20060505 microfinance challenges presentation coetzee

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  • 1. Challenges facing the microfinance industry in South Africa Gerhard Coetzee 2006 MFSA Conference

2. Outline

  • History
  • Present
  • Future

3. Short history

  • Four phases
    • Before 1992 from struggle to financial services
    • 1992 to 1999 growth after legislative changes
    • 1999 to 2005 era of growth continues in a more regulated environment (MFRC)
    • 2006 - onwards

4. Until 1992

  • NGO dominated market
  • Entrepreneurial focus
  • Origins in struggle and non-financial NGOs
  • Difficult to make the change
  • USAID spent $20m between 1988 - 1999on mostly NGOs
  • Decline of the NGOs, but exception(s)
  • Decline of the parastatal institutions
  • Financial exclusionof majority, role ofapartheid , distortions due to Usury Act

5. 1992 to 1999

  • Key NGOs collapse
  • Exemption under R6000
  • Micro lenders and consumer finance
  • Consumer protection
  • Credit bureaus
  • Exemption lifted to R10 000
  • Court case / MFRC
  • Exponential growth

6. 1999 to 2005

  • Khula failed in its mandate, looses intermediaries
  • APEX concept, design and ..
  • Land Bank failed in its small farmer finance mandate
  • MAFISA, concept, design and .
  • NHFC looses intermediaries investigate retail
  • General failure in development finance
  • Consumer Finance Growth continues
  • 2 ndExemption Notice, MFRC:
    • Formalizemicrolending within Exemption
    • Consumer protection
    • Improveinformation & understanding
  • More detail coming

7. Market growth in Rand volume 8. Assessing MFRC

  • Formalize microlending:
    • ~2200 registered, % unregistered ?
    • Black MLs, but informal township MLs (?)
  • Consumer protection:
    • Help for borrowers, complaints & enforcement
    • Progress on disclosure & reckless lending (?)
  • Information, understanding:
    • Central role in sectoral data & analysis
    • Efforts to inform, educate public (?)
  • Pro-active stance: enforcement and beyond
  • Institutional change: NLR, legal/judicial issues, National Credit Act
  • Influencing policy through research: competition, housing, indebtedness

9. MFRC outcomes, impact

  • Major change in microlender behavior
  • Influx of banks: lowered reputational risk
  • R22+ billion market, evidence of substantial use for developmental purposes (larger volume than DFIs?)
  • Quantum leap in information, understanding
  • Reinforce regulatory approach

10. 2006

  • MFRC ends
  • NCR starts
  • Challenges

11. Challenges Development Finance (Second economy?)

  • Understanding of clients
    • township money lenders example
    • real market research
  • Expansion of products, expanded options
  • SMME finance attacking the self employed market
    • Regulatory environment -heavy burden of red tape
    • Registry of security interests
    • Explicitly target productive uses of microfinance
    • Transformation of NGO MFIs
    • Business Development Services
    • Commercial banks already in there, but more focus needed
  • However, many success stories, in Africa and beyond

12. Challenges Asset accumulation

  • Savings, insurance, investment products (ever mentioned here?)
  • Targeted savings products
    • Mzanzi experience encouraging
    • Smooth consumption, raise repayment, minimize risk
    • Is the banks making money, threat of cannibalization
    • Savings Targets Not Addressed in Anticipated Legislation, Charter
    • Addressing negative real interest rates on savings instruments
  • Need for bundling lending and saving instruments.
    • Repayment is a combination of amortized principal, interest, forced saving
      • Banco Sol model
      • Accion model
      • Village Banking Model
  • Housing: embryonic township markets
  • Investment products

13. African examples

  • National Microfinance Bank Tanzania
  • Amhara Credit and Savings Institution Ethiopia
  • Banque du Caire Egypt
  • K-Rep Kenya
  • Equity Bank Kenya
  • CERUDEB Uganda
  • Novo Banco - Mozambique
  • Novo Banco - Angola

14. Other countries

  • BRI Unit Desa - Indonesia
  • Banco do Nordeste Brazil
  • Peoples Bank of Sri Lanka
  • Banrural Guatemala
  • Bank Pertanian Malasia Agricultural Development
  • Kyrgyz Agricultral Finance Cooperation Kyrgyzstan
  • Land Bank, Development Bank, National Bank Philippine
  • BancoSol Bolivia
  • 14 other banks in Eastern Europe
  • Grameen Bank - Bangladesh

15. Challenge Rules and enforcement

  • NCR
  • Other rules
  • Harmonisation of policy and legislation?
  • Main challenge enforcement?

16. Challenge Information

  • Need for even better data and information
    • Better credit scoring and pricing models
  • Having better information on individuals, households and firms applying for / using credit for policy development
  • Training and capacity building
    • Major need, no recognition, not willing to pay
    • Short sighted need to invest in most strategic asset
  • Consumer education
    • Need for improved outreach
    • Focus on lower income strata
    • Distinct lack of innovation
    • Use of CE as a monitoring tool
  • Pricing issues, competition, monitoring

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. 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