Is microfinance working in South Africa?

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. At 32.4% per annum, WDB’s interest payments are double those of Grameen’s, which remain at 16%. With the one-off initiation fee and administration fees, WDB’s combined charges are 54%, which may make loan payments difficult to keep up. Masumpa defends WDB by saying, “Microfinance costs are far lower than moneylenders,” and lays the higher costs down to the fact that “in South Africa, it is generally expensive for microfinance to cover its costs.” These costs, she says, are mainly those of skilled labour and collection fees. (Following this conversation we informed Zanele Mbeki, who heads the organisation, about the ACPAS system which significantly reduces costs for collection systems, and she said appropriate managers would visit the site and advise the WDB board on recommended action.)

Naturally, we wished to talk to the women who featured in the success stories. This proved initially difficult as, according to one official, the “system was not configured to provide these details.” Persistence paid off, and we were eventually put in contact with Thandi Dlamini and able to interview her in her village. The interview was then translated from her native Shangaan to English. Though the figures she quoted to us did not correlate with those provided in her case study by the bank, Thandi was positive about her microfinance experience. She talked about the possibility of opening a community creche and expanding her shop. “Before the loans, I had a tuckshop which was poorly stocked. After getting loans this improved. I also diversified the goods that I sell and in addition to groceries, I now sell clothing and blankets,” she said.

Thandi claimed that she was not the one who contacted WDB but, rather, that it intentionally sought out people in her income group, via its local management systems, also known as 'group structures'. “I get loans from Mvelamani* [her local group"> who get [the money"> from the WDB. I do not know anything about the group structure. But what I know is that they go around communities, asking people to come in groups of five to borrow money from them, which they get from the WDB.” The group structures also inspect businesses and “conduct workshops to teach you how to use your money,” she said. As with Grameen, it is the group-based system that is the collateral is the group-based system, ensuring that other women are responsible for the loan if one member cannot pay. Funds are “set aside as a group, every month, as insurance.” Should there be a problem repaying the loan, “we access this money that has been put aside to add to the group member’s instalment so that we can continue to meet our obligations.” She said she had never heard of Mvelamani not paying loans back to the WDB.

Despite the unsettling news from Bangladesh that, following Muhammad Yunus’s permanent removal as the head of Grameen Bank on the grounds of exceeding the official retirement age the finance ministry has unveiled a plan to increase its stake in the bank, Grameen remains a model for microfinance worldwide. But Yunus’s vision that poverty would become so rare that we would have to establish a “museum of poverty” has proved to be but a pipe dream. Though a whole host of motivations can be seen to be behind the widespread criticism of Grameen Bank, some of the more creditable analysis has revealed undeniable pitfalls, including the problems of running women-targeted programmes in often patriarchal developing countries, where the social, political, and legal status of women leaves them open to exploitation and debt.

In 2008, Professor Lamia Karim, who conducted an extensive 24 month study on Bangladesh’s microfinance borrowers and later authored a book on the subject, revealed that although women were the formal recipients of loans, “men used 95 percent of the loans… In my research area, rural men laughed when they were asked whether the money belonged to their wives. They pointedly remarked that since their wives belong to them, the money rightfully belongs to them.” According to Karim, though Grameen Bank (and models replicated thereof) exemplifies neoliberal ideas of development through microfinance, rendering the poor a ‘bankable’ group may have caused more ill than good. During an interview, Karim – a native of Bangladesh, identified three primary findings:

“First, women give the loans to their husbands. Women are the conduits for the circulation of capital in rural society. This has resulted in increased domination and violence for indivdual women both at the household and community levels. Second, women operate as the custodians of honor and shame in rural society. By instrumentalising these codes, NGOs shame rural women to recover their defaulted sums of money. Third, money is transferred from poor borrowers to the rural middle-class through proxy membership, moneylending, and by NGO officers allowing richer clients who they consider to be more credit-worthy,” she said.

A study conducted by Aminur Rahman of the Canadian International Development Agency, investigating gender-based violence in the context of Grameen’s micro-lending, revealed that 60% of women were asked to join the Bank by their husbands; a further 11% by other males; 13% by female relatives; 5% recruited by Bank’s officials, and just 10%, of their own initiative. Female borrowers were subject to victimisation by male relatives and forced to sell their homes and possessions to ensure repayment. Banked ‘clients’ – stuck in submissive roles, were also forced to collateralise their ‘honor’, and experience shame and marginalisation, by the group and the village, in the event of non-repayment. In India, this has resulted in over 200,000 suicides. In Peru, severe sanctions on borrowers. In Egypt, the use of criminal law to facilitate repayment.

