Micro-Credit Lending in Durban An information brief prepared by post-gradute students at the School of Development Studies, University of KwaZulu-Natal Sponsored by the Economic Development Unit of the ethekwini Municipality.
This information brief was prepared as part of an exercise designed to expose post-gradute students at the School of Development Studies, UKZN, to policy-related research work. The project was sponsored by the Economic Development Unit of the ethekwini Municipality. Ethekwini Municipality EDU project co-ordinator: Fred Pietersen School of Development Studies project co-ordinator: Glen Robbins Participating students responsible for authoring the document: Baruti Amisi, Kruschen Govender, Michiel Arnoldus, Renato Palmi, Susan Gatsinzi, William Girardo, Zaheera Jinnah Editing: Jillian Nicholson Design and Layout: Jess Nicholson Special thanks to organisations and individuals that provided valuable information and insights for the project. School of Development Studies University of KwaZulu-Natal http://sds.ukzn.ac.za/ Economic Development Unit ethekwini Municipality http://www.durban.gov.za/
Micro-Credit Lending in Durban Introduction.............................................. 2 Why micro-credit?......................................... 3 International initiatives...................................... 4 South African initiatives..................................... 6 Questions and challenges................................... 9 Possible roles for the ethekwini Municipality................... 11 Useful internet addresses.................................. 12 The membership of the United Nations declared that 2005 was the Year of Micro-Credit. The intention during this year was to extend more micro-credit programmes to poorer people, as part of global strategies to achieve the Millennium Development Goals. To support these activities the Economic Development Unit of the ethekwini Municipality supported students from the post-graduate programme at the School of Development Studies (UKZN) in examining issues of microcredit as they affect the citizens of Durban. This brochure was produced as part of these efforts with the intention of popularising the issues around micro-credit in local development debates. 1
Terms used in this brochure Collateral The bank usually only lends to someone who has a fixed job or a fixed asset such as a house or land.this is called collateral. If a loan is not repaid the fixed asset can be sold and the bank gets its money back that way. So collateral is a security or guarantee that a loan will be paid back. Micro-credit Micro-credit is a small amount of money lent to an individual or a group of individuals by a financial institution. It is often lent without collateral. Group lending is when all members of a group guarantee a loan. If a person in the group cannot pay back a loan, the group collectively undertakes to repay it.the motivation to pay back is based on peer pressure. Micro-credit bridges the gap between regular loans from commercial banks and informal forms of lending such as stokvels and loans from family members. It can be a solution for people who cannot raise enough through these informal means and are not eligible for loans from commercial banks. Micro-finance Micro-finance is a broader concept as it also includes savings facilities that assist poor people to save small amounts of money.this is done by reducing the costs of opening and using an account. Introduction Micro-credit is a vital part of development. Whether through group based loans, loans offered by formal banking institutions, or special banks such as Grameen or Ithala, it can play an important though not exclusive role in poverty alleviation. To be sustainable and effective micro-credit must be part of a package that includes business and financial training and a culture of savings. The diagram below shows the types of loans provided in South Africa today, from those that are most accessible to poor people, to those that are least accessible. Corporate finance (bonds, corporate loans) Commercial bank loans with collateral Micro-Credit institutions: loans for survival business, no collateral, group or individual Informal money lenders (loan sharks) Stokvels/family loans 2
Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs.together, we can and must build inclusive financial sectors that help people improve their lives. Kofi Annan UN Secretary-General Why micro-credit? Poorer people can use micro-credit for two main purposes: 1. To assist them deal with shocks such as the loss of the family breadwinner or a bad harvest or the theft of an income generating asset - such as a sewing machine. 2. To help start up a business, generate income and build up assets. This might eventually lead to escape from the poverty cycle. Credit can, for instance, be used to buy a small plot of land to grow food, to invest in education, or to buy stock for a small shop. On a national level micro-credit can play an important role in combating poverty and improving the lives of poor people because: It provides working capital for the informal economy. It helps women, who more frequently face poverty and who more frequently work in the informal economy than men. It can help develop the rural areas where informal work predominates and where commercial banks often do not operate. WARNING! Micro-credit is not a miracle solution to poverty. Poverty arises from a number of interconnected factors that need to be addressed independently in order to make micro-credit a success. For example, a borrower s ability to succeed in using the micro-credit to generate income and pay back a loan depends on basic education, business skills training and a secure business environment. So these need to be provided together with micro-credit. Credit can be used to buy a small plot of land to grow food on 3
