Challenges facing the microfinance “industry” in South Africa Gerhard Coetzee 2006 MFSA Conference
Outline <ul><li>History </li></ul><ul><li>Present </li></ul><ul><li>Future </li></ul>
Short history <ul><li>Four phases </li></ul><ul><ul><li>Before 1992 – from struggle to financial services </li></ul></ul><...
Until 1992 <ul><li>NGO dominated market </li></ul><ul><li>Entrepreneurial focus </li></ul><ul><li>Origins in struggle and ...
1992 to 1999 <ul><li>Key NGO’s collapse </li></ul><ul><li>Exemption under R6000 </li></ul><ul><li>Micro lenders and consum...
1999 to 2005 <ul><li>Khula failed in it’s mandate, looses intermediaries </li></ul><ul><li>APEX concept, design and ….. </...
Market ‘growth’ in Rand volume
Assessing MFRC <ul><li>Formalize microlending: </li></ul><ul><ul><li>~2200 registered, % unregistered ? </li></ul></ul><ul...
MFRC outcomes, impact <ul><li>Major change in microlender behavior </li></ul><ul><li>Influx of banks: lowered reputational...
2006 <ul><li>MFRC ends </li></ul><ul><li>NCR starts </li></ul><ul><li>Challenges </li></ul>
Challenges – Development Finance (“Second economy?”) <ul><li>Understanding of clients  </li></ul><ul><ul><li>township mone...
Challenges – Asset accumulation <ul><li>Savings, insurance, investment products (ever mentioned here?) </li></ul><ul><li>T...
African examples   <ul><li>National Microfinance Bank – Tanzania   </li></ul><ul><li>Amhara Credit and Savings Institut...
Other countries   <ul><li>BRI Unit Desa - Indonesia </li></ul><ul><li>Banco do Nordeste – Brazil </li></ul><ul><li>People...
Challenge – Rules and enforcement <ul><li>NCR </li></ul><ul><li>Other rules </li></ul><ul><li>Harmonisation of policy and ...
Challenge – Information <ul><li>Need for even better data and information </li></ul><ul><ul><li>Better credit scoring and ...
Short term price comparisons 360% 1 month R1,000 Micro-lender 6 336% 1 month R1,000 Micro-lender 2 222% 1 month R1,000 Ban...
Longer term price comparisons 198/209 6 R2000 7 lenders 80/105 12 R3000 27 lenders 56/83 24 R8000 21 lenders 70/95 12 R500...
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20060505 microfinance challenges presentation coetzee

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20060505 microfinance challenges presentation coetzee

  1. 1. Challenges facing the microfinance “industry” in South Africa Gerhard Coetzee 2006 MFSA Conference
  2. 2. Outline <ul><li>History </li></ul><ul><li>Present </li></ul><ul><li>Future </li></ul>
  3. 3. Short history <ul><li>Four phases </li></ul><ul><ul><li>Before 1992 – from struggle to financial services </li></ul></ul><ul><ul><li>1992 to 1999 – growth after legislative changes </li></ul></ul><ul><ul><li>1999 to 2005 – era of growth continues in a more regulated environment (MFRC) </li></ul></ul><ul><ul><li>2006 - onwards </li></ul></ul>
  4. 4. Until 1992 <ul><li>NGO dominated market </li></ul><ul><li>Entrepreneurial focus </li></ul><ul><li>Origins in struggle and non-financial NGOs </li></ul><ul><li>Difficult to make the change </li></ul><ul><li>USAID spent $20m between 1988 - 1999on mostly NGOs </li></ul><ul><li>Decline of the NGOs, but exception(s) </li></ul><ul><li>Decline of the parastatal institutions </li></ul><ul><li>Financial exclusion of majority, role of apartheid , distortions due to Usury Act </li></ul>
  5. 5. 1992 to 1999 <ul><li>Key NGO’s collapse </li></ul><ul><li>Exemption under R6000 </li></ul><ul><li>Micro lenders and consumer finance </li></ul><ul><li>Consumer protection </li></ul><ul><li>Credit bureaus </li></ul><ul><li>Exemption lifted to R10 000 </li></ul><ul><li>Court case / MFRC </li></ul><ul><li>Exponential growth </li></ul>
