Is microfinance working in South Africa?

Published on Pambazuka News, by Khadija Sharife, June 30, 2011.

Is microfinance is helping families out of poverty or merely plunging them into debt? Khadija Sharife speaks with one recipient about her experience.

Poverty at home when she was growing up caused Thandi Dlamini* to drop out of school in Grade 11 – two years prior to matriculation. Her lack of education prevented her from obtaining formal sector work. She married, and moved to a small village in the semi-rural community of Acornhoek, Limpopo, with her husband and four children, but the family struggled to survive on her husband’s meager income as a driver and before long they were begging for hand-outs from neighbours and relatives as the house around them fell apart. 

Thandi took the poverty bull by the horns. Having noticed there was a lack of small shops selling basic commodities nearby, she started a spaza shop selling products directly from her house, in part using her children’s social grants to finance the purchase of stock. In 2007, she joined the Women’s Development Businesses (WDB) microfinance programme, providing micro-credit to poor women. The loans – R1000 ($150) in 2009, increasing to R2500 in 2010 and R3000 in 2011 – allowed her to develop her business through the purchase of wider stock, and she now makes an income of around R600 a month.

Thandi Dlamini is one of two success stories provided to us on request by WDB. To date, the programme has over 70,000 clients accessing credit via a group-based methodology based on that of Grameen Bank, the original micro-credit institution formed by Muhammed Yunus with the dream of eradicating world poverty. Like Grameen Bank, WDB – a 100% women’s programme – provides loans solely for enterprise purposes. But this represents only tiny slice of the larger microfinance cake: in South Africa, only 6% of the R50bn microfinance industry is invested in micro-enterprises, the remainder being chiefly small loans to consumers in need of quick cash flow. “The WDB approach is to focus on enterprise development or productive loans since you cannot ensure a sustainable livelihood for the family unless your income generating activities are showing growth,” said the bank’s fund development manager Nomalanga Masumpa.

Not all WDB’s conditions are identical to Grameen Bank, however, with a primary difference being the repayment costs … //

… To counter the pitfalls of microfinance, and protect consumers from predatory lenders, the National Credit Act (NCA) was launched in mid-2006, which covers loans and other credit from banks, including mortgages, overdrafts, credit cards, vehicle finance, micro-loans, pawn transactions and other type of credit and loans provided to consumers. To date, there are just under 4500 registered lenders, with over almost 2000 registered debt counsellors. The NCR claims to have resolved 94% of complaints (estimated at 10 442).

This is where South Africa differs from Bangladesh: according to Karim, despite the latter being the ‘market leader’ in microfinance, no bankruptcy laws and consumer protection bills exist. In South Africa, where the average cost to collect defaulting loans is R6000 – far below the average microfinance enterprise loan – compliance is possible only for the ruthless or, alternately, so-called ‘development’ institutions, peddling handsome salaries and perks to advocacy-type employees eager to prove that the hand which feeds, does so benevolently.

In an interview with The Africa Report in 2007, Yunus revealed that if he were to launch the microfinance movement again it would be in Africa where women are more assertive. This is, of course, a far cry from reality in many African countries, north and south, but in South Africa at least, the social, economic and religious background points to an environment where women are less vulnerable to the types of abuses uncovered in Rahman’s study.

At the time Thandi Dlamini connected with the WDB, poverty in Limpopo was estimated at over 65%, one of the poorest provinces in South Africa. But poverty is not lack of income alone. Deprivation of, or limited access too, basic services such as infrastructure, transport, healthcare, education, clear water and waste sanitation, as well as other key opportunities and institutions, provide the structural pillars informing South Africa’s income inequality – one of the world’s more glaring known gaps. Until these factors too are addressed we are far from achieving the microfinance dream. (full text).

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