The Evolution of the South African Microfinance Sector From 1992 to

Transcription

The Evolution of
the South African
Microfinance
Sector from 1992
to 2004: The role of
the Microfinance
Regulatory Council
Prepared by
Maple Place North
Momentum Park
145 Western Service Road
Woodmead, 2148
Tel: 011 802 0015
Fax: 011 802 1060
www.eciafrica.com
and
IRIS Centre of the University Research
Corporation International
2105 Morrill Hall
University of Maryland
College Park
Maryland, 20742
www.iris.umd.edu
March 2005
EVOLUTION OF THE SOUTH AFRICAN MICROFINANCE SECTOR FROM 1992 TO 2004
Preface
We wish to thank USAID and the SEGA/MESP project as well as the Microfinance
Regulatory Council for commissioning ECIAfrica, in collaboration with the IRIS Centre at
the University of Maryland, to undertake this study, and for all the support and guidance
received from them in the execution of the study.
We also wish to thank the many practitioners and experts who made time available to us
to contribute their knowledge and insights to this study.
We trust that this report provides an accurate and true reflection of the evolution of the
South African microfinance sector since 1992, and hope that it will contribute to the
development of a more inclusive financial sector in South Africa, a process that is already
underway.
The opinions in this report are those of the authors, and are not necessarily those of
USAID, the SEGA/MESP project or the Microfinance Regulatory Council. Any queries
should be directed to the authors of the report. They are:
Dr Gerhard K. Coetzee (Ph. D.)
Kathlean A. Druschel
Dr Lisa D. Cook (Ph. D.)
Neil W. Brislin
J. Patrick Meagher
Roland V. Pearson
i
The Evolution of the South African Microfinance Sector
from 1992 to 2004: The Role of the Microfinance
Regulatory Council
Executive Summary
Overview
Over the 1992 to 2004 period South Africa has mostly trodden a path of intermittent and
reactive financial sector reform, rather than organised financial sector development. Most
of the milestones noted in this report, as least until the last two or three years – i.e. 1992
Usury Act Exemption; 1994 threat to revoke that same Exemption; 1999 establishment of
the MFRC; and 2000 withdrawal of the PERSAL direct debit mechanism – all mark sharp
actions to correct, i.e. reform, specific perceived and / or real aspects of financial service
delivery in South Africa, especially in the context of credit for poor and low income
individuals.
Thus, in retrospect, the financial sector development role that MFRC has played, since
1999, and in particular over the last two to three years of its tenure, is somewhat
remarkable. The MFRC has deftly supported, and in some cases led, a wide-ranging
review and development of new legislation and other market infrastructure towards a
better functioning and more rational financial services sector. In particular, it has deftly
interpreted and enhanced its originally relatively narrow mandate to: embed public and
private sector confidence in the legitimacy of the small loans sector; establish norms and
standards and clear incentives and penalties for compliance and non-compliance around
a whole host of conduct issues; raise the level of debate about financial sector
development to everyday discourse among a broad spectrum of stakeholders; and help
spur wholesale transformation of the structure of the entire industry.
The aggregate picture suggests that MFRC has ensured a high level of synergy among its
objectives, activities, and departments in service of the consumer protection mandate and
the underlying policy goal of development of the sector. Some would even describe MFRC
as “visionary.” Government, lenders, and consumer advocates all praised the agency for
its willingness to study the concerns of credit institutions and consumers on the ground,
and to take these findings into account. MFRC’s activities have gone from formalizing the
industry, and thereby setting new behavioural standards, to conducting research and
advocacy concerning the new National Credit Bill that would unify the patchwork of norms
and implementing agencies in this field – including a regulator that would replace MFRC
(an indication that strategic thinking weighs more heavily than bureaucratic self-interest).
MFRC’s Performance Against its Mandate
By most accounts, MFRC succeeded in performing most of its mandate, and several
people went as far to say that they have done a “sterling” job overall. Furthermore, MFRC
added to its mandate by expanding its focus in strategic ways to address glaring
deficiencies in financial sector development, which may have strictly fallen outside of their
explicit charge, but clearly either impeded or undermined their core responsibilities. Some
see a tension between these two aspects of its work, suggesting that the expanded work
compromised its core mandate. However, our analysis finds that the strategic work and its
synergies with MFRC’s efforts within the core mandate seem to have enhanced its
performance against the core mandate, which were to:
i
•
Formalize the microlending sector
•
Provide consumer protection
•
Improve information and understanding
•
Manage its business and operate in a self-supporting way, ensuring appropriate
training of staff
While the research reveals some mixed results and lack of unanimous agreement on
success, failure, and / or impact, the preponderance of facts bear out the claim to
substantial achievement of these aims. On the first count of formalisation, all of those
interviewed for this study were unanimous in their view that the MFRC has played a major
role in “cleaning up” the industry, and providing an avenue for clients to seek recourse.
The influx of banks into the sector appears to be driven in part by the reduction in
reputation risk. MFRC also has fomented major changes in behaviour, towards more
responsible lending practices and concern for the reputations of microlender lenders.
On the second count of consumer protection, MFRC has dramatically taken the industry
forward, albeit still with a long way to go to fully effective protection. The existence of the
MFRC has provided a platform for complaints resolution, and has been seen to have
raised the bar in terms of ethical behaviour by lenders. MFRC’s compliance audits,
together with its responses to complaints and pro-active investigations, have helped
encourage compliance. Rates and disclosures are standardized, and the procedures
widely understood, if not followed universally. The high levels of success in resolving
complaints investigated is noteworthy, and speaks well of the approach adopted by the
MFRC in dealing with lenders who are at fault. The first complaints related mostly to
retention of bank cards, which became illegal along with the creation of the MFRC. After
accounting for some 33% in the MFRC’s first year, this complaint has comprised
consistently below 5% of complaints since then. As a result of MFRC introducing a
prescribed loan summary in 2000, in line with the “truth in lending” disclosure
requirements of the USA, the research reveals greater transparency in pricing. MFRC’s
change of rules in 2002 on “agents and brokers”, requiring training by lenders and correct
identification, appears to have resulted in a significant reduction in complaints related to
non-compliance with MFRC rules. And, in an effort to increase its efficiency and move
closer to a risk-based, as opposed to rules-based regulatory approach, MFRC analyzed
complaints concerning the largest of its member institutions, and worked with them to
establish their own complaints departments. Now, some 20 lenders have such
departments, which are required to meet standards and response times defined in
service-level agreements with MFRC.
In regard to MFRC’s information role, as compared to the situation in 1999, much more is
now known about the microfinance sector, and this is largely MFRC’s doing. The body of
research commissioned by MFRC, along with its very active, sometimes leading role in an
array of public and private forums dealing with financial sector reform and development,
has yielded a quantum leap in information and understanding with respect to the sector.
Having moved far beyond its narrow requirement to publish basic statistics on the size
and composition of the industry, MFRC has used well-formulated and executed research
to both improve its own regulatory function, as well as contribute handsomely to the
broader debates and policy development in the financial services sector. In fact, the
international scope of the research and the adapted relevance of it to South Africa’s
financial sector development (e.g. tiered banking, activity vs. institutional regulation,
compatibility of prudential and conduct regulation, etc.) substantially reflect the efficient
and effective application of external resources, such as that provided via USAID and other
donors, and smartly procured and managed by MFRC.
ii
MFRC has managed its own affairs very well. Through reasonable and sustainable
annual fees and penalties, MFRC can support its core regulatory and supervisory
operations. Meanwhile, the organisation has mobilised substantial sums of donor money
mainly to support its extensive research agenda, which has helped to both bolster its core
mandate, as well as definitively lead the South African debate and policy formulation for
broader financial sector development. At the same time, MFRC receives high marks for
the expertise and professionalism of its staff, while the organisation has suffered only
minimal staff turnover in its five years.
Results and Influence of MFRC Actions
In respect of impact, at the macro level, indebtedness is not a problem in South Africa.
Bad debts are decreasing in SA. Nonetheless, the observed increase in overindebtedness of the poorest income groups is a cause for concern, not only in terms of
lender and borrower behaviour, but also in terms of general levels of poverty and the
challenges that this poses. Also, valid concerns remain about the insufficient data and
mechanisms to measure financial distress (a more refined measure than indebtedness)
and the deleterious impact of unsustainable levels of debt on the poorest in society.
The poor state of financial literacy in South Africa throws the indebtedness debate into a
much sharper light. Despite multiple financial literacy initiatives, including the widely
praised but narrowly implemented programmes of the MFRC, South Africans remain by
and large underserved by programmes offering financial education. This is particularly the
case in low income and rural communities. Existing programmes are mostly supply driven
(product-specific) or reactive (debt management), and programme evaluation is almost
non-existent; leaving a void of currently viable solutions to the financial literacy problem at
any scale.
MFRC has played an important custodial role in the emergence of a R17 billion market
(from less than R1 billion in 1992, and around R10 billion in 1999, at the time of MFRC’s
inception), along with evidence of nearly 30% of the consumer credit going towards
developmental purposes (i.e. enterprise, housing, and education). Based on the evidence
that we have, one can conclude that the MFRC has contributed to an increase in access,
with an estimated 3 million people now having access to finance, the majority of whom did
not have access to formal finance before.
Nonetheless, while it is clear that access to credit, particularly consumer credit, has
increased significantly since the 1992 exemption notice, it is equally clear that the original
intention of expanding access to SMME finance has not been directly achieved (although
it probably has increased indirectly through leakage at the household level from a
dramatically increased pool of funds circulating within poor and low income households).
This is clearly an area where DTI, National Treasury, and the microfinance industry at
large need to place more focus going forward, while at the same time addressing the
other regulatory constraints on small business establishment, growth and development.
MFRC’s multiple actions in respect of disclosure, fair practices, and so on have
contributed to a decrease in rates in the 30-day loans market. Although, the most
important factor in bringing down prices (albeit to levels still far above what a vocal group
of advocates feels is fair) may be that people are now interest rate sensitive, which
represents a major step towards the ideal that clients should be informed and act as the
first order monitor of prices and supplier behaviour. However, the term lender market
presents a different and less optimistic story, wherein rates seem to have increased,
iii
rather than decreased, resulting mostly from a lack of effective competition in that
segment of the market.
The microlending market features severe concentration, with the commercial banks
constituting 0.5% of the registered lenders with the MFRC, but holding 47.8% of the gross
loans and 38% of the clients. Once the banks decided to enter the sector, they were very
quick to aggressively grow their market share, with some banks taking particular
advantage of the PERSAL withdrawal and outlawing of the card and PIN collection
methods to grow their businesses by virtue of their preferential access to the payment
system, which the non-bank microlenders did not have. In addition, the exit of Saambou
and Unifer (Unibank) from the market and losses sustained in the sector by other retail
banks (leading to them contracting their activities) meant that important competitive forces
were removed from market.
Thus, pricing and inadequate competition, along with insufficient levels of development
finance and financial illiteracy, remain as the most important market development gaps for
South Africa’s financial sector. These issues largely fall outside of MFRC’s direct remit,
but to the organisation’s credit, these issues also have featured at the centre of much of
their research and extended activities, thereby highlighting MFRC’s pivotal role as not just
a sector reform instrument, but indeed an agent of financial sector development in a more
strategic way.
SA Financial Sector Development Issues – Past and Future
By many accounts, the 1992 Exemption Notice created a “disaster” by dividing the market
and thereby fencing lower income people off from the banking sector and formal credit
options. Interest controls were removed without other constraints (such as debt recovery
and capital access) being addressed. The result was that full conditions for the
development of an efficient market did not exist at a time when the market was growing
very quickly.
By the mid-1990s, the advent of the first ANC government raised expectations and
created increasing pressure for policies that would extend the benefits of credit
liberalization to all – and create rules of conduct that would protect borrowers from sharp
practices. The general legislative fragmentation created by the different rules applicable to
each form of credit, especially the restrictive framework that impeded entry of competitors
into the banking sector, was exacerbated by the Exemption Notice. In particular, this
arrangement impeded development finance. An early response was to set up the
parastatal development finance wholesalers – NHFC and Khula. The general perception
has been that these institutions have not been a great success. Today, both NHFC and
Khula suffer from a lack of sustainable clients, and in a way reflect the problems of
Apexes in many settings, that of adding cost to the system without improving access and
efficiency.
The push to establish MFRC came largely in response to widespread concern about high
interest rates and abusive practices in what many perceived as the “cowboy” microlending
market that boomed during the mid-1990s. There was a convergence of interest in
creating a consumer credit regulator, among government, consumer advocates, and a
number of financial institutions who were concerned about abuses as well as questions of
sustainability in a market seemingly unconstrained by standards of good conduct. Added
to this worry about conduct were lingering concerns about the arrested state of the
market’s development, and in particular the unmet needs for credit in priority areas such
as enterprise, housing, and education. Banks were also concerned about the potentially
iv
negative reputation effects on the mainstream financial sector of this combined lack of
conduct standards and development finance. At the same time, the government had a
mass of urgent policy priorities to address.
One might have wished for thorough financial reform to put the industry on a solid footing.
However, this proved infeasible at the time. There was pressure to enhance access to
finance (mainly credit) for a large segment of the population, while still protecting
individuals who were seen to be vulnerable to exploitative practices. In general
government policies either ignored, or superficially addressed the challenges and role of
financial services for the poor, and only recently did government policy and private sector
activities start to focus specifically on the role of finance in economic development. Thus,
as a “quick and dirty” approximation, the 1999 Exemption Notice, and with it the MFRC
emerged.
Looking forward, as the situation develops in South Africa, a number of critical issues
remain to be addressed:
•
Incentives to expand development finance: top-down (banks), bottom-up (MFIs);
•
The efficiency of commercial credit transactions;
•
Savings, insurance, other vehicles;
•
The heavy burden of “red tape” on SMMEs;
•
The need to develop the embryonic township and moderate-income housing
markets; and
•
The need to improve information infrastructures, such as title and collateral
registries.
The South African banking sector has been quite sophisticated at dealing with the
requirements of big business, but largely ineffective in providing financial services to small
and medium enterprises and poor households. The development of financial products
(particularly, credit) has, to date, appeared to have largely been dictated by the collection
mechanisms available to lenders, as only a handful of NGO MFIs make loans to nonsalaried people, even though some financial institutions, including at least one bank, have
begun to develop and pilot products that would better serve this market.
Still, as shown in international research that MFRC has spearheaded, only competition
between banks and other financial service providers on a relatively even playing field,
combined with an inclusive payment system that allows innovative delivery mechanisms
to flourish, plus the regulatory freedom for banks to explore alternative delivery
mechanisms through partnerships with retail institutions will translate into a serious push
for finding new market niches. In addition, the historical and current lack of tiers and
options for NGO transformation are ultimately detrimental to the provision of financial
services to the poor.
For South Africa this implies two important lessons that currently raise concern around the
Dedicated Banks Bill: one, it does not create a truly competitive financial services sector;
and two, it does not overtly allow access to the payments system. In addition, valid
apprehension revolves around the new National Credit Bill and its provisions that would
raise the cost of doing business and thereby constrain credit in the short to medium term,
especially in respect of the costs of compliance with the monitoring system.
v
These market conditions are consistent with MFRC’s burgeoning role in financial sector
development. As a hybrid form of regulator, MFRC has created distance between political
influences and regulatory capture by the industry. However, its implicit and explicit
industry promotion role has allowed it to not just create credible space for debate, but to
actively participate in and sometimes set the debate. Learning from its own experience
and international practice, MFRC has enhanced its core operations by introducing
modifications such as more risk-based regulation, and delegating some authority and
functions, which may help to reduce costs for fair lenders and for smaller lenders.
Meanwhile, it has used the same learning platform to effectively transition its role from a
policeman focusing on the high priority of reigning in the microlending “cowboys”, to a
market development facilitator focusing increasingly on efficient intermediation and
responsible growth of the financial services sector.
In summary, one might well conclude that the financial services reform process in South
Africa consists of competing proposals for empowerment and protection (respectively,
best illustrated through the Financial Sector Charter and the National Credit Bill) that suit
the political temper of the time, and may provide some satisfaction when implemented, but
that on the whole will likely strengthen the hand of the major banks and postpone the
introduction of serious competition into the sector. On the other hand, the MFRC has
proven itself as both an effective regulator and an agent of positive change. MFRC, in the
substantially larger and wider scoping form of the new National Credit Regulator, should
try to retain as much as possible of its rich capacity and innovative nature, so that it can
lead as effectively on the issues of pricing, competition, financial illiteracy, and
developmental finance as it has progressed the agenda of formalisation, protection, and
information over the past five years. In conclusion, the experiment with conduct legislation
and legislative instruments, in the form of the exemption and the MFRC, is indeed unique
in the international sphere and can serve as an example of a legislative strategy in a
specific market context.
vi
Table of Contents
1.
INTRODUCTION................................................................................................................................ 5
1.1
2.
ASSESSMENT OF THE MARKET .................................................................................................. 7
2.1
2.2
2.3
2.4
3.
APPROACH, METHODOLOGY AND REPORT STRUCTURE........................................................... 6
1.1.1
Obtaining information ....................................................................................... 6
1.1.2
Structuring the report......................................................................................... 6
INTRODUCTION ...................................................................................................................... 7
CONTEXT ............................................................................................................................... 7
ACCESS .................................................................................................................................. 9
2.3.1
Introduction ....................................................................................................... 9
2.3.2
General credit clients......................................................................................... 9
2.3.3
SMME clients...................................................................................................13
2.3.4
Suppliers...........................................................................................................16
2.3.5
Saving, Insurance and Transaction Products ....................................................17
2.3.6
Changes in market structure .............................................................................19
2.3.7
Conclusion........................................................................................................22
PERFORMANCE......................................................................................................................22
2.4.1
Introduction ......................................................................................................22
2.4.2
Prices ................................................................................................................23
2.4.3
Product range....................................................................................................27
2.4.4
PERSAL ...........................................................................................................28
2.4.5
Exploitation ......................................................................................................31
2.4.6
Fallout...............................................................................................................34
2.4.7
Education and information ...............................................................................38
THE MFRC AND ITS MANDATE...................................................................................................43
3.1
3.2
3.3
3.4
3.5
INTRODUCTION .....................................................................................................................43
MFRC: PERFORMANCE OF MANDATED FUNCTIONS ...............................................................46
3.2.1
Registration ......................................................................................................47
3.2.2
Investigations and Prosecutions........................................................................47
3.2.3
Compliance Monitoring....................................................................................48
3.2.4
Over-indebtedness and Reckless Lending ........................................................49
3.2.5
Investigations and Prosecutions........................................................................50
3.2.6
Education and Communication ........................................................................52
3.2.7
Information and analysis ..................................................................................53
3.2.8
Finance and Human Resources.........................................................................53
MFRC: EXPANDING THE MANDATE ......................................................................................54
3.3.1
National Loans Register ...................................................................................55
3.3.2
Unregistered lenders.........................................................................................56
3.3.3
Research and policy development ....................................................................57
OVERALL RESULTS................................................................................................................58
CONCLUSION: MFRC’S IMPACT ...........................................................................................63
3.5.1
Reforms in Law and Regulation and Changes in Financial-Services Provision
..........................................................................................................................64
1
4.
THE REMAINING CHALLENGES ................................................................................................66
4.1
4.2
4.3
4.4
4.5
4.6
INTRODUCTION .....................................................................................................................66
LESSONS FROM COUNTRY COMPARISONS ..............................................................................67
4.2.1
The Structure of the Regulator .........................................................................67
4.2.2
Approaches to Financial Outreach ...................................................................68
4.2.3
Consumer Protection ........................................................................................68
SITUATION IN SOUTH AFRICA AND EXPECTED TRENDS .........................................................69
LEGAL AND REGULATORY GAPS AND ENHANCEMENTS .........................................................70
4.4.1
Dedicated Banks Bill........................................................................................70
4.4.2
Financial Sector Charter ...................................................................................71
4.4.3
National Credit Bill, National Credit Regulator – and lessons from MFRC ....72
INSTITUTIONAL GAPS AND CHALLENGES ...............................................................................75
4.5.1
Development of the Market for Microfinance: Institutional Gaps ...................75
4.5.2
Suppliers of Microfinance ................................................................................75
4.5.3
Macroeconomic Developments and Challenges: Changes in Financial-Services
Provision and Changes in Economic Activity and Poverty Alleviation ...........77
GAPS IN PRODUCTS AND SERVICES AND CHALLENGES...........................................................78
LIST OF ANNEXURES
ANNEX I:
CASE STUDIES OF COMPARISON COUNTRIES ........................................................79
ANNEX II: 1999 EXEMPTION NOTICE ..............................................................................................96
ANNEX III: CIRCULARS ISSUED BY THE MFRC IN RESPECT OF ITS RULES AND
PRACTICES. ......................................................................................................................101
ANNEX IV: THE DEVELOPMENT FINANCE INSTITUTIONS .....................................................102
ANNEX V: LIST OF STAKEHOLDERS INTERVIEWED...............................................................105
REFERENCES ..........................................................................................................................................106
2
LIST OF TABLES
TABLE 1: SUMMARY OF RETAIL OUTREACH IN THE MICROFINANCE MARKET IN SOUTH AFRICA (1999/2000)
...................................................................................................................................................10
TABLE 2: REGISTRATION STATISTICS AT 31/08/2004 IN % OF INDUSTRY ...................................................12
TABLE 3: ITHALA DEVELOPMENT BANK LOAN STATISTICS .......................................................................13
TABLE 4: LAND BANK DEVELOPMENT LOAN STATISTICS ..........................................................................13
TABLE 5: CREDIT SUPPLIERS .....................................................................................................................16
TABLE 6: MFRC REGISTRATION STATISTICS, SHOWING NUMBERS OF REGISTERED LENDERS AND
BRANCHES ..................................................................................................................................20
TABLE 7: COMPARATIVE TABLE: LOAN BOOK AND NUMBER OF LOAN ACCOUNTS OF MFRC REGISTERED
LENDERS .....................................................................................................................................21
TABLE 8: SUMMARY OF PRICING RESPONSES TO LEGISLATIVE FRAMEWORK ............................................24
TABLE 9: COMPARATIVE TABLE: INTEREST CHARGES BY INSTITUTIONS IN 2000 AND 2003 (RANDOM
INSTITUTIONS) – CASH LENDERS ................................................................................................25
TABLE 10: COMPARATIVE TABLE: INTEREST CHARGES BY INSTITUTIONS IN 2000 AND 2003 (RANDOM
INSTITUTIONS) – TERM LENDERS...............................................................................................26
TABLE 11: SUMMARY OF PRODUCT DEVELOPMENT.....................................................................................27
TABLE 12: EVOLUTION OF MICRO-LOANS ON THE PERSAL SYSTEM .........................................................28
TABLE 13: NUMBER OF LOANS PER PERSON THAT BORROWED IN PERSONS AND IN % ..................................29
TABLE 14: COMPLAINTS STATISTICS ...........................................................................................................32
TABLE 15: MAIN PERIODS AND DECISION POINTS IN THE DEVELOPMENT OF THE MICROFINANCE SECTOR 43
TABLE 16: MFRC MANDATE .......................................................................................................................46
LIST OF FIGURES
FIGURE 1: INDUSTRY TURNOVER (FORMAL LENDERS) ................................................................................11
FIGURE 2: NUMBER OF MICRO-LOAN ACCOUNTS AND AGGREGATE LOAN BOOK .......................................11
FIGURE 3: SOCIAL GRANT BENEFICIARIES ..................................................................................................17
FIGURE 4: CONTRIBUTION OF GRANTS TO POOR RURAL HOUSEHOLDS.........................................................18
FIGURE 5: MARKET STRUCTURE BY LOAN BOOK - AUGUST 2004 ................................................................20
FIGURE 6: CHANGE IN NUMBER OF LOANS PER EMPLOYEE ON PERSAL FROM 1999 TO 2000 .....................29
FIGURE 7: GROWTH IN LOANS PER EMPLOYEE FROM 1999 TO 2000 BASED ON PERSAL ............................30
FIGURE 8: GROWTH IN ARREARS REFLECTED BETWEEN 1999 AND 2000 ON PERSAL ................................30
FIGURE 9: GROWTH IN LOAN DEDUCTIONS AS % OF NET SALARY FROM 1999 TO 2000 ON PERSAL ..........31
FIGURE 10: CIVIL SUMMONSES FOR DEBT.....................................................................................................36
FIGURE 11: CIVIL DEFAULT AND CONSENT JUDGMENTS FOR DEBT ..............................................................37
FIGURE 12: CURRENT FINANCIAL LITERACY PROGRAMMES AND COVERAGE OF SOCIO-ECONOMIC
GROUPS ......................................................................................................................................40
FIGURE 14: SOUTH AFRICAN FINANCIAL REGULATORY STRUCTURE (SOURCE: FINMARK TRUST) ..............45
FIGURE 15: CUMULATIVE NUMBER OF MFRC REGISTERED ENTITIES AND BRANCHES ..................................47
3
LIST OF ACRONYMS
ADR
ANC
ATMs
BANKSETA
BCB
BEE
CFA
CFCs
CIMA
CRA
DOSD
DTI
FAIS
FDIC
FINCA
FSA
IAC
INSETA
LOA
LSM
MEA
MFIs
MFRC
NCB
NCR
NEDLAC
NGOs
NHFC
NLR
OFT
OSCIPs
PDI
PERSAL
PEWG
PFEG
PO
POCA
RDP
RHLF
SA
SACCOL
SAIA
SAICA
SAICSA
SARB
SCMs
SMEs
SMMEs
SROs
TIPS
U.K
USA
USAID
Alternative Dispute Resolution
African National Congress
Automatic Teller Machines
Banking Sector Education and Training Authority
Banco Central do Brasil
Black Economic Empowerment
Commercial and Financial Accountants
Commercial Finance Companies
Chartered Institute of Management Accountants
Community Reinvestment Act
Department of Social Development
Department of Trade and Industry
Financial Advisory and Intermediary Services Act
Federal Deposit Insurance Corporation
Foundation for International Community Assistance
Financial Services Authority
Institute of Administrators & Commerce
Insurance Sector Education and Training Authority
Life Offices Association
Living Standard Measure
Micro Enterprise Alliance
Microfinance Institutions
Micro Finance Regulatory Council
National Credit Bill
National Credit Regulator
National Economic Development and Labour Council
Non Governmental Organisation
National Housing Finance Corporation
National Loans Register
Office of Fair Trading
Organizacaos da Sociedade Civil de Interesse Publico
Previously Disadvantaged Individual
SA Government’s Personnel Salary System
Pensions Education Working Group
Personal Finance Education Group
Post Office
Post Office Card Account
Reconstruction and Development Program
Rural Housing Loan Fund
South Africa
The Savings and Credit Cooperative League of SA
South African Insurance Association
South African Institute of Chartered Accountants
Southern African Institute of Chartered Secretaries & Administrators
South African Reserve Bank
Sociedades de Credito ao Microempreendedor
Small and Medium Enterprises
Small, Micro and Medium Enterprises
Self Regulatory Organisation
Trade and Industrial Policy Strategies
United Kingdom
United States of America
United States Agency for International Development
4
1. Introduction
Since 1994, South Africa has made significant strides toward improving the national
policy and legal environment for more equitable economic growth. It is recognized that
the financial sector has historically been unable to effectively serve the majority of the
South African population. This is particularly true for lending to small businesses and
micro-enterprises, for low-end housing, insurance and for savings services at the lower
end of the income range. Recent data available from FinScope1 suggests that up to 60%
of the population is excluded from formal financial services. This data does not indicate
what the trends are or what the position was a decade or more ago when the country
entered a new democratic era. In essence, political liberalisation took place at a much
faster pace than economic liberalisation.
As a part of the process of deepening the financial sector, the Micro Finance Regulatory
Council (MFRC) was established under the 1999 Usury Act Exemption Notice. The
MFRC's purpose is to supervise the operations of those institutions lending under its
unrestricted interest rate window to facilitate more effective consumer protection and
regularization of micro-lender operations in a growing market. As the MFRC marks the
end of its fifth year, it has engaged the leaders in this sector from government, the
private sector and civil society in a policy dialogue aimed at building a consensus for
necessary reforms.
Outdated financial sector legislation has been identified as a major obstacle to the
deepening of South Africa’s financial market. A number of reviews have been
undertaken in the last four years to assess the problems associated with the existing
rules as well as the potential benefits of changes in the laws. These include:
1
2
•
a variety of studies completed under the MFRC;
•
papers presented at the NEDLAC conference on Financial Sector Issues in April
2002;
•
the findings of the Task Group of the Policy Board for Financial Services and
Regulation;
•
the World Bank review of South African legislation related to low-end finance;
•
the TIPS Forum Paper on the performance of the financial sector since
democracy; and
•
the Task Force on the Credit Law Review2.
FinMark Trust (2003), Finscope
See list of references for detailed references.
5
To move forward with the reform process, key stakeholders need research and
information enabling them to determine:
•
the role of the micro-lending sector in South Africa;
•
the value of the micro-lending sector to its users;
•
the effectiveness of the MFRC and the regulatory regime it has created by
expanding the provision of financial services;
•
the remaining gaps in the provision of financial services and options for the future
of the sector; and
•
the legal and regulatory enhancements most likely to expand services in this
segment of the financial market.
1.1 Approach, methodology and report structure
As a comprehensive review of the changes, including a quantitative and qualitative
assessment was virtually impossible, a pragmatic approach was followed for the
purposes of this report to ensure that the main events and consequences were
incorporated. The following approach was chosen for the review and final report.
1.1.1
Obtaining information
Two strategies are used in this study. Firstly, individuals with an institutional memory and
experience in the microfinance market in South Africa over the last decade and a half
were selected to work as a team. Secondly, prominent role-players and stakeholders in
the sector were identified and interviewed to ensure that their views and this assessment
are largely congruent.
1.1.2
Structuring the report
The report structure follows the three main requirements stipulated in the brief:
•
a historic assessment of the industry, examining access to financial services,
particularly credit and market conduct;
•
an assessment of the role of the MFRC and how it has performed against its
mandate; and
•
a forward-looking assessment of issues that need to be addressed within the
sector.
6
2. Assessment of the Market
2.1 Introduction
For purposes of this study, specific time periods relevant to the review were identified,
starting with the market situation in 1992, the year the first exemption notice was
published. The next point in time is 1994, the year of the first democratic elections and
the change of government in South Africa. The second exemption notice was published
in 1999, and thereafter changes and events in the financial market are traced up to the
present day. The emphasis of this report is on financial services for the poor, and
consequently many aspects of the financial market and changes in institutions relevant
to the more affluent section of the population have been left out. The discussion in this
section and subsequent sections follows a timeline allowing events to be linked to
changes and outcomes. In terms of the end result, while an impact study (which
demands far more time and resources) was not undertaken, the impact in terms of
access and performance was considered using proxy variables. Finally, the review is
largely focused on the MFRC, and not on the broad financial market.
This section is divided into three themes, namely context, access and performance.
Context will describe the environment within which the market changed, developed and
expanded. This will be followed by a section that covers access and issues affecting
access. Here the market will be examined from the demand side, looking at among other
things the products provided and the institutions that provided them, all in terms of the
timeline.
The market performance segment will look at the stakeholders in the market, and
summarize conduct of clients, suppliers and of the rule makers and rule appliers. In the
second part of this report, the performance of the MFRC will be examined and
evaluated.
2.2 Context
“The apartheid system severely distorted the South African financial system. A handful
of large financial institutions, all linked closely to the dominant conglomerates, centralise
most of the country's financial assets. But they prove unable to serve most of the black
community, especially women. Nor do they contribute significantly to the development of
new sectors of the economy. Small informal-sector institutions meet some of the needs
of the black community and micro enterprise. They lack the resources, however, to bring
about broad-scale development” (RDP, 1994)3.
The above quote raises the question that after more than a decade of democracy in
South Africa has the country succeeded in providing access to financial services for
economic development purposes, and has this access been efficient? In this study, it is
argued that there was indeed a deepening of the market, but its meaningful contribution
to economic development and alleviating poverty is disputed.
