons for 1994 Banks/ Government RoU prevail: • Vanilla mortgage lending proved unsustainable • Most township areas remain under or un-serviced • Underlying risk profile of under-serviced areas improved little • New Government projects remain under-serviced

3. Introduction Alternative (intermediated) tenure/finance options in subsidized segment: • Made limited impact (numbers) • Few if any so far proven sustainable/scalable • Remain dependent on soft funding Secondary housing markets underperforming in: • Majority of township markets; • Areas of high transition New Government subsidized projects: • Slowed down considerably by policy choices/ capacity constraints; • Remain under-serviced with private finance

4. The Financial Sector Charter The FSC is a landmark for change: • Sector committed to sustainable transformation • Broad range of tenure/finance approaches envisaged • Commercial sustainability as foundation • Long term partnership between sector and Government possible

5. The Financial Sector Charter The FSC should result in: • Financial product innovation • Customer service transformation and innovation • Clear risk allocation between the private sector and Government • Multi facetted approach to delivery • Investment in new capacity especially at the intermediary level • Standardization and transparency • Recognition of incremental housing as a cornerstone of delivery under the FSC

6. Role of Micro Finance 1.9 million families during the past 10 years obtained: • Freehold title; • A starter housing unit Starter units largely not suitable as mortgageable security due to: • Housing standards • Concentration of the poor • Environmental conditions impact on values • Distortive impact of capital subsidy on market values • Financial profile of beneficiary mix

7. Role of Micro Finance Families on these projects left 3 choices: • Be content with what they got; • Incrementally improve the units with cash when available • Gain access to non-mortgage finance and incrementally improve their properties Is cash savings a realistic solution? • Marginal incomes mean low or no savings • Saving term doesn’t match timing of need • Significant lump sum amounts needed • Cash route not a realistic route

8. Role of Micro Finance What are the alternatives available? • Fully guaranteed loans (pension backed) • Unsecured personal loans Can these alternatives be accessed? • 3 million people are regularly accessing unsecured loans • Many pension schemes allow borrowing for housing So are there problems? • Yes and no

9. Role of Micro Finance Wide access to unsecured finance is already achieved • Loan size/ product choices are restricted by by law and affordability • Pricing is high due to regulatory uncertainty, costs, risk and inadequate competition • Delivery of finance and housing subsidy not linked • Delivery of finance and home improvements inadequately linked FGL low priced (Prime -) • Substantial leakage • Erodes retirement provisions/ increases dependency on state – questions as to whether it should be allowed

10. Role of Micro Finance • Despite all of this an estimated R2 –3 billion per annum flows into incremental housing • People are doing it for themselves while policy debates and conferences to solve the “problem” are abundant • We need to recognise and support what people on the ground are already doing for themselves

11. 3. Role of Micro Finance Do the economics of micro finance work for the borrower? – a real life example: • Ms X a teacher in Kimberley takes a R25 000 20 year mortgage @ 15% pa on average with a R330 p.m installment from a big 4 bank in 1992 to build a house (assuming she could get it). • She elects to pay R380 pm to pay the loan off faster/ save interest

12. Role of Micro Finance By 1999 she has: • Paid back R9 951.35 in capital (still owes R15 048 or 60% of loan) • Paid interest in the amount of R21 968.65(87.9% of the loan amount) • Paid an installment of 29% (R380) of her R1316 take home pay in 1992 • The house was contractor built and we assume equated to the market value at the time of delivery • She still has to repay every month and cannot borrow any new money to improve the house

13. Role of Micro Finance The same Ms X takes 5 18 month unsecured payroll deducted loans of R5000 each @ 40% pa NACM during the same period (1992 – 1999) During this time she: • Repaid the full R25 000 capital (she owes nothing on the house) • Paid a cumulative total of R6920 in interest (31.5% of the R21 968 she would have paid on the R25 000 bond and only 27.7% cumulatively on the R25 000 capital she borrowed) • Paid the same installment of 29% (R380) of her R1316 take home pay in 1992

14. Role of Micro Finance • Today she owns a bond free house and continues to improve it every year, taking small amounts. • She did the construction work with the help of her son and spent capital on materials and specialists such as an electrician and a plumber. • Her house today is 20% bigger than what she could have built for R25 000 in 1992 through a contractor.

