The microfinance sector in South Africa is a large and growing
sector of the national economy. It aims to bring access to
financial services to the poor and unemployed by assisting them
in setting up income generating micro businesses.
With the vast inequality in income distribution between the
wealthy and the poor, the microfinance sector is playing an
increasingly important role in the banking sector as the
retail banking sector attempts to provide financial services to
millions who have previously never had access to finance.
Increasingly government has begun to view the microcredit sector as
a significant part of its employment creation and economic growth
targets and has increased the capacity of its state microfinance
The South African government is certainly not the first to use
microcredit as an avenue with which to tackle development issues,
as many governments have prioritised the development of the sector.
From a poverty alleviation standpoint, critics of the policy have
argued that the microcredit policy is driven by policies on job
creation and economic growth. They also go on to add that the
poorest of the poor are themselves unable to access finance even
from microfinance institutions (MFIs) as those costs would still be
prohibitive to the economically marginalised. However, it is
important to understand that growth in the small and
microenterprise sector will ultimately result in employment
creation and therefore also poverty alleviation to a degree.
In order to advance the growth strategy, it is important to
assess whether the finance advanced is actually reaching the
microenterprise or if it is used in setting these up. This does not
seem to be the case. The microfinance industry in South Africa is
estimated to be R50 billion. Studies have shown that only 6% is
loaned to small businesses while the rest are consumer personal
loans which are mainly used to buy food and to pay off old loans.
It is clear that many consumers are caught up in a seemingly
endless cycle of borrowing often made worse by the desperate
financial circumstances that the poor face. As a result consumers
often approach "loan sharks" or "mashonisas"
who are quick to advance loans and require little or no
documentation which the more formal MFI's require. MFIs
therefore need to build strong relationships with communities and
build a reputation for efficiency in delivery of their
So the question remains, can microfinance become effective in
poverty alleviation, even when offered by the mainstream registered
MFIs? Regardless of the provider of the credit, microfinance is
always going to be expensive. For MFIs to be financially viable,
they have to build in the credit risk and lack of security into
their pricing. This results in astronomical interest rates borne by
those requiring microcredit; rates which are much higher than those
available to the much wealthier. And so, for the poor who end up
indebted due to their poverty, they find that their poverty deepens
as they try to escape the vicious cycle.
In recent months, there has been increased focus on the
In Duplum rule and how it can protect/s consumers, poor and
wealthy alike, from the effects of crippling interest charges. The
In Duplum rule is deeply rooted in South African common law and
indeed has a very strong moral basis imposing a limit on the
interest that can be charged on a loan. Interest is capped when the
amount equals the outstanding capital; a situation which arises
very frequently in the high interest environment of microfinance.
However, the practical application of the In Duplum rule remains
challenging in many environments. While major banks are refining
their systems to ensure compliance, it is doubtful that smaller
MFIs have their systems configured to suspend interest once this
has reached the level of the outstanding capital. It is likely that
even the mechanisms in law designed to alleviate the interest
burden will fail the poorest that probably need it the most.
The high cost of credit associated with microfinance is likely
to trap the poorest consumers in an endless spiral of debt. As long
as finance is granted by private entities they will have to price
the credit appropriately to remain in business and unsecured credit
cannot be inexpensive even with the highest intentions. It will
therefore remain a contentious issue whether microfinance will
assist even those who are using the funds to start up micro
businesses to advance out of poverty. The case for poverty
alleviation will probably be strongest when government funds are
used and state MFIs grant finance at highly subsidised rates to
individuals looking to set up micro businesses at interest rates
that they can actually afford. There is always a cost though and
where state subsidisation occurs, the taxpayer will ultimately bear
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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