  6. 6. 1999 to 2005 <ul><li>Khula failed in it’s mandate, looses intermediaries </li></ul><ul><li>APEX concept, design and ….. </li></ul><ul><li>Land Bank failed in it’s small farmer finance mandate </li></ul><ul><li>MAFISA, concept, design and …. </li></ul><ul><li>NHFC looses intermediaries – investigate retail </li></ul><ul><li>General failure in development finance </li></ul><ul><li>Consumer Finance Growth continues </li></ul><ul><li>2 nd Exemption Notice, MFRC: </li></ul><ul><ul><li>Formalize microlending within Exemption </li></ul></ul><ul><ul><li>Consumer protection </li></ul></ul><ul><ul><li>Improve information & understanding </li></ul></ul><ul><li>More detail coming </li></ul>
  7. 7. Market ‘growth’ in Rand volume
  8. 8. Assessing MFRC <ul><li>Formalize microlending: </li></ul><ul><ul><li>~2200 registered, % unregistered ? </li></ul></ul><ul><ul><li>Black MLs, but informal township MLs (?) </li></ul></ul><ul><li>Consumer protection: </li></ul><ul><ul><li>Help for borrowers, complaints & enforcement </li></ul></ul><ul><ul><li>Progress on disclosure & reckless lending (?) </li></ul></ul><ul><li>Information, understanding: </li></ul><ul><ul><li>Central role in sectoral data & analysis </li></ul></ul><ul><ul><li>Efforts to inform, educate public (?) </li></ul></ul><ul><li>Pro-active stance: enforcement and beyond </li></ul><ul><li>Institutional change: NLR, legal/judicial issues, National Credit Act </li></ul><ul><li>Influencing policy through research: competition, housing, indebtedness </li></ul>
  9. 9. MFRC outcomes, impact <ul><li>Major change in microlender behavior </li></ul><ul><li>Influx of banks: lowered reputational risk </li></ul><ul><li>R22+ billion market, evidence of substantial use for developmental purposes (larger volume than DFIs?) </li></ul><ul><li>Quantum leap in information, understanding </li></ul><ul><li>Reinforce regulatory approach </li></ul>
  10. 10. 2006 <ul><li>MFRC ends </li></ul><ul><li>NCR starts </li></ul><ul><li>Challenges </li></ul>
  11. 11. Challenges – Development Finance (“Second economy?”) <ul><li>Understanding of clients </li></ul><ul><ul><li>township money lenders example </li></ul></ul><ul><ul><li>real market research </li></ul></ul><ul><li>Expansion of products, expanded options </li></ul><ul><li>SMME finance – attacking the self employed market </li></ul><ul><ul><li>Regulatory environment - heavy burden of “red tape” </li></ul></ul><ul><ul><li>Registry of security interests </li></ul></ul><ul><ul><li>Explicitly target productive uses of microfinance </li></ul></ul><ul><ul><li>Transformation of NGO MFIs </li></ul></ul><ul><ul><li>Business Development Services </li></ul></ul><ul><ul><li>Commercial banks – already in there, but more focus needed </li></ul></ul><ul><li>However, many success stories, in Africa and beyond </li></ul>
  12. 12. Challenges – Asset accumulation <ul><li>Savings, insurance, investment products (ever mentioned here?) </li></ul><ul><li>Targeted savings products </li></ul><ul><ul><li>Mzanzi experience encouraging </li></ul></ul><ul><ul><li>Smooth consumption, raise repayment, minimize risk </li></ul></ul><ul><ul><li>Is the banks making money, threat of cannibalization </li></ul></ul><ul><ul><li>Savings Targets Not Addressed in Anticipated Legislation, Charter </li></ul></ul><ul><ul><li>Addressing negative real interest rates on savings instruments </li></ul></ul><ul><li>Need for bundling lending and saving instruments. </li></ul><ul><ul><li>Repayment is a combination of amortized principal, interest, forced saving </li></ul></ul><ul><ul><ul><li>Banco Sol model </li></ul></ul></ul><ul><ul><ul><li>Accion model </li></ul></ul></ul><ul><ul><ul><li>Village Banking Model </li></ul></ul></ul><ul><li>Housing: embryonic township markets </li></ul><ul><li>Investment products </li></ul>