A World Bank report (2000) argues that the South African financial system is highly
developed and well managed, even by first world standards with a range of financial
3
Reconstruction and Development Programme: A policy framework (1994)
7
products, unparalleled in other emerging market economies. Even though the financial
sector went through a comprehensive modernization and strengthening process, and
withstood the effect of the Asian Crisis in 1998, efforts to enhance the contribution of the
financial sector to growth and poverty reduction have been only partially successful. The
banking sector has been quite sophisticated at dealing with the requirements of big
business, but largely ineffective in providing financial services to small and medium
enterprises and poor households.
It seems that until recently, South Africa had no complete answer on how to ensure that
access to financial services plays a widespread role in economic development and
poverty reduction. No comprehensive development finance policy exists, even more than
nine years since it was proposed by the Strauss Commission (1995 and 1996)4. Past
macro-economic policies and the incentive structure in South Africa have been inwardlooking, with a focus on import substitution, protection by quantitative, tariff and other
controls and artificial industrial location subsidies. In the SMME arena, this has resulted
in a distorted location of economic activity and high input prices. These policies mostly
benefited larger firms in the economy. In contrast, some small firms catering for specific
niche markets have also survived. However, the result is a “missing middle” in respect of
firm size in general enterprises, including primary, manufacturing and service sectors
(Strauss Commission, 1995 and 1996)4.
The argument is that in general, government policies either ignored or superficially
addressed the challenges and role of financial services for the poor, and that only
recently has government policy and private sector activities started to focus specifically
on the role of finance in economic development. This is evident in the activities,
discussions and undertakings in the NEDLAC5 process, the establishment of the
Financial Sector Charter6, and movement on the legislative front in terms of a range of
financial bills being discussed. For example, although the 1992 Exemption notice did
facilitate the process of improved financial access, the overall result fell short of
Government intentions as a large consumer finance market grew in response to the
exemption as opposed to increased access to micro-lending by SMMEs. While it may
seem that nothing really happened over the last fifteen years, the rest of this study will
look in more depth at the changes in the financial market over the period.
4
Strauss Commission Reports (1995 and 1996), Interim and Final report of the Commission of Enquiry into
the Provision of Rural Financial Services
5
The National Economic Development and Labour Council (NEDLAC) comprises Government, organised
business, organised labour and organised community groupings on a national level. NEDLAC’s aim is to
discuss and try to reach consensus on issues of social and economic policy. In terms of Section 77 of the
Labour Relations Act, Nedlac has a dispute resolution function between trade unions and Government
and/or Business on issues of socio-economic policy.
6
In August 2002, at the NEDLAC Financial Sector Summit, the financial sector committed itself to the
development of a Black Economic Empowerment (BEE) charter – which came to be known as the Financial
Services Charter. The development of this charter was spearheaded by the Banking Council of South Africa,
with high level involvement of senior management from the big banks.
8
2.3 Access
2.3.1
Introduction
Evaluating access to financial services is complicated by a general lack of data on the
topic, particularly before the establishment of the MFRC. Where possible, information
from other sources is drawn upon to gain some understanding of the financial products
available to the low end of the market, and MFRC data are used to look at the
development of the market since 1999.
2.3.2
General credit clients
Prior to the first exemption notice issued in 1992, the vast majority of the South African
population did not have access to formal credit. The Usury Act limited pricing and
effectively restricted the product offering in the market. Similarly, the Credit Agreements
Act (under which hire purchase transactions were concluded) also attempted to limit
interest rates. However, due to weaknesses in the legislation, there was also wide scale
circumvention of the acts by suppliers in the market that were able to levy additional fees
and charges to increase the effective interest rate to above the limits set, while staying
within the letter of the law.
There is no accurate information on the size of the microfinance industry prior to the
establishment of the MFRC. Even where aggregate information exists, it is not available
across different income ranges. The following table (Coetzee & Grant, 2001)7 provides
an assessment of the microfinance industry’s retail outreach at the end of 1999. As is
indicated, the data ranges from 1999 to 2000 and consist of a wide range of sources
(from annual reports of institutions and disparate research studies, to the first data
emanating from the MFRC). The table may include double counting and use a number of
assumptions to enumerate financial services for the poor (LSM 1-5). The table also
includes estimates of savings and loan activity in the formal and informal sectors. It is at
best an approximation of the microfinance industry’s retail coverage during the period.
7
Coetzee, GK and Grant, W (2001). Microfinance in South Africa over the last decade: The Silent
Revolution. Invited Paper read at the Frankfurt Seminar for Development Finance, Frankfurt, September.
9
Table 1: Summary of retail outreach in the microfinance market in South Africa
(1999/2000)
Retail institutions
Public sector
Land Bank
Provincial parastatals
Post Office Outlets
Private sector
NGOs
Village banks
Credit Unions
Co-operatives
Commercial Banks
Retail stores
TEBA Cash
Private sector
Registered small loans industry
Pawn Brokers
Informal sector
Mashonisas
Burial Societies
Stokvels
Source
date
Mar-00
Jun-99
Jun-99
Dec-99
May-00
Apr-00
Dec-99
Dec-99
Apr-00
Apr-00
Dec-99
Apr-00
Apr-00
Apr-00
Feb-99
Apr-00
Loans Savings
Estimated
Loan
Savings
Outlets
Rm
Rm
% Rural accounts accounts
330
1,646
2,440
36
78,000
2,840,000
30
25
80
43,000
300
600
50
80
35,000
840,000
1,046
2,365
35
2,000,000
12,599
4,661
17,132
38
7,951,580 4,740,100
108
5
30
35
66,000
1
10
100
1,100
9
10
6,000
1,200
80
12
4,000
4,000
33
4,000,000
5,000
1,000
35
2,173,913
130
600
172
40
86,667
700,000
40
45
20
100
25,000
33,000
7,000
5,700
35
5,600,000
300
5,000
35
400
1,760 1,150,000
35
0
14,750,000
150
25,000
35
1,560 325,000
35
6,500,000
250
200
800,000
35
8,250,000
Total 13,329
8,067
1,169,572
35
8,029,580 22,330,100
Two earlier research studies were conducted by P.G. du Plessis,8 in which the size and
composition of the micro-lending industry were estimated. While the figures are rough
estimates, it is the only information available on the industry covering that time period.
From these two studies, information on the growth of the industry can be extracted.
In 1995, it was estimated that the micro-loan industry had an annual turnover of around
R3.7bn, increasing rapidly to an estimated R10.1bn in 1997, of which R7bn was
attributed to formal lenders, R1.6bn to semi-formal lenders and R1.5bn to informal
lenders9. According to du Plessis (1998), these loans were disbursed from an estimated
3,500 formal outlets, 2,000 semi-formal and 25,000 informal outlets. While it is not
possible to quantify the extent of informal lending, most stakeholders are now of the
opinion that lending by informal, non-registered lenders is no longer significant. As a
result, this report focuses exclusively on data relating to formal, registered lenders.
By combining the results of the du Plessis studies (1995 and 1998) (with the proviso that
these are estimates) with data from the MFRC, the growth of the industry can be shown
as illustrated by the following graph. The rapid growth, along with its consequences was
confirmed by industry stakeholders interviewed during the study.
8
P.G. du Plessis, The Small Loans Industry in South Africa -1995, University of Stellenbosch, December
1995 and P.G. du Plessis, The Micro-lending Industry in South Africa 1997, University of Stellenbosch, July
1998.
9
Informal lenders are those that do not have any fixed place of business, whereas semi-formal lenders are
more likely to operate from a specific outlet – and tended to have been attracted by the high margins being
made in the early days of the first exemption notice. However, the exact split is difficult to define – as the
study does not have a concrete definition of the categories.
10
Figure 1: Industry Turnover (formal lenders)
R billion
25
20
15
10
5
0
1992
1995
1998
2001
2004
Estimated Annual Disbursements
Figure 2: Number of Micro-loan Accounts and Aggregate Loan Book
Number
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
2000
2001
2002
Loan accounts
2003
R million
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2004
Value of loans
At the end of August 2004, there were over 5.5 million loan accounts open with
registered micro-lenders, compared with just over 3,7 million at the end of November
2000. The total outstanding loan book was R16.9bn at the end of August 2004. The
MFRC estimates that since some clients have accounts with more than one institution,
the number of people involved was around 3 million at the end of August 2004. In
general, it is quite difficult to estimate the number of people involved at the lower end of
the market due to a lack of public information and the inability of many institutions to
stratify their clients in income categories.
11
The tables shown later on in this report give more detail about the current micro-loan
industry, but a summary of recent industry statistics is shown below.
Table 2: Registration Statistics at 31/08/2004 in % of industry
Number
Registered
Number of
Branches
Gross
loans
Loan
accounts
Average
size
Industry
1,777
7,960
R16.9bn
5,514,735
R 1,390
Banks
0.5%
34.6%
47.8%
2,107,812
R 1,876
0.3%
15.5%
77.2%
3.9%
1.5%
1.2%
0.2%
36.2%
26.1%
1.6%
0.5%
0.8%
0.4%
46.6%
2.9%
0.2%
1.6%
0.5%
33,765
2,690,100
528,273
37,384
64,467
52,934
R 799
R 1,919
R 631
R 632
R 2,995
R 2,408
Public Companies
Private Companies
Close Corporations
Trusts
Co-operatives
Section 21 Companies
Source: MFRC, 2004.
It is clear from Table 2 that there is a concentration in the micro-lending market with the
commercial banks that constitutes 0.5% of the registered lenders with the MFRC, with
47.8% of the gross loans and 38% of the loan accounts. If private companies and banks
are added, they represent 16% of registered entities, but 94.4% of the gross loans and
87% of the loan accounts. The development lenders represented by the Co-operatives
and Section 21 Companies represent 2.7% of the registered lenders with only 2.1% of
gross loans and a negligible percentage of the loan accounts.
In addition to the traditional micro-loan providers discussed above, there are also some
parastatal institutions providing retail finance to this market segment (as opposed to the
wholesale finance provided by institutions like Khula Enterprise Finance, Development
Bank of Southern Africa, Industrial Development Corporation, National Housing Finance
Company, Rural Housing Loan Fund and the section of the Land Bank that provides
finances to co-operatives)10. The main11 retail finance parastatals are the Post Office
Bank, Land Bank and Ithala Development Finance. While Post Bank and Land Bank
operates with branches nationally, Ithala is geographically constrained to the KwaZuluNatal province.
The following tables summarise the involvement of the two institutions in this sector of
the market.
10
See Annex IV for descriptions of these institutions
Other parastatal institutions such as Uvimba Rural Finance and the Mpumalanga Agricultural
Development Institution provide loans to entrepreneurs. However obtaining accurate data from these
institutions proved to be very difficult. Note also that the Post Office Bank only provides saving and
transaction services.
11
12
Table 3: Ithala Development Bank Loan Statistics
Total enterprises assisted
1998
1999
2000
2001
2002
Micro & Small Business Sector
2,188
1,110
559
327
702
Medium & Large industrial sector
Commercial & Tourism business
sector
75
128
216
55
177
24
175
143
146
137
Agricultural sector
841
193
205
74
52
Other
Home Loans
Savings accounts opened
1,549
3,461
1,991
3,802
2,745
104,088
123,807
141,804
121,797
162,223
Source: Ithala Development Bank Financial Statements
As shown above, Ithala appears to have been considerably more successful in
mobilising savings with the numbers of loans made to micro and small businesses
decreasing.
Table 4: Land Bank Development Loan Statistics
Development loans
1998
1999
2000
2001
2003*
2004
14,175
133
19,090
317
22,801
413
35,300
451
59,875
1,041
61,014
1,096
97
235
286
346
518
449
- Rural entrepreneurs: Step up
4
11
22
37
68
69
- Projects
* Represents a fifteen month period
32
71
105
68
455
578
Number of loans
Development Loan Book (Rm)
- Individual farmers: Silver & Bronze
Even though the Land Bank has increased its number of development loans to 61,014
as at the end of March 2004, in comparison to the micro-lending industry, the outreach is
quite limited. On the other hand, it is a sizable part of the enterprise-focused lenders,
contributing nearly half of the total current estimated outreach of these institutions.
2.3.3
SMME clients
The original policy intention of the first exemption to the Usury Act in 1992 was to spur
growth in lending to micro, small, and medium sized enterprises (SMMEs). This first
exemption allowed lenders to charge whatever rate of interest they wanted to on loans
under R6,000 and for a term of less than 36 months. Of course, what actually emerged
was the micro-loans sector, dominated by payroll and cash-based lending mostly to
formally employed, largely urban individuals.
In 1994, with a new Government in place, the new Minister of Trade and Industry
observed that poor and low income South Africans were being charged unreasonably
high rates of interest through the burgeoning micro-lending industry that specifically
targeted mostly urban, employed individuals, especially those in the public sector, with
little or no apparent increase in credit to SMMEs. On the basis of this perception, the
Minister (then Mr. Trevor Manual) threatened to revoke the 1992 exemption. This
threatened action sparked the five year process of debate and negotiation between the
industry and government, which eventually led to the formation of the MFRC in 1999.
13
Incidentally, the micro-enterprise lenders, represented by the then fledging Alliance of
Micro Enterprise Development Practitioners (now renamed, the Micro Enterprise
Alliance), spearheaded the debate and lobbying process with Government. Eventually,
the micro-lenders also joined MEA officially and by association to form a larger and more
united front. Ironically, this merger, while creating a more numerous support, probably
contributed to the undermining of the focus on micro-enterprise lending.
Concurrently, Government, mainly in the form of the DTI, decided that the way to
support SMMEs, especially micro and small enterprises, would not be through changes
in legislation and regulations (i.e. a market development approach), but rather through
wholesale level intervention in the markets, namely the establishment of Khula and
Ntsika. This line of attack was supported by mostly unspoken and errant assumptions.
On one hand, the DTI believed that all micro-lenders were inherently exploiting the poor
and therefore could not be used as a tool to deliver finance to SMMEs. On the other
hand, NGOs, which would be the only retail level structures allowed to benefit from the
activities of Khula and Ntsika were assumed to conduct their business in more socially
and politically acceptable ways, including the notion that they charged low interest and
treated their clients fairly (e.g. fully disclosed loan agreement terms, etc.). Of course,
both notions express the extreme, but the DTI chose to deal in the realm of black and
white, not grey. In addition, the DTI indicated little understanding of the extreme difficulty
of developing a viable business model that would be limited to providing credit only (i.e.,
no intermediation foreseen) in amounts under R10,000 only.
By 1999 the connection between the Usury Act and SMME credit had waned in
comparison to the extremely sensitive issue of very high interest rates being charged to
poor and low income individuals, along with over-extension of credit and other alleged
abuses (e.g., illegal collection methods, improper inducements, issuing credit before
having signed documents, etc.). As a consequence, the discussion and aim of
regulation had substantially shifted, in the context of the Usury Act, from one of
facilitating access to finance for SMMEs to one of protecting credit consumers broadly
who were not predominantly SMMEs.
Today, with the advent of the new National Credit Bill and a raft of other legislation that
seeks to change the institutional landscape for provision of credit and other financial
services, as well as the relative success of the MFRC in curbing at least the most
egregious abuses in the micro-lending industry, the debate has begun to shift slightly
more towards the questions of access to financial services for all poor and low income
people, including SMMEs. Government has expressed its expectation that micro-lenders
will take advantage of the newly emerging playing field, and start lending to SMEs, but
they remain sceptical.
Throughout this entire 13 year period, broad consensus holds that the proportion of
SMMEs holding loans now is no greater than that in 1992 as a ratio of total possible
demand. Although in gross terms, more credit has flushed into low and moderate income
households, implying that a greater number of SMMEs have access to credit, if only
through indirect and imperfect channels. There is little doubt that access to banking (a
rough proxy for access to credit and finance for SMMEs) has grown significantly over the
last decade. Informed estimates indicate that the adult population with some form of
bank account has risen from 25 percent in 1994 to between 38 and 48 percent at
present (AMPS and FinScope, 2003). As mentioned in other sections of this report, data
14
are scarce, often unreliable and incomparable. In addition, it is important to note some
additional measurement complexities:
•
•
•
•
Race – Prior to 1994, there is little doubt that the majority of SMMEs receiving
finance, with the possible exception of the microenterprise clients of a few
nascent NGOs, were white. By comparison, in the context of BEE and other
redistribution strategies in the post-94 era, expansion of SMME credit must be
looked at in racial terms, whatever progress may have been made with whiteowned SMMEs. Measurement along these lines is made somewhat more difficult
by the elimination of race from many publicly available data sources.
Enterprise size – Micro-enterprises, small businesses, and medium-sized firms
have clearly faced different financing challenges and have different demands,
making any lumped discussion of “SMME finance” somewhat meaningless.
Demand vs. supply – As poor as data are for the supply side of SMME finance,
they are even more abysmal from the demand side. Prior to Finscope 2003 and
2004, there really were no comprehensive and useful figures for SMME finance /
credit demand. DTI figures often refer to 1.5, or 2.0, or 2.5 million SMMEs. They
then point to the limited numbers receiving credit (at least through formal
sources), and justify calls for more finance to SMMEs by calling attention to the
gap. However, this is a long way from convincing proof of real demand.
Leakage and hidden markets – As mentioned elsewhere in this report, only the
vaguest notion exists of the accuracy of loan usage data, especially for micro
loans. In addition, by definition, there is little real knowledge of how much finance
flows in the informal and semi-formal markets, from mashonisas on the corners
to trade and supplier finance between two consenting SMME entities.
Nonetheless, we do know that around the 1994 to 1996 period, during the design and
implementation of Khula, approximately 35 NGOs and parastatals existed, which
provided credit to micro, small, and medium enterprises. In addition, organisations such
as Business Partners (then SBDC) and the major banks did have portfolios of formal
small to medium sized enterprises. Rough estimates put the number of microenterprises served mainly through the NGOs at about 75,000. Small to medium sized
enterprise credit was and still is a bit harder to discern, since data are often aggregated
within different categories, but consensus put the number at between 200,000 and
300,000, including all of the banks, Provincial Development Corporations, and SBDC.
However, arguably, more SMMEs do have more access to credit, since the volume of
institutions and money available in the market has greatly increased. This argument
refines the review of access down to questions of institutional types, credit and other
financial product models, remaining legislative and/or regulatory barriers, and leakage
between products not particularly designed for SMME finance as well as the fungibility of
money in households. In other words, there is no disputing that more money and more
institutions exist in the credit market today than existed in 1992 and, thus, especially
considering the reality of fungibility, SMMEs have theoretically enjoyed increased access
to finance.
Looking at the latest MFRC statistics, the 4% leakage/development lending figure would
translate into about 360,000 SMME loans. Since MFRC statistics only cover loans under
R10,000, it is safe to assume that these would be predominantly micro-enterprises, with
a few small ones interspersed. Therefore, it seems safe to say at a very high level that
perhaps as many as twice as many micro-enterprises have a loan now than the number
15
having a loan in 1992/94. However, it remains to be proven whether the relatively low
deduced supply of credit to SMMEs of 4%, as a percentage of the total micro loan book,
reflects real demand, poor measurement or remaining blockages.
2.3.4
Suppliers
Prior to 1992, micro loans were largely being provided by the NGO MFIs focused on
enterprise lending, and largely operating in contravention of the Usury Act. To date, only
a handful of these MFIs are still in operation, and only one has recently become
sustainable. Further, it would be fair to say that there has not been much development in
this sector. The developments from a supplier side in the micro loan industry,
subsequent to the first exemption notice being published, are summarised in Table 5.
Table 5: Credit Suppliers
1992-1994
1994-1999
Beginning of
consumer micro
credit industry:
Credit indemnity
already existed and
started to grow;
King finance,
Louhen Financial
services, etc.
Growing phase in
the number of
commercial microlenders and in the
volume of
business; some
lenders are listed
on the JSE stock
exchange (19971999)
1999-2002
2003-2005
Consumer credit
Suppliers
Around 1,200
formal micro lender
outlets in 1995
Turnover
estimated at 2.5
bn. (1995)
3,500 formal
microlender outlets
in 1997
Turn over
estimated at R7
bn. (1997).
1999-2002
Consolidation of
micro-lenders and
acquisition by some
of them of banking
licences (African
Bank, UniBank)
2002: Failure of
Saambou and
absorption of
Unibank/Unifer into
ABSA.
1,346 micro-lenders
registered with the
MFRC at end of
2001.
Turnover estimated
at around R13 bn.
African Bank
remains the only of
the three original
micro finance
banks.
Process of
consolidation is still
underway.
Trends toward
offering a bigger
range of financial
services to clients
and to acquire
banking licence for
that purpose Capitec Bank and
Teba Bank.
1,476 microlenders registered
with the MFRC in
2004.
Turnover estimated
at R19.2bn.
Housing credit
Suppliers
Banks have
stopped mortgage
lending to the low
income brackets
after losing a high
proportion through
mortgage
repayment
boycotts.
Group Credit
Company starts
housing lending
Banks resume
mortgage lending
after agreement
with government.
NHFC (apex) is
created and new
housing finance
institutions (around
25) are financed by
NHFC.
16
Bank mortgage
lending to the low
income is again at a
very low level. Banks
also do pension
fund-backed lending.
Number of housing
finance institutions
decline;
consolidation of
lenders
Same
2.3.5
Saving, Insurance and Transaction Products
Probably the biggest story in the non-credit side of the access picture has become the
rapid and massive disbursement of social grants. Currently at over 7.4 million
beneficiaries, translating into more than 9.4 million individuals, receive some form of
social grant from DOSD (NB: Some beneficiaries may receive 2 or more grants, e.g. a
poor mother may receive 2 grants for each of her 2 children – and thus the difference
between beneficiaries and individuals). The chart below shows that the growing majority
of these grants go to women for child support, with pensions and disability grants taking
up most of the rest. DOSD projects that mainly due to the extension of the Child
Support Grant to children up to the age of 14, the total number of beneficiaries will swell
to nearly 10 million by the end of 2006, with total monthly disbursements nearing R5
billion, from a current base of about R3.9 billion.
Figure 3: Social Grant Beneficiaries
Social Grant Beneficiaries by Grant Type (Number)
0%
1%
2%
4%
0%
14%
51%
28%
Child Support (Total 0-14)
Old Age
Permanent Disability
Temporary Disability
Foster Care
Care Dependancy
Grant in Aid
War Veteran
A swelling tide of research, from FinScope to Financial Diaries, to DOSD’s own
monitoring and evaluation reports, to anecdotal snippets from financial service providers
at the low end of the market, all point to the increasing influence and importance of
social grants. In short, they provide the most consistent and reliable source of cash
income and potential savings for the poorest South Africans. Figure 4 (Poulton et al,
2001) below indicates the contribution of grants to typical poor rural households in
Limpopo province, as an average for surveys conducted in 2000 and 2001.
17
Figure 4: Contribution of grants to poor rural households
Income Shares by Activity - Limpopo
Livestock Sales
4.2%
Livestock Consumptio
Self-Employment
1.7%
7.3%
Crop Sales
Fruit Trees
9.4%
1.5%
Crop Consumption
Other Sources
4.7%
5.1%
Casual Employment
4.6%
Welfare Payments
31.0%
Regular Employment
30.4%
In the post-94 era, there has been an increase in the number of people holding bank
accounts, from roughly one-quarter of adults in 1994 to one-half of adults as of 2004).
Most of these accounts come in the form of a savings and/or transaction accounts. The
Mzansi account joint initiative of the four major banks and the SA Post Office could
represent the most significant expansion of a first-order transaction banking account in
the country’s history. As of mid-May 2005, 1 million Mzansi accounts had been opened.
According to the Banking Association of South Africa, “…91.3% of the Mzansi Accountholders are new to the institution at which they have opened their account…, [perhaps
an early indicator] that the account is achieving its aim of providing affordable and
accessible banking to the previously unbanked population…. The majority of account
holders (62%) are between 25 and 54 years, 28.9% are between 16 and 24, % 6.9% are
above 55 and 2.1% are below 16 years old…. The largest take-up comes from black
communities which has the largest unbanked population…. [Between October 2004 and
April 2005] an additional four percentage points of South African population have been
banked via the Mzansi Account, placing the country at the same level as Argentina and
a step away from Malaysia”.
At the same time as the banking industry at large has focused on Mzansi, the fact that
Capitec Bank has been garnering about 15,000 new accounts per month outside of
Mzansi is an interesting observation. While it is not clear that all these clients are new
people to the banking system, and thus may say nothing about the unbanked moving
into the banked market, Capitec's being a relatively smaller player and the possibility that
the offering of a real positive savings rate is actually attracting customers is an
interesting proposition, albeit just conjecture at this point.
18
Along with the increases in bank accounts, the insurance industry found it more viable to
push its products (mostly life insurance for poor and low income individuals). However,
because the rate of “cancelled policies” has mushroomed from around 10-15% ten years
ago to as much as 40% or more currently, serious questions must be asked about how
many people actually have credible insurance cover. In fact, MFRC’s own investigations
into the costs of credit and reckless lending have revealed a substantial trend towards
“over-insuring” low-income people.
2.3.6
Changes in market structure
The structure of the microfinance industry has changed quite significantly since the
advent of regulation. It has become more formalised, and according to stakeholders
interviewed, the regulation by the MFRC and the actions it has taken, has led to an
improvement in the image of industry.
This improvement is demonstrated by the increasing role of the formal banks. Banks are
now the biggest lenders in the industry in terms of value, whereas they avoided any
direct links to the market before regulation because of the high levels of reputational risk
they associated with the then unregulated market. Retailers have also become a
significant part of the industry, making use of their existing customer bases to augment
income from the sales of goods by providing finance as well.
The MFRC had registered 1,777 micro-lenders by the end of August 2004, of which 9
are banks. However, as shown in table 6 below, these 9 banks account for half of the
industry’s outstanding gross loan portfolio, and just fewer than 40% of loan clients. The
Table 6 shows the movements in registration over the last four years, highlighting the
significant increases in registration. In the eight months to August 2004, the number of
registrations increased by a significant 24%, showing increasing compliance in the
industry.
A further encouraging development is that, in recent months, the number of PDI12 owned
lenders registered with the MFRC has increased from almost nothing to over 300 (1 in 6
of all registered lenders).Figure 5 illustrates the current market structure by loan book,
with a more detailed breakdown of the market structure shown in tables 6 and 7.
12
Previously Disadvantaged Individual
19
Figure 5: Market structure by loan book - August 2004
Trust
0.2%
CC
2.9%
Co-op
1.6%
Sect 21
0.5%
Banks
47.8%
Pvt Co
46.6%
Public Co's
0.4%
Table 6: MFRC Registration Statistics, showing numbers of registered lenders and branches
Dec-01
Lenders
Industry
Dec-02
Branches
Lenders
Dec-03
Branches
Lenders
Aug-04
Branches
Lenders
Branches
1,346
7,001
1,298
6,534
1,430
7,280
1,777
7,960
Banks
9
2,070
9
1,831
8
2,616
9
2,755
Public Companies
7
821
6
59
5
10
6
12
Private Companies
187
2,214
192
2,875
199
2,753
275
2,883
Close Corporations
1,050
1,686
1,009
1,573
1,112
1,684
1,371
2,081
75
142
64
127
58
112
69
125
1
18
1
17
26
42
26
42
17
50
17
52
22
63
21
62
Trusts
Co-Operatives
Section 21 Companies
Source: MFRC Annual Reports
20
Table 7 shows how the composition of the micro-lending industry loan book, has
changed by type of lender over the last few years.
Table 7: Comparative Table: loan book and number of loan accounts of MFRC
registered lenders
Loan Book (R000's)
Nov-00
%
Banks
7,406,518 57.2
Public Co's
2,455,743 19.0
Pvt Co
2,095,331 16.2
CC
512,121
4.0
Trust
235,600
Co-op
178,220
70,112
Sect 21
Total
Nov-01
%
Nov-02
5,733,692 39.0
393,977
2.7
7,998,056 54.4
280,145
1.9
1.8
28,794
1.4
207,962
0.5
48,408
12,953,646 100
%
8,451,369 51.1
80,337
0.5
7,374,661 44.6
313,655
1.9
0.2
31,842
1.4
231,175
0.3
56,148
14,691,033 100
Nov-03
%
8,486,306 51.6
58,963
0.4
7,190,528 43.7
Aug-04
%
8,092,022 47.8
71,805
0.4
7,897,368 46.6
372,969
2.3
0.2
27,897
0.2
36,345
0.2
1.4
263,226
1.6
268,054
1.6
0.3
55,742
0.3
80,691
0.5
16,539,188 100
16,455,630 100
493,329
2.9
16,939,615 100
Number of loan accounts
Nov-00
Banks
%
1,940,116 52.3
Public Co's
568,604 15.3
Pvt Co
664,531 17.9
CC
437,882 11.8
Nov-01
%
Nov-02
2,258,242 41.3
107,163
2.0
2,620,932 48.0
%
1,870,045 34.8
36,560
0.7
2,975,791 55.4
Nov-03
%
2,065,948 38.1
30,912
0.6
2,774,133 51.1
Aug-04
%
2,107,812 38.2
33,765
0.6
2,690,100 48.8
351,892
6.4
361,960
6.7
417,380
7.7
528,273
9.6
Trust
32,741
0.9
30,546
0.6
34,130
0.6
30,070
0.6
37,384
0.7
Co-op
51,972
1.4
54,323
1.0
57,117
1.1
65,350
1.2
64,467
1.2
Sect 21
16,049
0.4
39,581
0.7
33,850
0.6
43,524
0.8
52,934
1.0
Total
3,711,895 100
5,462,679 100
5,369,453 100
5,427,318 100
5,514,735 100
Source: MFRC Annual Reports
What is clearly evident is that banks, once they decided to enter the sector, were very
quick to aggressively grow their market share, with some banks in particular taking
advantage of the PERSAL withdrawal and outlawing of the card and PIN collection
methods to grow their businesses by virtue of their access to the payment system, which
the non-bank micro-lenders did not have. Following the Unifer and Saambou debacles
(which saw the absorption into ABSA of one bank and closure of the other), the banks
contracted their micro-loan portfolios, as evidenced in the numbers for November 2001.
Unfortunately, the exit of Saambou and Unifer (Unibank) from the market and losses
sustained in the sector by other retail banks (resulting in the contracting of their
activities) meant that important competitive forces were removed from market. The
market has, therefore, been heavily skewed towards African Bank who, in the absence
of real price competition, tends towards monopolistic behaviour.
Subsequently, banks have again started to grow their market share in terms of the
number of loan clients, although the levels of growth have slowed since the early days.
In addition to seeing the larger banks moving downstream, we have also seen the
emergence of specialist micro-lending banks, like Capitec and Teba Bank, adding a new
dimension to the supply side.
21
In terms of market structure and spread of institution by size and activity, it is clear that
the commercial banks and the retailers are the biggest players in the market, controlling
the largest share of current advances in the market. A number of consolidation
examples can also be mentioned, the most vivid is that of Capitec who combined a
number of micro-lenders, first in Key Matrix and later rebranded through the FinAid
brand to the Capitec brand. In summary, it is a market that consolidated a great deal
and is largely in the hands of the commercial banks and the larger retail shops.
2.3.7
Conclusion
While it is clear that access to credit, particularly consumer credit has increased
significantly since the 1992 exemption notice, it is equally clear that the original intention
of expanding access to SMME finance has not been directly achieved (although, as
argued, it probably has increased indirectly).
This is noticeably an area where more focus Access to consumer credit has
needs to be placed, while at the same time undoubtedly increased, but SMME
addressing the other regulatory constraints finance has not expanded in a similar
on small business establishment, growth and manner. It can be concluded that the
MFRC has contributed to an increase
development.
in overall access. The fact that
At the same time, the percentage of the mainstream commercial banks entered
adult population that have bank accounts the sector is a further indication of the
has increased significantly, and is being positive role played by the regulator.
further increased by the Mzansi account
rollout by the commercial banks and Post
Bank. In particular, there is a push to make savings and transaction facilities available to
more South Africans in a sustainable affordable manner.