15. Role of Micro Finance Ms X made a rational economic decision in 1992 • She escaped the indignity of living in a shack by helping herself • Her house is debt free today • She has more house for much less money today • She paid the “horrifying” interest rate of 40% pa or 2.67 times the mortgage rate (15%) on her unsecured loans; yet • She paid much less (in nominal rands) than on a mortgage • She didn't have the need to ask Government for a handout • She remains a valued and profitable customer for her financier

16. Where to from here? • Present price control in the Usury Act and the limitations and legal uncertainty under the Exemption Notice • Inhibit innovation, investment and competition • Encourage inappropriate lending and borrowing • Has divided the market in two distinct segments: • Low (regulated) priced, wide variety of choices for the haves • High priced, limited choices for the have-nots (Exempt) • By regulation largely precluded low income borrowers from access to: • Overdrafts • Revolving credit lines • Credit cards

17. 4. Where to from here? • A new National Credit Bill (2004) (replacing the existing laws) proposes: • Price control across the market • Limitations on marketing conduct • Regulatory prescribed affordability requirements • Substantially increased cost of compliance • Massive penalties for credit providers • Weakening of credit provider contract enforcement capability: • Prescribed delays in legal process • 14+ new defenses debtors can raise in court under default

18. 4. Where to from here? • Bill still under consultation before being submitted to parliament • The present Bill likely to exacerbate the ills of the present laws i.e.: • Reduced legal access to credit in formally employed sector • Limited prospects for legal access in informally employed sector • Substantially reduced competition in this market due to: • Increased compliance cost of provision • Increased compliance risk for providers • Increased collection risk • Regulatory limits on recovering such cost and risk • Large increase in illegal credit provision to fill gap • A downward revision of housing finance targets under the FSC

19. Where to from here? • Pre-occupation with the effective rate at which people borrow: • Defies economic logic • Kill innovation, investment and competition and therefore choice • Regulatory interference in creditability assessment/ contract enforcement will result in: • Inhibited innovation and competition • Rigidity, arbitrary exclusion and moral hazard • Increased risk aversion from credit providers • Consumers and providers will make rational choices given: • Enough competitive options • Transparent comparable disclosure • Predictable and legally certain outcomes

20. Where to from here? • The FSC creates an opportunity for a new dispensation • Government subsidy policy and processes and private sector finance and product delivery processes need to be aligned • Recent housing policy shifts bode well for such a dispensation • Progressive reform in the legislative environment for credit can make a massive difference – the new Credit Bill needs serious revision • Regressive market interventions - especially government price control, regulatory prescription in credit assessment and interference in contract enforcement, can set the country back 15 years and frustrate the achievement of the FSC finance goals in: • Housing • SME and Agriculture

21. Where to from here? • The largest micro finance bank in SA today, service 1.2 million customers annually with unsecured loans • It owes its existence to public policy interventions through DFI’s such as the IDT Finance Corporation and the NHFC during its formative years Its success is directly attributable to: • The ability to flexibly price for risk and cost • The ability to effectively collect in the legal system • Attaining critical mass and a track record with initial DFI (public policy) support • Being able to offer shareholders attractive risk adjusted RoE’s • Being a fully regulated banking institution • Having a credit rating enabling sustainable funding

22. Where to from here? SA needs a number of such entities vigorously competing on: • Price • Product • Service Government can start a new wave of capacity/ investment through: • Visionary legislative/ regulatory reform creating certainty and stability in the credit environment • Recognizing and dealing with the causes of market failure (where it is proven to exist) not the symptoms

23. THANK YOU