I have now finished my first month working in South Africa – both with a Cape Town based funder of microfinance as well as a small, struggling microfinance institution (MFI) based in the North East part of the country, in collaboration with a Canadian NGO. It has been an interesting experience so far, and has definitely tested my academic notions of microfinance and helped put them in a real world context.
Microfinance in South Africa faces many unique challenges, as does the country itself. The relatively recent end (1994) of the racial segregation that was so strictly enforced by the former Afrikaans regime leaves in its wake a country still heavily divided along racial lines. Strolling through the poorest regions of the country – the townships – it is virtually impossible to find anyone white there. While there are more black and coloured people (South African designations that I will not fully go into in this post) entering mid and upper class, the transition has been slow. In my opinion, the problem is compounded by the fact that the government wants to fix these problems quickly and so sometimes pushes under-qualified individuals into jobs while forgetting that the best way to close the gap would be to invest more in education and grass-roots initiatives instead. The education gap seems to be a very serious issue. The schools in good parts of towns and cities here look and feel just like your average Western school, with a high quality level of education. Step into the poorer areas however, and you soon forget that this is a country with one of the most developed economies in Africa – the schools in these areas feature crumbling facades, lack basic amenities and are often staffed by underpaid and undertrained teachers. How can you close the gap between the rich and the poor when the poor are getting a 3rd world education and have to compete with the 1st world education of the rich when it comes to jobs?
In any case, in terms of microfinance it seems on the surface at least that South Africa should be a good place to implement and spread the development of such a grass-roots based approach designed to promote entrepreneurship through economic empowerment. Certainly in most of the townships and the more traditional African cultures there seems to be a strong sense of family and community which should help promote the Grameen style approaches that so heavily rely on trust and group pressure. In addition, the South African government does want to promote business development and close the economic gap and so one would expect that government policies would therefore highly favour the development of MFIs. However, for a number of reasons the successful spread of microfinance in South Africa has been slow and problematic. There are certainly organizations that are doing it well, however there are many more who are struggling. In addition, the government support is lacking in this regard, and the institutions set up to help often seem to do more harm than good.
One of the biggest barriers to microfinance in South Africa – meaning development oriented microcredit designed for poverty alleviation – is the fact that it gets so often confused with other forms of microcredit like small consumer loans and payroll lending which are hugely widespread in the country. These types of loans are often spent on non income generating activities and the high interest rates and quick payback periods mean that they do nothing to improve the welfare of the borrowers who take them on. Some of these moneylenders, but not all, therefore perpetuate poverty, and have a deservedly negative reputation within the country. However, what is now happening is that even MFIs with poverty alleviation as their main goal are facing the negative backlash from those who assume that they are the same as the consumer loan lenders. This also creates risks for the MFIs in selecting their clients, since many may pretend to have a business premise but will then turn around and use the loans for consumer purposes, thus creating a larger risk of defaulting, as well as causing no movement towards the ultimate objective of the MFI.
A further significant problem is one that can be seen as a direct legacy of the oppressive apartheid regime – the overall reduction in entrepreneurial spirit in the poorest areas. Many of the small business owners in the townships have similar businesses – hair salons and spaza shops perhaps being the most common. It is much rarer to see something truly innovative, though innovation is in itself not a precursor to a good business. However, along the same lines, these businesses start out small and tend to stay that way. It could be a lack of resources, and this certainly plays a role, but there also seems to be a pervasive frustrated resignation to the way that things are. Not having lived here for a significant period of time I cannot say if this is something that is improving or not, but again it is something that well implemented microfinance should be able to help with by giving the power to change their own lives back to the people. In this regard, as in the previous paragraph, it seems that a national media campaign on microfinance might be one of the best ways to deal with this problem.
Some International Organizations (IOs), like the ILO, are already trying to stimulate entrepreneurship through approaches like social entrepreneurship competitions in the townships. This is a good start. A national media campaign designed to educate people on the different types of microcredit available and the varying aims of each would also help the right people get to the right loans. If the South African government, in conjunction with IOs and NGOs, takes a top down approach to education on the resources available to those in the poorest regions, then the MFIs can at least enter communities with less false perceptions and a greater chance at success.
That being said, there will still be many challenges ahead. South Africa is a large country and many of the poor towns and townships, especially in very rural areas, are quite spread apart and therefore hard to service. This is also something to consider as many of the Loan Officers (LOs) do not have access to cars and will have to travel far in order to supervise groups of lenders, thus making very frequent contact a bit difficult. In addition, the salaries paid to LOs will have to be proportionally higher than in other countries in order to attract the right individuals, and this is important for funders of South African MFIs to be aware of.
Lastly, the government needs to develop a formal microfinance policy and stop opting for quick-fix solutions. An example of the worst kind of quick-fix is of a government agency that was offering micro-loans with absolutely not verification of business potential and minimal supervision. As the money was seen as coming from the government, many of the borrowers felt that it was owed to them and did not feel obligated to pay it back. The program is now closing, and any MFI opening in that region will have a decidedly harder time getting a successful lending program in place due to the perceptions already existing in the region. On this point, it is time that the government makes a comprehensive policy on microfinance and makes serious moves to support the MFIs that are doing it well, while putting in place capacity building resources and funding for those are starting out.
There is a lot of potential for MFIs in South Africa to make drastic changes. If the government works with IOs and NGOs towards a national policy, as well mobilizes a media campaign to educate the people, the successful spread of MFIs should increase exponentially, thus providing a powerful tool for closing the economic and class gap created by the former apartheid regime, and allowing South Africa to finally move towards a real form of equality which is a long time coming.
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