Based on the evidence that presented, it can be concluded that the MFRC has
contributed to an increase in overall access, with an estimated 3 million people now
having access to finance (with over 5 million loan accounts), the majority of which did not
have access to formal finance before. In particular, the fact that mainstream commercial
banks entered the sector is indicative of the positive role played by regulation.
2.4 Performance
2.4.1
Introduction
With the exemption to the Usury Act in 1992, extensive growth in the micro-lending
industry occurred. The subsequent changes in government in 1994, and the fact that the
significant growth of the consumer loan industry was somewhat of an unintended, and
for some an unwanted, consequence, as well as widespread and high level perceptions
that the industry was harmful, led to uncertainty around the Usury Act Exemption. There
was pressure to enhance access to finance for a large segment of the population while
still protecting individuals who were seen to be vulnerable to exploitative practices.
It was clear that the industry required some form of regulation and management due to
rapid growth, increasing levels of indebtedness and the reported exploitation of
22
individuals. Several sources confirm the need for regulation: inter alia research by the
Black Sash13 on over-indebtedness, research by the University of Cape Town14 on
changes in debt loads of the lowest income strata in South Africa and anecdotal
information on abuse and exploitation. Following five years of discussions, the MFRC
was established in July 1999 and appointed as regulator for the compliant loans sector.
In looking at market performance, this study takes quite a broad view of the market and,
in particular, how the suppliers of financial services have interacted with their clients. As
a result, the pricing of loan products, the product offering, and issues related to
exploitation and fallout, specifically in terms of judgements, complaints and similar
issues are investigated. Where reasonable to do so, MFRC actions are linked to
observed changes in market conduct since 1999. While these linkages are by no means
statistically or academically rigorous in any way, the authors of this report believe them
to be largely accurate, particularly in the absence of other extraneous factors that could
have caused the changes in market conduct.
2.4.2
Prices
With the establishment of the MFRC, on the 16th of July 1999, and the subsequent
withdrawal of the 1992 exemption notice, all lenders wishing to receive the exemption
had to register with the MFRC. Registered microfinance institutions were required to
provide the MFRC with quarterly returns. This source of information is very useful in
providing information with respect to trends in pricing. Prior to this, however, information
on pricing is less accessible.
13
Black Sash submission on the National Credit Bill (17 August 2004) and interview conducted in January
2005
14
Reza Daniel, (2001) “Consumer Indebtedness among Urban South African Households: A Descriptive
Overview”, DPRU Working Papers.
23
Table 8: Summary of Pricing Responses to Legislative Framework
Point in time
Before 1992
Legislation
Usury Act in place.
Pricing Impact

Unknown – largely informal and totally unregulated.

NGO lenders were openly breaking the provisions of
the Act, but were not prosecuted because their lending
supported development in principle.

Simultaneously, a lot of providers of credit
circumvented the act by charging other fees in addition
to interest – increasing the effective rates.

No successful prosecutions for failing to comply with
the Usury Act recorded.
1992
First exemption notice issued –
no ceiling on exempted loans.

Range of pricing existed – with a lack of uniformity in
the way lenders calculated interest rates.
In the informal sector, rates of up to 100% per day
reported – but no reliable data.
In the formal sector, rates ranged from 10-50% per
month
1994
Some uncertainty but legislation
unchanged
No effect on pricing – no real enforcement of standards or of
the requirements of the exemption notice.
1999
Second exemption notice issued
– with MFRC created & interest
ceiling lowered. However, the
ceiling was overturned in court,
effectively removing interest rate
ceilings from compliant loans.

Jan 2005
Pending all inclusive National
Credit Bill, but so far unchanged.
Pricing appears to be better regulated since the MFRC has
been operating according to the table below.
Some market segments see the intended rate cap
under the exemption notice as a prescribed rate, rather
than maximum rate.

Tendency in the market to levy additional transaction,
application and other fees to enhance non-interest
income.

Micro-loan interest rates are uncapped if the institution
abides by the exemption notice and is regulated by
MFRC. Pricing in this sector: industry norms vary from
18%-360% per annum (Hawkins, P. 2003)
Usury cap calculation for non-exempt institutions: Prime rate
(of 5 leading banks) plus 1/3 (Prime) plus 6% (for amounts
of up to R10,000) and Prime rate plus 1/3 (Prime) plus 3%
(for amounts greater than R10,000).
While the 1999 exemption notice contained a price ceiling (10 times the average prime
rate), a number of micro-lenders saw this as a prescribed rate, rather than a maximum
rate. As a result, pricing tended to be different within different segments of the market. It
should also be noted that, after being challenged in court, the ceiling was ruled to be
non-enforceable, thus effectively no price limit exists on exempted loans. The ruling by
the court was that the DTI did not do an adequate study on which to base decisions in
terms of capping of interest rates. Subsequently the DTI commissioned a study which
was executed by ECIAfrica.15 This study looked at the interest rate approach from many
angles and proposed that interest rates under the exemption should not be capped, a
proposal that was accepted by the DTI.
Table 9 summarises figures from two earlier studies conducted for the DTI by ECIAfrica
and for the MFRC by Hawkins (2003), as well as the MFRC’s report on the total cost of
credit. It shows figures for random microfinance institutions interviewed during the
respective studies and is indicative of the influence that greater regulation has had on
pricing in this sector, specifically with respect to 30 day loans.
15
ECIAfrica (2000) Small Loans Industry Interest Rate Study Report (2000). DTI
24
Table 9: Comparative Table: Interest Charges by Institutions in 2000 and 2003
(Random Institutions) – Cash Lenders
2000
16
Institutions
Loan amount
Term
Cash lender 2
Cash lender 3
Cash lender 4
Cash lender 5
Cash lender 6
R100-R500
R500
R500
R500
R500
7-25 days
30 days
25-30 days
25-30 days
25-30 days
540-1040%
360%
360-450%
640-780%
540-1040%
MFRC TCOC
13 lenders
2003
R750
30 days
60-360%
APR
Institutions
Bank 6
Micro-lender 1
Micro-lender 2
Micro-lender 9
Micro-lender 3
Micro-lender 4
Micro-lender 1
Micro-lender 5
Bank 6
Micro-lender 2
Micro-lender 6
2003
Loan
amount
R100
R100
R100
R100
R100
R100
R500
R500
R1,000
R1,000
R1,000
Term
APR
1 month
1 month
1 month
1 month
1 month
1 month
1 month
1 month
1 month
1 month
1 month
228%
264%
336%
360%
360%
360%
259.2%
360%
222%
336%
360%
Source for 2000 figures: DTI Interest rate study, ECI Africa, 2000.
Source for 2003 figures: Cost, Volume and Allocation of Consumer Credit in South Africa, Hawkins, 2003.
MFRC total cost of credit report, published in 2004 (Legal rates).
According to an earlier study of the micro-lending industry conducted in 199517 by P.G.
du Plessis (commissioned by the Micro-lending Association), interest rates in the formal
sector ranged from 10% to 50% per month, with an average of 30% per month assumed
based on the responses received by the researchers. Rates in the informal sector were
reported to be as high as 100% per day. A follow up study conducted in 199718 found
that interest rates were in a narrower range, from 15% to 35% per month, with the
majority of cash lenders charging 30% per month. Of note is the finding that nearly 11%
of lenders indicate a reduction in rates to between 20-25% per month, and some 30% of
the lenders surveyed indicated a variation in interest rates between clients.
More recently, the MFRC (2003) completed a survey on the total cost of credit, analysing
34 registered lenders. The unweighted average of the 13 lenders in the sample offering
of one month loans was just over 23% per month, excluding insurance which is more of
a factor in term lending.
Further anecdotal information19 on the interest rate charges of a 30-day cash lender with
a sizable market share indicates a decrease over time of the 30-day loans, and also
supports the general observation that a rough comparison of the 2000 and 2003
information indicates a decrease in rates. Capitec Bank20, in particular, has introduced
more competitive pricing into the market.
16
Annual Percentage Rate (APR) – interest rate calculation based on compound annual cost
P.G. du Plessis, The Small Loans Industry in South Africa -1995, University of Stellenbosch, December
1995
18
P.G. du Plessis, The Micro-lending Industry in South Africa 1997, University of Stellenbosch, July 1998
19
Price comparison chart of Cash Lender X
20
www.capitecbank.co.za
17
25
Table 10: Comparative Table: Interest Charges by Institutions in 2000 and 2003
(Random Institutions) – Term Lenders
2000
Institutions
Loan amount
Term lender 3
Cash lender 8
Term lender 2
Cash lender 9
Cash lender 7
Term lender 1
>R2,000
<R10,000
<R9,000
<R6,000
R1,500-R3,000
R2,000-R6,000
Term
(months)
12
18-24
24
3
3-6
6-12
MFRC TCOC
23 lenders
21 lenders
27 lenders
7 lenders
2003
R5000
R8000
R3000
R2000
12
24
12
6
APR (%)
Institutions
45-88
242
57
153
287
78
Bank 5
Micro-lender 8
Bank 1
Bank 4
Micro-lender 7
Bank 2
2003
Loan
amount
R5,000
R2,000
R1,000
R2,000
R2,000
R5,000
Term
(months)
12
12
12
12
9
12
APR (%)
83
155
98
147
209
112
70/95
56/83
80/105
198/209
Source for 2000 figures: DTI Interest rate study, ECI Africa, 2000.
Source for 2003 figures: Cost, Volume and Allocation of consumer credit in South Africa, Dr. P. Hawkins,
2003.
MFRC total cost of credit report, published in 2004 (Legal rates / inc. Cost of insurance).
The background to the tables above is important. The 2000 information is in the context
of the existence of the PERSAL21 deductions for repayment from salaries. Thus, at that
time due to the repayment function that PERSAL handled, the repayment of loans was
easy and indeed low cost. After the withdrawal of the right to deduct loan repayments
on the system, costs increased for lenders as they had to find new loan repayment
deduction approaches. The MFRC report mentioned above found that the average rates
for a twelve month R5,000 loan varied from 18% to 157% APR, with a weighted average
rate of 70% (excluding insurance). If one consider the analysis of the DTI (2000) report,
where APR was slightly lower for 1 month loans, it is not clear that any lowering of
interest rates occurred in this part of the financial market.
The analysis carried out for this report illustrates that while interest rates, on average,
did not decrease with increased competition in the sector from 1992 to 2000, interest
rates have reduced significantly since then. It must be noted, however, that these
indicative rates are drawn from different studies for each time period, and hence are not
directly comparable. The authors of this report believe, however, that one can
reasonably assume that it is a fair reflection of what has happened in the market. If one
considers that the MFRC started operating in the middle of 1999, and that a loan
summary, in line with the “truth in lending” disclosure requirements of the USA was
introduced in 2000, one can also infer that the greater transparency in pricing
subsequent to the MFRC’s establishment has contributed to the decrease in rates.
There is however an important differentiation to be made. The authors of this report are
confident with regard to their statements on the decrease in interest rates in the 30 day
market. Here decreases and experiments by institutions, like Capitec Bank, introduced
more competition in the market, and this impacted on interest rate levels. Flowing from
the more competitive environment, the search by lenders for more efficient services also
impacted on the lowering of interest rates. However, the term lender market presents a
different and less optimistic story. Payroll products for banks dominated term lending
from 2000 to 2002. These were replaced by much more expensive debit order products
21
PERSAL is the personal salary system of the government. This system allowed for loan deductions for
housing and education loans from the salaries of government employees. See later section on PERSAL.
26
from 2002 onwards. Due to the lack of competition and very strong market position of
African Bank (being nearly six times as big as the next biggest microlending bank especially with the demise of Saambou and the implosion of Unibank), interest rates in
the term portion of the market seem to increase, rather than decrease. This is then a
situation of making prices, rather than that of a bank which is looking at innovations in a
competitive environment.
2.4.3
Product range
Table 11 summarises the development of the credit products available to the low income
market since 1992. While there has clearly been development, a particular aspect that is
missing is the provision of finance for non-salaried individuals – specifically in the form of
SMME finance or when the person earns an informal income.
Table 11: Summary of Product Development
1992-1994
Consumer credit
Products
Credit under R6,000
for a maximum of 3
years.
PERSAL starts in
1993 (officially for
housing purposes).
Cash lending using
the Card and PIN
repayment
“methodology”
(Louhen Group)
Housing credit
Products
Pension -fund
backed lending starts
(often compliant with
the Usury Act)
1994-1999
PERSALdeduction at
source for civil
servants.
Other payrollbacked loans in
the private sector.
Card and PIN still
used.
Mortgage finance
targets high and
middle income
clients.
Pension fund
backed lending.
Payroll deduction
loans used for
incremental
housing purposes
(up to R20,000).
1999-2002
2003-2005
Exemption to the
Usury rate raised to
R10,000.
PERSAL stopped
by government in
2000.
Private sector also
becomes more
selective on
allowing payroll
deduction to repay
credit.
Bigger microlenders (African
Bank, UniBank,
Saambou) focus on
“term” loans, i.e.
one to three years
Through the use of
credit scoring,
some microlenders try to
differentiate their
product offering to
clients (Credit
Indemnity, African
Bank)
Same products,
“consumer” micro
loan seem also to
be used for
incremental
housing purposes.
Instalment sales
used for properties
between R45,000
and R80,000.
More focus on
rental stocks;
Financial
institutions target
housing
institutions to
cover long term
financing of rental
units, often in inner
cities
The development of products has, to date, appeared to have largely been dictated by
the collection mechanisms available to lenders – starting in 1992/1993 with payroll
deduction (largely PERSAL) and card and PIN retention for those without access to
payroll deduction. Following the withdrawal of both of those, we have seen the
development of partnerships between banks in the payment system and lenders outside
the system, and also the development of various preferred payment / debit order
services. It could be argued as well that, with the limitation of products as described, it is
27
logical that interest rates are high as the specific sources of funding, risk management
and collections systems arguably result in high costs.
It is only really the NGO MFIs that make loans to non-salaried people, and as shown
previously, both their outreach and sustainability has been poor. Until recently, not a
single NGO lender was financially sustainable. It is noted, however, that some financial
institutions, including at least one bank that is currently piloting a product, are developing
products that would better serve this market.
However, nationally, there is a lack of information on the actual demand for SMME
finance, and in fact, on how much SMME finance is being provided at the moment
through “consumption loans”, trade credit, mortgage finance, etc. A comprehensive
survey and better data on credit provision would go a long way in better understanding
the dynamics in the market. The issues related to SMME finance have been discussed
previously in this report.
2.4.4
PERSAL
The personal salary (PERSAL)22 system of the government contains information on the
financial behaviour of government employees in terms of salaries and deductions. Until
the end of 2000, it also captured information (starting in 1997) on the loan use of
government employees. This section which is largely drawn from earlier work for the
MFRC looks again at the analysis that is based on two sets of PERSAL data, namely
data for July 1999 and data for February 2000. The July 1999 date provides a fair
snapshot of the situation before the effect of the June exemption change could take
place (the MFRC only started officially to operate in July 1999). Thus, the PERSAL data
are a good indication of what happened in the market since July 1999 and the effect of
the legislative announcements and regulatory body. Tables 12 and 13 provide a
summary of changes since July 1999.
Table 12: Evolution of Micro-Loans on the PERSAL System
Variable
Number of people on the system
Percentage of people with micro loans
Female percentage with micro loans
Total monthly deductions
Gross salary
Net salary (after all deductions)
Avg. remaining balance of micro-loans/borrower
Avg. no of loans per employee with micro-loans
July 1999
976,098
44.7
52.02
540.09
4,435.85
1,697.30
7,516.59
2.0
Feb 2000
1,011,213
49.2
51.89
1,295.14
4,418.91
1,411.96
11,797.68
2.17
Change in %
4%
10%
-0.2%
140%
-0.4%
-17%
57%
8.5%
In Table 12 it is evident that the level of indebtedness of individuals with loans on the
system increased by 57 percent. Net salary decreased and gross salary stayed
constant. The pressure on repayment ability is evident. The next table indicates the slow
creep in terms of the increase in number of loans per employee who borrows.
22
This section is largely drawn from the DTI Small Loans Industry Interest Rate Study Report (2000).
28
Table 13: Number of loans per person that borrowed in persons and in %
Number of loans
N
01
02
03
04
05
06
07
08
09
10+
Jul 1999
436,421
199,972
118,285
65,659
31,966
13,458
4,885
1,611
453
108
24
Feb 2000
%
45.82
27.10
15.04
7.32
3.08
1.12
0.37
0.10
0.02
0.00
497,328
201,562
135,458
84,250
44,679
20,042
7,773
2,598
721
185
60
%
40.53
27.24
16.94
8.98
4.03
1.56
0.52
0.14
0.04
0.01
In Figures 6-9 which follow, the growth in number of loans of employees over the period
of observation is shown diagrammatically. Also shown is the growth in arrears in classes
defined by the number of loans per employee taking up loans. This is normally a good
indication of increased risk (and distress) and by identifying these clients where the
highest arrears occur one can make observations about vulnerable groups.
Figure 6: Change in number of loans per employee on PERSAL from 1999 to 2000
250000
Employees
200000
150000
1999/06
100000
2000/02
50000
0
1
2
3
4
5
6
7
Number of loans
29
8
9
10
11
12
Figure 7: Growth in loans per employee from 1999 to 2000 based on PERSAL
Employees
250000
350%
300%
250%
200%
150%
100%
50%
0%
1999/07
200000
% growth
150000
100000
50000
0
1 2 3 4 5 6 7 8 9 10 11 12
Number of loans
Figure 8: Growth in arrears reflected between 1999 and 2000 on PERSAL
120%
100%
80%
Arrears growth rate
60%
40%
20%
0%
1
2
3
4
5
6
7
-20%
-40%
-60%
-80%
Number of loans per person
30
8
9
10
11
Figure 9: Growth in loan deductions as % of net salary from 1999 to 2000 on
PERSAL
25%
20%
15%
Growth %
10%
5%
0%
1
2
3
4
5
6
7
8
9
10
11
-5%
-10%
-15%
Number of loans per person
The PERSAL analysis indicated a good profile of what happened in the market between
1999 and 2000 and specifically with respect to the lending behaviour of the government
employee. At the end of 2000 the Government cancelled all loan deductions for
microlenders from the PERSAL system. This wiped a few billion Rand from the share
values of listed microlenders in the market, and largely let to immense challenges for
microlenders in terms of payment systems. It also put the banks in a preferential
situation, especially with the advantage and preferential treatment in a payment system,
controlled by the banks.
2.4.5
Exploitation
There is no doubt that the creation of the MFRC gave rise, for the first time, to a
reasonably accessible avenue for addressing client complaints. Prior to the MFRC,
clients of micro-lenders who were subject to unlawful practices had practically no
recourse. While most consumer rights advocates still feel quite strongly that a lot still
needs to be done, particularly in terms of interest rates and reckless lending, they are
unanimous in their view that the MFRC has played a major role in “cleaning up” the
industry, and providing an avenue for clients to seek recourse.
Complaints dealt with by the MFRC
While the MFRC firstly encourages micro-lender clients to take up any issues with the
lenders involved, after informing them of their rights, the MFRC will follow up and seek
redress where the clients concerns have not adequately been dealt with by the lender
where complaints have been lodged.
The following table categorises the complaints recorded by the MFRC over the last four
years, as well as showing the status of the complaints at the end of the year. The high
31
levels of success in resolving complaints investigated is noteworthy, and speaks well of
the approach adopted by the MFRC in dealing with lenders who are at fault.
Table 14: Complaints Statistics
Year ended 31 December:
2000
Number
Total calls received (including complaints)
2001
%
Number
2002
%
Number
2003
%
Number
2004
%
Number
11,418
20,146
16,457
18,066
22,961
Total complaints received
1,838
3,173
2,071
2,281
2,545
Resolved
1,649
Referred
96
2,017
134
4
54
3
90
4.0
0
0.0
21
0
0
0
15
1.0
544
21.0
%
Number
%
Number
%
Number
%
Number
%
16
1
1,118
24
645
23
642
24
211
7
Copy of contract not given
355
18
312
7
141
5
128
5
96
3
Deductions without signed contract
457
23
259
5
56
1
15
1
71
2
286
9
124
6
46
2
153
6
In Progress
Complaints by category
Broker/Agent's non-compliance with MFRC rules
Early settlement - refusal to provide or disputed
90
3,039
189
10
0
0.0
Number
-
97
2,176
95.0
2,001
%
79.0
Excessive interest
293
15
692
15
500
20
615
23
1,294
45
Illegal collection methods
155
8
819
17
450
16
329
12
181
6
Over-deduction of repayment instalment
26
1
400
8
530
19
568
21
575
20
Retention of bankcards and/or ID documents
38
2
172
4
37
1
89
3
102
4
Terms and conditions of contract not explained
199
10
89
2
86
3
121
5
81
3
Use of signed blank documents (by lender)
27
1
71
2
52
2
14
1
9
0
Other
401
20
798
17
228
8
130
5
233
8
Total
1,967
100
4,730
100
2,785
100
2,651
100
2,853
100
Source: MFRC
It is interesting to observe the change in the nature of complaints received by the MFRC
over the years. Initially, the biggest complaint related to retention of bank cards, which
became illegal along with the creation of the MFRC. After accounting for some 33% in
the MFRC’s first year, this complaint has comprised consistently below 5% of complaints
since then.
The MFRC’s change of rules in 2002 on agents and brokers, requiring training by
lenders and correct identification, appears to have resulted in a significant reduction in
complaints related to non-compliance with MFRC
rules. Where this complaint was always In 2004 alone, the MFRC
historically closer to 25% of total complaints, it recovered over R2.5 million from
dropped to 7% of total complaints in 2004. The lenders for borrowers, in the way
exit of Saambou and Unibank from the market of refunds and adjustments that
(both significant users of agents) also contributed were made to the loan balances
to the drop in this type of complaint. Similarly, of borrowers. This “real” action
complaints related to illegal collection methods highlights
the
MFRC’s
dropped significantly as a proportion of total commitment to protecting and
complaints to 6% in 2004, notwithstanding that promoting consumer rights in the
industry.
32
they have been consistently decreasing every year. Another significant change is the
increase in complaints relating to over-deductions from 9% in 2001 to 20% of total
complaints in 2002, a level maintained since then. On reflection, most of these changes
are most likely related to targeted actions and education campaigns undertaken by the
MFRC – reflecting for example better consumer knowledge of their rights rather than
increased abuses.
The last significant change is the increase in 2004 of complaints related to excessive
interest rates – comprising an incredible 45% of total complaints received in the year,
which is more than double those received in previous years. While we can state many
arguments to explain this, the most important may be that people are now interest rate
sensitive, which represents a major step towards the ideal that clients should be
informed and act as the first order monitor of prices and supplier behaviour.
Court cases and outcomes
Since the establishment of the MFRC, there were a number of important court cases, the
outcomes of which had an impact on the market.
The first important milestone in this regard was the 1999 High Court confirmation of the
MFRC’s status as regulator and of its powers as such. In the same judgement, the
prohibition on the use of bank card and PIN retention as a repayment mechanism was
also confirmed, while the interest rate cap was set aside. These outcomes clearly were
critical to the MFRC and helped to shape the industry.
Another important development was the successful action in 2003 against the Secondhand Dealers and Pawn Board. In this case, the court ordered that pawn shops also
had to register with the MFRC, and that the associations had to cease promoting
practices aimed at undermining the Usury Act and its exemption notices. This widened
the scope of the MFRC’s purview, and was important in protecting the interests of the
registered lenders complying with the legislation and regulations in force.
Combined with the declaratory order and interdict obtained against the Pawnbrokers, the
MFRC simultaneously obtained such an order against a group of unregistered lenders
who claimed to have found a loophole in law not to register with the MFRC whilst still
being able to charge usurious rates. The MFRC also won this case against the South
African Micro-lenders Affairs Council (SAMLAC) and A-Z International Ltd. These
lenders are now within the regulatory framework.
The last case, decided in 2004, saw the MFRC rules on reckless lending and
compulsory use of the NLR set aside as invalid. However, after the MFRC was granted
leave to appeal the decision, the High Court then reinstated the 1st set of rules pending
the outcome of the appeal. Even though it has not been compulsory since the court
case, the NLR has subsequently seen an increase in use – demonstrating that lenders
are seeing value in the system in managing credit risk, and are looking beyond merely
complying with the rules. The MFRC then submitted proposals to the Minister of Trade
and Industry to strengthen its position.
It should also be noted that the MFRC engages constantly with the courts, whether it be
affidavits that they file, testimony provided or acting as amicus curiae (friend of the
33
court). They are also often required to state the registration status of lenders and the
legal effect of non-registration.
General views from the microfinance market
In general, stakeholders interviewed were unanimous in opinion that the MFRC had
done a lot, particularly in terms of “cleaning up” the industry.
While consumer advocates continue to express concerns, they readily admit that the
situation would be far worse in the absence of the MFRC. The existence of the MFRC
has provided a platform for complaints resolution, and has been seen to have raised the
bar in terms of ethical behaviour by lenders.
The larger banks have seen the MFRC as improving the image of the industry, and
reducing the potential ‘reputation risk” for banks of being involved directly in the industry.
As a result, from a situation where banks were not in the market at all prior to the MFRC,
banks now dominate the market in terms of the value of loans made.
However, there were still some very negative views held about consumer loans in
general, particularly by NGO MFIs focused on enterprise lending, notwithstanding that
the industry which was aimed predominantly at salaried people, has had a very limited
impact, if any, on their business or clients. They do, however, argue that the
reputational risk is high since they are also seen as part of this microfinance “sector” and
then suffer from bad press on the industry as a whole.
2.4.6
Fallout
Over-indebtedness
“There are indications of over-indebtedness in at least certain segments of the
population, and an alarming number of “extreme over-indebtedness” amongst these.
However, the greater number of borrowers appears to manage their debts responsibly
and there are indications of significant numbers of people that have reduced their level
of consumption debt since 1995. Furthermore, the majority of South Africans still have
insufficient access to finance, rather than being over-indebted. There is a need for
appropriate measures to prevent “reckless credit provision”, and to assist consumers
that find themselves in an over-indebted position. However, a general clamp down on
credit extension would be counter productive as there is as great a need for an increase
in access to finance.”23 (MFRC, 2003).
By and large, the findings of a recent study by ECIAfrica (2004) for the MFRC support
the statement above. A number of stakeholders were interviewed during the study, and
the key findings are outlined below:
•
At the macro level indebtedness is not a problem in South Africa, even in
comparison to other countries such as the U.K .and the U.S.
•
Bad debts are decreasing in SA – confirmed by national surveys and a number of
financial institutions interviewed.
23
Micro Finance Regulatory Council, “Submission to the Portfolio Committee on Finance on Indebtedness”,
17 June 2003.
34
On the definition of over-indebtedness, several points raised are worth mentioning:
•
The commonly used debt to income ratio was questioned as the right indicator to
establish over-indebtedness. Several perceived weaknesses of the measure
were noted: (i) measurement of income: individual vs household income; (ii) total
income vs disposable income.
•
Client ability and the underlying capacity to repay should be considered as an
important factor in the understanding of indebtedness and over-indebtedness
(“can’t pay vs. won’t pay”)
•
The design of indicators of financial distress would be better than indicators of
over-indebtedness. Financial distress is a precondition for over-indebtedness.
Indicators of financial distress could be: black-listing; delinquency history, etc.
•
The continuing poor levels of financial literacy were a commonly raised concern.
Initial conclusions of the secondary research conducted as part of the study are that:
•
The incidence of indebtedness is quite small across income groups. From 1995
to 2000, there is an increase in indebtedness which may be attributed to an
increase in access to financial services by the previously unbanked population
sub-groups.
•
The incidence of over-indebtedness, calculated as consumption debt equal to or
over 20% of income, is also quite small. The trend, however, seems to indicate
an increase, especially for low income groups. This may be the result of an
increase in the number of households in the lowest income group, which cause
the ratio of consumption debt to income to rise24.
•
The available data seems to indicate that inequality or relative poverty is a major
problem and over-indebtedness may be a contributing factor.
•
As inequality increases, the vulnerability of low income groups also increases. If
indebtedness becomes financial distress leading to over-indebtedness, the
situation for those groups becomes exacerbated.
Overall, while there are certainly over-indebted individuals, it does not seem to be a very
large problem. However, we currently do not have adequate data to fully measure the
incidences of over-indebtedness and, more importantly, of financial distress. Unless this
information is obtained through a regular data gathering exercise, policy makers and
regulators will find it difficult to make informed decisions about the matter in the future.
Lastly, the observed increase in over-indebtedness of the poorest income groups is a
cause for concern, not only in terms of lender and borrower behaviour, but also in terms
of general levels of poverty and the challenges that this poses. The reaction should thus
be wider than purely looking at influencing lender and borrower behaviour.
Judgements
Figure 9 shows the number of civil summonses for debt issued to individuals from
January 1988 through July 2004. An increase in the variation from the trend line is
apparent, particularly looking at the different periods, i.e. before the 1992 exemption
24
This is however based on data up to 2000 where the size of the lowest income (highest poverty) group
increased. Recent research (BMR 2004) indicates that this group has contracted by 12 % between 2001 and
2004.
35
notice, and again from around the MFRC was established. However, the different
periods in the development of the sector are more clearly reflected in Figure 9 which
follows.
Figure 10: Civil Summonses for Debt
Civil Summonses for Debt
Number
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
Source: Statistics South Africa
36
04
03
NUMBER OF CIVIL CASES RECORDED AND SUMMONSES FOR DEBT ISSUED
Poly. (NUMBER OF CIVIL CASES RECORDED AND SUMMONSES FOR DEBT ISSUED)
01
20
02
01
20
01
01
20
00
01
20
99
01
20
98
01
19
97
01
19
96
01
19
95
01
19
94
01
19
93
01
19
92
01
19
91
01
19
90
01
19
89
01
19
01
19
01
19
88
0
Figure 11: Civil Default and Consent Judgments for Debt
Number
120,000
Civil Default and Consent Judgements for Debt
100,000
80,000
60,000
40,000
20,000
01
19
8
01 8
19
8
01 9
19
90
01
19
9
01 1
19
9
01 2
19
9
01 3
19
9
01 4
19
9
01 5
19
9
01 6
19
9
01 7
19
98
01
19
9
01 9
20
0
01 0
20
0
01 1
20
0
01 2
20
0
01 3
20
04
0
Number of Judgements
Poly. (Number of Judgements)
Source: Statistics South Africa
Figure 10 shows the number of civil default and consent judgments issued against
individuals, also from January 1988 through July 2004. Three distinct periods are clearly
evidenced – the first being the pre-1992 exemption notice, the second being between
the first and second exemption notices, and the third being the period subsequent to the
second notice, which established the MFRC and outlawed the card and PIN collection
method. This was followed not long after by the withdrawal of the PERSAL deduction
facility from micro-lenders amongst others.
A possible interpretation is that the declining trend seen in the middle period reflects the
growth of the payroll deduction and card and PIN retention methods of collection –
meaning that as payment was secured through the collection mechanism,
proportionately fewer judgements were required. Furthermore, up until around
1999/2000, there is a consistent pattern in the number and value of judgements issued,
with observations being quite near the trend line. However, with the withdrawal of the
collection mechanisms largely in use from 1992 to 1999, the number and value of
judgements becomes far more volatile, notwithstanding that the trend is still upwards, as
would be expected in an environment of increased access to financial service,
particularly credit. It will be interesting to see if the volatility reduces once the new credit
law regime is in place – with the possibility of bringing stability and certainty to the
market.
It would appear that the MFRC has not had a direct impact, as the changes discussed
above were not due to the MFRC per se, but associated with government actions – the
first in outlawing card and Pin, and the second in withdrawing the PERSAL salary
deduction facility.
37
2.4.7
Education and information
This section draws mostly on a previous study conducted by ECIAfrica for FinMark Trust
in 200425, with relevant sections extracted.
