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

1. Mass Banking and the Micro-financing Industry in SA’s Second Economy Lumkile Mondi Chief Economist Industrial Development Corporation of SA Making Finance Work for Africa 7-9 May 2007 Zambezi Sun Hotel, Livingstone, Zambia

2. Background • 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.

3. The Financial Services Charter • 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.

4. The 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 Tribunalto 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;

5. SA’s micro-financing industry • 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. Pyramid of SA financial institutions Very few SA MFIs reach the very poor, or seek to do so as a matter of policy.

6. SA micro-financing industry players • 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)

7. The SA Micro-Finance Apex Fund (SAMAF) • 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.

8. 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 study

9. 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 services

10. Challenges facing SA’s micro-finance industry • 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.

11. SA micro-finance industry risks • Unsecured loans to clients are by their very nature risky, and there is a need to develop aculture 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.

12. Some of the developmental returns to be realised from involvement in the micro-financing industry: Socio-economic development impact • 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.

13. 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 tounbanked emerging entrepreneurs in the LSM 1-5 band. Focus on the provision of financing mainly for entrepreneurial purposesin conjunction with or via established institutions in the financing/banking arena. IDC strategic orientation

14. 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)

15. IDC Portfolio on the African continent Approved Country Perspective Value 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

16. Thank you lumkilem@idc.co.za Tel: +27112693682 www.idc.co.za