Why micro-credit institutions target women There are several reasons why it makes sense for micro-credit institutions to target women as the main recipients of loans: The majority of poorer people are women. The majority of those not catered for by formal employment are women. For example, females made up only 43% of South Africa s total labour force in year 2000 (World Bank Gender Statistics). With financial independence comes the courage to challenge traditions such as purdah (which confines women to their homes). When women are targeted this impacts on a wider range of issues, such as, for example, the use of contraception.the average family size in Bangladesh in the past 25 years has shrunk from seven members to a more manageable four.this is partly attributed to increased financial independence of women. The example of Grameen Bank has shown that wives are less likely than husbands to squander the money on gambling and alcohol and so creditors are keen to target women. International initiatives These three intermational examples give some idea of how micro-credit, as part of a wider programme, can help improve the lives and livelihoods of people living in poverty. 1. Grameen Bank, Bangladesh If financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable these millions of people with their millions of small pursuits can add up to create the biggest development wonder, Prof.Yunus, founder of Grameen Bank. Grameen Bank was founded in 1976. By July 2004 it had 3.7 million borrowers, nearly all of whom were women. This covered 68 percent of the total villages in Bangladesh. By the end of 1998, the bank contributed just over 1 percent of the country s Gross Domestic Product (GDP). Grameen Bank has succeeded in enabling the poorest women in rural Bangladesh to reap the benefits of development by providing them with credit and using mutual trust as a form of collateral. It is based on the voluntary formation of groups of five people who provide group guarantees instead of the collateral normally required by conventional banks. At first only two members of a group are allowed to apply for a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth member as well. The loan repayment is by periodic instalments and is the collective responsibility of the group. www.grameen-info.org/ 2. Sostenica, Nicaragua Though Nicaragua has a much smaller population than South Africa, it has similar inequalities. For example, the lowest 10 percent of South Africa s population earns just 1.1 percent of all 4
Low income farmers would benefit from an institution such as Sostenica. As a result of a programme in Nicaragua, farmers have become more sustainable and can now feed their families, sell the excess to make a profit and pay off their loans. income while Nicaragua s lowest 10 percent earns 1.2 percent. Sostenica is a successful micro-lending institution that models itself on Grameen Bank. It aims to promote sustainable rural development and help reduce poverty by providing credit to poor entrepreneurs and their families. It requires little, if any collateral and relies on mutual trust as an incentive to pay back debt. 3. FOCCAS (Foundation for Credit and Community Assistance), Uganda FOCCAS was established in Uganda in 1996 as a non-bank financial institution. It is modelled on the concept of credit with education and works though village banking programs for rural women in Eastern Uganda. Sostenica has extended approximately US $2.6 million in credit, and disbursed almost 3,000 loans to low-income farmers and small business people. Just over half the loans go to women. Sostenica also began a programme to train local farmers in the use of small wells, irrigation, fertiliser, pest management and the growing of non-conventional crops. As a result farmers have increased their crop variety from just cotton to include passion fruit, mangoes, watermelons, squash, and plantains. Farms have become more sustainable and farmers can now feed their families, sell excess produce to local markets and super market chains, and pay off their loans. The model involves a village-banking loan (weekly or biweekly or monthly) paid in equal instalments and complimented by adult education lessons during the midweeks of the cycle. These cover topics that are mainly related to health matters. By March 2002, FOCCAS s credit associations were serving more than 15,000 women and by March 2004, a food security module had been developed for educating clients on how to prepare for famine by planning ahead of time. Treated mosquito nets have been introduced to assist in preventing malaria among FOCCAS clients families. Contact details for FOCCAS: P.O. Box 907 Mbale, Uganda. Tel, 256-45-4295, Email, Admin@foccasuganda.org 5