The Relevance of Financial Education
Financial literacy or the lack thereof has long been recognised as a major problem in
poor households and communities. This is not only because of the generally lower levels
of access to (quality) formal education, but also because of a lack of access to
information. This is particularly the case in South Africa where the formal education
system has fallen short of achieving acceptable literacy levels – not to say financial
literacy – among communities who were marginalized by the previous political
dispensation.
However, it is not only low income communities who demonstrate low levels of financial
literacy in South Africa. As highlighted in the recent FinScope study (2003) undertaken
by FinMark Trust, lack of financial literacy remains a major challenge in South Africa with
the vast majority of respondents to the FinScope study indicating a high level of
“confusion” on financial matters. Even among the fully banked, a staggering 45% of
respondents indicated a level of confusion on financial matters. Needless to say, this
percentage increases among the partially banked (59%) and unbanked (61%)
respondents. However, lower income households and pensioners remain the most
vulnerable to poor planning and exploitative schemes, as it is often more difficult (if not
impossible) for them to recover after a financial set-back.
South Africa is known as a country with low household savings rates, while
indebtedness has increased amongst the most vulnerable, as well amongst the most
affluent income groups. A major behavioural shift is therefore required, away from a
consumer and credit-oriented mindset, towards one of financial prudence.
The need for saving is more important today than ever before, especially considering the
HIV/Aids epidemic now ravaging the nation. HIV/Aids could have a devastating financial
impact on individuals and households, where even the most careful financial planning
may not suffice if it does not make provision to deal with the impact of frequent and
debilitating illnesses associated with HIV/Aids.
What has been done in South Africa
Overview
The low level of financial literacy in South Africa has been recognised by various
community-based organisations, the financial industry, the government and other
organisations.
During the 1990s, many of these institutions launched financial education projects. The
level of involvement in financial literacy, as well as the objectives, target market, scope
and nature of financial literacy programmes, varies broadly.
25
ECIAfrica, Financial Literacy Scoping Study and Strategy Project, 2004
38
The providers or suppliers of financial education can roughly be categorised as follows:
•
Government:
o
introduction of financial literacy in school curricula as from 2002
(Department of Education)
o
BANKSETA and INSETA (initiatives of the Department of Labour)
o
through other government departments, e.g. DTI
•
Financial sector: on sector level, subsector level (e.g. SAIA, LOA, MFRC, etc)
and institutional level
•
NGOs
•
Private education or consulting companies
The Financial Sector in particular has realised the importance of financial literacy, and
therefore included a financial literacy target in the Financial Sector Charter (2003),
namely 0.2% of annual after-tax operating profits of member institutions should be
committed to financial literacy projects. More detail on the financial sector is provided
later in this section.
Form and Content
The form and content of programmes offered are varied and largely determined by the
institutional objectives, the programme’s purpose and the target audience. Programmes
range from broad-based generic financial literacy programmes to focused or discrete
programmes with a narrow programme content aimed at certain behavioural outcomes
such as purchasing a home or increasing retirement savings. Some are preventative in
nature, while many focus on debt management.
Most programmes fall in the discrete category as the training content is generally
related to the product category of the supplier, e.g. the LOA ran an educational
programme on HIV/AIDS and the implications for life policy holders. Another good
example is the activities in the housing industry, where training sessions on the
implications of house ownership and carrying a mortgage bond are taught to potential
applicants. These programmes are generally short and available on demand.
An example of broad-based generic programmes would be employee-workplace
programmes – although when offered by a life assurer or debt-counsellor, it also tends to
be narrow. These also tend to be short-term, once-off programmes with a narrow target
market.
There are unfortunately very few broad-based, long-term programmes present in the
market place. Two such programmes encountered are those of Mutual and Federal – a
multimedia programme focused on the lower income public at large – and the Standard
Bank Schools programme. These programmes are preventative, with a wide outreach,
and are on-going.
NGO’s focus primarily on debt counselling, but also provide financial planning skills.
Their courses are more personalised, and as such presumably more effective than
generic programmes. The challenges here are resource and outreach. The NGOs would
clearly like to play a pro-active preventative role in society, but lack the necessary
resources.
39
Very few programmes currently touch on the financial implications of HIV/Aids, or any
other long-term illness. This presents a challenge, both for providers of financial
education and employee HIV/Aids workplace programmes. The utopian situation would
then be to move over time from a decrease in the need for reactive counselling type
programmes and a shift toward informative, preventative programmes.
Target Market
Looking at Figure 11, it is clear that in South Africa much of the focus of non-profit
organisations has been on vulnerable segments of the population with a strong bias
towards reactive programmes such as counselling on indebtedness. In contrast, the
initiatives of the financial industry have been largely focused on the lower end of their
current or potential target base – primarily low income employed. This implies that the
two extreme segments, top end and lower end of the market, have had limited exposure
to broad-based financial education programmes.
At the top end of the market, high literacy levels and the availability of general
information in the marketplace such as through media, institutions, personal advisors
allows for much independent learning. If anything, the problem at this end of the market
appears to be information over-load, and at times less than scrupulous advisors. The
latter should to an extent be addressed through the implementation of FAIS. It is then
predominantly the lower end of the market, particularly the unemployed and rural
communities which is largely neglected. The community-based programmes targeting
this market segment have been doing exceptional work, but their outreach is limited due
to a lack of resources.
Figure 12: Current Financial Literacy Programmes and Coverage of Socioeconomic Groups
CORPORATE FOUNDATIONS/GOVERNMENT
Adult
Schools
SELF-LEARNING
FINANCIAL INDUSTRY:
Brokers/Advisors
FINANCIAL INDUSTRY:
Marketing
NGOs
(Indebtedness)
1
2
3
FINANCIAL INDUSTRY:
Fin Education
4
5
6
Socio-Economic Groups/LSM
40
7
8
9
10
It is of concern that even in the face of the strong commitment to financial literacy by the
financial sector, poor and disenfranchised communities may remain neglected as the
large institutions do not have the infrastructure to reach these communities. In addition,
the large institutions may be less interested in getting involved as these communities do
not present market expansion opportunities in the near future. Should the financial
industry choose to reach these communities, it could possibly be done through
partnerships with existing community-based organisations which already have the
infrastructure in place, but lack the resources.
The MFRC intervention
Figure 13: MFRC Borrower Education
The MFRC has a formalised
Activities
education and awareness campaign.
In addition to supporting the Banking
2001
2002
2003
Council consortia, the MFRC has
also launched various other financial
Capacity building workshops
education initiatives: a multimedia
Workshops
56
103
144
campaign
aimed
at
informing
Participants
1,600
8,224
16,564
consumers on their rights when
borrowing money,
their rights to
recourse, the role of the MFRC in the
Awareness campaign
protection of borrower rights and
Radio
89
101
97
educating them on prudent financial
348
344
265
management;
the
training
of Newspaper
educators
and
advisors
of Borrow wisely
25
63
73
intermediary organisations which run adverts
educational programmes amongst
employees and in communities; and the launch of a debt relief programme aimed at
establishing a network of debt and financial counsellors and mediators across the
country (with encouraging results from the pilot programme). The MFRC uses different
communication tools to maximize outreach to and impact on the different target groups.
The impact of their various initiatives has not been formally established, but is being
tracked through their call centre and to date has shown remarkable results.
Concluding remarks
The Financial Literacy Report concluded that apart from a few flagship programmes
most institutions had done very little (if anything) in the field of financial education, and
that the financial sector still had a lot to do to meet the Charter objectives. The low levels
of financial literacy were a common concern amongst stakeholders interviewed in the
course of this assignment as well, and it is apparent that there is, indeed, still significant
work to be done.
41
Some studies, such as FinScope, have touched on certain indicators of financial
knowledge and confidence. However, no baseline study has ever been undertaken in
South Africa. This is of major importance, not only to benchmark financial literacy for
future purposes, but also to ascertain financial literacy needs.
In conclusion, despite multiple financial literacy initiatives, South Africans remain by and
large underserved by programmes offering financial education. This is particularly the
case in low income and rural communities. Existing programmes are mostly supply
driven (product-specific) or reactive (debt management), and programme evaluation is
almost non-existent.
42
3. The MFRC and its mandate
3.1 Introduction
In this part of the report, the performance of MFRC – in terms of its mandate and in
general terms is assessed. The explicit stated mandate (including changes that were
made over time) is examined as well as MFRC’s expansion of its mandate (largely as a
result of MFRC suggestions). After placing MFRC in its historical context, the
performance of its mandated functions and its expanded activities are assessed. This
section concludes with an evaluation of MFRC’s outputs and results, taking into account
relevant features of the legal-regulatory landscape.
The following table summarizes the main periods and decision points in the development
of the microfinance sector:
Table 15: Main Periods and Decision Points in the Development of the
Microfinance Sector
Time period/ regulatory
regime
Pre-1992 – Usury Act, etc.
st
1992-1999 1 Exemption
Notice
nd
1999-present, 2
Exemption Notice, MFRC
Usury Amendment Act 10
of 2003
2005 into the future
Credit Regulator
Issues and approaches
Financial exclusion of majority, role of apartheid, distortions due to Usury Act
Micro-lending boom raises need for consumer protection – DTI
New regime (1994) must address need for development finance (SMMEs,
housing, education) – DFIs
MFRC mandate:
•
Formalize micro-lending within Exemption
•
Consumer protection
•
Improve information & understanding
•
Empowers MFRC to conduct inspections on both unregistered and
registered lenders
•
Allows CEO of MFRC to appoint external inspectors
•
Provides for submitting questions to the High Court for declaratory
order
Unified credit law regime
Consumer protection: more solid legal foundation, more robust controls
As Table 15 suggests, the successive time periods produced different approaches, each
embodying a different set of concerns and motivations, and each producing distinctive
outcomes that would need to be addressed by the succeeding regulatory approach.
Long-term observers of this sector in South Africa were in general agreement that the
original 1992 Exemption grew out of a particular set of circumstances, as well as an
interpretation of needs and an approach that differed from that of subsequent periods.
The original Exemption essentially licensed micro-lenders to create a separate, largely
unregulated, tier of credit provision to people on the fringes of the banking system. The
Exemption did not have an immediate effect. Then a few pioneering lenders started
implementing a new approach to credit provision that showed the potential of the 30-day
cash loan market. Based on this demonstration effect, the market expanded rapidly.
By many accounts, the 1992 Exemption Notice created a “disaster” by dividing the
market and thereby fencing lower income people off from the banking sector and formal
credit options. Interest controls were removed without other constraints (such as debt
recovery and capital access) being addressed. The result was that full conditions for the
43
development of an efficient market did not exist at a time when the market was growing
very quickly.
By the mid-1990s, the advent of the first ANC government raised expectations and
created increasing pressure for policies that would extend the benefits of credit
liberalization to all and create rules of conduct that would protect borrowers from sharp
practices. The general legislative fragmentation created by the different rules applicable
to each form of credit (large and small loans, instalment sales, leases) – especially the
restrictive framework that impeded entry of competitors into the banking sector
(definition of deposit-taking, sources of loan capital) – was exacerbated by the
Exemption Notice. In particular, this arrangement impeded development finance. An
early response was to set up the parastatal development finance wholesalers – NHFC
and Khula. The general perception has been that these institutions have not been a
great success. Khula at first restricted its dealings to non-profit MFIs, later opened up to
other institutions but could never succeed in building their clients capacity and
expanding outreach. NHFC tried a few different approaches to financing low-income
housing credits. However, the NHFC laboured under restrictions that made it difficult to
sustain – for example, rates were capped. Once NHFC did make some headway in
supporting housing lenders, these were acquired by lenders such as African Bank,
hence merged into larger commercial operations, leaving NHFC with a much-reduced
role. Today, both NHFC and Khula suffer from a lack of sustainable clients, and in a
way resemble the problems of Apexes in many settings, that of adding cost to the
system without improving access and efficiency.
The push to establish MFRC came largely in response to widespread concern about
high interest rates and abusive practices in the “cowboy” micro-lending market that
boomed during the mid-1990s. There was a convergence of interest in creating a
consumer credit regulator, among government, consumer advocates, and a number of
financial institutions (notably NHFC) who were concerned about abuses as well as
questions of sustainability in a market seemingly unconstrained by standards of good
conduct. Added to this worry about conduct were lingering concerns about the arrested
state of the market’s development, and in particular the unmet needs for credit in priority
areas such as enterprise, housing, and education. Banks were also concerned about the
potentially negative reputational effects on the mainstream financial sector of this
combined lack of conduct standards and development finance. At the same time, the
government had a mass of urgent policy priorities to address. One might have wished for
a thorough financial reform to put the industry on a solid footing. However, this turned
out not to be feasible, give the other business at hand, along with a lack of consensus
about long-term policy and a political atmosphere that weighed heavily against the
removal of usury restrictions and their replacement with a sustainable market framework.
Thus, as a “quick and dirty” approximation, the 1999 Exemption Notice emerged and
with it the MFRC.
44
Figure 14: South African Financial Regulatory Structure (Source: FinMark Trust)
45
3.2 MFRC: performance of mandated functions
The 1999 Exemption Notice made it a condition of micro-lender operations (i.e.
extending credits up to a new maximum of R10,000 at rates above the statutory cap)
that each institution register with a new regulatory agency that would be established as a
legal person. Thus, the MFRC came into being as a section 21 company carrying out
delegated regulatory functions within the market niche carved out by the new Exemption.
The full text of the MFRC’s mandate, as set forth in the 1999 Exemption Notice, appears
in Annex II. The key elements of MFRC’s mandate boil down to these:
•
Formalize the micro-lending sector
•
•
•
Operate in a self-supporting way, ensuring appropriate training of staff
How has the MFRC responded to this mandate? It dealt with the elements of the
mandate by structuring itself along the functional lines depicted in the table below. In the
discussion that follows, MFRC’s performance in each of these areas is assessed and the
way in which its activities correspond to the mandate. The next section of the report
focuses on those activities that extend beyond the strict terms of the agency’s mandate
as set forth in the Exemption Notice. Following that, the MFRC and its activities are
placed in perspective, offering some observations on MFRC’s accomplishments and
impact.
Table 16: MFRC Mandate
Mandated functions
Formalize micro-lending
Consumer protection
Information, understanding
Manage its business, operate in
self-supporting
way,
ensure
training of staff
Relevant MFRC department
Accreditation and Compliance:
•
Registration of Micro-lenders
•
Investigations and Prosecution (both registered and
unregistered lenders)
•
Investigations and Prosecution (including reckless lending)
Complaints and Enforcement
Education and Communication
•
Industry Statistics
•
Research
Investigations and Prosecution
•
Declaratory Orders and interdicts in High Court
•
Presenting information on website regarding prosecutions
and certain court cases impacting on industry
Human Resources
Finance and IT
46
3.2.1
Registration
The Accreditation and Compliance Department of MFRC handles this function. Upon
MFRC’s founding in 1999, it had to set up a specialised system of application, checking,
and expediting registrations. Since mid-2004, evidently as a result of MFRC’s campaigns
against unregistered lenders, some 55 applications have been received per month. The
Department responded to this influx by allocating two staff exclusively to new
applications, and the remaining three largely to renewals. The number of currently
approved entities ballooned by 1,905 with 8,477 branches country wide. MFRC tracks
work-in-progress, which varied from 6% to 8% of approvals for most of 2004, and staff
productivity in terms of approval per person, which averaged in the mid-300s during
2003-4. These self-reported numbers are not conclusive, but they are subject to
verification and they do suggest a high level of output. As important, MFRC’s
unregistered lender investigations and prosecutions (see below) contributed to the heavy
influx of registration applications. The following figure illustrates the growth in the level of
registrations.
Figure 15: Cumulative number of MFRC registered entities and branches
9000
8000
7000
6000
5000
4000
3000
2000
1000
Entities
3.2.2
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
Aug-99
0
Branches
Investigations and Prosecutions
Reported complaints have increased since 2001. One might interpret this as the
continuation, or indeed intensification, of undesirable lender behaviour. This, however,
would constitute an increase in potential complaints. The increase in actual complaints,
by contrast, arises from a combination of lender behaviour, borrowers’ perceptions of
rights and standards in the credit market, and borrowers’ willingness to bring complaints
before MFRC. It is possible, but unlikely, that worsening lender behaviour played the key
role here. More plausibly, borrowers’ understanding of their rights and their willingness to
file complaints played at least as large a role. These are positive trends that point
47
directly to the activities of MFRC. The level of complaint intake and resolution is amply
documented by MFRC, consistent with the 1999 Exemption Notice, in detailed statistics
contained in the activity reports of the Complaints and Enforcement Unit.
Around the world, agencies with statutory enforcement and complaints resolution
mandates often end up taking a “retail” approach, i.e. devoting the bulk of their efforts to
responding directly to all complaints and referrals. This approach could reflect a literal
reading of the agency’s mandate, or a strategy that a comprehensive response “without
fear or favour” would set a standard of integrity, alerting all sides that no matter is too
minor to be addressed. As a signal of serious intent, and as an early encouragement
toward compliant behaviour, this has its advantages. But, it is expensive, and is not
always within the means of the agencies involved, especially small ones. Some
agencies, where they are not legally prevented from doing so, have attempted to
marshal their resources to deal with strategic issues and have maximum impact.
MFRC is in the latter category. While its complaint lines field all inquiries, these are
filtered so that the numbers referred for action are kept within limits. MFRC has
attempted to be strategic in several ways. First, it decided by 2003 that it did not make
sense for it to become the “complaints department” of first instance for all institutions in
the sector. Thus, MFRC analyzed complaints concerning the largest of its member
institutions, and worked with them to establish their own complaints departments. Now,
some 20 lenders have such departments, which are required to meet standards and
response times defined in service-level agreements with MFRC. In these cases,
complaints are supposed to come to MFRC only when an acceptable solution has not
been reached at the level of the institution. Once a complaint reaches MFRC, “desk-top”
analysis is done, and it is referred for investigation if appropriate. MFRC’s analyses of
complaints against lenders feed into its training modules on complaint-related topics
such as judicial garnishee orders. One area that MFRC has not exploited as much as it
might have ideally is that of test cases, i.e. strategic lawsuits aimed at establishing
helpful rules and precedents.
3.2.3
Compliance Monitoring
Another strategic effort by MFRC to leverage its resources has been its approach of
coupling annual audits with lender compliance certificates. The latter enable the lenders
to report regulatory non-compliance before it is discovered by auditors, and thereby gain
the opportunity to work out a compliance plan with MFRC (and reduce the possibility of
eventual sanctions). Any such plans or settlements need to be approved by the MFRC
Board – a form of oversight that discourages abuse of discretion. This activity intends to
improve the mutual understanding and cooperation between regulator and lender based
on voluntarism and reciprocal interest. MFRC statistics report that compliance has been
improving, along several axes. This includes timelier reporting by lenders, a decrease in
infractions by large institutions, and an increase in the resolution of complaints in favour
of MFRC – up to a current reported figure of 55%.
Another strategic tool used by the MFRC in monitoring lenders’ compliance with the
Exemption Notice is through the submission of the Report of Factual Findings compiled
by the Accounting Officer or Auditor of a registered micro lender after performance of the
Agreed Upon Procedures. MFRC has accredited five Professional Bodies to date,
namely, the South African Institute of Chartered Accountants (SAICA), the Commercial
and Financial Accountants (CFA), the Southern African Institute of Chartered
48
Secretaries & Administrators (SAICSA), the Chartered Institute of Management
Accountants (CIMA) and Institute of Administrators & Commerce (IAC).
The
accreditation of these Professional Bodies provides MFRC with access to more than
8000 accounting officers and auditors who annually perform certain reporting functions
(agreed upon procedures) designed to investigate lenders compliance with the Usury
Act Exemption Notice and the Rules of the MFRC. It is through this process that
timeous and corrective action is taken against micro lenders who are reported to be noncompliant by either their accounting officer or auditor.
Many observers point out that there is a large amount of lending activity outside this
limited sample, and that compliance by smaller lenders seems to leave a great deal to
be desired. There is wide consensus, outside MFRC as well as inside, that the retention
of bank cards and PIN numbers continues to be rampant. Also, disclosure practices are
frequently reported to be non-compliant. The consumer still cannot get a clear idea of
the cost of credit – this is an especially severe problem in light of illiteracy and financial
ignorance. Some say that lenders pay only “lip service’ to the explanation of credit terms.
Still, MFRC’s compliance audits, together with its responses to complaints and proactive investigations, have helped encourage compliance.
Another effort along strategic lines has been to require lenders to use form contracts that
have been approved by MFRC. This, in a sense, is preventive work that lessens the
burden of enforcement later on. However, the approval of form contracts for all lenders
has proven too burdensome for MFRC, which reports that it has begun to move from its
earlier comprehensive approach to one based on contract issues that arise in its audits,
complaints, and enforcement processes.
3.2.4
Over-indebtedness and Reckless Lending
A major substantive thrust by MFRC has been to address over-indebtedness and
reckless lending. To do this, MFRC had to come up with a definition of overindebtedness – i.e., that point at which debt service obligations become unsustainable
and affect the debtor household’s standard of living. MFRC settled on a scale of 60%80% of income required for debt service, with the lower end of the scale representing a
serious risk of over-indebtedness, and the top of the scale indicating, essentially, a debt
crisis. Reckless lending, in turn would be the extension of credit in circumstances where
the lender is aware (or has reason to know) that the borrower is over-indebted. The
development of the National Loans Register, discussed in more detail later in the report,
was a very important part of MFRC’s strategy to address this problem.
This area represents a strategic choice that MFRC had little or no ability to avoid, given
the political concern surrounding it. In some other national contexts, the choice might not
have been a sensible one – for example, a Western European country with a relatively
equitable distribution of income and near-universal access to the banking system. In
South Africa, however, it is often argued that such a situation does not exist; rather,
income and opportunity are very unevenly distributed, hence the very existence of the
micro-lending sector. The relative lack of financial literacy and economic sophistication
of the average household argues for strong consumer credit protection. Further, given
the near-automatic repayment mechanisms for payroll-based credits, the lenders face
little deterrent to over-lending.
49
These are valid points and do justify a serious concern about over-indebtedness and
reckless lending. Do they justify the approach that MFRC has actually taken? To assess
this requires sufficient information to compare the costs and benefits of such an
approach with alternatives, such as not placing strategic emphasis on this set of issues,
or placing greater strategic emphasis elsewhere. From a system-wide perspective, a
tough line on reckless lending was perhaps not the top priority – greater benefits might
well have come from introducing greater competition in financial services. However,
MFRC did not have authority in that area, although it did contribute significantly to policy
development there. Given that over-indebtedness was both inflicting pain on many
ordinary households, and casting doubts on the legitimacy of a financial sector that
already had burdensome historical legacies to overcome, the choice to get tough on
reckless lending seems inevitable.
Should MFRC have taken a lower-key, more cooperative approach, instead of its more
punitive stance? It seems doubtful that such an approach could have succeeded, given
that MFRC was stepping into a fast and loose “cowboy” market that seemed to depend
on high indebtedness. This required it to establish its authority in this field, and its
willingness to enforce sanctions. Newly established agencies across the world often face
such challenges. An effective response can include compromise, but only against the
backdrop of a credible enforcement threat. This is how MFRC chose to act, and this is
consistent with international practice. Unfortunately, after it made some progress in this
area, its revised 2002 rules (including the reckless lending provisions) were struck down,
leaving it without investigation and enforcement powers – apart from those directly
delegated by DTI under the Usury Act.
The lenders and borrowers, as often happen, have diametrically opposed views of these
events, and are equally strident in their criticisms of MFRC. One consumer advocacy
group complained of a “slow” MFRC response to reckless lending, but admitted that
MFRC has been excellent on responsiveness to borrower complaints and working with
such groups to detect patterns. A representative of a lender association stated that
MFRC “overplayed” its mandate in going after reckless lending. First of all, this matter
was not strictly within its mandate. Second, MFRC would have been more successful
with a cooperative rather than confrontational approach. These views suggest that
MFRC’s stance has been even-handed in drawing regulatory lines.
3.2.5
Investigations
Prosecutions
and
Activities in this area that are not
pursuant to the enforcement of the
Usury Act itself (e.g. unregistered
lenders) or the 1999 Exemption
Notice (e.g. card and PIN retention)
have been impacted on by the AAA
case.26 While investigations on
registered lenders are being done
under inspection powers per Section
13 of the Usury Act, the disciplinary
action phase will have to stand over
26
Mentioned earlier in the section on conduct.
AAA Investments (Pty) Ltd v MFRC and the
Minister of Trade and Industry - case
number 30335/2002.
On 27 May 2004 the High Court declared the
MFRC rules invalid. The MFRC applied for
leave to appeal to the Supreme Court of
Appeals. As such, the Court reinstated the
MFRC’s original rules pending the outcome of
the appeal, except for rules 3.11 and 3.21.2 –
the investigation rules. However, the court did
find that investigations may proceed in terms
of the Usury Act powers. The MFRC also
drafted an amended exemption notice to
address areas which may be vulnerable, such
as incorporation of the NLR and reckless
lending rules into the new Notice.
50
until the revised Exemption Notice is approved. There should be no doubt about the fact
the MFRC continues to conduct its investigations, but how they treat the results of these
investigations may now differ. For example, the MFRC is looking at prosecution of
registered lenders where they do not substantially comply with the Exemption Notice.
They may also wish to take a civil route or inform other regulators, courts, SAPS etc. of
their findings. According to the MFRC, there is still a wide range of avenues that may be
pursued when lenders contravene the Exemption Notice.
While retention of bank cards and PIN numbers, in contravention of the 1999 Exemption
Notice is by all accounts, still rampant, it is important to note that the number of abuses
reported to the MFRC where a borrower’s card and pin were retained, is minimal, as
previously shown. In principle, MFRC could have used its power of deregistration to deal
with this, but it found this to be impractical. To do this consistently, MFRC would have
been required to deregister a significant proportion of the sector. This would not have
been politically feasible, and it would have defeated the objective of developing the
sector. By MFRC’s account, no lender has been deregistered for this infraction alone –
and MFRC’s statistics show that this ultimate punishment has been used very sparingly,
i.e., six times since 1999. It should also be noted that retaining the card/PIN was a
contravention in the Exemption Notice before it was in the Usury Act. This issue can
only be solved satisfactorily by the payment system authorities, SARB and Treasury.
MFRC has no authority in this domain. In addition to the MFRC’s actions in this regard
(including conducting inspections on over 400 lenders since May 2003 and criminal
prosecution of lenders who keep the card and pin), the SAPS and Registrar of the Usury
Act can also address this issue.
Again, the question arises whether the attention that MFRC has focused on the card and
PIN represents a rational investment of its resources. Opinion is divided. Micro-lender
representatives felt that the MFRC has been hard on the card and PIN issue in large part
because it “sounds immoral” -- yet, MFRC has not taken such a hard line on the banks’
use of debit orders. In their view, this approach hurts competition. An alternative would
have been for MFRC to engage in discussions with SARB and the banks to open up
equitable access to the payment system to all competitors. Indeed, debt repayment by
debit order helps customers manage cash, by taking repayments out of their pay checks
before the money can be spent (or claimed by other members of the household or family
network). The new approach under discussion will randomize debit order “strikes” on
debtors’ bank accounts. As with other emphases of MFRC, this may not have been a
first-best approach from the perspective of the overall financial services sector. Viewed
in isolation, it is not a desirable practice, but it gives lenders who do not have access to
the payment system a kind of rough parity with the
banks. It appears to make little sense to prohibit the one
“…one should bear in mind
practice while access to the payments system is
that if lenders were willing
dominated by the banks. However, the suppression of
to
do
the
required
card and PIN retention was written into the 1999
affordability
assessment
Exemption Notice, hence was unavoidably part of
prior to extending a loan,
MFRC’s mandate. In addition, the moral issues around
the majority of defaults
the retention of Card and PIN cannot be argued away,
would be eliminated and
nor the abuse that did take place.
the need to retain cards
and pins as security for
Less numerous than card and PIN cases, though by
payment could possibly be
most accounts more serious, are cases in which
limited.”
MFRC
staff
lenders have used, illegally, blank process documents –
member.
51
often as an integral part of a loan agreement. The possibilities of abuse with the signing
of blank court process documents far exceeds those of a lender retaining a bank card
and pin, which the borrower can cancel at his or her bank at any time. The MFRC has
had to educate court officials to help improve court practices, and also follows up on a
number of complaints in this regard. Consumer education has also focused on
addressing this issue, emphasizing that blank documents should not be signed.
There are a number of concerns arising in this area. First, while MFRC struggles to act
strategically and maximize its impact, it is saddled with the requirement to suppress the
retention of card and PIN. It manifestly has not succeeded, less as a result of any failing
of the MFRC than the lack of legitimacy of this policy and the difficulty of enforcing it on
micro-lenders who tend to resist it. Second, the legal basis of its authority to investigate
and enforce in various areas has been under constant attack – and indeed most of its
activity in this area is suspended due to ongoing hearings. Third, the sanctions at
MFRC’s disposal appear to have significant weaknesses in practice. Deregistration is
frequently not a viable option. Fines appear to be set at less than deterrent levels – i.e. a
maximum of R 25,000 per offence (defined as one or a series of infractions within the
same category), with steep discounts for admission of guilt the first time around. Third,
enforcement of consumer protections has apparently suffered due to lack of cooperation
between DTI and the Ministry of Justice. While card and PIN is widely accepted as being
illegal and irregular, it must also be stated that the failure of banks to provide fair access
for non-bank entities to repayment deductions has contributed significantly to the card
and PIN practice.
Although the task of enforcement falls on the shoulders of the MFRC, other role players
would be able to give great assistance. In this regard one needs to consider the possible
impact that the courts could have. Consents to judgments which were signed on the
same day as the loan agreements could be limited should the courts take a firm decision
not to grant such judgments. Unregistered lenders applying for judgments against
borrowers could be refused access to the courts when bringing such application. The
mere request from a magistrate that a lender must provide MFRC registration certificate
when applying for judgment on a loan where the interest rate exceeds the Usury Act
limitations, will force lenders to register. Too many unregistered lenders are able to
utilize the court system to ensure judgments and emolument attachment orders. A
possible review of section 57 and 58 of the Magistrates Court Act (no 32 of 1944) could
assist in limiting these consents.
3.2.6
The function of providing training and communication to consumers was delegated by
DTI to MFRC at the latter’s founding. The challenge at that point was to transform DTI’s
approach of farming this out to NGOs, by developing a model of effective outreach and
teaming with relevant organizations to carry it out. MFRC tested out new approaches
through pilot initiatives, then worked through a combination of law firms, legal clinics,
and NGOs. Services include advice and training to consumers on budgeting, and
provision of support for debt rescheduling, legal representation to reverse erroneous
judgments, reaching settlements with creditors, and dealing with administration orders
imposed on insolvent debtors – the latter are apparently triggered unnecessarily in many
cases, with high fees required from the consumers under administration.
52
The way MFRC intervenes here is through contractual engagements (including servicelevel agreements and periodic reporting) with seven organizations. These are all nonprofit organisations, selected on the basis of their capabilities and MFRC’s judgment that
their incentives could be aligned with the requirement of providing these services to
vulnerable populations regardless of location (not only in more profitable urban centres).
In addition to borrowers, MFRC also directs its public education efforts at lenders and at
government (i.e. policy advocacy). Its outreach takes the form of workshops, brochures,
and advertisements. A particular focus has been on black micro-lenders, whom MFRC
approached in an effort to help them get to organized among themselves, to employ
good practices, to register with MFRC, and to cope with their relative disadvantage
(compared to banks) in terms of enforcing repayment. More than 200 black microlenders have been registered in connection with this initiative. MFRC has produced
consumer-oriented materials on a range of topics. While some observers feel that they
are too “legalistic” and have limited impact, our review of the materials suggests that
they are of high quality. However, it is possible that, given the difficulties faced in
building consumer awareness and understanding, alternative approaches need to be
explored, e.g. communications that are more closely tailored to the cultural and cognitive
realities of low-income communities.
