has branches in the hostels of major mines and in rural areas where it provides transmission and savings services to the mine workers and their dependants.Ithas achieved a considerable scale of operations and outreach, serving approximately 700 000 savings accounts (Strauss Commission, 1996a). Thus, microfinance markets in SA tended to be segmented and under- serviced with government-funded supply-led institutions providing targeted credit while private sector institutions mobilised savings. Recognising the shortcomings of micro credit programmes in SA, policy proposals more akin to the new institutional view on rural credit outlined in section 1.3 above began to receive attention in the mid 1990s.
should form an integral component of future MFOs in South Africa (Christodoulou et ai, 1993; Coetzee, 1995).
This new view of the role of microfinance required a review of the role of government in rural fmance. Two views on the role of government exist within the rural fmance literature: a non-interventionist and an interventionist view. The non-interventionist view argues for the removal of interest rate restrictions and the elimination of state development banking to allow the competitive market to be the driving force in the growth of financial intermediation. The underlying premise was that growth in the financial sector would ultimately benefit rural areas, although indirectly (Krafft, 1996).
The interventionist approach argued that government intervention, based on perceived credit market failures to encourage technology adoption and to offset years of discrimination in access to resources, was justified. Such intervention, however, had limited success as evidenced by the poor performance of the cited MFOs and the inability of the sector credit programmes to bring about substantial economic development and technology adoption (Krafft, 1996). While market failures are said to occur when the competitive market is unable to bring about a pareto-efficient allocation of credit, this defmition assumes away the presence of asymmetric information and positive transaction costs in rural fmancial markets (Besley, 1994). Thus, a standard of efficiency impossible to achieve in the real world is not a useful test against which to define market failures. Instead, Besley (1994) defmes a constrained pareto-optimal criterion accounting for information, incentive and enforcement imperfections. The point at which this condition is violated and market failure occurs is less clear, and blanket state intervention based on the inability of credit markets to achieve constrained pareto-optimality, given the current status of empirical evidence, becomes
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difficult to justify (Besley, 1994). The extent of government intervention thus lies somewhere between these two extremes with no fully accepted view on appropriate levels of intervention.
Lessons for SA that emerged focused on developing the right framework for successful rural financial intermediation. Emphasis was placed on developing 'good' institutions that are based on clearly defmed property rights and sound contract enforcement, rather than trying to address non-credit problems with subsidised credit (Coetzee, 1994; Krafft, 1996). While initial state support may be required in establishing and facilitating growth of current MFOs, this intervention should be temporary and in the form of infrastructural improvements only.
Government intervention should not crowd out the private sector but rather create a favourable economic environment in which it can operate. Trade, legal and regulatory constraints should be removed and property rights, infrastructure and education levels improved, making information accessible, contract enforcement more credible and lowering transaction costs (Besley, 1994; Fafchamps et al., 1995; Krafft, 1996). Savings mobilisation should form an integral component of future rural finance institutions (Coetzee, 1994).
These policy proposals regarding future direction of rural finance in South Africa formed the basis of the work of the Strauss Commission in 1996. The Commission was established to investigate the provision of fmancial services within the context of the SA Governments Reconstruction and Development Programme (RDP) objectives and to make recommendations for future policy, legislative and institutional measures to improve rural finance. The recommendations of the Commission broadly encompass three areas: the fmancial environment, the legal environment and policy implementation.
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Both the interim and final reports of the Strauss Commission emphasised the need for promoting access to a broad range of fmancial services with specific emphasis given to savings mobilisation, transmission services, housing, trade, agricultural and consumption- related fmance (Strauss Commission, 1996b). While these proposals were in line with the new institutional view of credit, the SA government still regards as one of its key responsibilities the channelling of resources to strategically targeted areas such as the support of SMMEs (DTI, 1998). While SMMEs and poor individuals may be credit-constrained, financial markets can only indirectly contribute to economic development and income growth. Constraints other than access to finance that create sufficient incentives for rural individuals to invest need to be addressed first. These include factors already mentioned in Chapter 2 such as the development of secure and transferable property rights, infrastructural development and legal certainty to reduce market transaction costs for all rural participants, including women (Gonzalez-Vega, 1994; Lyne, 1996).
In addition, loans in rural areas of SA are not only needed for productive investment but are intimately linked to inter-temporal consumption smoothing. Hence the less interventionist approach could, create an environment such that private lending institutions are encouraged to become more active in micro-financial markets. Commercial banks already had an extensive branch network and had indicated their willingness to become more involved in rural finance, provided rural infrastructure is improved, contract law is enforced and adequate crime prevention measures are instituted (Fuchs, 1996; Krafft, 1996).
The interim report of the Strauss Commission focused much on the development of multisectoral institutions which are well-diversified and give equal emphasis to savings mobilisation and credit, given assessments of targeted SA credit programmes, such as the
FSP, and international experience. The Commission recognised the efforts of NGOs but argued that these local level institutions, with the exception of commercial banks, were small and had a narrow focus in terms of clientele and geographic spread (Strauss Commission, 1996a; Strauss Commission, 1996b). The absence of commercial financial institutions in developing markets in SA is seen as a constraint to increased SMME investment in rural and developing urban areas. The importance of private sector involvement in supporting small business has been acknowledged, as government resources alone are not sufficient for small business support.
The SA government has taken several measures totryand increase private sector participation in micro credit markets, with particular emphasis on providing financial services to SMMEs and emerging farmers. These include exempting certain money lending transactions from the Usury Act (Act No. 73 of 1968). Such transactions included loans under R6000, repayable over 36 months or less where such loans are not paid out in terms of a credit card scheme.
State funded institutions such as Khula Enterprise Finance (Khula) were established to act as wholesaler providing services to financial institutions serving small business and micro entrepreneurs. Importantly Khula offers a credit guarantee scheme that covers 60% of a financial institution's exposure to SMMEs (Schoombe, 1998).
The credit guarantee scheme did not result in commercial banking institutions increasing their exposure to designated sectors such as SMMEs. Although commercial banks had indicated a willingness to participate in the sector, the absence of suitable financial technologies to operate in this market, cost pressures, and the perceived high risk of micro enterprise were major constraints to commercial banks operating in this sector. Commercial banks tended to opt for granting larger (greater than R50 000), more cost-effective loans at lower interest rates
with collateral. Commercial banks were also reluctant to charge high interest rates due to the negative perceptions associated with expensive credit (Schoombe, 1998; 1999) Importantly, development finance institutions and NGOs such as Ithala, FAF (now called Umthombo Agricultural Finance) and SEF continue to play a meaningful role in the microfinance landscape. Umthombo Agricultural Finance provides finance to small-scale sugarcane growers who do not have access to normal credit facilities and has advanced a total ofR344
million in loans (Bates and Sokhela, 2003). The Land and Agricultural Bank of South Africa (Land Bank) has also entered the development finance arena and has provided loan finance to more than 90 000 small-scale farmers and rural households since 1995 (Coetzee, 2003).
Providing fmancial services to SMMEs and low-income urban households remains a challenge with few microfinance organisations penetrating this segment on a large-scale.
Commercial banks remain hesitant given the risks and the costs while NGOs such as the Get Ahead Foundation (provides finance to SMMEs using group loans) have been plagued by administrative problems. To better understand the mechanisms that have shaped the microfinance landscape in SA and the challenges and current issues that SA microfinance institutions face, it is important to review the laws and recent amendments to laws that govern the microfinance policy environment in SA.