Micro-credit initiatives in South Africa still do not reach lower-income households. Formal banking is reserved for the employed. South African initiatives Micro-credit initiatives in South Africa still do not reach lower income households. Formal banking services in South Africa are reserved for the employed and thus exclude the majority of poor households that rely on either state transfers or income from informal activities for survival. Alternative approaches to micro-credit such as saving and credit networks deserve further attention and the Department of Social Development s Social Finance Programme has attempted to engage with such schemes. More initiatives and greater support of this kind is needed to make micro-credit more accessible to those who really need it. In South Africa institutions and informal organisations providing credit can be grouped into the following categories: 1. Commercial Retail Banking South Africa s commercial retail banking sector caters for richer households. Since 1990, the South African Reserve Bank has introduced tighter regulations in banking to increase foreign investment and ensure stability. Such measures have resulted in stricter requirements for loans and savings accounts that make formal banking services less accessible to the poor. 2. Off-book institutions These so called off book institutions (PEP Bank, Africa Bank, Cash Bank) have been established by formal banks with the specific aim of meeting the needs of lower income households. They offer a range of financial services including small scale loans. However most of the new structures are not based on branch operations in low-income areas, but on card-based electronic services. Physical access to these services remains a problem. 3. SMME Micro-credit initiatives This is a government initiative to support more start up loans and credit for Small, Medium, and Micro Enterprises (SMMEs). This is done through indirect measures rather than by providing credit directly to enterprises. National government has focused on providing financing to Khula, which in turn assists micro-credit retail institutions to provide credit supported by Khula s loan guarantee system. Provincial and local governments have made funds available to micro-credit organisations to lend on to enterprises and individuals. 6
4. Commercial micro-lending institutions During the second half of the 1990s, a substantial South African micro-lending industry began to emerge. Although there have always been township moneylenders in South Africa, the formalisation of this sector is a new development. These institutions, which must register and comply with government regulations, offer loans of between R200-R2000. These loans are easier to repay than loans from formal banking services but they still require the borrower to produce pay slips and identity documents. This excludes people working in the informal economy. Details of some of these are in the next section. 5. Informal micro-lenders Unregistered micro-lenders operate within the poorer sections of society. Loans are easy to obtain from these institutions but high interest rates make them difficult to repay. South African micro-credit institutions Khula Enterprise Finance Limited The amount of public finance involved in Khula indicates government s focus on SMME micro-credit. Khula is an agency of the Department of Trade and Industry (Dti) and was established in 1996 to facilitate access to finance for SMMEs. It is currently being restructured within the new Small Enterprise Development Agency of the Dti. Khula is a wholesale institution, providing wholesale loans and loan guarantees to SMME micro-credit institutions that in turn retail this as loans directly to SMMEs. Over the past five years, Khula disbursed over R1 billion directly into the SMME retail lending sector. This led to a 21 percent increase in the number of beneficiaries, to 110 000. Micro-credit institutions supported by Khula predominantly provide entrepreneurial loans for SMMEs as opposed to loans for survivalist micro-enterprises. Thus households that are not candidates for entrepreneurial micro-credit are largely excluded. Ultimately, Khula financing has failed to reach the poorest of the poor. From the Khula experience it is clear that in South Africa most entrepreneurs get involved in business for survivalist purposes, however retail micro-credit institutions fail to provide appropriate products for this specific market. www.khula.org.za Ithala Bank Ithala Bank is a state subsidised bank, located in KwaZulu Natal, which caters primarily for low income households. Two of its objectives are to make financial services more accessible to all people and to assist the government to meet its development related needs. The bank has a network of 45 branches and agencies throughout KwaZulu-Natal. In May 2004 Itala launched a micro-finance business unit, which is geared specifically to assist emerging entrepreneurs to enter mainstream economic activities and remain viable. Coupled with this unit Ithala is providing business skills training for the micro-business community. Ithala states that it will not decline or refuse a loan because an intended business is located in a high-risk area of KZN, nor will it charge a higher interest rate than its prime-lending rate. Ithala has set up a Small Enterprise Development Agency (SEDA) that offers hands-on support, advice and skills development for small enterprises at very little and sometimes no cost. The establishment of SEDA centres will play an important role in the distribution of credit products, facilitating the delivery of loan finance and maximizing market penetration. Ithala has created 858 new employment opportunities in the Micro and Small Business Sector within KZN in 2005. In 2005 it provided R72.9 million to 138 SMME clients. Of the 138 total loans advanced, 104 were granted to entrepreneurs operating micro and small enterprises. Ithala also opened 107 780 new saving accounts in 2005. Contact details: P.O Box 2801, Durban 4000. Tel, 031 9078911. Email, marketing@ithala.co.za, Web www.ithala.co.za 7