3.2.7
Information and analysis
Here, perhaps most starkly of all the fields in which MFRC works, there is something
where there was once nothing. Compared to the situation in 1999, much more is now
known about the microfinance sector, and this is largely MFRC’s doing. There are two
main approaches here. One involves analyzing the returns of MFRC member lenders
and issuing quarterly statistical reports on this basis. Here, the regular publication of
industry data has made a dramatic difference. However, questions do arise about the
quality of the information, since MFRC in practice (though not in theory) has few options
to verify lender-reported data or to sanction its non-provision or inaccuracy. The agency
tried to attack this through lender audits that would use samples of lenders’ loan
portfolios to check the accuracy of data that MFRC was capturing through the quarterly
returns. These samples came from the largest lenders that accounted for some 80% of
the market. The second approach taken by MFRC is to sponsor research in areas within
its expanded dual mandate that warrant it. This is not strictly part of its mandate, and we
therefore discuss it in the section below.
3.2.8
Finance and Human Resources
A look at MFRC’s finances suggests that its core regulatory functions (and administrative
support for these) are financed out of fee and penalty income, while grants cover much
of the research, counselling, and outreach activity. In this regard, MFRC has met the
mandate. MFRC’s mandate to be self-supporting conflicts to some extent with its proactive agenda of influencing policy dialogue to strengthen the institutional framework for
microfinance. MFRC’s income comes from several sources. In 2002, some 25% of it
came from grants, up from 12% in 2001 and 18% in 2000; this number was just over
33% in 2003. Grants come from a combination of DTI and foreign donors and
foundations. The remaining income is derived largely from fees and fines (with a small
amount coming from interest and other sources). These numbers suggest a trend in
reduced self-sufficiency by MFRC, but this is not the whole story. MFRC has actively
sought grants for special projects, while some functions delegated by DTI have
53
necessitated additional grant funding. These grants cover a range of activities, from the
NLR to unregistered lender investigations, and research and policy advocacy on several
subjects. Some core MFRC functions, such as educational outreach to consumers,
appear to be paid to a significant degree from DTI grants. MFRC also generates
surpluses, as in 2003.
As for the size and sustainability of MFRC’s fees, these occasion some complaints but
they appear far from burdensome. The relatively light fees for very small lenders would
seem to pose little disincentive for entry into the regulated market – reporting, oversight,
and compliance surely create the larger burden and concern. At the high end of the
scale, fees are capped at R428,000, which would tend to encourage institutions to
increase their scale, thereby reducing regulatory fees as a percentage of turnover. As
suggested earlier, other aspects of compliance pose a greater burden, the authors of
this report have not found any rigorous assessment of the impact of these costs. Overall,
the level of growth in the sector suggests that the costs might be set at the right level,
although high rates and limited competition in some sectors point in the opposite
direction. Based on the assessment carried out for this report, on the whole, fees and
compliance costs are not out of line.
South Africa faces severe constraints on human resources. The relatively advanced
state of economic, financial, and governmental development generates demands for
highly-qualified personnel that are difficult to meet locally, given the imperative of black
empowerment and the continued lag in the provision of advanced education to the
majority population. In short, highly qualified employees command a premium, and this
is especially true of well-credentialed black South African professionals. Given this
situation, the MFRC has done remarkably well in maintaining high levels of qualification,
professionalism, motivation, and representativeness. The quality of the staff is evident
from written documentation of their credentials, as well as discussions with them (both in
mid-2001 and in early 2005) and from their output.
3.3 MFRC: Expanding the mandate
Did MFRC have the right mandate? As we have mentioned, it was very much a “quick
and dirty,” second-best response within a somewhat distorted, path-dependent
regulatory and political environment. The ideal would have been to: scrap the Usury Act,
reform banking law and regulation to introduce tiering and competition, to rationalize the
“balkanized” laws on credit, address land titling and mortgage in low-income areas, and
bring much greater efficiency to commercial credit transactions. As seen previous, these
choices did not appear to be available in 1999.
MFRC had a number of choices before it. It could have focused on its mandate, narrowly
defined, as some have suggested. This would have freed up resources that MFRC spent
on other activities, enabling it to concentrate more on registration and consumer
protection – but at the cost of its strategic “upstream” interventions, such as research on
township housing and other issues, policy-level work such as its contribution to the
Credit Law Review, and its efforts to extend its powers (e.g. to deal with unregistered
lenders) in order better to meet its overall objectives.
The MFRC took steps on its own initiative to “correct” its mandate, bringing it closer to
the ideal. The 1999 Exemption Notice calls for a “regulatory institution” (Article 1.6)
54
approved by DTI, with representatives of consumers and industry on its Board, and
charged with enforcing market conduct and disclosure rules, addressing consumer
complaints, educating the public about consumer rights, and publishing information on
the industry. Nowhere is it stated that MFRC should act as a financial regulator, in terms
of ensuring the development of a responsible and sustainable micro-lending (or more
broadly, small-scale financial services) industry. However, by most accounts, this sector
development mission was very much part of the discussions that led to the 1999 Notice,
and the expectation of several key officials and stakeholders at the time of MFRC’s
establishment was that it would have the “dual mandate” of consumer protection and
fostering development of the industry. These same officials and stakeholders have often
been MFRC’s strongest supporters in taking on the dual mission. They, along with
MFRC itself, see MFRC’s sectoral development work as a strategic approach toward
meeting the ultimate objective of sustainable access to financial services for the average
South African. However, others such consumer advocates and some financial institution
managers feel that by interpreting its mission so expansively, MFRC has made it difficult
for itself to meet the “core” mandate of consumer protection.
In this section, performance of MFRC’s expanded functions was reviewed. In the section
below, the question of how MFRC’s work in this broader area affected its core mission
will be examined.
3.3.1
MFRC understood that an implication of both the core consumer protection mandate and
the industry development mandate was the need for much better credit information
systems. Having these in place would enable the setting of over-indebtedness standards
and help reduce the risks to lenders. Thus, MFRC stepped into the gap with its National
Loans Register initiative. It seems clear that something like the NLR was needed in the
circumstances. The issues were who would take the initiative to get it established, and
what model would be used?
Possible options would have included a voluntary, private sector model that set a
requirement, such as loans must be registered in order for the creditor’s interest to have
legal priority over third parties. This is the essence of the system in the U.S. and other
industrial countries. The model chosen, which requires checking the NLR as a condition
of the enforceability of a loan agreement, takes a more direct approach. On its face, this
seems to provide similar incentives, but in fact it is more coercive, directing the lender to
check the register rather than setting up an institutional framework in which the lender
has a strong incentive to do so.
The South African approach is linked to specific features of the environment, notably the
near-automatic repayment of payroll-based loans and the queue-jumping of banks in
dealing with debit orders. These features suggested the need for a more directive
approach – one driven more by consumer protection needs than commercial incentives.
Apart from the requirement imposed in MFRC’s 2002 rules, it was the threat posed by
MFRC’s reckless lending investigations, and the sanctions that adverse findings could
bring, that pushed the industry towards compliance. As a result, as in other areas
discussed here, there is much more information, more widely shared, than in the past.
This serves the collective interests of lenders and borrowers, as the NLR helps
coordinate lender behaviour and imposes objective limits on indebtedness.
55
The requirement that lenders use the NLR, contained in the 2002 revised MFRC rules,
was struck down with the rest of those rules in the AAA case. One of the more striking
outcomes is the increase in NLR filings since then – indicating that lenders may have
determined it to be in their continued self-interest to use the system. Thus, the kinds of
commercial incentives discussed above appear to be coming into play in South Africa.
This is partly due to the design of the system. Rather than set up a separate public credit
registry, as a number of countries have done, MFRC chose a private sector model that
links the two large credit reporting firms that serve the banks and larger micro-lenders
(TransUnion ITC and Experian) to second-rung credit bureaux that deal with the smaller
micro-lenders. MFRC has access to this information, and monitors activity and reports
aggregate statistics.
3.3.2
Unregistered lenders
The Minister, through legislative amendments to Usury Act in 2003, empowered the
MFRC to conduct inspections on unregistered lenders. As these powers were created by
law, they survived legal challenges to the MFRC’s revised rules. Since the amendment
of the Act, MFRC has acted aggressively. For the year 2004, MFRC received a grant of
R 1 million from DTI for its unregistered lender campaign.
Indicators of its performance here include the following numbers (MFRC statistics from
April 2003 to December 2004):
•
Cases launched (401) and concluded (343);
•
Work in progress (58);
•
Number of criminal prosecutions (21);
•
Cases inspected and completed waiting prosecution (214) (leading to 15
prosecutions, 64 amicable settlements);
•
Amount of fines paid (R 151,150); and
•
Fines often paid as alternative to imprisonment. In numerous cases, suspended
sentences were also given as a deterrent. Unregistered lenders therefore either
close down, register, or abide by Usury Act in the face of a jail sentence.
These numbers do not provide a comprehensive or conclusive statement of MFRC’s
outcomes in this area. They do indicate serious effort, and probably a strong signal to
many lenders who might consider operating without a registration and in contravention of
the Usury Act. However, the clarity and immediacy of this signal depend on the breadth
of MFRC’s reach, and where it has the greatest presence. No agency, above all a
relatively small one, can offer comprehensive coverage. Thus, the numbers become
more meaningful when interpreted in light of qualitative information on MFRC’s strategic
choices, i.e., has it been empowered to choose cases for maximum impact, has it done
so, and with what result? As MFRC is an independent regulatory body, it cannot act as a
prosecutor but must bring cases in the courts. As such, it has discretion over the choice
of lawsuits to bring. Otherwise, it would have only limited control over the use of its
resources, which could quickly get exhausted in pursuing all reports of unregistered
lending. However, another view to underscore success is that successful prosecutions
against these demeanours did not exist before the advent of the MFRC.
56
What impact has MFRC had on the proportions of registered versus unregistered microlenders? The MFRC has conducted some field enquiries to determine the approximate
numbers and trend in remaining unregistered lenders. On this basis, it has estimated
that their numbers are insignificant. Other observers, however, question this conclusion,
suggesting that it cannot be sustained, and in particular that it is extremely difficult to
locate and quantify unregistered lending activity in the townships.
3.3.3
Research and policy development
MFRC has addressed its dual mandate from multiple angles. One of the more prominent
of these approaches is its production of research and its engagement in the
development of policies on credit and financial services. Here, MFRC has made an
important difference in bringing information and analysis out on issues of critical
importance that were not otherwise dealt with such as over-indebtedness and credit law
reform. This is one of the areas where interviewees consistently made positive
comments, both about the quality of the research and about its impact on the direction of
policy development. A number of the research studies “made waves,” pushing issues
into a more prominent place on the policy agenda, and shaping the policy community’s
thinking.
Here, MFRC exceeded its mandate, which calls for it to collect statistics on its work,
publish information on the money lending industry, furnish information to DTI, and review
its own effectiveness. A narrow interpretation of these provisions would support
statistical reporting and some analysis of trends in the micro-lending market. MFRC
clearly went beyond this, studying both issues directly relevant to its mandate (e.g. cost
of credit, use of enforcement mechanisms, indebtedness) and issues that did not lie
within its mandate but that had a bearing on the long-term development of the smallscale credit market (e.g. credit law reform, township housing markets, banking
competition) – thus extending its mandate while ensuring that core resources covered its
original mandated functions.
One can well ask whether MFRC’s activities here amount to an effective use of its
resources. There is a sense in which its work in this area may have created opportunity
costs in terms of its core consumer protection mandate. This appears to be
counterbalanced in two ways. First, MFRC’s
The MFRC has enhanced the
involvement in research comes as part of its efforts
targeting of its efforts to meet
to act strategically and to maximize its impact. As
indicated above, the marginal value of additional its core mandate while, at the
same time, becoming a much
“retail” consumer protection efforts seems small in
greater contributor to policy
comparison to the benefit of new, high-impact
development than indicated in
information and analysis. MFRC’s research efforts
the terms of the 1999
appear to have been well-chosen and to have had
such an impact. Second, the trade-off between core Exemption Notice.
activities and research/policy work is not a strict
one. MFRC has kept up its consumer protection efforts while obtaining additional grants
for the research and policy work.
In short, the story of MFRC’s expanded mandate appears to be more one of synergies
and increasing returns than of diversion of attention and resources, as some critics
claim. Another import issue is that even if the MFRC do the research and publish it this
should be seen as the end of their ability to directly influence. For many of the issues
57
researched the responsibility for action and implementation lie with departments of
government (for example, abuse of pensioners should be investigated and acted upon
by the Department of Social Development, issues related to administrators lie in the
jurisdiction of the Department of Justice, RDP houses as collateral and repossessed in
times of default is once again a case for the Department of Housing in which to
intervene).
3.4 Overall results
Having reviewed the MFRC’s performance of its many functions, within its core and
expanded mandates, an evaluation of its overall performance and results can be put
forth. It is worth noting up front that drawing conclusions about the impact of a regulatory
agency must be done with care. One needs to deal separately with the effects of
MFRC’s activities, the impact of the 1999 Exemption Notice itself, and the influence of
other events and institutions. This discussion assesses MFRC’s overall effectiveness in
meeting its objectives, along with the immediate outcomes of its activities – i.e., its
outputs and the results that these produced in the near term. The wider issues of impact
are addressed in the concluding section below.
By most accounts, MFRC succeeded in performing most of its mandate, and it added to
this by expanding its focus in strategic ways. Some see a tension between these two
aspects of its work, suggesting that the expanded work compromised its core mandate.
However, analysis presented above shows that the strategic work and its synergies with
MFRC’s efforts within the core mandate seem to have enhanced its performance against
the core mandate. Many outputs and immediate outcomes have been documented.
Following are some of the key results for each component of the mandate:
Formalize the micro-lending sector
•
Some 1,900 lenders have been registered; MFRC argues that there has been a
decrease in the ranks of unregistered lenders, but this is not firmly established.
•
More than 200 PDI27 micro-lenders have been registered. At the same time, there
are indications that many more such lenders exist and have not registered,
especially informal township based lenders.
27
•
MFRC offers an effective mechanism for borrowers to submit complaints and
seek help. Even critics of the agency seem to agree that this is a breakthrough. It
also brings specialized resources to bear on the enforcement of consumer
protection.
•
On several fronts, MFRC has made a significant difference in the policing of
micro-lenders’ market conduct. For example, it has made important progress on
issues of loan term disclosure and reckless lending. This is not to suggest that
these issues have gone away, but there are now standards and information
systems in place that, over time, show signs of channelling lender behaviour.
PDI refers to Previously Disadvantaged Individual
58
•
MFRC has played a central role in the collection of sectoral data and the analysis
of trends in the market. There are, at the same time, questions about the quality
of MFRC’s data. On the one hand, the data are clearly better than what had been
available previously. On the other hand, researchers suggest that the data suffer
from some inaccuracies, due in part to their source in lender self-reporting. The
counter argument here is that part of registration is that lenders have to appoint
an accounting officer to audit returns. Some of the information, however, for
example on allocation of credit, is virtually impossible to check and confirm,
leading to the questions around the quality of some of the returns.
•
MFRC has made strong efforts to inform and educate public. The legacy of the
past places a continuing burden here. Despite MFRC’s public information
campaigns and its efforts to ensure the use of standard contracts and
disclosures, there are constant complaints that borrowers do not understand the
terms of their loans. Sometimes these are attributed to less-than-wholehearted
lender compliance with the requirement to explain the written disclosures. A
minority strand of opinion suggests that most borrowers are more sophisticated
and less in need of paternalistic care than government believes. This is no doubt
true for some borrowers, but probably not the majority.
•
MFRC has produced critically important research, creating a much better
standard of knowledge about the microfinance sector. It has used much of this
research to press on major policy issues (e.g. credit law reform), injecting sound
information and analysis into a political discourse that tends to be dominated by
anecdote and polarizing rhetoric.
Manage its business and operate in a self-supporting way, ensuring appropriate
training of staff
•
As suggested previously in this report, the MFRC managed to sustain its core
operations largely on the basis of income from fees and penalties, while
maintaining a high level of professionalism in its staff and obtaining grants for
research and special projects. It has operated at a high level of strategic focus
and productivity as compared to other regulators. This enabled it to stretch its
mandate and to take up “slack” where other relevant agencies, such as SARB,
were unable to deal effectively with micro-lending activities within their respective
mandates.
Cutting across the above themes are some persistent questions about MFRC’s
approach. Some of the key concerns are addressed in the analysis below:
How well did MFRC perform its industry development function?
By most accounts, MFRC did a “sterling” job overall. It imposed some order on conduct
in the micro-lending market, and has been a “reservoir of information” on trends and
needs in the market. Its performance of both the core and expanded mandates helped
develop the market, bringing banks down-market into the sector, and stimulating the
establishment of new institutions. The banks moved in because MFRC made them
comfortable, assuring them that they would incur no serious reputational risk. Existing
59
micro-lenders now have new, more responsible mind-set due to MFRC’s influence.
Thus, the market is bigger (R 17 billion) and more responsible. Beyond this, MFRC has
attempted, through research and policy advocacy, to address the wider difficulties in the
law and regulation on financial services. This has helped bring about current legislative
efforts on Consumer Credit and Dedicated Banks. Some observers also suggest that
MFRC helped create momentum for broader change in the banking sector – for example
the move towards CRA legislation, which played a role in the emergence of the Financial
Sector Charter. Others, including some of the banks themselves, deny that MFRC had
any influence here. It is difficult to take the banks’ position at face value – while MFRC
did not play a central role here, it seems clear that it had an influence.
Has MFRC been truly strategic and “smart” about its choice of focus areas?
The aggregate picture suggests that MFRC has ensured a high level of synergy among
its objectives, activities, and departments in service of the consumer protection mandate
and the underlying policy goal of development of the sector. Some would even describe
MFRC as “visionary.” Government, lenders, and consumer advocates all praised the
agency for its willingness to study the concerns of credit institutions and consumers on
the ground, and to take these findings into account. MFRC’s activities have gone from
formalizing the industry, and thereby setting new behavioural standards, to conducting
research and advocacy concerning the new Credit Law that would unify the patchwork of
norms and implementing agencies in this field – including a regulator that would replace
MFRC (an indication that strategic thinking weighs more heavily than bureaucratic selfinterest).
Interviewees have expressed a number of specific concerns in this area. For example,
MFRC chose not to focus on NGO-MFIs and development lenders. Quite simply,
MFRC’s management and Board, did not believe a focus in this area would be costeffective. The fact that commercial micro-lending has expanded into a R17 billion
industry seems to bear them out, as does the difficult experience in other countries of
transforming NGOs into sustainable financial institutions. Rather, MFRC focused –
consistent with its mandate – on regulating all would-be participants in the sector, who
were in the vast majority commercial enterprises. Development lending meanwhile
languished, but this was a result of flawed approaches adopted by the government and
the parastatal development finance institutions and the MFIs themselves, rather than
activities or lack of activities of the MFRC. Meanwhile, some analyses have been done
of the use of commercial micro credit that support a growing view that around 30% of
these funds are used for development purposes, such as enterprise, housing, education
– a sum that compares with and even improves on the portfolios of the development
lenders. More surely needs to be done. MFRC’s view, expressed in the focus of its
activities, is to improve the broader legal and regulatory framework for small credits.
Some have even suggested that MFRC should do more in this direction, rather than
spend so much of its energy on consumer complaints and regulatory compliance. This
might have been desirable, but it was probably not a viable option for MFRC to neglect
its statutory mandate. Furthermore, there are other support organisations, and the
MFRC was never created to be a support organisation.
Another strategic concern is the extent to which MFRC has shared information and
cooperated with other financial regulators. Some interviewees suggested that MFRC
went beyond its mandate by involving itself in financial regulation, and that it thereby
created duplication, raising costs for banks in particular with the implication that this in
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turn may have had a dampening effect on credit access. This is certainly possible, and
would have been directly addressed had there been a comprehensive regulatory impact
study. At the same time, the MFRC is designed as a functional rather than an
institutional regulator, which means that it deals with any institution engaged in the
market, regardless of form and therefore it must regulate the banks’ activities in the
sector. In principle, MFRC might have taken a “light touch” approach here, working out
an arrangement whereby the SARB took full responsibility for the banks’ activities, but it
would not only have required MFRC to ignore most of the market, but would have
proven ineffective in light of SARB’s apparent regulatory lapses that contributed to the
Saambou and Unibank failures.
Should MFRC perhaps have been more involved in banking, working as a close partner
of SARB and helping ensure timely action when banks were involved in risky practices?
Some have suggested it should have done so. This seems to be a more valid point than
the prior one. Working more closely with SARB, MFRC might have helped to mitigate
emerging problems based on under reporting of information relevant to banking system
(such as Unibank’s use of commission loan agents). Somehow, the link between bank
micro-lending behaviour and prudential concerns should have been better addressed.
However, it takes two to cooperate – perhaps MFRC should have been more forceful,
but certainly SARB could have been more solicitous and receptive. Some have raised
the further question whether MFRC created false expectations by putting itself forward
as a financial regulator, but not being able to fulfil that role – especially in the Saambou
and Unibank cases, where it had information on dubious practices but could not get
SARB to act promptly to prevent the crises. This is possible, but it seems implausible to
blame MFRC for any of this, except perhaps that it might not have been sufficiently shrill
in its warnings to SARB.
Has MFRC been a “captive” of the industry or of the consumer lobby?
MFRC is a self-regulatory organization, at least by the broad definition of that concept.
Such organizations are notoriously subject to “capture” by those being regulated. In fact,
some SROs are essentially captive from their creation. From different sides of the microlending market, one hears at times that the MFRC is a captive, and at other times that
the MFRC, far from being captive, is a “rogue” agency that fails to do the bidding of the
industry. The existence of such contradictory complaints is in itself a kind of testimony to
MFRC’s neutrality. Is there any evidence to support either side? On the one hand,
MFRC has at times been more of an honest broker in its dealings with the industry than
a hard-nosed policeman. Some would argue that it has not been hard enough on the
micro-lenders, failing to reveal the full facts about exploitative interest rates, falling short
of reaching consumers with an effective way to enable them to understand the full
implications of their credit agreements, and losing the battle against practices such as
card and PIN retention. All this has been viewed by some as evidence of either the
MFRC’s or the government’s sympathetic attitude to the lenders, or their desire to avoid
antagonizing or stigmatizing the financial sector. This is no doubt because of the
bankers that sit on the MFRC’s board, and the voice that the sector consequently has in
regulatory policy.
This soft view of the “MFRC as captive” does not square with the facts, nor can it be
reconciled with the views of some industry representatives. In their view, the MFRC is
not captive by any definition. There have been tough discussions of regulatory issues at
its Board meetings, despite the presence of industry players on the Board. The record
61
also shows that MFRC, despite being small (and perhaps under-funded), has been
tough on non-compliance. Furthermore, the member institutions sometimes fail to see
benefits of MFRC membership and complain that it does not act as an industry
advocate, and that it has been too independent in following up enforcement and policy
issues. Some of this toughness may have been driven by MFRC’s early need to
establish its credibility with both the market and the government. Now, it appears that
most people on all sides agree that the MFRC has been a success as an independent
agency. It has won their trust, and the market has voted with its money, by investing in
the sector.
Has MFRC been too interventionist?
This is mainly a complaint voiced by the lenders. There are a few versions of it:
Some claim that MFRC has focused too much on consumer protection. It did a thorough
job on consumer issues, but not enough to “normalize” and develop the market to
ensure sustained access to credit, especially for development purposes. Thus, the
consumer protection focus compromised its ability to be strategic. For example, instead
of going after card and PIN retention, it should have engaged SARB more forcefully on
the payment system. MFRC was said to have been “seduced by numbers,” rather than
focused on impact.
Some would even say that MFRC is a “glorified complaints department” that has had
little lasting impact on the behaviour of most micro-lenders. So, for example, its low
budget meant that the MFRC had to focus on the largest institutions, which were better
managed anyway. This left a lot of smaller lender behaviour unsupervised.
Others have said that MFRC has been, in effect, hyperactive in ways that have harmed
its mandate. Its interpretation of the dual mandate took it “all over the place,” so that it
lost sight of key issues or ended up extending its powers in ways that were successfully
challenged in court.
Another view is that MFRC “stigmatized” profitable pricing by focusing so much on
purportedly exploitative behaviour by lenders – this despite its understanding that smallscale credit is difficult if not impossible to do cheaply.
MFRC has also been said to be too prescriptive and interventionist, regulating actions
rather than attending to results. As a result, it has helped legitimize a highly directive
approach to the sector, which is now reflected in the Consumer Credit Law. MFRC is to
be absorbed in the new Credit Regulator, which one can expect to be even more forceful
(see below). Although a wide range of views was solicited in the development of the law,
the financial sector is quite worried about the possibility that it will raise costs and
constrain credit. At the same time, the political pressure to put consumer credit
regulation on a more formal basis, and to continue implementing an interest rate ceiling,
is intense. The DTI is cognisant of the concerns of the various stakeholders, and have
commissioned an impact assessment.
These variations on the theme of interventionism point to a combination of serious
concern and political posturing by the industry. They also reveal more about the design
of MFRC and the policy behind it than its performance. They point to the real costs to the
62
lenders of having a regulator of this kind without fully accounting for the public benefits
or the choices that MFRC had to make.
How well did MFRC use donor resources and technical assistance?
In the authors’ experience, the MFRC has shown an unprecedented level of interest and
initiative in benefiting from outside help. This is demonstrated in its record of soliciting
grants and technical inputs, as well as in the extent to which MFRC has used material
produced by outside experts in focusing its activities. This, to say the least, is somewhat
unusual in the authors’ experience of developing country governments and their
attitudes towards international aid. Certainly, some of the better-governed and more
forward thinking aid recipient agencies across the world behave more like MFRC. Still,
the agency’s record of soliciting and making use of technical inputs is impressive,
especially in light of its size and resource base. Credit is perhaps also due to the donors
that have worked with MFRC, including USAID, for engaging in real dialogue and
tailoring their inputs accordingly.
3.5 Conclusion: MFRC’s impact
Any exercise that would attempt to quantitatively measure the impact of the Microfinance
Regulatory Council (MFRC) on financial-service provision in South Africa would be
imperfect. The data required for such an empirical exercise were largely not available, or
at least not consistent, prior to collection by the MFRC. Indeed, one of the most valuable
public goods provided by this new regulatory body is collection, analysis, and, to a lesser
extent, dissemination of data on the micro-lending sector. Nonetheless, there will be an
asymmetric emphasis on ex post analysis rather than on ex ante analysis or analysis of
what might have happened in the absence of MFRC. The analysis will also be limited by
the short time period, five years, for which data are available. To the greatest extent
possible, such an examination is undertaken in this report using data published by
MFRC and by other sources.
What does the evidence suggest has been the impact of MFRC’s activities since 1999
on the micro-lending market and the financial services sector as a whole? Our review
points to these broad impacts:
•
Major changes in micro-lender behaviour towards more responsible lending
practices and concern for lenders’ reputation.
•
The influx of banks into the sector, which appears to be driven in part by the
reduction in reputational risk.
•
The emergence of a R17 billion market, along with evidence of use of some of
the consumer credit for developmental purposes.
•
A quantum leap in information and understanding with respect to the sector.
It can be said with some, but not complete, confidence that these results would not have
come about, certainly not to the same degree, in the absence of MFRC. Other results
might have appeared without MFRC. One example that has been cited is the fact that
competition in cash lending drove rates down from 30% to much lower rates per month,
a result that owes more to liberal entry into the sector than to consumer protection.
Some of the lenders that entered the market eventually left it. Some have suggested that
63
MFRC’s efforts encouraged consolidation, since the more marginal players were unable
to meet all the regulatory requirements. Again, not all of this is due to MFRC. For
example, the government’s decision to cut off lenders’ access to PERSAL drove a
number of lenders out and led to some consolidation. This has led some to complain that
MFRC in fact had an anti-competitive effect on the market, and in particular that
compliance costs may have discouraged more black micro-lenders from entering the
market. Further, the most recent failures (Saambou and others starting in 2001) helped
reinforce the division of the market between very large lenders, mainly banks and very
small ones – with little middle ground. Again, much of this results from secular trends
that were only tangentially related to MFRC.
3.5.1
Reforms in Law and Regulation and Changes in Financial-Services
Provision
Pre-1999
The timeline of legal and regulatory changes is presented extensively elsewhere in this
report. Major events are mentioned briefly here in order to establish a benchmark for the
data presented.
The 1992 Exemption to the Usury Act of 1968 exempted small loans from interest-rate
restrictions. As a result, micro-lending increased rapidly due to pent-up excess demand,
and disbursements reached nearly R15 billion in 1999. This is consistent with a broader
trend in the South African banking industry. Between 1994 and 1999, the number of
domestic banks increased by 17 percent, and the number of foreign banks increased by
50 percent. Loans and advances in the banking sector increased to 69 percent of GDP
from 56 percent of GDP over the same period.28
The microfinance sector was largely unregulated but came under scrutiny when the
perception that reckless lending practices were widespread grew. In response, the
MFRC was named as regulator of this sector with the Second Exemption Notice of 1999.
1999 to 2001
Among the most important roles of the MFRC with the Second Exemption Notice of 1999
was monitoring suppliers of microfinance. These providers, banks and non-banks, were
required to register with the MFRC to be eligible to charge interest rates in excess of
those outlined in the Usury Act of 1968. Registrations of microfinance suppliers
increased by a modest 8.6 percent between 2000 and 2001. While such an increase in
the number of registrations suggests better capacity for monitoring and evaluation of
registrants, many suppliers remained unregistered and, therefore, unmonitored. It is
estimated that a small, but significant number remain uncounted. The MFRC has
undertaken efforts to raise registration and reporting, using a carrot-and-stick approach.
With respect to incentives for cooperation with the MFRC, it has facilitated the creation
of the Black Micro-Financiers’ Association. With respect to disincentives, the MFRC has
investigated both registered and unregistered lenders. In 2001, 132 investigations of
registered lenders led to 50 prosecutions, and, in 2002, 139 investigations resulted in 18
prosecutions.29 For the unregistered, the MFRC has worked with the South African
28
29
Falkena, et al. (2004), p. 22.
MFRC Annual Report 2000.
64
Police Service (SAPS). The continuation and extension of these efforts would be
advisable. Otherwise, the integrity and efficacy of the regulator of these suppliers would
be undermined.
Another important aspect of the monitoring function is complaint resolution. In its first six
months of operation, it received 13,397 calls, 3,149 of which were complaints. Table 2
shown previously in this report gives the composition of complaints received. Most
complaints related to nondisclosure of contracting terms and use of bankcards and PIN
codes. Complaints served as both grounds for investigation of lenders and the basis for
borrower education campaigns.
It is worth noting that a positive externality for the federal government is derived from
registration with the MFRC. An unintended outcome is that the revenue-collection
capacity of the South African Revenue Service is enhanced, since registration with the
revenue service is required with MFRC registration. While the effect on banks is trivial,
many non-banks were not previously and legally in the formal sector, and this is one of
many ways by which the economy is becoming more formalized and potentially more
productive.
2002-2005
Registration with the National Loans Register (NLR) became compulsory for suppliers of
microfinance in July 2002. The NLR is a database which records all loans which are
disbursed by lenders registered with the MFRC. By the end of 2004, the NLR contained
more than 5 million loan records encompassing over 1,000 lenders and had over 16
million inquiries.30 For lenders, the NLR allows more careful assessment of potential
borrowers’ ability to repay a loan. In the interviews conducted while in the field, many
suggested that compliance with NLR registration had provided a useful service for the
financial services industry. For the MFRC, this has resulted in better execution of its
monitoring and consumer-protection role. Through the NLR, the MFRC has been
provided with more information to identify reckless lending practices and to increase
compliance with Reckless Lending rules. Nonetheless, the NLR is only as good as the
data reported. In the future, it would be useful for the regulator to aid in increasing the
quality of data reported, e.g., with respect to borrowers’ own commitments and creditor
data.