  13. 13. African examples  <ul><li>National Microfinance Bank – Tanzania  </li></ul><ul><li>Amhara Credit and Savings Institution – Ethiopia  </li></ul><ul><li>Banque du Caire – Egypt  </li></ul><ul><li>K-Rep – Kenya  </li></ul><ul><li>Equity Bank – Kenya  </li></ul><ul><li>CERUDEB – Uganda  </li></ul><ul><li>Novo Banco - Mozambique  </li></ul><ul><li>Novo Banco - Angola  </li></ul>
  14. 14. Other countries  <ul><li>BRI Unit Desa - Indonesia </li></ul><ul><li>Banco do Nordeste – Brazil </li></ul><ul><li>People’s Bank of Sri Lanka </li></ul><ul><li>Banrural – Guatemala </li></ul><ul><li>Bank Pertanian Malasia Agricultural Development </li></ul><ul><li>Kyrgyz Agricultral Finance Cooperation – Kyrgyzstan </li></ul><ul><li>Land Bank, Development Bank, National Bank – Philippine </li></ul><ul><li>BancoSol – Bolivia </li></ul><ul><li>14 other banks in Eastern Europe </li></ul><ul><li>Grameen Bank - Bangladesh </li></ul>
  15. 15. Challenge – Rules and enforcement <ul><li>NCR </li></ul><ul><li>Other rules </li></ul><ul><li>Harmonisation of policy and legislation? </li></ul><ul><li>Main challenge – enforcement? </li></ul>
  16. 16. Challenge – Information <ul><li>Need for even better data and information </li></ul><ul><ul><li>Better credit scoring and pricing models </li></ul></ul><ul><li>Having better information on individuals, households and firms applying for / using credit for policy development </li></ul><ul><li>Training and capacity building </li></ul><ul><ul><li>Major need, no recognition, not willing to pay </li></ul></ul><ul><ul><li>Short sighted – need to invest in most strategic asset </li></ul></ul><ul><li>Consumer education </li></ul><ul><ul><li>Need for improved outreach </li></ul></ul><ul><ul><li>Focus on lower income strata </li></ul></ul><ul><ul><li>Distinct lack of innovation </li></ul></ul><ul><ul><li>Use of CE as a monitoring tool </li></ul></ul><ul><li>Pricing issues, competition, monitoring </li></ul>
  17. 17. Short term price comparisons 360% 1 month R1,000 Micro-lender 6 336% 1 month R1,000 Micro-lender 2 222% 1 month R1,000 Bank 6 60-360% 30 days R750 13 lenders 360% 1 month R500 Micro-lender 5 2003 MFRC TCOC 259.2% 1 month R500 Micro-lender 1 360% 1 month R100 Micro-lender 4 360% 1 month R100 Micro-lender 3 540-1040% 25-30 days R500 Cash lender 6 360% 1 month R100 Micro-lender 9 640-780% 25-30 days R500 Cash lender 5 336% 1 month R100 Micro-lender 2 360-450% 25-30 days R500 Cash lender 4 264% 1 month R100 Micro-lender 1 360% 30 days R500 Cash lender 3 228% 1 month R100 Bank 6 540-1040% 7-25 days R100-R500 Cash lender 2 APR Term Loan amount Institutions APR Term Loan amount Institutions 2003 2000 Table 9: Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Cash Lenders
  18. 18. Longer term price comparisons 198/209 6 R2000 7 lenders 80/105 12 R3000 27 lenders 56/83 24 R8000 21 lenders 70/95 12 R5000 23 lenders 2003 MFRC TCOC 112 12 R5,000 Bank 2 78 6-12 R2,000-R6,000 Term lender 1 209 9 R2,000 Micro-lender 7 287 3-6 R1,500-R3,000 Cash lender 7 147 12 R2,000 Bank 4 153 3 <R6,000 Cash lender 9 98 12 R1,000 Bank 1 57 24 <R9,000 Term lender 2 155 12 R2,000 Micro-lender 8 242 18-24 <R10,000 Cash lender 8 83 12 R5,000 Bank 5 45-88 12 >R2,000 Term lender 3 APR (%) Term (months) Loan amount Institutions APR (%) Term (months) Loan amount Institutions 2003 2000 Table 10: Comparative Table: Interest Charges by Institutions in 2000 and 2003 (Random Institutions) – Term Lenders

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