Small Enterprise Foundation The Small Enterprise Foundation (SEF) is a non-profit NGO, established in 1992 and located in Limpopo. It has two grouplending credit programmes. SEF has modelled itself on Grameen Bank. www.sef.co.za/ FINCA (Foundation for International Community Assistance) FINCA is an international organisation operating in South Africa. It targets rural rather than urban communities and nearly all its clients are women (99.5%). FINCA offers two types of loans: 1. Group based loans Groups consist of between 5 20 people and loans are up to R2000.00 per person. The group can borrow over a period of 2 4 months and must make re-payments weekly. A 20% deposit is requested for the group to receive credit. 2. Individual loans An individual can borrow between R3000 R10 000. The individual needs to have an established business and must provide FINCA with specific information on the business such as financial records, inventory list, business plan etc. The average age of FINCA s clients is 40 and the average loan is between R500.00 to R2000.00. Most of FINCA s clients operate in the informal economy. Typical examples are fruit and vegetable traders, hairdressers and traders in second hand clothing and furniture. These are clients that run survival type businesses. FINCA encourages savings as this reflects positively on the individual if they approach FINCA for credit and indicates a dedication to making regular payments. If re-payment in according to the contract is not fulfilled FINCA can place the defaulter s details onto a national data base such as the National Loans Register which will list the individual as a bad creditor for up to 5 years. The ethikwini Municipality has recently been approached with a proposal that FINCA pay the license fees of the street traders and the street traders in turn reimburse FINCA in the same way that they would repay a loan. Tel: 031-307 1513 The Mzansi Account This initiative was launched on the 25 October 2004. The objective is to offer banking services to low-income earners. South Africa s four major retail banks: Absa, FNB, Nebank and Standard Bank as well as Postbank offer the Mzansi Account. This is a standardised debit card-based transactional and savings account. All that is required to open the account is a valid South African ID document. The account is limited to deposits, withdrawals and debit card payments, and the account offers a debit card that is accepted at retail accounts. No management fees are charged and one free cash deposit is offered per month. Each bank has established its own branch transactions fees as well as initial deposit requirements. By 2005 over one million accounts were in operation, more than half of which were held by women. The Mzansi Savings Account as an important initiative in that it links credit to savings. See www.banking.org.za/ for a list of SA banks The ethekwini Business Development Centre While not a micro-credit institution, the ethekwini Business Development Centre assists registered SMMEs that have been awarded tenders to raise capital so that they can complete the requirements for the tender. Capital needed by these SMMES ranges between R5000 to R50 000. The role of the centre is to act as a conduit between the business and the bank. The centre makes a lot of use of the Mzansi Account as commercial banks have agreed to use the tender contract as collateral for a loan. The centre also refers clients to Ithala Bank. The view of a representative of Streetnet International, an NGO working with street traders, is that the ethekwini Business Development Centre could play a more prominent role in working with informal business on issues such as secure trading spots, facilities on site, skills training and savings accounts. Although micro-credit is important for informal businesses these issues can be just as important. 8
Typical examples of FINCA clients are hairdressers (left) and street traders. These are clients that run survival type businesses. Photographs: Angela Shaw Questions and challenges HIV/AIDs HIV/AIDS is a social structural challenge to South African microcredit because of the inherent risks associated with lending to HIV positive clients. Furthermore, the cost associated with increased mortality is likely to raise the demand for credit (i.e. funeral costs and loss of the family bread winner ). KZN has a higher incidence of HIV/AIDs than the national averages, with just over 40% of women attending antenatal clinics testing positive, compared to just under 30% for the national average (2004). High operating costs of micro-credit institutions The socio-economic inequities in South Africa have created a business environment with very high operating costs for microcredit institutions. At present micro-credit institutions in South Africa have to recover First World costs (i.e. salaries) from Third World revenues. The table below shows that micro-credit institutions in South Africa are significantly more expensive in all categories, than they are by African and World standards. Expense comparison of South African micro-credit institutions (Source: Baumann, 2004) Expense item compared to total assets SA Africa World Total expense 101% 39% 30% Operating expense 84% 31% 19% Financial expenses 11.7% 2.6% 4.5% Personnel expense 52% 15% 11% Non-staff admin expense 32% 16% 9% 9