Further, important new data have been made available on borrower and household
indebtedness and on financial deepening. In a study that uses the Income and
Expenditure Surveys of Statistics South Africa and was commissioned by the MFRC, it
was found that while mean indebtedness fell between 1995 and 2000, the total indebted
population doubled, going from 15 percent in 1995 to 31 percent in 2000. Two of the
three poorest categories of borrowers experienced the largest increases in
indebtedness: 216 percent and 236 percent, in real terms. The debt-service ratio is
highest in the lowest income category, 60 percent, compared to 36 percent in the
median category. One upshot of these findings is that there was deepening in the
financial sector over this period, since consumers are more indebted.31
30
31
MFRC
Human Sciences Research Council (2003), p. 6.
65
Whether borrowers are over-indebted is an open research question, since it hinges on
the accuracy of reporting of income and indebtedness data. For those who are
legitimately over-indebted, MFRC is implementing a program of debt relief that includes
negotiating with creditors on behalf of borrowers. In general, considerations of borrower
indebtedness and use of the NLR should aid in greater efficiency and smoother
functioning of credit markets and, by extension, the economy in South Africa.
Registration with the MFRC increased by 40 percent between 2002 and 2004. This is
likely due for the most part to increased awareness and MFRC encouragement. By the
end of 2003, its cooperation with the police, revenue service, and Commercial Crimes
Courts, among other agencies, resulted in 86 investigations on which a number of
prosecutions have been based.
4. The remaining challenges
4.1 Introduction
The discussion above on market development and the MFRC inferred a number of
deficiencies and needs within the South African context. Perhaps the most obvious of
these is a robust market for enterprise, housing, and other kinds of developmental
finance.
The market for small and micro enterprise finance – credit or otherwise – has developed
only modestly since the early 1990s. It is hard to make a profit in enterprise credit, hence
the massive entry into consumer credit, which now relies almost exclusively on either
bank account deduction (debit order based) or, to a lesser extent, payroll-based
repayment mechanisms, neither of which are available to enterprise lenders. And,
somewhat ironically, with all of the attention paid to credit, and hence a dearth of
financial approaches that prioritise intermediation, the financial sector has not developed
the liability and fee based products that might have lessened the dependence upon
salary and bank account-based collection methodologies.
A complex array of problems, many of them unrelated to the governance of the financial
sector, weigh down the development finance market. Of the problems related to finance
per se, many relate to the bank-oriented regulatory structure (entry barriers, lack of
tiering and competition as well as NGO-MFI transformation option, limits on permitted
sources of finance for non-banks), while others derive from inefficiencies in the
transactional framework for credit (emphasis on form rather than function in the
treatment of secured transactions, lack of support for self-help options, difficulty in
enforcing agreements and repossessing collateral). Added to this is the failure of the
development finance parastatals to reach scale and have an impact. Similarly, scale
economies are not being realised by the NGO-MFIs, and they continue to have high
costs relative to the size of their lending operations.32 These issues have been
addressed in a number of reports (see Meagher and Wilkinson 2001), and there is
apparently an understanding at cabinet level of the need for reform in areas such as
commercial credit transactions.
32
Presentation by MFRC to the Micro Enterprise Alliance Conference, October 2004
66
The non-financial problems are equally if not more complex. Labour regulation and land
titling are at the top of many lists of complaints. The former appears to have a severe
dampening effect on the growth of small firms, hence the demand for SME credit. The
land titling makes it extremely difficult for lenders to efficiently leverage collateral in the
form of real property. Apparently, title registries in low-income areas such as townships
cannot keep up-to-date records of transfers, because so many of these happen
informally. Related to this is a lack of supportive economic infrastructure in the
townships, which government is now trying to address. This has led many to the
conclusion that there is as yet no real moderate-income housing market in South Africa.
Looking forward, as the situation develops in South Africa, a number of critical issues
remain to be addressed:
•
Incentives to expand development finance: top-down (banks), bottom-up (MFIs)
•
The efficiency of commercial credit transactions
•
Savings, insurance, other vehicles
•
The heavy burden of “red tape” on SMMEs
•
The need to develop the embryonic township and moderate-income housing
markets
•
The need to improve information infrastructures, such as title and collateral
registries.
In the discussion below, some of the legal-regulatory environment issues are explored in
more depth, using lessons from international comparative case studies to structure the
discussion.
4.2 Lessons from country comparisons
As South Africa looks to the future of its financial sector and proceeds with a national
debate on consumer credit, financial sector tiering, and the best approaches to
combating over-indebtedness, the research team looked to international comparisons to
see what lessons could help structure the discussion for South Africa. Annex I discusses
these cases in further depth, but some brief highlights from the lessons for South Africa
will be outlined here.
4.2.1
The Structure of the Regulator
The regulator, both broadly of the financial sector and for consumer protection (whether
this is outlined broadly or narrowly, as South Africa proposes in the case of the National
Credit Regulator) must serve both the roles of preserving the integrity of the sector by
maintaining competition and protect the rights and interests of the consumer. Debates
about where such regulators should be housed include: directly within the government,
as a self-regulated industry association, or as a hybrid mix between the two. The MFRC
has often been described as just such a hybrid mix.
The case studies explored an instance of self-regulation (Mexico) and of keeping the
regulator within the central bank (Brazil). The United Kingdom’s approach of placing
67
regulation for consumer protection and financial services in two separate, independent
regulatory bodies seems to achieve a relatively good balance between the two such
competing interests. It should be noted, however, that neither regulator is tasked with
“industry promotion” which may increase the conflict of interest between regulating
effectively and being attentive to regulated entities.
Furthermore, international discussions on the appropriate form of microfinance
regulation and supervision create a distinction between regulating microfinance activity
versus regulating microfinance institutions. While not mutually exclusive, regulating the
activity implies a separate legal definition of microfinance as distinct from commercial,
consumer, or mortgage lending – while any institution within the financial system may
undertake such activity. Regulating institutions implies the creation of separate tiers or
“windows” for institutions that engage in microfinance; pundits suggest that this should
only be developed if no other institutional type exists suitable for NGO transformation.
The current debate in South Africa effectively allows both options.
4.2.2
Approaches to Financial Outreach
The Annex outlines several interesting approaches to financial outreach. First, some
countries have begun introducing innovative savings initiatives similar to the mzansi
accounts33 in South Africa. Second, in other places there have also been innovative
partnerships developed between traditional banks and non-traditional retail outlets to
deliver financial services. These include partnerships between supermarkets, post
offices, and even local shops and kiosks. The success of such initiatives is predicated on
a competitive environment such that financial institutions, searching to build new market
niches, have commercial incentives to create such partnerships. They also require the
regulatory freedom to engage in these partnerships, including increased access to the
payment system from a variety of players. Finally, no punitive legislation requiring
outreach was implemented in the case studies highlighted, and still these mechanisms
that increase outreach were created and became quite successful. Therefore,
competition between actors – including between tiers – must be built into the system.
4.2.3
Consumer Protection
Recent initiatives in the United Kingdom have been driven, as in South Africa, by
concerns about over-indebtedness, reckless lending, and the increased vulnerability of
low-income populations. The Annex highlights recent discussion in the UK, where a new
consumer credit bill was introduced to Parliament for debate in January 2005. These
initiatives will create a minimal cost of compliance for fair lenders and smaller lenders by
implementing a risk-based monitoring system that has allowances for small lenders. In
addition, it will promote new measures for effective enforcement by the Office of Fair
Trading, the UK’s independent regulator for consumer protection and competition.
Finally, the government has requested and built a strategy to reduce over-indebtedness
that corresponds to the increased levels of information disclosure called for in the
consumer credit legislation; in addition it defines reckless lending broadly to not only
include high interest rates, but poor information disclosure, pressure-lending, and
inappropriate levels of security as well. These are some lessons that South Africa can
learn from as it debates its own consumer credit policies.
33
A savings account offered by the commercial banks and the Post Office Bank with low entry hurdles, low
cost structures and that incentivises accumulation by its progressive rate structure.
68
4.3 Situation in South Africa and expected trends
Three different pieces of legislation will most directly impact the structure and market
response in the South African financial services arena, namely the National Credit Bill,
the Dedicated Banks Bill, and the Cooperative Banks Bill. All three will likely become law
by the end of 2005, and already some market players have begun to assess the
opportunities and threats proposed by them. The other legislative reform that could
potentially have as much impact as any one of these bills, is changes to the structure
and running of the payments system – in short, a ground swell of activity has pushed the
four major banks, which effectively control all payments, and the SARB to look at
opening access to the payments system to many other and different kinds of financial
service providers.
The National Credit Bill (NCB) will have more impact on business models than on
institutional structures. With the real potential for restrictions on things like marketing in
the home or office, lines of credit, waiting and cooling off periods, stricter enforcement of
the use of the NLR, and the likely cap on interest rates for certain classes and sizes of
loans, financial service providers will have to modify systems, procedures, staffing levels
and competencies and a host of other ingredients that comprise the delivery of credit in
its current form.
Depending upon the content and mode of application of the regulations coming out of
the NCB, there could be at least a temporary dip in access for poor and low income
financial services consumers, as providers tighten credit granting procedures and realign
their business models. On the other side of the dip, the market may see more
aggressively competitive providers trying to offer similar or better products for the same
or less cost to the consumer.
The Dedicated Banks Bill may not have as much impact on diversifying institutional
structures that the National Treasury would like to see for two major reasons. One, as
currently drafted, limits the ability of core banks to make loans to SMEs and other
unsecured loans, because they could not use the deposits mobilised to on-lend for those
purposes. And two, some of the biggest non-traditional companies like cell phone
operators and retail chains, which Treasury sees as key actors in this new banking tier,
seem to be opting for an alliance with an existing bank under a tier one license, rather
than going through the hassle of setting up their own new bank.
The commercial attractiveness of a narrow bank (i.e. savings and transactions only) has
yet to be proven, but the business models of some retailers may lend themselves to this
institutional form, as they try to extend their existing reach into the low income market
with store credit products, into savings and transactions products. Otherwise, Post Bank
and perhaps Ithala remain as the main organisations poised to take up this sort of
license.
Cooperative Banks already exist in the various forms of user owned and managed
savings and / or credit societies – from SACCOL’s affiliates, to stokvels of various
flavours, to the vestiges of the village bank experiments. Thus the new legislation would
largely serve to formalise existing institutions and take them from some form of exempt
status to a proper legal status. The significance of their role in extending access to
69
financial services will derive more from their ability to build skills and credibility in the
market, rather than from formalisation per se. In fact, many may wither or go
underground in the face of new official and tighter regulation, without explicit
interventions to improve systems, people, and business models.
Innovators would appear to be keener and better equipped to venture into the low
income markets through the liabilities side of their balance sheets, rather than through
the assets side. In addition, since several of the innovators likely to come to the market
will enter through existing models that sell goods and services to low income clients,
they are likely to look for ways of improving the transactional efficiency and effectiveness
of their offerings. These two important factors sharpen the policy and regulatory focus on
access to the payments system. Without responsible opening of the payments system,
all non-bank financial intermediaries (and in reality, any others than the “big 4”) will have
only limited appetite and ability to roll-out profitable business models for the poor and
low income market segments.
4.4 Legal and regulatory gaps and enhancements
The broad array of reforms and improvements needed in and around South Africa’s
financial sector have been mentioned above and discussed in a number of other reports
(see Meagher and Wilkinson 2001). In this part, the discussion is focused on current
South African initiatives to deepen the financial sector, namely the Dedicated Banks Bill
and the National Credit Bill. We also address the Financial Sector Charter, a recentlylaunched initiative of the banks in cooperation with NEDLAC.
4.4.1
Dedicated Banks Bill
The bill provides new windows for financial services: the savings bank, and savings and
loan bank. The bill’s provisions seem to create an institutional license category that
could be filled by non-bank companies with the capital and outreach to compete with the
banks in offering basic savings, transfer, and credit facilities. Some have expressed
scepticism about how much this will change things. It is unlikely to attract a large influx of
new entrants. Its success in mobilizing savings on a safe and sound basis will likely
depend on the establishment of some form of deposit insurance, which to date has been
resisted by the banks. However, there may well be sufficient interest by companies with
client bases, e.g., large retailers and cellphone companies, to make possible the entry of
a few key competitors.
There are at least three sets of provisions in the Dedicated Banks Bill that are likely to
discourage any potential interest by those wishing to establish a savings and loan (S&L)
(second tier) bank. First, an S&L’s ability to extend intermediate savings is limited. It can
extend unsecured loans only up to the amount of its qualifying capital and reserves, and
it can extend secured loans up to a percentage – to be prescribed – of the value of the
security (Art. 4(1)). Unless borrowers can put up valuable collateral, an S&L will be
limited – as all non-banks are currently under the Banks Act – to its own capital as a
source of loan funds. (Contrast this with banks, which can extend unsecured credit
subject to risk-based capital adequacy and provisioning rules.) Secured loans, of course,
can potentially be a highly valuable source of small enterprise finance. But this assumes
the kind of efficient and flexible system of secured transactions available in a few of the
70
developed industrial countries, but not yet in South Africa. So also with mortgaging
systems, which have proven thus far unequal to the task of supporting investments in
housing for the average South African – above all in the townships. If this situation is
improved, then the bill’s provisions in this area should not be a problem – but for now,
they present difficulties.
Two other issues with the bill are of a lesser order. The minimum capital of R50 million
for an S&L (Art. 66) may be difficult to raise. Restrictions on ownership of dedicated
banks by non-financial companies (Arts 33, 38) may create a disincentive for potential
investors such as cellphone companies and retailers. Last, the liquid reserve levels are
to be determined – it is not entirely clear how viable the second and third tier banking
windows will be until this is defined. As suggested above, these concerns apply to the
S&L or second-tier bank category. This is the tier that, in principle, holds the greatest
promise of bringing serious competition into the banking industry. The limitations in the
bill correspond well with the anti-competitive posture of the dominant banks (notably the
“big four”), and the relative lack of concern by the SARB with banking concentration. The
bill fits with the longer-term scenario of the banking industry fending off potential sources
of competition, e.g. in creating the Mutual Banks Act, which has attracted very little
interest due to the inadequate incentives offered to potential entrants. Similarly with the
1992 Exemption Notice – an initiative widely understood as an effort to liberalize informal
finance while protecting the banks from any serious pressure to move down-market.
The third-tier savings bank category appears more straightforward and raises fewer
concerns. This suggests that mobilizing savings is a key motivation behind the bill, and
is the most likely benefit to materialize.
Perhaps a more binding constraint is the lack of any provision in the bill for access to the
payment system by dedicated banks. Since the payment system is essentially a
common enterprise of the largest banks, it is very unlikely that prospective competitors
will be offered equal access – short of some robust government intervention.
4.4.2
Financial Sector Charter
The banking industry has focused its response to popular pressure for expanded
services and “black economic empowerment”
on the Financial Sector Charter. The Charter The Charter is frequently cited as
embodies an agreement among the major transformative – something that will
players in the financial sector – banks, supply the missing dynamism and
insurance companies, brokers and exchanges outreach to the sector. It is certainly
– on a set of service provision and possible that it will bring significant
empowerment targets in such areas as improvements in service provision.
banking services to low income populations, However, it is a pale substitute for
black employment and ownership in the real competition – and it is the
financial sector, and support for black spectre of competition that the
entrepreneurship.
Financial
services sector appears to have headed off
companies are expected to pursue these by means of the weak provisions of
targets, to report periodically on their progress the Dedicated Banks Bill and other
to a monitoring body set up under the Charter, relevant legislation.
and to be graded on their performance in the
71
form of a public “scorecard.” The mechanism here is one of self-regulation on the basis
of a voluntary code – but with the threat of CRA legislation hanging in the background
should the sector not perform satisfactorily.
It is also not clear what the cost will be of meeting the Charter targets. In the U.S., while
the Community Reinvestment Act has forced some service extension and empowerment
activities, some analyses see it as anti-competitive. The costs of compliance have been
more easily borne by large banks than by their prospective competitors in the relevant
neighbourhoods – with the result that actual financial services to these communities
have in many cases suffered. Similarly with the Charter, the dominant players in the
sector will be best able to afford to comply. Again, this may bring benefits in terms of
outreach and black representation, but the Charter is also likely to be anti-competitive
(despite exemptions for very small institutions). The Dedicated Banks Bill does too little
to counteract this, and is in any event not the top priority for reform in the sector. That
honour goes to the National Credit Bill, which will also inevitably create compliance costs
that are more easily borne by the dominant institutions.
In summary, one might well conclude that the financial services reform process in South
Africa consists of competing proposals for empowerment and protection (the Credit Bill
and the Charter) that suit the political temper of the time, and may provide some
satisfaction when implemented, but that on the whole will likely strengthen the hand of
the major banks and postpone the introduction of serious competition into the sector.
4.4.3
National Credit Bill, National Credit Regulator – and lessons from
MFRC
The centrepiece of South Africa’s current strategy for enhancing credit access is the
National Credit Bill. There is little need to repeat the detail provisions of the Bill here,
given the extensive public discussions that have been held.
The National Credit Bill aims to formalize and rationalize the system that has existed
since 1999, in the form of the 1999 Exemption Notice and its enforcement agency, the
MFRC. The Credit Bill replaces the dual system of Usury Act and Exemption Notice, and
the further division of transactions by form (e.g. bank loans versus retail credit
agreements), with a single set of norms. By setting up the National Credit Regulator
(NCR) under a legislative act, the Bill eliminates those questions that arose about the
ultra vires nature of MFRC actions with respect to the Exemption Notice and the Usury
Act – i.e. all NCR powers are on a firm legislative footing. Questions may (and probably
will) arise with respect to the consistency of the regulations DTI adopts for the NCR, but
at least the question of creating a “silk purse” (strong, consistent consumer protection
powers) out of a “sow’s ear” (an Exemption to the Usury Act) is a complication one no
longer will need to address.
In brief, the bill creates a unified credit law applicable (with a few exceptions) to those
loans extended to natural persons. It creates a set of protections, including a standard of
over-indebtedness and a prohibition on reckless lending, as well as interest rate caps to
be determined by DTI. This approach has evoked lots of commentary, as in many areas,
with different sides of the question taking strongly contradictory positions. The lenders
suggest - that the bill goes overboard in its level of protection, and that the compliance
costs will cause a contraction and consolidation in the credit market. Some go further,
72
claiming that the bill undermines the voluntary Charter by imposing interest rate controls,
costly and intrusive reckless lending rules (based on a definition of income that ignores
informal earnings), flawed disclosure rules – and all without a serious regulatory impact
assessment. All credit facilities will have to be reviewed in light of the reckless lending
rules. Some interpret the bill as imposing requirements that will make revolving credit
lines impossible, due to the required processes of giving quotes, and giving a cooling off
period between replenishments. It is also feared that it will discourage mortgage lending
due to over-indebtedness provisions. The Banks are said to be in favour of the bill. As in
other cases of heavy regulatory requirements (CRA), the large banks are in the best
position to make the adjustments and to bear the costs of compliance – it’s the smaller
providers that will be worst-affected.
This discussion is by way of evoking the tenor of the controversy. Much of it is based on
old drafts of the bill, some of it on selective reading of it – as well as political posturing. In
brief, the bill proposes an important shake-up that will spread costs and benefits
somewhat differently than at present. For purposes of this report, the important feature
of the bill, one that has not been discussed at length, is the transformation (or
absorption) of the MFRC into the National Credit Regulator. We focus the remainder of
the discussion on this and related features, bringing to bear some of the lessons of
MFRC’s experience.
What has MFRC done well, which would be worth preserving in the NCR regime?
What functions of MFRC would not fit in this model?
The authors have reviewed MFRC’s experiences, its successes and shortcomings. To
what extent does the Credit Bill reflect the lessons of those experiences? Does it build
on the MFRC’s successes? Clearly, the provisions on the NCR resemble those of the
1999 Exemption Notice. The responsibilities of the two agencies are quite similar, as is
the form (MFRC was called a “legal entity,” the NCR a “juristic person”). Both agencies
have as their major functions the promotion or development of the industry, conducting
research and periodically reporting on their monitoring of the industry, and the more
traditional regulatory functions of registration and enforcement. There is, however, a
potentially important difference. The MFRC reflected more of a self-regulatory approach
to the sector, while the NCR is to a greater extent a creature of government – hence
more of a classic public sector regulator. The full extent of this difference has yet to be
decided, since the enabling language of the Bill has not yet been translated into
regulations.
However, there are indications in the Bill of a different approach. Whereas the MFRC
was required to have equal representation of the industry and of consumers on its
Board, the NCR is to have a Board appointed entirely by DTI and other interested
ministries. In addition, the Exemption Notice stipulated that the MFRC’s revenue would
come in large part from regulatory fees – a provision that, along with the Board
representation and the trends leading to its founding, meant that MFRC’s incentives
were aligned with the industry’s, at least to the extent of try to ensure sustainability in the
sector. No provision of the Credit Bill deals with the budget issue (which is perhaps
better set out in a regulation). In other words, the MFRC and NCR look similar in many
respects, but the provisions of the Credit Bill provide some basis for designing a different
kind of agency in the regulations – perhaps one more closely tied to DTI and
government, and less sympathetic to the industry.
73
At this point, it is worth discussing the range of options for the design of the NCR. The
spectrum runs from ministerial control to full self-regulation. The bill, without defining its
terms, calls for the agency to be “independent.” This at least suggests a regulator that
falls somewhere between those two extremes – perhaps an independent public
regulatory agency or a hybrid arrangement in which a private entity carries out delegated
public regulatory functions. In the former case, special provisions regarding appointment,
accountability, and fiscal support are designed to ensure that the agency acts on an
autonomous and professional basis, free of both political and industry interference. This
is especially important where the agency combines the equivalent of legislative,
executive, and judicial functions – albeit subject to legislative oversight and appeal to the
courts. Such an arrangement can protect against (lower-case “p”) politics of the
bureaucracy, which might otherwise have produced regulatory actions motivated by
personal advantage. However, independent regulatory agencies are still subject to
(upper-case “P”) Politics in the sense that their key appointments and their medium-term
agenda are defined by elected officials and their policies.
In the case of hybrid or delegated regulation, by contrast, these political influences are
counterbalanced by the pressures inherent in all forms of self-regulation. At the far
extreme of self-regulation, i.e. voluntary industry codes of conduct, the government is
kept at arm’s length and the industry determines the mode of policing, which may be
more or less robust depending on the outside pressure that the industry faces – as in the
case of South Africa’s Financial Sector Charter. The other end of the self-regulation
spectrum is closer to classic governmental regulation, but with some public-private
division of labour. Here, there are a few variants. One is “statutory self-regulation,”
typically associated with the professions, where legislated standards are enforced by
industry associations, and certification procedures reinforce professional standards and
public confidence. Another variant, involving greater involvement by government, is
“supervised self-regulation.” The prime example here is the stock exchanges in the U.S.,
which police member behaviour according to well-established industry rules, under
continuous oversight by government regulatory, investigative, and judicial authorities –
notably the Securities and Exchange Commission. This arrangement draws on the
established customs and rules of the exchanges, backed up by official oversight. This
“outsourcing” of regulatory policing has the advantages of flexibility and efficiency –
although periodic scandals do arise, which often lead to a ratcheting up of regulatory
standards (Priest, 1997).
MFRC sits somewhere in this part of the hybrid regulatory spectrum, exhibiting some
features of the “statutory” and “supervised” self-regulation models. Several industry
representatives have complained about the MFRC’s intrusiveness, and the fact that it
does not behave the way a member-based industry promotion organization should. On
the other hand, consumer advocates have complained that it has been too lenient with
the industry on rates, disclosure, and over-indebtedness. Both sides admit that the
MFRC has had a major role in ensuring greater formalization, integrity, and sustainability
in the industry. This is, arguably, precisely because the MFRC was set up as a hybrid
and not an arm of government. It has been able to encourage voluntary compliance by
the industry, as a self-regulatory body, at the same time as it wielded investigatory
powers and official sanctions. In parallel, it has reached out to consumers to provide
information, training, and a forum for grievances. Last, its position outside the
government hierarchy (along with astute appointments), has enabled MFRC to resist
political pressures to become a draconian enforcer charged with “shutting down loan
sharks” wherever they exist.
74
What are the lessons of this analysis for the NCR? Consumer credit protections have
had such prominence in South Africa that one can now safely say that government and
the financial sector are taking these issues seriously. Indeed, in addition to the NCR, the
Credit Bill sets up a National Consumer Tribunal, and it recognizes the need for
coordination with emerging consumer regulators at the provincial level. In short, the
political atmosphere is very much protective of borrowers, and the instrumentalities of
consumer protection are being set up at multiple levels. In such an environment, it may
be wise to have a Regulator situated at a distance from the political currents in
government. A more politically responsive regulator would likely find it difficult to resist
crackdowns in response to outcries about particular problems or abuses. The political
economy of finance is such that the enforcement of protections could easily become
uneconomical, and so restrict the very access to affordable credit that policies in this
area seek. For similar reasons, central banks and prudential regulators are given
constitutional status or other guarantees of their autonomy. The NCR would probably
best be structured to resemble the MFRC, in order to benefit in the same way from a
solid understanding of, and relationship to, the industry. There are, of course, risks (e.g.
“capture” by the industry) in this strategy, but these risks also exist in classic
governmental regulation – and in this case they appear to be counterbalanced by the
benefits of insulation from political imperatives.
4.5 Institutional gaps and challenges
4.5.1
Development of the Market for Microfinance: Institutional Gaps
Reforms in law and regulation embodied in the activities of the MFRC have led to
changes in the provision of microfinance. In turn, it has been anticipated that changes in
the financial-services sector would result in changes in economic activity and in poverty
alleviation. Past shortcomings and institutional gaps in this regard have been alluded to
above. Presented below are recommendations for addressing these concerns in the
future.
4.5.2
Suppliers of Microfinance
Default rates are often high in the micro-lending sector. Too little attention has been paid
to the relation between interest rates and default rates. In the last 30 years, both the
theoretical and empirical economics literatures have examined the adverse-selection
and moral hazard problems. That is, in the presence of high interest rates, risky
borrowers are invited into the market for credit, and, due to incomplete information on
borrowers, good borrowers become indistinguishable from bad borrowers. Credit
rationing and default rates rise as a result. A number of suppliers of microfinance appear
to have the causal relation inverted, suggesting that because default rates are high, high
interest rates are needed. Given the growing evidence in the economics literature, there
is a need for better models among credit providers to appropriately price credit and to
mitigate credit-rationing problems.
In the future, a regulator may address the problem by encouraging development of
appropriate pricing models among suppliers through, for example, seminars, courses,
training sessions, and study tours of their counterparts in other countries. The Federal
75
Reserve Banks, the Federal Deposit Insurance Corporation (FDIC), and other regulatory
bodies provide such training and educational opportunities in the United States. The
MFRC already conduct seminars for lenders, and these efforts could be extended.
Related to the problem of inappropriate pricing models is the problem of information.
There is also a need for more appropriate models to assess creditworthiness, or credit
scoring. As aforementioned, the NLR often contains poor information from potential
borrowers, lenders, and credit bureaux. Therefore, more and better data on individuals
and households applying for credit are needed. Further, financial intermediaries, banks
and non-banks, should develop and use broader, more appropriate criteria to ascertain
creditworthiness. Again, the regulator might use educational programs, such as those
implemented by the Federal Home Loan Guarantee Program (Fannie Mae) that works
with low-income households and first-time borrowers to learn about one’s credit score, to
budget appropriately, to lower the debt-service-to-income ratio, and to save for
contingencies, among other things. Techniques have been used in other countries as
alternatives to collateral or traditional measures of creditworthiness, such as pledges or
co-signers.
In post-socialist Russia, it has been found that users and suppliers of trade credit were
being used by other firms and bank to ascertain creditworthiness of potential borrowers
(Cook (1997, 1999)). In general, surprisingly little attention is paid to inter-firm finance, or
trade credit, in South Africa, despite the fact that it accounts for roughly 60 to 75 percent
of working capital in the United States and in the United Kingdom and despite its
significant use by small firms throughout Eastern and Central Europe in leading their
post-socialist economic transition. In fact, the South African Reserve Bank estimates that
trade credit accounts for nearly 80 percent of firm finance in South Africa.34 Given the
experience of South African Breweries and the extensive network of firms to which it
supplies trade credit, a regulator should be interested in better measuring and
monitoring such credit flows.
A regulator in the future may also address the growing problem of secured lending. In
townships, home to 2.8 million households or one-fifth of all households in South Africa,
property rights are often not secure.35 Further, property is often of little or no value in
these areas due to poor environmental conditions and infrastructure. The secondary
market for housing, growth in property values, and general property development will
remain limited in these conditions. This issue was raised a number of times during the
field visit in January and February 2005. While fulfilling its role of consumer protection
and education, enhancing the value of collateral may also be included among the
training sessions conducted for financial intermediaries (and consumers). As well, the
regulator may also aid financial intermediaries in developing the market for title
insurance, which appears relatively underdeveloped in townships and rural areas. In
general, the regulator may support better enforcement of property rights, including
through promoting cooperation between suppliers of microfinance and local
governments and local firms, such as collection agencies and repossession
professionals.
According to MFRC data, most micro loans are for consumption: 70 percent,
consumption, including furniture and other household goods; 14 percent, education; and
34
35
Johan Prinsloo, Senior Economist, Reserve Bank, Interview on Wednesday 2 February, 2005.
FinMark Trust (2004), p. 1.
76
11 percent, housing.36 As aforementioned, SMME finance is under-reported and needs
further quantification and regular reporting. That is, in collecting, analyzing, and
presenting data on suppliers of finance, MFRC or its successor could regularly distribute
surveys to registered credit providers to inquire about end uses of finance and about
other information that may be of interest to other credit providers that is not proprietary
or sensitive. Nonetheless, not much has changed with respect to SMME finance since
the 2001 Task Group Report on SME Finance. “… The finance that the owner-managers
can access in their personal capacity plays a critical role in the provision of finance to the
enterprises.”37 Financial intermediaries should be encouraged to develop products
specifically for productive lending that would raise the income of the borrower and raise
the probability of repayment. The RHLF is developing a product by which financing for
home improvement is designated for rental.
4.5.3
Macroeconomic Developments and Challenges: Changes in
Financial-Services Provision and Changes in Economic Activity and
Poverty Alleviation
In general, in the South African banking system there appears to be too little
coordination with respect to systemic risk. The failures in 2001 of Saambou and Unibank
provide a stark example of this lack of regulatory coordination or clarity. Between the
SARB and MFRC there appears to have been a passive role adopted or unclear
responsibility established with respect to assessment of specific risk and of
interrelationships in the financial system, or systemic risk. It would be advisable for
MFRC or its successor to participate in an early warning system with clear standards for
detecting solvency, liquidity, and other critical problems and with clear lines of
communication established among all relevant regulators such that swift action, if
needed, can be taken by the SARB, which would ultimately be responsible for the
banking system in toto.
A second important macroeconomic issue is the overemphasis on lending to individuals,
particularly in the debate on access to the financial system, and a lack of savings
vehicles. A number of countries in Africa, Asia, and Latin America have developed and
used bundled lending and saving instruments. That is, repayment includes a forced
saving feature along with amortized principal and interest. Banco Sol and FINCA employ
models based on forced saving. Targeted savings products, such as Mzansi accounts,
could also be encouraged by the regulator as a means of smoothing consumption,
raising the probability of repayment and minimizing lender and borrower risk. There is
growing evidence in the economics literature that one of the principal successes of
microfinance in reducing the burden of poverty is its ability to provide households with
the means to smooth consumption, and saving is another way to accomplish this in the
presence or absence of lending.
A final macroeconomic issue is the term structure of loans. Most micro loans are not
one-month loans, the shortest loan term. Longer-term loans of two to 36 months
constitute 70 percent of annual disbursements and 90 percent of the loan book in
2003.38 While we cannot distinguish longer- from shorter-term maturities within the
36
MFRC, “Total Cost of Credit Study”, 2004.
