The Team. Brigitte Ryder. Bobby Madhav. Sipho Silinda. Lindi Makapela

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2 The Team Bobby Madhav Sipho Silinda Brigitte Ryder Lindi Makapela 2

3 Can Microfinance / Credit be delivered in a sustainable manner to the poor from a South African perspective? 3

4 Content What is microfinance Current landscape Current delivery constraints Global trends Business case Recommendation 4

5 Methodology Data Analysis and Statistics One on One interviews with Commercial banks Internet world websites Journals and research material 5

6 What is microfinance? Microfinance means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. 6

7 How does microfinance help the poor? Increase revenue Build viable business Reduce their vulnerability to external shocks namely Illness of wage earner Weather Theft Instrument for self empowerment Economic agents of change Fight against many aspects of poverty Contribution to household income benefiting Food security Children s education Better life Greater empowerment 7

8 Current Microfinance World - LANDSCAPE 8

9 Access to South African financial services Developmental frontier Formally served (55%) Financially excluded Black Black and Coloured Source: FinScope South Africa Female years Tribal land years Tribal, rural and urban informal 9

10 What is the current landscape Personal Loan limits R15k to R100k R6.750k to R100k R4.5K to R100k R15k to R100K R1K to R10K R500 to R22k Document ID,Payslip ID,Payslip, ID,Payslip, ID,Payslip, ID,Payslip, ID,Payslip, requirements Employed,Ban Employed,Bank Employed,Bank Employed,Bank Employed,Bank Employed, Bank k Statements Statements Statements Statements & Statements Statements Insurance Term of Months N/A Months 3 to 24 Months 3 to 60 Months loans Months Business 0 to R5m R20k to R5m R50K 0-R100K N/A N/A loans Training Yes Yes Yes Yes Yes Yes 10

11 Finance on proof of income History of non payment Current Reality Track record Lack of Trust Cost vs return 11

12 Current Public Sector Perspective Financial Intermediaries Regulation & Legislation Grant Funding Khula Credit guarantee Wholesale financing Umsobomvu Youth business loans Co-operative Bill FSC LRAD CASP Housing Landbank Emerging Farmers NCA Apex 12

13 Public Private Partnership & NGO s Business Partners Umsobomvu / Business Partners Urban Foundation Informal business loans Public private partnership Affordable Homes 13

14 Loans Sharks Lending from friends and family Informal Sector Stokvels Staff lending from companies Domestics borrowing from employers 14

15 Lack of coordinated and dedicated delivery channels Lack of cost effective technology Inconsistent credit vetting models Current Delivery Constraints Limited distribution points Exorbitant pricing No sustainable enterprise support Training Market linkages 15

16 Global Trends Bangladesh s Grameen Bank Delivery Model Self help groups Community networks Financial Model Donor funding Self Funding Equity funding Commercial funds Regulatory Microfinance Act 2006 Profit or non profit 16

17 International Bank s Microfinance Approach Lending to MFI S Support all models : group,individuals & Enterprise Strategic alliances 3 year $500m microfinance - Facility commitment Lending to MFI S Pilot Loans in Ghana Commitment Lending to MFI S Mexico, India $50m structured Bond for microfinance in Mexico 17

18 Research proves Microfinance is an alternative to poverty eradication 18

19 Business Case Purpose Reasons Value Proposition Options Benefits Expected To develop a cost effective model for a coordinated roll out of sustainable microfinance model Address the perception that microfinance is not viable Reduce exploitation by loan sharks Lack of financial acumen is prevalent Establishment of small social & sustainable networks Profitable revenue streams Contribute to poverty eradication Providing access to credit and financial services; Mentoring, Coaching and Skill transfer Vanilla products (Loans) replicated across all branches Establish a Lean Cost effective technologically driven microfinance bank Using franchising principles for greater distribution channels Third Party intermediaries (JV s) Financial accessibility by the majority Contribute some change to socio-economic variables Alleviation of poverty Reduction in unemployment Build a profitable proposition 19

20 Statistics: Demonstrative financial viability Small Enterprise Foundation Dec 2005 (6 months) Jun-05 Jun-04 Jun-03 Jun-02 Number of loans outstanding Loans disbursed since inception R 280 million R 236 million R170 million R124 million R91.5 million Current average loan size disbursed R R R R R Number of loans disbursed since inception Bad Debt rate 0.10% 0.40% 1.40% 1.50% 2.20% Re-scheduled loans (due to illness) R R R R R Death w rite off for the year R R R R R Principle outstanding R 31.8 million R 26.4 million R 19.1 million R 13.5 million R 8.0 million Total savings as held by Clients R 3.0 million R 3.2 million R 3.0 million R 2.5 million R 2.2 million % w omen clients 98% 98% 99% 99% 98% Number of clients per loan office Total staff Total Operations staff Financial self sufficiency 93% 92% 92% 76% 51% Source: Small Enterprise Foundation

21 Statistics: Demonstrative financial viability Financial Indicators for SEF Dec-03 Jun-03 Jun-02 Percentage change Loan interest income R 4.64 million R 7.31 million R 4.6 million 58% Operational expenses R 5.07 million R 9.35 million R 9 million 3.88% Interest paid R R R % Investment interest income R R R % Investments R 2.52 million R 1.3 million R 3.5 million 62.85% Operational self-sufficiency 91% 78% 51% 52.94% Source: Small Enterprise Foundation

22 Financial Justification Loan Sharks Y1 Y2 Y3 Y4 Y5 Loan outstanding 22,500,000 28,125,000 35,156,250 43,945,313 54,931,641 No. loans advanced 15,000 18,750 23,438 29,297 36,621 Average loan size ,500 1,500 1,500 1,500 1,500 Expected Return (30%) 3,375,000 7,593,750 9,492,188 11,865,234 14,831,543 Interest Expense (P-2%) 2,587,500 3,234,375 4,042,969 5,053,711 6,317,139 Operating Expense 3,932,000 3,932,000 3,932,000 3,932,000 3,932,000 Bad debts 0.25% 56,250 70,313 87, , ,329 Systems 2,000, , , , ,000 Annual (loss)/profit -5,144,500-72,625 1,017,219 2,379,523 4,082,404 Cummulative (loss)/profit -5,144,500-5,217,125-4,199,906-1,820,383 2,262,021 Assumptions: Operating Expenses Anticipated bad debt 0.25% Staff compliment 36 Grow th of 25% YOY in number of new loans Expected return calculated at 50% of new loans value to account for disbursements over time. 22

23 Regulatory Challenges Loans NGO s Via Agents Deposits Post office Banks 23

24 Recommendations Funding Model Grant & Donor funding from Business, Gov & International Bodies 30% Wholesale funding from banks 50% Raising deposits from lenders 15% Discounted shares from local people Establish a new Micro Finance Bank Loans, Deposits, Insurance, Low cost home finance Use Grameen bank Principles - Financially viable linkage model Delivery Channels across country Franchise principles Selected JV s with NGO s 24

25 Thank you 25

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27 So Is Microfinance viable from a South African banking perspective? 27

28 Global Trends India Delivery Model Self help groups Joint liability group Hybrid of the above Financial Model On lending Securitisation Equity funding Partnership models Charitable grants Regulator Broad legal forms Profit or non profit y 28

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