Clearly the cost of operating a micro-credit institution in South Africa is highly inflated compared to international standards. In this regard the economic sustainability of micro-credit institutions in South Africa an issue. Structural challenges faced by micro-credit institutions in South Africa Contributing to the harsh business climate indicated above, are a range of other structural challenges that inhibit micro-credit institutions: Most poor people who would benefit most from micro-credit live in rural communities that are difficult to access. Low-level literacy and business skills amongst clients in rural communities mean that there is a need for greater client training and skills development to ensure higher levels of repayment and sustainability. There is an inadequate employee skills base in the microlending sector, which increases levels of institutional risk. Lack of appropriate government support. Key questions for policy debate Before deciding to support micro-credit initiatives these key questions should be addressed: In the case of South Africa, is micro-credit the most effective approach for increasing access to financial services for poor rural households? Should micro-credit target the very poor by supporting livelihoods, or entrepreneurs without access to formal credit? Conversely should micro-credit be designed to assist vulnerable households by smoothing incomes through locally based savings and credit structures such as stokvels and savings clubs? Ultimately is micro-credit appropriate for poverty alleviation in South Africa? Poor people who would benefit most from micro-credit live in communities that are difficult to access. 10
Possible roles for the ethekwini Municipality The following are possible ways that the Municipality could expand its role in supporting and facilitating micro-credit initiatives: 1. Provide information Following an evaluation of all micro-credit institutions available, the municipality could: Ensure that people in need of credit know which organisation they can go to and what they can expect from these organisations. Publish this information in local newspapers. Produce flyers that are distributed in all municipality outlets, and more actively distributed in certain areas such as the Warwick Junction. Introduce a trademark for reliable, pro-poor finance institutions based on guidelines such as the interest rates charged. 2. Facilitate access This is an extension of the information role, where the municipality not only assesses micro-credit institutions, but also actively interacts as an intermediary between these institutions and the people. For example: It could use existing information centres where people can speak to an advisor and be referred to an institution appropriate for their needs. Ideally such a facility would combine micro-credit information with advice on related issues such as business planning, skills development and encouraging of savings. People at the Business Support Unit currently perform some of these functions but their knowledge of specific micro-credit institutions and informal, survival type business would need to be expanded. One could also argue for disbursement into other local areas to lower the barriers for people to use these services. Survival type entrepreneurs often might not have the time and money to travel to existing centres. Mobile services are quite common in other parts of the world. 3. Guarantee or subsidise services Another option is to facilitate the provision of micro-credit to currently un-serviced groups by: Guaranteeing to pay back a certain amount to the micro-credit provider if the borrower fails to pay back the loan. Subsidising interest rates on micro-loans for certain groups of borrowers, if it is established that people do not take out loans when they cannot afford to pay the interest. For people who would have taken a loan even without a subsidy this acts as a form of additional income, which would potentially be a great poverty alleviator. However more research is needed to establish the demand and effects of such a subsidy or guarantee. 4. Coordination of banking initiatives The municipality could opt to play a more prominent role in coordinating current activities in the banking sector that cater for poorer people. It could: Identify gaps in the current services that are offered. Encourage local banks and credit organisations to implement services that cater for poor people. Promote these services more actively in communities. 5. Services to support small business development The success of micro-credit depends on the ability of borrowers to start up a successful business. To this end the municipality could: Supply free business training for informal businesses. Supply on-site facilities and a secure trading environment. Work with micro-credit institutions, and instead of subsidising these organisations, provide services such as skills training, trading permits and advice to the borrowers. 11
Useful Internet addresses These web sites provide some starting points for further enquiries into issues relating to micro-credit. International multi-lateral agencies and initiatives: http://www.yearofmicrocredit.org http://www.microcreditsummit.org http://www.uncdf.org/english/microfinance/index.php http://www.worldbank.org/html/extdr/thematic.htm (selected Financial Sector under Topics ) Micro-credit organisations and general resource sites: http://www.villagebanking.org/resources.htm http://www.gfusa.org http://www.mfnetwork.org/links.html http://www.ruralfinance.org/id/18561 http://www.swwb.org http://topics.developmentgateway.org/microfinance http://www.eldis.org/finance/microfinance.htm South Africa: www.sef.co.za http://www.cmfnet.org.za www.mfrc.co.za www.finmarktrust.org.za http://www.seda.org.za 12