Task Group Report on SME Finance, 2001.
38
MFRC, Total Cost of Credit Study, p. 10.
37
77
second category, these maturities are too short to support investment in fixed plant and
equipment in the cases of firms or long-term assets, such as houses, in the case of
individuals. The availability of loans with maturities of 10 to 30 years would be more
consistent with an economy that anticipates long-run, sustainable growth. Again, the
regulator’s interaction with and educative role with respect to lenders may prove
valuable in encouraging micro-lending with longer maturities.
4.6 Gaps in products and services and challenges
The evolving financial services industry architecture, suggests two substantial gaps that
may turn into real business opportunities. The first involves financing SMEs in the
R10,000 to R100,000 bracket. The second revolves around savings and perhaps
insurance.
Even the simplest of micro and small businesses, beyond the trading survivalists, have
difficulty in sustaining, much less growing a business with debt of less than R10,000.
However, given the current Usury Act ceiling, lenders have found it nearly impossible to
profitably provide credit on loans between R10,000 and at least R50,000. And, aside
from credit cards, overdrafts and vehicle finance, the major banks, rarely offer any term
debt to SMEs under R100,000. Thus a gap has emerged in SME financing – the bottom
end of the spectrum largely borne out of a regulatory constraint, and the upper end
constrained by inappropriate business models to move down or to lead upwards. In
other words, the cost and credit management structures of the big banks limit their ability
to efficiently deal with loans under R100,000 while smaller and mostly non-bank financial
institutions do not have the skills and structures to leap from a focus on loans under
R10,000 to loans above that size (It should be noted that 30-day loans and group
lending schemes are vastly different from individual term credit products in the credit
assessment, credit and risk management approaches, staff skills, systems requirements,
etc.).
Meanwhile, Government pumps R4.5 billion per month into the poor bottom of the
pyramid in the form of social grants. And a growing body of market research indicates
that poor South Africans (like most of their poor cousins the world over) first demand a
safe place for their savings, and especially in the SA context, a trustworthy and sufficient
burial/funeral product. These two factors, coupled with the opening of some regulatory
space for better structured and supervised savings institutions, as well as a propensity
for several innovators to focus on fee based services first, all combine to create potent
potential for a burgeoning of the provision of savings and insurance products for poor
and low income households.
Of course, limitations in the second tier banking bill on lending deposits to SMEs (i.e.
unsecured lending) could at least complicate or diminish a massive roll-out of SME
credit. In addition, as noted earlier, certain provisions in the new Credit Bill, subject to
the content and nature of the accompanying regulations, could stymie some kinds of
legitimate business models. Also, the lingering uncertainty around interest rate caps
makes it difficult at this stage to say how viable certain approaches may or may not be,
and the lack of clarity on this issue would appear to be keeping some potential players
watching from the sidelines for now.
78
Annex I: Case studies of Comparison Countries
In the course of the South African Financial Sector Assessment, which broadly looks at
the process of financial sector liberalization in South Africa and actions taken to reform
and regulate the consumer credit and microfinance sectors - particularly the
effectiveness of the Micro Finance Regulatory Council (MFRC) to meet its mandate – it
is important to take stock of international lessons learned. The research team identified
three broad topics in which to look at international practices: savings, regulatory
approaches, and consumer protection/education. These topics seem especially
important as South Africa moves forward in discussing the National Credit Bill,
Dedicated Banks Bill, and Financial Sector Charter.
In choosing appropriate cases to examine, emphasis was placed on finding
environments sufficiently comparable to South Africa’s financial sector, macro-economic
environment, and regulatory approach. The United Kingdom, which is currently
undergoing national debate on a consumer credit bill and initiatives to combat financial
exclusion, is drawn on particularly to place these same discussions in South Africa in the
context of a developed country and to find comparable lessons. The Brazilian market
poses several similarities to South Africa’s with a fairly mature commercial banking
sector, large segment of the population without access to formal banking services, and
an array of formal and informal micro-lending actors. Both Mexico and Colombia’s
regulatory choices in regards to microfinance are briefly highlighted, as is Indonesia’s
method of hybrid regulation.
Savings Initiatives
A consistently missing element in the interface between the poor and the financial
system is in the area of deposits, where the poor often do not open deposit accounts of
any kind, for a variety of reasons, including a lack of documentation needed to open the
accounts, lack of access to deposit facilities, and mistrust of the system. Recently, both
developed and developing countries have begun addressing this problem by loosening
the requirements for opening deposit accounts and creating new types of accounts more
suitable to the needs of the poor. This is similar to the recent creation of mzansi
accounts in South Africa.
United Kingdom
Financial exclusion among the poor and in disadvantaged communities has been a
continual problem in the United Kingdom. A 1999 study by the Office of Fair Trading
estimated the number of people in Britain without current accounts to be as much as
14% of households; 7% hold no mainstream financial products of any kind. Furthermore,
relatively few people are denied access by the financial institutions, but rather choose
not to participate in the formal financial services market for reasons related to price,
inappropriate products, and a lack of marketing to the un-banked. (OFT 1999, Kempson
and Whyley 1999 and Caskey 2002, all cited in Marshall 2004).
In the late 1990s, the UK government’s focused its attention to social exclusion and
appointed a series of Policy Action Teams (PAT) to prepare research and
recommendations on various aspects of social exclusion. PAT 14 was convened to
provide insights on access to financial services among low-income people and was
79
tasked with examining the role of credit unions, insurance services, retail banks, the Post
Office, and other organizations in providing access to and delivering of financial services
in deprived neighbourhoods where most of the “unbanked” population live. (For reasons
of brevity, here we will discuss only those recommendations and impacts dealing directly
with banks and deposit services.)
It found that most banks do not outright refuse to do business with this population.
Rather, the banks are failing to offer products appropriate to these customers’ needs and
often do not have service outlets in these neighbourhoods. The report advocated simpler
banking accounts that overcome people’s fear of banking services, costly overdrafts,
and high interest rates. While many banks already offered such basic banking accounts
targeted towards young people, the report challenged banks to market the accounts to
the population living in deprived areas to boost interest in applying for them. It
encouraged use of the payment systems to create innovative ways of delivering services
to these areas such as through cash machines and recommended that banks become
more flexible about the range of identity documents they will accept for opening an
account.39 (National Strategy for Neighbourhood Renewal 1999)
Furthermore, in 1999 the national government decided that all benefits, pensions, and
tax credits would be paid directly in to bank and building society accounts; the process to
migrate these payments began in 2003 and has largely been completed. Their motive in
requiring this was to reduce benefit fraud, reduce cost of delivering such payments, and
help increase the number of people with bank accounts. At the time this measure was
passed, approximately 14 million people collected benefit payments from a Post Office
(PO) branch, of which it was estimated that 3.5 million did not have a bank account.
Thus, two options were created for these unbanked customers as well as any others
who chose to open a second account for this purpose. These two methods comprise
“universal banking services:”
•
Banks and building societies made their basic bank accounts (their “starter” or
introductory accounts) available, free of charge, at PO counters.
•
The Post Office introduced a Post Office Card Account (POCA) – a simple
account purely for the receipt of benefits, pensions, and tax credits that could be
used to withdraw from PO counters only.
The basic bank account has thus been embraced by most banks in the UK has an
essential starter account. It offers access to a debit card, ATMs, and money
transmission services. Furthermore, it is not backed by an overdraft, such that card
holders are refused transactions if the card is not backed by sufficient funds – thereby
reducing the credit risk for the bank and making it easier to allow people without a
previous credit history to open the account. (National Strategy for Neighbourhood
Renewal 1999)
October 2004 statistics from the Post Office show that the list of banking services
available throughout the Post Office included cash withdrawal from personal current
39
EU Money Laundering Regulations require financial institutions to take reasonable steps to satisfy
themselves as to their customers’ identity. Some banks have therefore required UK passports and driving
licenses, often an insurmountable requirement for low-income people. The regulations imply a much greater
flexibility in the types of acceptable documents, however, and this report recommends implementing a more
flexible approach.
80
accounts of 8 different institutions and basic bank accounts at 17 institutions, plus the
POCA. Balance inquiries are offered for 19 of those 25 accounts, cash deposits for 12 of
them, and check deposits for 12. These deposit services generally require a
personalized deposit slip from the bank and check deposits also require a deposit
envelope from the bank. POCA accounts are only for cash withdrawals and balance
inquiries; no deposits can be made into the account.
Brazil
The Brazilian economy is characterized by the dichotomy between rich and poor,
including access to financial services. The Brazilian government has adopted several
measures to deal with these disparities, including promotion of government financing
mechanisms for microfinance schemes, the creation of new tiers for microfinance
institutions (discussed below), and increased flexibility to offer new types of savings
accounts, allowed in a resolution passed in 2003 (No. 3.104). These “simplified
accounts” are for accounts with less than R$1,000 (US$345) turnover per month. Unlike
standard accounts, opening simplified accounts does not require proof of income and
residence. Clients not yet in possession of a tax identification number are assigned one
by the account-holding bank. This does not imply a tax obligation, but tax numbers are
used for identifying individuals and companies in financial databases.
In Brazil, because formal branch infrastructure is too capital intensive for many poor
communities, banks have been allowed to set up “banking correspondents” as their
points of service. These “correspondents” act almost like branch licenses, where retail
locations – particularly shops, lottery ticket sale stations, and post offices - provide
electronic access to the national payments system through an arrangement with the
parent bank. Clients can open accounts, pay utility bills, send and receive money, check
account balances, and draw on credit lines and repay loans by using a simple terminal
machine similar to an automatic teller machine (ATM). All banking correspondents are
linked to a specific bank, and banks compete on the basis of branch network, price and
service. The banking correspondent terminals are operated by franchises (i.e., the shop
owners and their staff) and the franchisees are paid a fee per transaction. Customers
then do not have to enter a bank branch in order to open a simplified account; it can be
done at any number of “banking correspondents” that have a relationship with the
partner bank.
Banks have responded quite positively to these regulatory developments and have used
the opportunities they created to boost the supply of low-income financial services
significantly. Perhaps the boldest approach has been undertaken by Banco do Brasil, a
government bank, which has started rolling out low-income current accounts and
associated loan products through its Banco Popular subsidiary. Although Banco Popular
only started operating in February 2004, it reached over a million clients by January.
Representatives of the central bank have proclaimed the initiative as meeting the goal of
combating financial exclusion and bridging the gap between the unbanked and the
banked. (See Barreto 2004)
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Lessons for South Africa
These initiatives have been largely successful in boosting the numbers of previously
“unbanked” people accessing the financial system and serve as a strong role model for
the mzansi accounts currently being opened in South Africa. Furthermore, the opening
of banking correspondents have been particularly helpful in reaching previously
underserved populations and help to create a unique bridge between commercial banks
and communities where they previously would not have built facilities. It is possible this
type of mechanism could help in South Africa to bring commercially regulated financial
services to the townships.
The situation of banking correspondents in Brazil have been enormously successful at
evoking alternative delivery mechanisms for bringing financial services to more deprived
areas, particularly around urban centres (such as Brazil’s favelas). It should be noted
that in Brazil’s case this was done in an effort to reach low-income households; however,
it was not a legislated mandate for the banks to begin offering these accounts. The UK’s
basic banking accounts were also not through a conscious legal treatment to expand
banking services. Rather, the opportunity was created through defining the type of
opportunity; banks then took it upon themselves to enter these new market niches. This
is interesting in the context of the debate about a Financial Sector Charter in South
Africa (and the overriding concern regarding more punitive Community Reinvestment
Act-type legislation). The competition experienced between the banks in both Brazil and
the UK have translated into a serous push for finding new market niches; these
incentives have helped banks to recognize the profitable opportunities behind such ideas
as simplified accounts, basic banking accounts, and banking correspondents – and how
they help to build up a future clientele with greater financial literacy.
Regulatory Approaches to Combating Financial Exclusion
Developed and developing countries have both explored a number of pathways to
combat financial exclusion and bring traditionally low-income segments of the population
into the banking segment. Here three topics are explored to consider these approaches.
In the first, the choice of how to regulate microfinance is discussed, especially including
the choices between tiering and regulating microfinance activities. In the second, the
choice of regulator is highlighted with particular emphasis on choices between self,
hybrid, and government regulation. Finally, regulatory environments flexible enough to
allow, and even promote, innovative delivery mechanisms are briefly touched upon.
Regulating Microfinance: Institutional versus Activity-based Regulation
As microfinance initiatives have grown over the last 20 years through a variety of
institutions: informal lenders, NGOs, non-bank financial institutions, state-owned banks,
and even commercial banks, a number of approaches have been made to regulate
these institutions and activities. (For a discussion of these approaches see Meagher
2002 and Staschen 2003). An often discussed option for combating financial exclusion
has been bringing microfinance-type NGOs into the mainstream financial sector by
allowing them to transform into formal financial institutions. Frequently, the institutional
windows in a country are not conducive (because of high minimum capital requirements,
restricted business activities, usury caps, or the like) and so a new institutional type is
formed to create a “tiered” banking structure. Tiering options chosen recently include the
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creation of microfinance-specific institutions, narrow banks/savings and loan type
institutions, or adapting an existing finance company type.
While tiering options have become quite popular, particularly in some areas of Latin
America, Eastern Europe, and Central Asia, these choices have not generally been
made without serious consideration of the existing legal and regulatory structure and
whether slight adjustments to an already existing regime would be just as effective.
Jansson, et al. (2004), promote the idea that microfinance as an activity should be
regulated before thoughts are given to creating new institutional tiers that require
extensive political processes and may stretch the capacity of the regulator. Especially in
supervisory environments where authorities are able to effectively analyze risk, this
approach may be more effective. To do this requires creating a legal definition for microlending, distinct from commercial, consumer, or mortgage lending. Micro-lending then
carries its own standards for risk classification, provisioning, and client loan
documentation, but can be carried out by any type of institution. Under this rubric,
institutional tiers for microfinance only should be created when a) a significant market
exists of institutions that provide microfinance services as the majority of their business
and b) existing institutional forms – both banks and finance companies – are
inappropriate due to high minimum capital requirements or operational restrictions (such
as branching requirements, loan documentation, or the inability to accept even limited
deposits).
Some have asserted that the concept of tiering is most effective when based on the
types of liabilities or funding sources used by the institution (Van Greuning et al 1999),
and second, that the creation of regulatory tiers should be done (if at all) parsimoniously,
in close relation to actual developments in the market (Christen, et al. 2003). These two
principles contain a number of subsidiary points. Regulation and supervision are
expensive, subject to a host of principal-agent failures such as corruption, and tend to be
of uneven quality and limited supply in most countries. The capacity to create and
administer regulatory frameworks effectively is particularly scarce in developing
countries. Regulation and supervision should be used sparingly, hence carefully focused
on high priorities. This means deploying them in the areas with the highest payoffs in
terms of systemic risk mitigation, protection of depositors, efficient intermediation, and
responsible growth. Setting up tiered systems is usually an important aspect of this.
However, there is always a danger of overreaching here, pushing the market too hard by
extending state guarantees to a host of market niches through a proliferation of
regulatory windows. (excerpted from Meagher 2002)
Below we will highlight a case where microfinance institutions are regulated (Brazil) and
where microfinance activity is regulated (Colombia).
Brazil40
The Brazilian financial system includes a wide range of institutions including traditional
commercial banks, credit unions, factoring and leasing companies, and informal NGOs.
In addition, the government has formalized two types of microfinance institutions:
Sociedades de Credito ao Microempreendedor (SCMs) – for-profit, non-deposit taking
institutions – and Organizacaos da Sociedade Civil de Interesse Publico (OSCIPs) –
non-profit, non-deposit taking institutions.
40
Information about Brazil largely collected during fieldwork conducted in August 2004. See also World
Bank 2004.
83
Microcredit was legally defined, in a 2001 Banco Central do Brasil (BCB) resolution, as
the provision of financing and guarantees to individuals to support professional,
commercial or industrial small-scale enterprises, or to organizations classified as microenterprises under other types of legislation. Under this definition, Sociedades de Credito
ao Microempreendedor (SCMs) were created with the intention of serving the lowincome and micro-entrepreneurial sector. They are formal, for-profit entities that must
register with the BCB and are only licensed to provide loans. The initiative for their
establishment has sometimes described as a top-down initiative. As of June 2004, 48
microfinance institutions (SCMs) had been established. Because they pose little risk to
the financial system, few requirements are made for reporting and supervision purposes.
Minimum capital is set at R$100,000 (US$36,600) and maximum loan amounts at
R$10,000 (approximately US$3,600). In addition, they must comply with a minimum ratio
of five times debt to liquid assets.
Organizacaos da Sociedade Civil de Interesse Publico (OSCIPs) are non-profit, creditonly NGOs registered at the Ministry of Justice. There are approximately 121 of these
institutions, mostly locally-owned and managed. The registration process is described by
all sides as straightforward and fair. Accounting standards and reporting requirements
are simple, and audited accounts are only required if public funds are used. These
advantages, coupled with the tax exemptions available to OSCIPs, ensure that this
arrangement is a widely used vehicle for non-profit microfinance initiatives. Because
OSCIPs operate outside the financial supervisory framework, no consistent information
about their portfolio size is available.
Together, credit unions (of which there are 1,400 in Brazil), OSCIPs, and SCMs account
for a very small proportion of total assets in the financial system(approximately 2.5%).
Nonetheless, these institutions, coupled with factoring companies, provide most of the
financial services traditionally provided by international microcredit NGOs in other
countries. The supply of credit to micro-entrepreneurs, however, still falls short of
meeting demand. Estimates from 2002 show that as little as 3% of demand is being met
collectively by credit unions, OSCIPs and SCMs.41
The effectiveness of the SCM window itself has been called into question by several
practitioners. SCMs are different from OSCIPs only in their for-profit formulation and
ability to access a wider array of investment mechanisms. Without being able to take
deposits, however, their potential for reaching large-scale profits is quite limited, thus
also limiting the attractiveness to investors. It is questionable that BCB resources should
be used for regulating and supervising such institutions, when they fail to achieve
significant market share and show little chance of reaching economies of scale. Instead,
it seems that banks, credit unions, OSCIPs, and factoring companies are reaching the
same clients as the SCMs with their services, are more attractive options for investors,
and show more promise for reaching larger and larger economies of scale. (See the
discussion of Brazilian banking correspondents and simplified accounts, above.)
41
“Introducao ao Microcredito,” Conselho de Comunidade Solidaria, Brasilia 2002. This does not include
any services being provided by commercial banks.
84
Colombia
Colombia’s microfinance sector is still relatively small, especially compared to its
neighbour Bolivia, but the Colombian approach has been quite distinct from its
neighbour. In Colombia, subsidized credit is provided, especially in rural areas, by the
public agricultural bank Banco Agrario; in addition, NGOs, commercial banks,
cooperatives, commercial finance companies (CFCs), and savings and credit companies
all are involved in microfinance to some extent. In 2002, the government created a legal
definition of microcredit: Financing provided to micro-enterprises (i.e.: with 10 or less
employees and total assets of less than 501 minimum monthly wages (currently: USD
67,635). Because a usury law does create an interest rate ceiling in Colombia, the law
further states that if such financing is provided by any financial intermediary or any
organization specialized in microcredit, and the maximum credit per customer is equal to
or less than 25 minimum wages (USD 3,375), the law authorizes charging fees (deemed
technical assistance cost) and commissions (deemed as cost of credit review and loan
collection cost) that are not considered as interest. Interest on other loans outside this
category is still limited by the usury laws (Commercial Code, Art. 884).
Further regulatory changes in 2003 aided the ability of NGOs to transform into regulated
institutions as the CFC window relaxed some to allow savings and borrowing from
commercial banks. Furthermore, the government has created another directed credit tool
whereby banks are mandated to invest in microfinance both as retailers and as
wholesalers – by lending to NGOs and CFCs. There is evidence that this mandate has
increased microfinance activity among all actors. (Trigo et al., 2004)
As South Africa embarks on a discussion about regulatory tiering and consumer credit
regulation, lessons about the suitable approach for expanding financial services can be
learned from these studies and others. In the Brazilian case, as in the Peruvian (see
Meagher 2002), there is a danger of opening so many institutional types as to create
confusion, increased burden on the regulator, and regulatory arbitrage. There is also a
danger that some tiers do not offer attractive business opportunities, such as the unclear
role for SCMs and OSCIPs in Brazil or the potential pitfalls in the Dedicated Banks Bill
identified in Section 2.4 above. For Colombia, however, the types of institutions available
seem sufficient to promote an activity based approach whereby any type of institution
can undertake microfinance activity while being under adequate levels of supervision by
the regulator. The impact of this regulatory choice has yet to be fully understood.
The two legislative initiatives currently under discussion in South Africa – the National
Credit Bill and the Dedicated Banks Bill – essentially offer both approaches, where the
National Credit Bill is an activity based approach while the Dedicated Banks Bill will
create an addition tier in the financial sector. The MFRC has shown its expertise in
regulating consumer credit as an activity regardless of the type of lender, and this
regulatory achievement needs to be built upon at the NCR. At the same time, however,
past research has proved a lack of competition in South Africa due to the lack of tiering
and options for NGO transformation is ultimately detrimental to the provision of financial
services to the poor; certainly the savings initiatives outlined above could only have been
so popularly embraced by commercial banks in a competitive environment. It seems
important in this context then to not allow the regulation of consumer credit and
microfinance as an activity to not be lost in the push towards tiering; simultaneously the
tiering options need to offer attractive investment opportunities that fill a real competitive
niche in the financial services market.
85
Microfinance Regulation: Choice of Regulator
Because choosing an independent hybrid regulator was key to the microfinance strategy
in South Africa, it will be important to explore the range of regulator choices that have
been made, especially in the context of the tiering options discussed above.
Because of the proliferation of institutional forms, countries have chosen a variety of
mechanisms to regulate and supervise, from maintaining responsibility within the
banking sector regulator (as in Brazil), to creating new, hybrid regulatory agencies (as
South Africa did) to building associations for self-regulation (as Mexico is currently
doing). Closely related to the questions of tiering and supervisory focus is the issue of
how labour is divided in the system. The questions here are who is regulated, what
entities handle the regulating and supervising, and what kind of regulation is applied.
“Best Practice” dictates the exclusion of the smallest institutions for which regulation
makes little sense – through either formal or informal exemptions. In almost all countries
small informals and traditional rotating and credit associations are exempt de jure or de
facto (the latter case is usually referred to as “regulatory forbearance”). This standard
protects regulators from unreasonable burdens. (This and following paragraph adapted
from Meagher 2002.)
A useful response to this disparity between the scale of the microfinance market and the
real limits on regulatory policy and capacity, has been the development of hybrid and
self-regulation systems. Experience has been varied, with delegated supervision
achieving good results, creditor and apex oversight leading to mixed outcomes, and selfregulation performing worst. These outcomes are to be expected, although they are
neither fully consistent nor inevitable – for example, a capable apex might perform better
than a badly designed scheme of hybrid regulation and supervision.
The spectrum of regulatory agency design runs from ministerial control to full selfregulation. The National Credit Bill, without defining its terms, calls for the agency to be
“independent.” This at least suggests a regulator that falls somewhere between those
two extremes – perhaps an independent public regulatory agency or a hybrid
arrangement in which a private entity carries out delegated public regulatory functions. In
the former case, special provisions regarding appointment, accountability, and fiscal
support are designed to ensure that the agency acts on an autonomous and professional
basis, free of both political and industry interference. This is especially important where
the agency combines the equivalent of legislative, executive, and judicial functions –
albeit subject to legislative oversight and appeal to the courts. Such an arrangement can
protect against (lower-case “p”) politics of the bureaucracy, which might otherwise have
produced regulatory actions motivated by personal advantage. However, independent
regulatory agencies are still subject to (upper-case “P”) Politics in the sense that their
key appointments and their medium-term agenda are defined by elected officials and
their policies.
In the case of hybrid or delegated regulation, by contrast, these political influences are
counterbalanced by the pressures inherent in all forms of self-regulation. At the far
extreme of self-regulation, i.e. voluntary industry codes of conduct, the government is
kept at arm’s length and the industry determines the mode of policing, which may be
more or less robust depending on the outside pressure that the industry faces – as in the
case of South Africa’s Financial Sector Charter. The other end of the self-regulation
86
spectrum is closer to classic governmental regulation, but with some public-private
division of labour. Here, there are a few variants. One is “statutory self-regulation,”
typically associated with the professions, where legislated standards are enforced by
industry associations, and certification procedures reinforce professional standards and
public confidence. Another variant, involving greater involvement by government, is
“supervised self-regulation.” The prime example here is the stock exchanges in the U.S.,
which police member behaviour according to well-established industry rules, under
continuous oversight by government regulatory, investigative, and judicial authorities –
notably the Securities and Exchange Commission. This arrangement draws on the
established customs and rules of the exchanges, backed up by official oversight. This
“outsourcing” of regulatory policing has the advantages of flexibility and efficiency –
although periodic scandals do arise, which often lead to a ratcheting up of regulatory
standards (Priest 1997).
Indonesia
Indonesia has supported financial deepening through a number of strategies. It has a
vast array of formal MFIs – some 15,000 by one estimate – in addition to hundreds of
thousands of informals. Out of this entire number, only some 1,000 privately owned MFIs
are directly regulated by the central bank, Bank Indonesia (BI). Best known is the unit
desa network. These units, now small local banking offices numbering more than 3,700,
were originally part of a subsidized agricultural credit program run by Bank Rakyat
Indonesia (BRI), a state commercial bank. In 1983, they were transformed into full
service rural banks operating under BRI – thereby forming the largest microfinance
network in the world. The unit desa have some 23 million depositors and borrowers with
total loans (ranging in size up to U.S. $2,500) of close to U.S. $500 billion. (Berenbach
1997, McGuire 1998) The BRI unit desa system is almost universally considered a huge
success.
The unit desa system is subject to a hybrid form of regulation, in which BRI is authorized
by Bank Indonesia to supervise the unit desa by means of personnel based in its branch
network and regional audit offices. The Village Unit Division of BRI, which runs the unit
desa system, is separate and independent of BRI’s large commercial banking network.
Pricing policies are set for the whole unit desa network, but each unit is treated as a
profit centre and has a separately generated and examined balance sheet. BRI provides
an incentive for high performance by conducting a semi-annual achievement contest
among the units, with the winner receiving cash prizes along with recognition. (Hannig
and Katimbo-Mugwanya, 2000; Rhyne and Christen, 2000) Interestingly, the BRI unit
desa network weathered the recent East Asian crisis much better than other financial
institutions in Indonesia. (Christen and Rosenberg, 2000) [The above excerpted from
Meagher, 2002.]
United Kingdom
The Enterprise Act of 2000 and the Financial Services and Market Act of 2001 created
two independent regulatory agencies in the United Kingdom, the Office of Fair Trading
(OFT) and the Financial Services Authority (FSA), separately. Each are run by an
independent board of directors and subsist largely on fees from the industries they
regulate. In terms of financial services, the Office of Fair Trading is responsible for all
aspects of consumer credit protection and consumer education about consumer credit
only. The Financial Services Authority, on the other hand, handles consumer protection
issues around all other types of financial services include mortgages, business loans,
and investment opportunities. It also offers consumer education about these issues.
87
Both competition and consumer legislation acts give the OFT power to seek court orders
against violators of consumer protection or competition law broadly across the entire
range of legal entities (consumer credit is just one area of concern). Neither regulatory
body, however, face the “industry promotion” aspect that the NCR is being asked to also
undertake and thus serve the interests both of the consumer and the businesses, banks,
etc., who are regulated.
Mexico
With regards to microfinance, the Mexican government reorganized the entire sector in
2001 when it created the institutional form of Popular Financial Partnerships, a
transformation option for existing NGOs, financial organizations, and small savings
cooperatives. The National Banking and Securities Commission has delegated authority
for supervision of these institutions to member-based organizations, or federations.
These federations have the authority to enforce laws while also providing supervisory
duties. The institutional type has become quite popular in Mexico, however, it remains
unclear whether any federations have been formed or how successful they have been in
effectively supervising the market.
Brazil
All responsibility for regulation and supervision is housed within the Central Bank (Banco
Central do Brasil, BCB). Reporting and supervision schedules applied by the BCB reflect
real risk, so that institutions with limited systemic risk are subject to minimal reporting
requirements and on-site inspections, if any. Banking supervision focuses on the largest
10 to 12 banks, accounting for over 60% of assets, which have dedicated officers at the
BCB’s supervision department. Several independent factors determine the effort spent
on supervising a particular institution. For example, smaller banks or those with sound
track records require less onerous supervision. For most non-bank financial institutions,
supervision is mostly restricted to reviewing financial statements, since the risk to the
financial system is negligible. However, if necessary, the BCB has the means to
intervene in cases of fraud, money-laundering, etc.
The commercial banks are not subject to special supervisory practices for any business
that might be construed as microfinance. SCMs are largely subject to off-site supervision
only by a unit within the off-site supervision department. This unit evaluates market
trends and looks for weaknesses within individual firms that might be cause for concern.
As South Africa moves to diversify both the types of financial service providers and
create a new, national consumer credit regulator, questions about the form such a
regulator should take, especially in the context of greater financial services regulation,
are crucial. Self-regulated apex bodies have largely proven unsuccessful, and the
weakened response in Mexico to the creation of such entities is testimony to this fact. It
will remain to be seen whether this form will ultimately be an effective supervisory model.
Brazil, meanwhile, has kept all responsibility for regulating the sector within its Central
Bank. This means that microfinance activities, because they pose little risk to the overall
financial sector, are barely supervised. As is pointed out above, however, the beauty in a
“hybrid” form of regulator is the potential it carries for creating distance both between
political influences and regulatory capture by the industry. It seems in the United
Kingdom that this has been achieved through the two independent agencies, but an
important point is raised: neither is tasked with an industry promotion role. Rather, they
are tasked with enforcing rules and safeguarding the interests of the consumer while
88
maintaining a competitive environment. This delicate balance is key to the success of
the regulator in both instances.
Encouraging Innovation: Flexible regulatory environments
United Kingdom
The supervisory approach in the UK is risk-based, where the supervisor seeks to
understand the institution’s risk management procedures in order to assess the
institution. Prescriptive rules regarding minimum capital requirements and other ratios
still exist, but most of the analysis is concentrated on the risk procedures. Because the
regulatory environment is not prescriptive by nature, however, there is not an obvious
method by which to require all institutions to reach the un-banked. Rather, there has to
be convincing evidence that it is a profitable venture for the institutions themselves. The
success of the universal banking services discussed above is one demonstration effect
for the UK’s banks to understand the potential profitability of serving these sectors if
innovative mechanisms can be implemented.
The PAT 14 discussed above advocates for the promotion of alternative delivery
channels to increase financial inclusion. This includes expanding the facilities which
banks and building societies own, such as ATMs, online banking, and mobile bank
vehicles as well as incorporating facilities provided by others such as offering cash-back
at shops accepting debit cards, PO partnerships as described above, PayPoint agencies
for settling bills, and supermarket partnerships with banks where a range of facilities can
be offered. UK banks have been increasingly innovative in creating these types of
partnerships and it is the laissez fair attitude of the regulator towards branching
requirements and the inclusive nature of the payment system that allows such innovative
delivery mechanisms to flourish.