And while the Grameen Bank boasts a repayment level of 97%, other studies reveal that the bulk of general weekly loan repayments were financed by relatives (39.4%), moneylenders (7%), peers (1%), other sources including neighbours (7%). In fact, a study commissioned by the Grameen Bank itself revealed, “Based on the studies in this survey, the overall effect on the incomes and poverty rates of microfinance clients is less clear, as are the effects of microfinance on measures of social well-being such as education, health, and women’s empowerment.” As the Harvard Business Review revealed in 2007, “Many heads of microfinance programs now privately acknowledge 90 percent of micro-loans are used to finance current consumption rather than to fuel enterprise.” In 2009, almost 40% of microloans supplied to South Africans were used to purchase food, and a considerable portion of indebted consumers engaged in cross-consumption of loans – using one source to pay off another.

The potential dangers of the microfinance industry for Africa were recognised by the African National Congress Economic Transformation Committee (2005) which stated, “Rather than promoting employment and economic security it could promote unemployment and economic insecurity by thriving on the extension of unsustainable debt burdens among low-income workers, thus generating economic disempowerment…”

But South Africa, according to some, has the right conditions for responsible microfinance to benefit the poor, and particularly women. “The political reality is that in South Africa, for various historical and other reasons, the women are left to fend for themselves,” said Professor Gerhard Coetzee Director of the Centre for Inclusive banking in Africa at the University of Pretoria and Advisor (Inclusive Banking) for ABSA to The Africa Report. “As with Bangladesh, there is the same same disciplined repayment of 98%, and this allows for women to empower themselves. Not only do women spend more of their returns on their children, but the positive impact on their daughters is considerable.”

A spokesperson for WDB says, “In deep rural areas, women are mostly heading up single households with menfolk having left the area to seek work in urban zones. Thus the women are responsible both for generating income to support the family left behind and to take care of the children. In our experience, women have time and time again demonstrated their discipline in both growing their small income generating business and in their ability to repay their business loans on time.”

Muhammed Yunus made the point that charity is not the way to eradicate poverty, but for some microfinance is just another opening to profit. The World Bank’s microfinance-focused Consultative Group to Assist the Poor (CGAP) revealed in 2008, during the recession, that the assets of the world’s top ten microfinance investment groups grew by over 30%, rendering ‘the promise of poor women’, a lucrative private asset class.

“The phenomenon of growth has several reasons,” says Coetzee. “One is that as people lose their jobs in the formal economy, they turn to informal activities and survivalist businesses, so instead of a negative impact, microfinance becomes the cushion of the poor. The second reason is that there is a tremendous gap in the demand for microfinace services. Studies from the CGAP and Finscope reveal that more than 80% in sub-Saharan Africa do not have access to financial services, ranging from loans to saving and transactional products, as well as insurance.”

Presently, while over 60% of eligible people are banked in South Africa, there is weak penetration in the loans and insurance sectors. University of KwaZulu-Natal Development Studies professor Patrick Bond, formerly the first US Federal Reserve employee assigned to regulate the 1977 Community Reinvestment Act on a full-time basis, says that the overall interest rate structure is biased against ordinary people.

“The usury ceiling was raised dramatically on the advice of the Free Market Foundation in 1992, up to 32% for small loans, and today the rate is even higher,” he said. “Even NGOs purportedly trying to help poor people using the Grameen Bank model have vastly inflated overhead and salary costs far out of line with the global industry.” According to Bond, 17 years after apartheid, not only has unemployment doubled, and inequality rising steadily, but the profit by financial institutions has soared. “The extreme expansion of bank credit to working-class people is far beyond their ability to pay. So from 2007-10, the number of South African consumers with ‘impaired credit ratings’ rose from 37% to 47%, a 2.3 million increase. Nearly a third of consumer credit outstanding is unsecured.”

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.

* Name of the WDB client and the group structure has been changed.

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* Khadija Sharife is a journalist and visiting scholar at the Center for Civil Society (CCS) based in South Africa, and a contributor to the Tax Justice Network. She is the Southern Africa correspondent for The Africa Report magazine, assistant editor of the Harvard ‘World Poverty and Human Rights’ journal and author of ‘Tax Us If You Can Africa’.
* This article first appeared in The Africa Report.
* Please send comments to editor[at]pambazuka[dot]org or comment online at Pambazuka News.