CHAPTER THREE
MICROFINANCE MARKETS IN SOUTH AFRICA - PAST POLICIES AND FUTURE DIRECTIONS
The first section of this chapter reVIews the function and pitfalls of targeted credit programmes that were implemented to encourage economic development in low-income rural and urban areas of SA. Limited outreach and continued subsidy dependence by development microfinance institutions in SA resulted in a review of these programmes and the adoption of the principles of the 'new view' of the role of microfmance institutions. The emergence and adoption of the 'new view' in SA is discussed in section two while sections three and four outline some the key challenges facing microfmance in SA.
Low levels of liquidity and limited access to finance have been identified as important constraints faced by small farmers and small- and medium-scale micro enterprises (SMMEs) in SA (Fenwick and Lyne, 1999; Schoombe, 1999). This led to initiatives by the SA government in the early 1980s to actively intervene in microfmance markets, based on the premise that subsidised credit was needed to give the poor better access to support services and to motivate productive investment and technology adoption by providing low cost funds.
In addition, it was assumed that low-income individuals were too poor to save to finance own investments (Coetzee and Vink, 1991; Coetzee et al., 1993b; Coetzee, 1995). Targeted, sector-specific rural development programmes, such as the Farmer Support Programme (FSP), were launched as part of SA government initiatives to promote structural change, based on the assumption that this change could be achieved by supplying a comprehensive set of support services including subsidised credit to economically and geographically isolated areas (Singini and Sibisi, 1992).
Problems experienced with targeted credit programmes in other developing countries also emerged in these SA initiatives. The provision of finance followed a supply-driven approach by institutions with highly specialised loan portfolios established between 1975 and 1985 by the SA government. These included MFOs such as the Ithala Finance and Investment Corporation (Ithala), Agriwane, Agricultural Bank of the Transkei (ABT), Agricultural Bank of the Ciskei (ABC), and Agribank, as well as, Development Finance Corporations (DFCs) such as Gazankulu Development Corporation (GDC), KwaNdebele National Development Corporation (KNDC), KwaNdebele Agricultural Company (KAC), KwaNdebele Utility Company (KUC) and the Northwest Development Corporation (NWDC) (Coetzee and Vink, 1996).
These financial institutions operated in geographic-specific areas, which resulted in focusing specifically on fmancing agricultural activities that were vulnerable to covariant risks, which undermined their financial self-sustainability. Relatively high administration costs were incurred due to technical assistance offered by these institutions, in addition to providing credit. These MFOs were also plagued by relatively high infrastructure fixed costs and complex financial technologies that were not geared to reducing agency problems and transaction costs (Coetzee and Vink, 1991; Strauss Commission, 1996a).
These government-supported MFOs had limited client outreach and relatively low productivity. Average loan sizes were relatively large (R2 700 to R43 000 - LB and ACB not included) and branch networks small, while the mean loan-to-staff ratio of 98 was low compared to the norm of approximately 200. These MFOs also had poor loan recovery records with high arrears (mean arrears = 20 per cent by volume), particularly in the institutions that focused only on agriculture (mean arrears of 25 per cent by volume).
Contract enforcement was difficult due the absence of tangible collateral such as land (no secure and transferable property rights in tribal areas of South Africa), a costly legal system and the developmental focus of MFOs (which made MFOs less willing to enforce loan contracts). MFOs also did not have suitable information systems and screening procedures to adequately assess borrower repayment capacity and to track loan repayment performance (Coetzee and Vink, 1991; Strauss Commission, 1996a).
Savings mobilisation was largely neglected with only Ithala and ABC actively mobilising savings. The lower subsidised interest rates that they charged did not reflect the true cost of lending, further undermining fmancial viability of the MFOs (Coetzeeet al., 1993a). The net
effect was that these institutions tended to crowd out the private sector, and became dependent on continued state subsidies as evidenced by the high subsidy-dependence indices ranging from 54 to 808 per cent (LB and ACB excluded) (Coetzee and Vink, 1996). Little attention was given to the scope of financial service requirements and the inherent costs of credit to borrowers. Cash tended to be disbursed in kind, with MFOs situated further away from clients than informal lenders. They required a greater number of visits (often double the number) and had much longer average loan approval times (60 days, compared to eight days) than informal lenders, due mostly to centralised decision-making structures. This increased both the direct (travel costs and commissions) and indirect (opportunity cost of time) borrower transaction costs in accessing credit, further limiting the ability of the MFOs to reach the rural poor (Coetzee and Vink, 1991; Coetzee, 1995).
Although credit was targeted for the purchase of inputs, few used this credit as the need for production finance amongst subsistence households tended to be low. More use was made of own savings, with family and friends being preferred as alternate sources of informal fmance.
In addition, credit provided by these MFOs gravitated to surplus-producing households who had larger tracts of land and higher family incomes to service the loan repayments (Ortmann and Lyne, 1995; Coetzeeet aI., 1993a). Elements other than credit, such as insecure property rights, adverse weather and cost and availability of inputs, were major constraints to production, while access to extension services in many rural areas was poor (Fenwick and Lyne, 1999). Blanket approaches to credit provision did not, therefore, seem to have the desired effect of promoting technology adoption and development in rural areas of SA and raised doubt as to whether production credjt was the real constraining factor to economic development (Ouattara and Graham, 1996; Fenwick and Lyne, 1999). The need for
consumption credit, transmission and savings facilities tended to be more important for subsistence producers.
Some non-government organisations (NGOs), such as the Financial Aid Fund (FAF) of the South African Sugar Association (SASA), Rural Finance Facility (RFF), Social Enterprise Foundation (SEF), Get Ahead Foundation (GAF) and Village Banks (VB) were able to reduce some of these transaction costs by operating closer to the clients and using simpler financial technologies with suitable collateral substitutes such as joint liability mechanisms. However, most focused mainly on financing non-farm micro-enterprises, with FAF being the only NGO making exclusively agricultural loans. Few NGOs provided voluntary savings facilities, with only VB actively engaged in savings mobilisation.
While these institutions serviced much poorer clientele, as shown by the small average loan sizes, the scale of outreach as indicated by relatively low number of branches and small client base was fairly limited (a survey of 13 NGOs showed these to collectively have fewer than 24000 clients) (Schoombe, 1999). The productivity of these NGOs was good, and arrears were moderate ranging from 1,6 per cent to 25 per cent. Although these NGOs charged relatively high nominal interest rates (36 per cent to 46 per cent per annum), they had relatively high administration costs as many of them were recently established and thus had not achieved a sufficient scale of operations, and due to the type of clientele they served (small and frequent loan disbursals) (Strauss Commission, 1996a).
Commercial banks, while having an extensive branch network, provided largely transmission and savings facilities rather than loans. Banks registered as Mutual banks were only established in 1995, and focused largely on small business and housing loans. TEBA Cash
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.