Chile
In Chile, there are a mix of domestic and foreign banks in the country which provide a
range of credit (including consumer type lending), leasing, factoring, and deposit
services. In addition, non-bank commercial companies can also engage in various types
of banking activity. As an example, department-store chains have become quite heavily
involved in consumer credit through the use of store credit cards; several of the larger
chains have also begun offering full-scale financial services and have come under the
auspices of the regulatory authority. One of these department stores purchased the
consumer lending division of Banco Santiago, thus acquiring an extensive branch
network and a number of assets. These banks, however, are not subject to any interest
rate ceilings and have charged high interest rates and large commissions for these
services. BancoEstado – the large state-owned bank which provides the majority of
microfinance-type services in Chile – has recently entered into an alliance with a
supermarket chain whereby holders of the supermarket’s credit card can use the bank’s
ATMs to access funds, and will receive preferential treatment for mortgage loans and
other services. (EIU 2004)
89
The success of these initiatives is predicated on two factors: the freedom for banks to
explore alternative delivery mechanisms through partnerships with retail institutions plus
a level of competition between banks that creates incentives for finding just such
innovative techniques for gaining more clients. On a more practical note, both of these
examples also imply greater access to the payment system among a broader section of
commercial entities that would allow these services to work so efficiently. For South
Africa this implies two important lessons that currently are causes for concern in the
Dedicated Banks Bill: one, it does not create a truly competitive financial services sector
and two, it does not overtly allow access to the payments system. In order to fuel
innovative initiatives that effectively help bring broader sections of the population into the
formal financial system, such freedom needs to be further built into the system.
Furthermore, neither these initiatives nor those outlined in the section on savings
initiatives above came about due to enforcement mechanisms as stringent as the
Community Reinvestment Act.
Consumer Protection
As the range of institutions offering financial services to the poor expands beyond
traditional microcredit providers to commercial banks, finance companies, and even
supermarkets and department stores, there is increasing evidence of predatory lending
practices promulgated by a lack of knowledge concerning consumer rights and
inconsistent requirements about information disclosure. A few countries have begun to
address this particularly in the arena of consumer credit through strengthening consumer
protection rights and improving consumer education.
United Kingdom
While the studies mentioned above show a considerable level of un-banked in the
United Kingdom, particularly among the poor, financial institutions complain that demand
for their services is affected by mistrust caused by ignorance. In the United Kingdom,
however, consumer protection around financial services is split between two regulatory
agencies. The Financial Services Authority provides consumer protection rules and
consumer education for all financial services except consumer credit, which falls under
the jurisdiction of the Office of Fair Trading.
Consumer education has been promoted in recent years through a variety of mediums.
Consumer groups such as the Personal Finance Education Group (PFEG) and the
Pensions Education Working Group (PEWG) have been formed around consumer
education issues. Moreover, the FSA launched in 2002 an ambitious project to promote
consumer awareness of the financial system and the benefits and risks associated with
specific financial products. (Devlin 2002) This consumer awareness initiative provides
information on financial planning, credit and debt, financial advertising, insurance,
pension, mortgages, investments and savings. Within each topic, there is information on
the types of products available, how to understand the differences between the types
and shop around for the best deal, and what the consumer’s rights are. In addition, tools
such as personal budget or mortgage payment calculators are offered. None of this is
intended to promote a specific service but rather to give the consumer the knowledge
needed to make the best decision. Detailed information is also given on how to
understand credit scorings and ratings and where to make complaints about institutions
90
or incorrect information. All of this information is available on their website; a consumer
hot line is also available. (See the FSA website at http://www.fsa.gov.uk)
Second, conduct of business regulations are very strict in protecting the consumers’
interests in investment. Here, rules are detailed with respect to the sales process,
disclosure requirements, ensuring that provided services are appropriate for the
consumer, and that the risks of the product are clearly stated to the consumer.
Salespeople have stringent training and competence requirements and there is an
individual registration process for such salespeople. (Llewellyn 1999)
In the area of consumer credit, however, a national process of dialogue and debate has
been occurring over the past three years. In January of 2005 a new Consumer Credit Bill
was introduced to the UK’s Parliament that would address consumer credit protection
and education.42 Previous consumer credit legislation had been passed in 1974, but
since then the consumer credit market has grown in size and variety. The volume of
unsecured consumer credit had increased from £67 billion to £168 billion between 1993
and 2003 while the average unsecured debt-income ratio rose from 11.9% in 1995 to
15.6% in 2000. The increase in debt-income ratio mostly occurred among low-income
segments of the population, where those with a household income below £11,499
increased their average debt-income ratio from roughly 16% in 1995 to over 35% in
2000. (Department of Trade and Industry 2003, 12, 18, 21) The type of lenders has also
grown as specialist lenders have taken advantage of IT advances and risk-assessment
procedures to enter the market in increasing numbers. A white paper commissioned by
the UK’s DTI to study the consumer credit market found:
•
As the numbers and types of consumer credit products has increased in number
and complexity, information about the product and its cost was not being
disclosed in a clear, uniform manner.
•
Many consumers felt “surprised” by post-purchase fees such as penalties for
early settlement.
•
There is little redress for consumers facing unfair practices; moreover, regulatory
authorities had few options for effectively stopping unfair practices.
•
Illegal money lenders were taking advantage of vulnerable populations while
causing overall distrust of the market due to their less than scrupulous practices.
•
Over indebtedness among the population remained a problem: 20% of
households were facing some sort of credit crisis and approximately 7% of
households with outstanding credit could be considered over-indebted.
•
OFT does not have appropriate methods of enforcing sanctions against
undesirable practices, as refusal, suspension or revocations of licenses are only
used in the most serious of cases. (Department of Trade and Industry 2003)
42
Consumer credit in the UK is defined as: secured lending other than first charge mortgages, credit cards,
loans, mail order, hire purchase, store cards, credit unions.
91
The white paper advocated for the following actions to be undertaken in order to remedy
the situation:
Transparency:
•
Change advertising regulations for standardized information disclosure and
easier enforcement
•
Increase clarity in information before and after agreements are signed
•
Introduce on-line capabilities for consumer credit, streamlining the process and
reducing paperwork
•
Raise awareness about early settlement charges and change the law to prevent
penalties for early settlement
Fair Framework:
•
Strengthen credit licensing regime that gives regulatory authorities more power to
enforce rules against unfair practices and supervise the market. Grant licenses
indefinitely to allow OFT to focus resources on monitoring rather than licensing.
•
Make unfair selling practices illegal by using an “unfairness” test and an effective
dispute resolution system.
•
Remove the £25,000 ceiling which defines consumer credit to build a wider
definition and strengthen the enforceability of agreements. The ceiling will remain
for business lending.
Strengthen the European Agenda
•
Work on cross-border data access, consumer rights and redress mechanisms,
and a common approach to information disclosure, rules on unfair practices, and
debt-recovery/collection practices
Minimize over-indebtedness
•
Plan for consumer education and generic advice to consumers
•
Create a voluntary sector for providing free, targeted debt advice to consumers
•
Pilot an enforcement scheme to tackle illegal moneylenders
•
Review bankruptcy remedies to ensure effectiveness
•
Ensure over-indebtedness strategy is shared and pursued across government
agencies
•
Publish an over-indebtedness strategy in 2004
Authority for licensing consumer creditors, ensuring compliance and pursuing
enforcement would remain with the Office of Fair Trading; the Financial Services
Authority will continue to participate in consumer education initiatives and consumer
protection issues for the entire range of financial services outside of consumer credit. A
number of the proposed changes are particularly relevant to the current initiative in
South Africa.
92
First, similar weaknesses in the ability to enforce consumer protection against unfair
practices are found in both places. The DTI White Paper suggests improving the fit and
proper test required for licensing, granting licenses indefinitely to free OFT resources for
monitoring lenders, and to implement a monitoring system that is aligned with the risks
posed to the consumer (a risk-based approach). Past activities of each lender will be
considered in assessing the level of risk it poses for future unfair practices. Thus, more
resources are spent on the worst offenders rather than blanketing the industry with
enforcement procedures. An intermediate enforcement measure will be introduced
whereby the OFT can impose fines on those lenders who, while violating regulations, do
not have a serious enough offence to merit license revocation. Finally, the OFT will be
given more leeway to seek additional information from licensees and third parties in
order to more effectively monitor compliance.
In terms of reckless lending practices, the White Paper recognizes that the current
consumer credit legislation is vague in its definition of reckless lending and as such has
failed to adequately enforce against such practices, to the detriment of the most
vulnerable members of the population. The White Paper discusses the range of factors
that contribute to reckless lending in addition to the high interest rates most often
discussed; these include the level of security required, default charges, lack of
transparent information, pressure-selling, or changes to the terms of agreement after the
contract is signed.
The success of the proposed consumer credit regulations depend on the ability of the
consumer to effectively seek redress for unfair practices. The White Paper promotes an
Alternative Dispute Resolution (ADR) mechanism accessible to consumers and other
interested third parties to use for this purpose.
Second, similar concerns about over-indebtedness drive both the UK’s and South
Africa’s initiatives. Part of the consumer credit discussion held in the UK cantered
around this subject and an action plan was prepared in 2004 to address the issue. The
following strategic priorities were identified:
•
Increase financial capability and awareness
•
Ensure access to affordable and reasonable credit
•
Develop responsible lending principles that protect the most vulnerable
•
Encourage savings
•
Ensure that accumulating arrears are identified early by creditors and appropriate
steps taken outside of the courts
•
Create a system of high quality, free debt advice
•
Handle court cases efficiently and effectively without making debts worse
These discussions have failed to build a uniform definition of over-indebtedness beyond
a more generic inability “to pay current credit repayments and other commitments
without reducing other expenditure below normal minimum levels.” (Department of Trade
and Industry 2004) This may results in an inability to effectively enforce measures
93
against over-indebtedness due to a lack of clarity about what truly constitutes the
condition.
A full regulatory impact assessment of the proposed regulatory changes was done by
the Department of Trade and Industry. This report details the costs and benefits of the
proposed reforms from the perspective of consumers, businesses, and its affect on the
competitive financial environment. Identified benefits to consumers include clarity in
contractual information and thus the ability to comparison shop between lenders and
thus, a boost in demand. Consumer credit business will incur increased compliance
costs as well as indirect costs to train staff and maintain the systems needed to ensure
compliance. Costs of compliance will vary across firm sizes due to measures that
stagger licensing fees according to the types of licensable businesses being undertaken,
the risk-based approach to monitoring that places greater emphasis on firms that pose a
greater risk, and placing less onerous requirements on post-contract disclosure for very
small loans. The regulatory impact assessment does not believe these costs will pose a
barrier to entry into the market, except for the lenders that might incur increased scrutiny
due to past unscrupulous practices, who might then decide to exit the market (and thus,
a victory over unfair lending practices). It is believed that the overall effect will be higher
standards of behaviour in the market and thus increased demand.
Because of the array of similarities in discussions around consumer credit protections in
both places, we have decided to focus on the United Kingdom for this topic. There are a
number of lessons and suggestions made in the United Kingdom that may be helpful as
South Africa moves forward in implementing its own system.
First, in regards to monitoring and compliance, the text of this report has shown that the
MFRC has done a fair job in monitoring and ensuring compliance of consumer creditors.
One concern about the new National Credit Bill and its provisions, however, is that it
would raise the cost of doing business and thereby constraint credit. This refers largely
to the costs of compliance with the monitoring system. In the United Kingdom, the
concept of risk-based monitoring may be easily dovetailed with existing MFRC systems
of focusing its efforts on the largest lenders; a system where past fractions trigger more
intense scrutiny and larger lenders bear higher scrutiny may help to reduce costs for fair
lenders and for smaller lenders. In addition, the UK recommendations will require lower
fees for lenders working with very small loans. While this initiative may be harder to carry
out if the majority of lenders offer very small loans, such a system may be adapted
according to the overall volume of credit a lender deals in per year.
It is worth noting that concerns about over-indebtedness were drivers of reform in both
places, such that even in developed countries these problems – and the vulnerability
associated with it – can take place. The United Kingdom’s commitment, however, is
shown quite clearly not only in the strategy for discussion consumer credit protections
but also in devoting resources to creating a strategy for overcoming over-indebtedness.
Such a task force may be able to come up with helpful recommendations in South Africa
as well, and would certainly show the commitment of the government to such an issues.
The United Kingdom may well take a page from the MFRC, however, in clearly defining
over-indebtedness such that measures to combat it can be effectively targeted.
It is recognized in both places that one cause of over-indebtedness is reckless lending
practices by unscrupulous lenders. In South Africa, reckless lending has largely been
94
identified by the high interest rates and fees charged by these lenders and as such,
political motivation to keep a usury ceiling in place is intense. Both the Consumer Credit
White Paper and the Strategy on Over-Indebtedness, however, discuss usury limits in
the context of the range of actions that constitute reckless lending, including poor
information disclosure, the level of security required for the credit, and tactics to pressure
consumers into taking on the credit. The current status of discussion is that usury limits
would not adequately address the entire range of reckless lending and might instead
constraint credit practices, and so will not be proposed at this time. It is possible that
South Africa could learn from such a broad definition of reckless lending.43
Finally, the United Kingdom’s regulatory impact assessment clearly laid out the causes
and consequences of the reform structure being proposed, and was meticulously
conducted for not only the overarching consumer credit bill being introduced but for each
secondary piece of regulation proposed along side it. While concerns in South Africa
about the consequences of the National Credit Bill have been voiced, a full impact
assessment of the proposed regulatory changes has not been released.
43
Another approach is that taken in Chile, where interest rates are determined through a threetiered system depending on the credit size, maturity of the loan, and whether it is adjustable to
inflation-indexed units (UF). In Aug. 2004, for credits up to UF5,000 and maturities up to 90 days,
the rate was 17.22%; for credits of more than UF5,000 it was 4.02%. Non-indexed credits of less
than UF200, with greater than 90 day maturity are at 38.43%, for credits between UF200 and
UF5,000 it was 21.45%, and for credits greater than UF5,000 it was 9.27%. The maximum rate
for inflation-index credits for maturities greater than one year was 8.61%. (EIU 2004) These rates
are flexible enough to allow banks engaged in lending to MSMEs and low-income households to
cover their risk and costs of lending while also allowing the SBIF to continue to place a cap for
defining usury practices. (Lanuza 2004)
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Annex II: 1999 Exemption Notice
Government Gazette
1 June 1999 (Vol. 408)
DEPARTMENT OF TRADE AND INDUSTRY
NOTICE IN TERMS OF SECTION 15A OF THE USURY ACT, 1968 (ACT NO.
73 OF 1968)
NO. 713
1 June 1999
In terms of section 15A of The Usury Act, 1968 (Act No. 73 of 1968), I, Alexander Erwin, Minister
of Trade and Industry, hereby exempt the category of money lending transaction referred to in the
Schedule from the provisions of the said Act with the exception of sections 13, 14,and 17A of the
Act, on the conditions set out in the Schedule.
SCHEDULE
1.
Definitions
In this Schedule any word to which a meaning has been ascribed in The Usury Act, 1968,
shall have the meaning ascribed to it in the Act, and
1.1
1.2
(a)
(b)
(c)
1.3
1.4
1.5
1.6
“annual rate for the total charge of credit” means the total charge of credit in respect of a
money lending transaction expressed as a nominal annual percentage rate;
“category of money lending transaction” means a money lending transaction in respect of
which the loan amount –
does not exceed R 10 000,00;
together with the total charge of credit which is owing by the borrower, shall be paid to the
lender, whether in instalments or otherwise, within a period not exceeding 36 (thirty six)
months after the date on which the sum of money has been advanced to the borrower;
and
is not paid in terms of a credit card scheme or withdrawn from a cheque account with a
bank registered in terms of the Banks Act, 1990 (Act No. 94 of 1990), or a mutual bank
registered in terms of the Mutual Banks Act, 1993 (Act No. 124 of 1993), so as to leave
such account with a debit balance;
“credit bureau” means a business which records the credit transactions and payment
history of individual borrowers;
“loan amount” means any money paid over to, or on behalf of, the borrower;
“lender” means an entity whose business includes money lending, who is required to
comply with the rules and who is registered with a regulatory institution;
“regulatory institution” means a legal entity having a Board of Directors which has,
amongst other directors, equal and balanced representation between consumers and the
money lending industry and which is approved by the Minister in writing and published in
the Government Gazette as having the capacity and the mechanisms in place effectively
96
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(k)
(l)
1.7
1.8
1.9
to manage its business as a regulatory institution with competent management and staff;
register lenders in accordance with accreditation criteria approved by the Minister;
ensure adequate standards of training of staff members interacting with the general
public;
require adherence to and monitor and ensure compliance by lenders with this notice;
fund itself from contributions by lenders or other sources;
ensure that complaints from the general public are responded to objectively;
deal with appeals by lenders and borrowers in respect of any decision of the regulatory
institution or any committee, ombudsperson or referee instituted by it;
educate and inform the general public and lenders in relation to their rights and
obligations under this notice;
annually publish information regarding the money lending industry, the services provided,
security and/or guarantees required, types of charges and the average annual charges
levied by each lender in a comparable format;
collect and collate information and statistics on lenders and complaints handled by the
regulatory institution, including the number of complaints lodged and details of the complainant;
number of lenders found in breach of this notice and the reasons therefor;
names of lenders against whom substantiated complaints have been lodged and the
number and nature of complaints;
response time to resolve complaints;
the number of items monitored under each category;
the number of breaches detected through monitoring;
the number and nature of sanctions imposed; and
the number of decisions appealed against and the outcome thereof;
annually furnish the Minister with a detailed report on lenders, its activities and functions
and any other information that the Minister may require;
review its own effectiveness and the effectiveness of this notice and to recommend
appropriate changes to the Minister;
“rules” means the rules set out in Annexure “A” to this notice;
“this notice” includes Annexure “A”; and
“total charge of credit” means all charges levied in respect of the money lending
transaction, including, but not limited to, interest charges, but excluding insurance
premiums.
2.
Conditions
2.1
(a)
(b)
The category of money lending transactions is exempted on the conditions that the entity concluding the category of money lending transaction is registered as a lender
with a regulatory institution; and
the lender shall at all times comply with this notice.
3.
General
3.1
Insofar as the exemption may be interpreted to impose any obligation on an entity only a
part of which conducts business in respects of the category of money lending transaction,
such obligations shall apply only in respect of such part of the entity to the extent it shall
be capable of being so applied.
The Usury Act, 1968, shall apply to a money lending transaction falling within the
category of money lending transactions should a lender fail to comply in respect of such
money lending transaction with the conditions of this notice.
The Minister may withdraw the approval of a regulatory institution should it fail to fulfil the
functions contemplated in paragraph 1.6 above and shall publish such withdrawal in the
Government Gazette.
3.2
3.3
97
4.
Commencement of Notice and transitional arrangements
4.1
This notice shall come into effect on 1 June 1999 and Government Notice R3451 of 31
December 1992 is hereby repealed with effect from 1 June 1999.
Provided that, notwithstanding the repeal of Government Notice R3451 of 31 December
1992, the provisions of that Notice will be deemed to continue to apply to an entity to
whom the provisions of that Notice are applicable, until that entity becomes registered as
a lender of a regulatory institution as required by section 2.1(a) of this notice. Provided
further that Government Notice R3451 of 31 December 1992 shall in any event have no
force or effect after 1 August 1999.
4.2
ALEXANDER ERWIN MINISTER OF TRADE AND INDUSTRY
ANNEXURE “A”
RULES FOR PURPOSES OF EXEMPTION
UNDER SECTION 15A OF THE
USURY ACT
1.
Confidentiality
1.1
The lender shall not disclose, without the express consent of the borrower, any
confidential information obtained in the course of a money lending transaction.
Should the lender wish to obtain from or to disclose to a third party, the borrower’s credit
record and payment history, the borrower’s consent shall be obtained through specific
and prominent clauses in the application for the relevant money lending transaction or
other documentation signed by the borrower.
1.2
2.
Disclosure
2.1
The lender shall at each of its business premises conducting business in respect of the
category of money lending transactions keep available a copy of the rules set by the
Minister in Annexure “A”. These rules shall be made available to the borrower for perusal
prior to entering into the money lending transaction.
The lender shall at each of its business premises conducting business in respect of the
category of money lending transactions display prominently a copy of the lender’s registration certificate issued by the relevant regulatory institution;
and
the complaints procedure and the manner in which and where complaints may be lodged.
The lender shall use standard written agreements, as approved by the regulatory
institution, containing all the terms and conditions of the money lending transactions and
clearly reflecting the rights and obligations of the borrower and the lender.
The lender shall provide the borrower, prior to the conclusion of the money lending
transaction and at the conclusion of the agreement, with a schedule setting out the loan amount in rands and cents;
the total amount repayable in rands and cents, at the then current interest rate, over the
repayment period;
the amount of the total charge of credit in rands and cents, at the then current interest
rate, over the repayment period and the elements comprising the total charge of credit;
the annual rate for the total charge of credit, whether this is fixed or variable, and, if
variable, how it may vary;
the nature and amount of any insurance, including the name of the insurer;
the penalty interest and any additional costs that would become payable in the case of
2.2
2.2.1
2.2.2
2.3
2.4
2.4.1
2.4.2
2.4.3
2.4.4
2.4.5
2.4.6
98
2.4.7
2.4.8
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
default by the borrower or how that would be calculated;
the instalment amount in rands and cents at the then current interest rate, and the
number of instalments;
the repayment period in respect of the money lending transaction.
The lender shall in a language understood by the borrower before the conclusion of the
agreement explain the essential terms of the money lending agreement to the borrower
so as to ensure that the meaning and consequences of the agreement are understood.
The lender shall, before the conclusion of the money lending agreement, allow the
borrower an opportunity to read the agreement, or have it read to the borrower in the
instance where the borrower is illiterate.
The lender shall provide the borrower with a copy of the signed money lending
agreement before or at the time of advancing the loan amount.
The lender shall maintain a proper set of accounting records reflecting full details of all
money advanced, interest and other charges raised, repayments received and the
amounts outstanding.
The lender shall on demand provide the borrower with a statement setting out all charges
levied, all payments made and the balance outstanding. A charge may be levied for the
provision of a duplicate copy of a statement, but may not exceed R3.50 per page of the
statement.
Should the lender decline a money lending application, the lender shall at the request of
the borrower provide the main reasons therefore. If such reason include an adverse credit
record recorded with a credit bureau, the name and details of the relevant credit bureau
will be provided to the borrower by the lender so as to enable the borrower to check the
accuracy of the credit information held by the credit bureau and/or to obtain advice from
the credit bureau on how to improve the record.
The lender shall inform the borrower in writing at least 28 (twenty eight) calendar days
beforehand, by way of a notice addressed to the domicile of the borrower, of the lender’s
intention to forward adverse information to any credit bureau, which information is to be
accessed by subscribers to the credit bureau, before forwarding any such information to
the relevant credit bureau.
Where any amount owing by the borrower is disputed by the borrower, that fact shall be
communicated to the credit bureau when providing information to it.
3.
Consideration
3.1
The lender shall not charge any fee to be paid by the borrower in circumstances where
the money lending transaction is not granted or money is not paid out to the borrower in
respect of the money lending transaction by the lender. This excludes fees charged for
evaluating or preparing business plans.
The borrower may make additional payments or settle the outstanding amount in one
payment where the repayment period does not exceed 12 (twelve) months. Where the
repayment period exceeds 12 (twelve) months and where the borrower wishes to settle
the outstanding amount in one payment, the lender may require up to 60 (sixty) days
written notice of the borrower’ intention to settle the outstanding amount in one payment,
but only if such period was stipulated in the written agreement and does not exceed 60
(sixty) days. No penalty may be charged for the settlement of the outstanding amount in
the case of retrenchment of the borrower.
The lender shall ensure that the annual rate for the total charge of credit stipulated,
demanded or received by the lender shall not exceed ten times the average prime
overdraft lending rate from time to time of the four banks, registered under the Banks Act,
1990 (Act No. 94 of 1990), from time to time with largest asset base providing cheque
services.
3.2
3.3
99
4.
Cooling-off period
4.1
4.2
The lender shall, in terms of the provisions of the agreement with the borrower, allow the
borrower to terminate the money lending agreement within a period of 3 (three) business
days after the date of the signing of the agreement, and, where the loan amount has
been advanced, simultaneously to repay the loan amount advanced to the lender.
Should the borrower terminate the money lending agreement within such period after
having received the money, the lender shall, upon the borrower offering simultaneously to
repay the total amount advanced to the borrower, only be entitled to stipulate for, demand
or receive from the borrower, pro rata charges of credit at the annual rate for the total
charge of credit applicable to the agreement.
5.
Collection methods
5.1
The lender shall not make use of personal information such as pin codes and bank cards
as security or collection arrangements.
The lender shall not indulge in the use of any process documents signed in blank.
The lender shall not collect or attempt to collect any amounts for costs exceeding costs
allowed for in terms of the Magistrates’ Court Act, 1944, (Act No. 32 of 1944), the
Attorneys Act, 1979, (Act No. 53 or 1979) or the Debt Collectors Act, 1998, (Act No. 114
or 1998).
The lender shall not make use of any illegal collection methods.
5.2
5.3
5.4
100
Annex III: Circulars issued by the MFRC in respect of its
Rules and practices.
•
Circular 0019: Submission of Returns - Compliance Enforcement
•
Circular 0018: Revised Annual Fees
•
Circular 0017: Amended Agreed Upon Procedures
•
Circular 0016: Approval of Lenders' Standard Written Loan Agreements
•
MFRC Circular 0015/01/2003: The Admission of Guilt Fines.
•
MFRC Circular 0014/03/2002: Prescribed format for the agent's ID cards
•
MFRC Circular 0013/03/2002: Imposition of fines
•
MFRC Circular 0012/03/2002: Reasons for the amendments of the MFRC Rules
•
MFRC Circular 0011/03/2002: The New MFRC Rules
•
Circular 0010: Information on the National Loans Register
•
Circular 009: Prohibition of the use of personal information such as Identity
Documents as security or as a collection method
•
Circular 008: Procedures to be followed in the calculation and disclosure of the
"Annual Rate for the Total charge of Credit" in accordance with the Usury Act
Exemption Notice
•
Circular 007: Irregular usage of Consent to Judgement and Emolument Attachment
Orders
•
Circular 006: National Loans Register
•
Circular 005: Policy and procedure for usage of MFRC Stamp of Approval and logo
•
Circular 004: New MFRC fee structure
•
Circular 003: Prohibition on use of PIN numbers and bank cards
•
Circular 002: Agreed upon procedures
•
Circular 001: Amendment of the Rules of the MFRC
101
Annex IV: The Development Finance Institutions
National Level
Development Bank of Southern Africa (DBSA)
The DBSA was established in 1983 by the government of the Republic of South Africa. It is
one of five existing national development finance institutions in South Africa and has a
mandate to accelerate sustainable socio-economic development in the region by funding
physical, social and economic infrastructure. In doing so, the DBSA endorses and promotes
human resource development and institutional capacity-building. The DBSA finances and
sponsors programmes and projects formulated to address the social, economic and
environmental needs of the people of southern Africa in improving their quality of life. The
Bank adheres to the principles of sustainable development.
For more information, go to: www.dbsa.org
Industrial Development Corporation of South Africa (IDC)
The IDC is a self-financing national development finance institution whose primary
objectives are to contribute to the generation of balanced, sustainable economic growth in
Africa and to further the economic empowerment of the South African population, thereby
promoting the economic prosperity of all citizens. The IDC achieves this by promoting
entrepreneurship through the building of competitive industries and enterprises based on
sound business principles. IDC’s core strategies are:
•
Providing risk capital to the widest range of industrial projects.
•
Identifying and supporting opportunities not yet addressed by the market.
•
Maintaining financial independence.
•
Building upon and investing in human capital in ways that systematically and
increasingly reflect the diversity of our society, and
•
Establishing local and global involvement and partnerships in projects that are rooted
in or benefit South Africa and the rest of Africa.
For more information, go to: www.idc.co.za
Khula Enterprise Finance Limited (Khula)
Khula was established in 1996 in terms of a Department of Trade and Industry initiative. It is
an independent liability company with its own board of directors. Khula’s mission is to ensure
improved availability of loan and equity capital to small, medium and micro enterprises by
offering guarantees and seed funds to retail financial intermediaries in need of capital and
capacity (Khula Annual report, 2003).
For more information, go to: www.khula.co.za
Land Bank
The Land Bank is a South African Agricultural Development Bank of, formed in 1912 with the
aim of providing world-class financial services to enhance rural development and the
contribution of agriculture to South African economic growth, rural development and social
well being, through the provision of sustainable financing to all entrepreneurs within the
agricultural value chain. Following the recommendation of the Strauss Commission in 1996,
the objectives of Land Bank were revised in 1997, to be measured against four criteria:
102
•
Expanding its reach and providing/delivering appropriately designed products for its
new clients
•
Continuing to support commercial enterprises
•
Fulfilling a wider development mandate
•
Running effectively, on a cost-effective basis, with comparable benchmarks to private
sector institutions
For more information, go to: www.landbank.co.za
National Housing Finance Corporation (NHFC)
The National Housing Finance Corporation (NHFC) is a development finance institution
established in 1996 and wholly owned by the South African Government. The NHFC
addresses the housing finance needs of the housing market that have an ability to contribute
financially to their housing costs, but to whom bank-funded housing finance is not readily
available. This low- to moderate-income housing market sector, with a household monthly
income between R1,500 – R7, 500, is not eligible to full government housing subsidies. As a
wholesale lender the NHFC does not finance home-seekers directly but provides services
and funding to specialised lenders, who in turn, service the target market. The NHFC also
partners with banks with a view to providing risk enhancement to the lending in the lowincome market.
The NHFC is a registered public company that operates under specific exemptions from the
Banks Act of 1990 (Act No. 94 of 1990), and adheres to the regulatory framework of the
Public Finance Management Act (PFMA).
For more information, go to: www.nhfc.co.za
Rural Housing Loan Fund (RHLF)
RHLF is a rural housing wholesale lending institution that operates with a social venture
capital mindset to create new financial arrangements and opportunities for rural families to
improve their housing, economic and living environment. Its mission is to empower rural
people to maximize their housing choices and improve their living conditions with access to
credit from sustainable retail lenders.
The primary objective is to improve the basic living standards of low income rural people
through the provision of funding to qualified intermediaries. Through its 20 retail lending
clients, RHLF has funded housing improvements for the rural poor.
For more information, go to: www.rhlf.co.za
South African Post Bank
The Post Bank is a savings institution which operates as a division of the South African Post
Office. The Post Office and Post Bank operate from within the same state entity but with
independent budgeting. The products and services of the Post Bank are offered through
more than 2000 Post Office outlets country-wide. The Post Bank’s mission is to be a caring
and self-sustaining financial institution of national significance that enhances the quality of
life of all South Africans.
For more information, go to: www.sapo.co.za/postbank
103
Provincial Level
Ithala Development Finance Corporation Limited
Ithala is a Provincial Development Finance Corporation established in terms of the KwaZuluNatal Ithala Development Finance Corporation Act, Act 2 of 1999, and Promulgated in
March 1999. Ithala’s objectives include promoting, supporting and facilitating social and
economic development in KwaZulu-Natal by:
•
mobilising financial resources and providing financial and supportive services to the
people of KwaZulu-Natal;
•
planning, executing, financing and monitoring the implementation of development
projects and programmes in the Province;
•
promoting, assisting and encouraging the development of the Province's human
resources and its social, economic, financial and physical infrastructure; and
•
promoting, encouraging and facilitating private sector investment in the Province and
the participation of private sector and community organisations in development
projects and programmes, and in contributing to economic growth and development.
For more information, go to: www.ithala.co.za
104
Annex V: List of Stakeholders Interviewed
Person
Alan Hirsch
Anita Samaad
Astrid Ludin
Cas Coovadia
Charles Chemel
Chris Hock
David de Jong
Dennis Dykes
Gabriel Davel
Hans Falkena
Johan de Ridder
Johan Prinsloo
John de Wit
Lauren Knott
Mark Seymour
Michiel le Roux
Morgan Pillay
Mutle Mogase
Penny Hawkins
Rudolph Willemse
Sharon Lewis
Ted Bauman
Willem van Emmenis
Organisation
Office of The President
Department of Social Development
Department of Trade and Industry
Banking Council of South Africa
African Bank
Pan African Consultants
SACCOL
Nedbank
Microfinance Regulatory Council
African Bank
Small Enterprise Fund
Black Sash
Microfinance South Africa
Capitec
National Housing Finance Corporation
Microfinance Regulatory Council
Feasibility
Home Loan Guarantee Company
National Treasury
Bay Research
Rural Housing Loan Fund
105
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