Throughout the developing world appropriate microfinance has helped address the poverty and vulnerability of millions of poor households in the informal sector. The United Nations has declared 2005 the Year of Microcredit. With a few exceptions, however, South Africa lacks the sort of poverty-oriented microfinance institutions common in Africa, Asia and Latin America. Why is this?
Since 1994 the government’s microfinance policy has focused on microenterprise development. Policymakers believe small businesses create more jobs than big firms. To this end, it set up microfinance parastatal Khula Enterprise Finance. Unfortunately, this strategy hasn’t worked. Khula has persistently failed to extend microcredit in meaningful volumes.Â
The explanation lies in part in the African National Congress’s concept of the “two economies”. In an integrated economy, most micro-enterprises produce inputs for bigger firms. Potential micro-entrepreneurs seek loans for such “supply-chain” businesses, because there is a market for their products. In a “two economies” situation, however, there is little opportunity for this kind of micro-enterprise. The first economy meets its own input needs, or imports them.
As a result, there is little demand for microcredit for “formal” micro-enterprise in the second economy: the demand for microenterprise credit is derived from the supply of realistic business opportunities.
Khula’s microcredit strategy has thus failed because it is designed to supply a virtually non-existent demand. It assumes that South Africa’s first economy generates demand for second-economy microenterprise. It tries to “push” microcredit products that aren’t needed by the second economy rather than develop products that are.Â
Microcredit for “formal” micro-enterprise is only one aspect of microfinance. In many developing countries, microfinance institutions provide a variety of services — microcredit and microsavings — to households in second-economy circumstances.
These services don’t assume that the borrower is an entrepreneur running a formal business. Instead, they are designed to support poor households’ “livelihood strategies”.
A livelihood strategy is a set of activities, assets and entitlements that allows a household to survive. A job might be part of a livelihood strategy, but not always. Most livelihood strategies combine informal business activity; transfers from employed relatives; small-scale agriculture; and other activities. Livelihood strategies are not necessarily intended to grow a business or create new jobs.
Access to microcredit is useful to any second-economy livelihood strategy, and not just for business purposes. Microcredit can help a hawker obtain stock. Life-cycle expenses like weddings and funerals, which help cement “social capital”, require extra cash. Informal community savings and credit pools provide access to funds in emergencies (a “poor person’s overdraft”).
The most famous example of “developmental” microfinance is the Grameen Bank of Bangladesh. It has helped millions of women to improve their households’ livelihood strategies. Very few of them ever develop into “first economy” businesses.
South Africa has a few Grameen-type NGOs, such as the Small Enterprise Foundation and Marang Financial Services. Some community based organisations, like the Homeless People’s Federation and the Poor People’s Movement, help women to informal savings and credit schemes. The government, however, has not done enough to replicate these initiatives, hoping that the first economy would create jobs to absorb second- economy labour. Indeed, some policymakers seem to regard developmental microfinance a “second-best” option that implies South Africans can’t make it as entrepreneurs.
In May President Thabo Mbeki announced that an Apex Fund for developmental microfinance will soon become operational. Funded by the Department of Trade and Industry, it will provide grants and loans to microfinance institutions to set up or extend developmental microfinance programmes targeting poor households. A number of challenges remain:
l It is important that the department does not impose a “business school” approach on the Apex — ideas and skills from the social development and NGO sector are more relevant. The government needs to wean itself from an “entrepreneurial” mindset concerning microfinance and micro-enterprise;Â Â Â
l The department should not impose overly-strict “sustainability” criteria on the Apex. Traditional banking logic is usually applied to microfinance: all costs must be covered through interest charges, quickly. One of the reasons for Khula’s poor performance, however, has been its reluctance to accept that building a pro-poor microfinance sector takes time — and money. Khula clients are usually expected to achieve total cost recovery within two to three years, which is all but impossible under South African conditions. The Apex should accept that new developmental microfinance institutions will take several years to “learn the ropes” before they can cover their own costs;
l The Apex must not neglect savings, the “forgotten half of microfinance”. Indeed, global evidence suggests that microsavings facilities are as important to second-economy households as credit, if not more so (credit is just savings in reverse). Although the Apex plans to include support for financial services cooperatives, it is not clear that this more formalised model is appropriate for South Africa. Support for less formal grassroots savings and credit schemes might be more appropriate.
The government must recognise that microfinance is a necessary but insufficient strategy for development, because what people can do with it is bound by external conditions. Without a comprehensive strategy to transform the economy into one that provides the kind of opportunities that ordinary people can use, even the Apex will be only a band-aid.
Ted Baumann is a consultant to the development sector on housing and microfinance issues. He is also coordinator of the Community Microfinance Network, a national grouping of pro-poor microfinance NGOs and CBOs
Driving home change
The South African Homeless Peoples’ Federation began as a group of informal saving schemes in 1991.
Two hundred active saving schemes were officially bound into a federation in March 1994. Today the federation has a membership of 100 000 families, a presence in 700 informal settlements and has assisted members to build 14 000 houses.
“The South African Homeless Peoples’ Federation is a social movement of the poor. It is based on a savings and loans programme and is geared towards people who don’t own land and live in unserviced areas. The main aim is to empower the poor to start providing for themselves, which they do through their savings,” says Western Cape and Free State coordinator Thami Maqelana.
“When a community with one of our saving schemes wants to get involved in a development project we teach the community to go out and collect information. says Maqelana. “With this information we go to government and use it in our negotiations. We have all the information at the tips of our fingers and because of this we are entering into negotiations with an upper hand.”
Maqelana said the response from government has been very positive and it has often provided land free of charge or at a rate lower than the market value as well as providing funding through the ministry of housing. Once the project has acquired land, their savings are used as collateral to secure loans from the federation to build houses.
Maqelana points out that the federation has become an empowerment and development project by default not design. “More than 80% of our members are women and they tend to be much more efficient than the men. When we run a housing project, it is the women who are out there building the houses.”
“When you look at households, the person who is concerned with housing, children and food is generally the women. The men are normally out looking for work to bring money home.”
The federation also relies on funding from overseas, having recently signed a three-year funding cycle with a German development funding agency, Misereror.
The next challenge as Maqelana sees it is to get the government to consult with and involve South Africa’s poor in policy formation. As one of the federation’s central principles states, “No one knows more about surviving poverty than the poor themselves.” — Lloyd Gedye