Research Report - CiteSeerX

Key factors for commercial banks

providing microfinance:

A multiple case studies perspective

Sibongile Kumalo

Research report presented in partial fulfilment

of the requirements for the degree of

Master of Business Administration

at the University of Stellenbosch

Supervisor: Professor Marius Ungerer

Degree of confidentiality: A December 2011

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Declaration

By submitting this research report electronically, I, Sibongile Kumalo, declare that the entirety of

the work contained therein is my own, original work, that I am the owner of the copyright thereof

(unless to the extent explicitly otherwise stated) and that I have not previously in its entirety or in

part submitted it for obtaining any qualification.

________________________________

Sibongile Kumalo Date: December 2011

Copyright © 2011 Stellenbosch University All rights reserved

Stellenbosch University http://scholar.sun.ac.za

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Acknowledgements

This research paper would not have been possible without the support of my family, supervisor and

colleagues. I am grateful to Professor Marius Ungerer, who supervised me and critically reviewed

this paper to ensure that the research paper is of the right standard, as well as for his continuous

support throughout the study. Special thanks to Professor Gerhard Coetzee for helping me in

refining the topic and ideas for this paper. Thanks to Bongiwe Tindleni, Frances Fraser, Carl

Fischer, Ben Nkuna and Daphne Motsepe, who provided powerful insights from the interviews that

made it possible for me to complete the study.

To my dearest loving husband, this would not have been possible without you – thank you for

being understanding, your continuous encouragement and for believing in me.

To God Almighty – thank you for giving me the courage and strength to deliver this paper.


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Abstract

Little research has yet been undertaken in South Africa about commercial banks that are servicing

the microenterprise market. The objective for the current research was to investigate the key

factors that should be considered by commercial banks in South Africa servicing the

microenterprise market. The focus for the study was on identifying the key factors and on

investigating how the key factors were being considered.

There are a number of case studies documenting the key factors that international commercial

banks have considered. However, in South Africa, there are relatively few documented cases,

which rightfully confirms that commercial banks providing microfinance to microentrepreneurs are

still in a new line of business that is in its early developmental stages.

The first part of the current study aimed to identify the key factors that required consideration,

which have been well documented in a number of research reports. The focus was also laid on

international commercial banks that offered microfinance services, especially to microenterprises.

The intention was to obtain an overview of how international banks have considered the key

factors concerned. The second part of the research study aimed to see how South African

commercial banks have considered the above-mentioned key factors, using Absa and Capitec

banks as case studies.

The key factors identified are the following: the operating model; the delivery model; institutional

commitment; product development; funding; technical assistance; human resource (recruitment,

retention and remuneration); and operations (credit methodology; loan appraisals; lending

methodology; collections; branch network; and support services). The international commercial

banks whose case studies are reviewed include: Banco do Nordeste; Bank Rakyat Indonesia; the

Commercial Bank of Zimbabwe; the Cooperative Bank of Kenya; Banque du Caire; the Agricultural

Bank of Mongolia; Hatton National Bank; the Industrial Credit and Investment Corporation of India;

and Banco de la Empressa. From the case studies it was seen that some of the commercial banks

considered certain factors more than others. The other differentiating factor is how the key factors

were considered, because the operating context of the different commercial banks differs.

In South Africa, Absa and Capitec Bank have also considered the key factors, however, the

operating model and the delivery model are the biggest differentiator as to how the other factors

are considered.

Key words: Commercial banks; Downscaling; Microenterprise; Microfinance


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Table of contents

Acknowledgements iii

Abstract iv

Table of contents v

List of figures xi

List of acronyms and abbreviations xii

CHAPTER 1 ORIENTATION 1

1.1 INTRODUCTION 1

1.2 RESEARCH OBJECTIVES 2

1.3 RESEARCH QUESTIONS 2

1.4 CLARIFICATION OF KEY CONCEPTS 3

1.4.1 Microfinance 3

1.4.2 Microenterprise 3

1.4.3 Downscaling 4

1.5 SIGNIFICANCE OF THE STUDY 4

1.6 CHAPTER OUTLINE 4

1.7 LIMITATIONS OF THE STUDY 4

1.8 CONCLUSION 5

CHAPTER 2 LITERATURE REVIEW ON MICROENTERPRISE LENDING LANDSCAPE 6

2.1 INTRODUCTION 6

2.2 REASON FOR MICROFINANCE 7

2.2.1 Financial inclusion 7

2.2.2 Poverty 9

2.2.3 Economic development 10

2.3 THE CUSTOMERS OF MICROFINANCE 10

2.3.1 The needs of microfinance customers 10

2.4 THE PROVIDERS OF MICROFINANCE 11

2.5 DOWNSCALING OF COMMERCIAL BANKS 11

2.5.1 Reason for the late market entry 12

2.5.2 Reason for the downscaling of commercial banks 13

2.6 THE PARADOX OF COMMERCIAL BANKS AND MICROFINANCE 15

2.7 CHALLENGES FACED BY MICROFINANCE GLOBALLY 17

2.8 SOUTH AFRICAN CONTEXT OF MICROFINANCE 18

2.8.1 Historical view of South Africa and the need for microfinance 19

2.8.2 Socio-economic overview 19

2.8.3 Financial inclusion in South Africa 22

2.8.4 The microfinance industry in South Africa 24

2.8.6 The South African banking industry 28


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2.8.8 Financial regulatory environment in South Africa 30

2.8.9 The South African government and microfinance 32

2.9 KEY CONSIDERATIONS BY COMMERCIAL BANK 34

2.10 SUMMARY 35

CHAPTER 3 RESEARCH METHODOLOGY 37

3.1 INTRODUCTION 37

3.2 RESEARCH OBJECTIVES 37

3.3 RESEARCH QUESTIONS 37

3.4 THE POPULATION AND SAMPLE 38

3.4 THE INTERVIEW GUIDE DESIGN 38

3.5 DATA COLLECTION 38

3.6 DATA ANALYSIS 39

CHAPTER 4 KEY FACTORS 41

4.1 INTRODUCTION 41

4.2 OPERATING MODEL 41

4.2.1 Internal unit 43

4.2.2 Financial subsidiary 43

4.2.3 Service company 44

4.2.4 Strategic alliance 44

4.3 FUNDING 44

4.4 TECHNICAL ASSISTANCE 45

4.5 HUMAN RESOURCES 46

4.5.1 Acquiring 46

4.5.2 Development 46

4.5.3 Retention 47

4.6 INSTITUTIONAL COMMITMENT 47

4.7 PRODUCT DEVELOPMENT 48

4.7.1 Product types 48

4.7.2 Pricing 49

4.7.3 Collateral 50

4.8 OPERATIONS AND DELIVERY MODEL 51

4.8.1 Credit methodology 51

4.8.2 Lending methodology 51

4.8.3 Loan appraisal 52

4.8.4 Collections 52

4.8.5 Supportive branch network 53

4.8.6 Support services 53

4.8.7 Decentralisation and internal controls 53

4.9 SUMMARY 53


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CHAPTER 5 CASE STUDIES OF INTERNATIONAL COMMERCIAL BANKS 54

5.1 INTRODUCTION 54

5.2 BANCO DO NORDESTE (BN) 54

5.2.1 Background 54

5.2.2 Technical assistance 54

5.2.3 Human resources 55

5.2.3.1 Staffing 55

5.2.4 Product development 55

5.2.5 Institutional commitment 56

5.2.6 Operations 56

5.3 AGRICULTURAL BANK OF MONGOLIA (ABM) 57

5.3.1 Background 57





5.3.6 Operations 58

5.4 BANK RAKYAT INDONESIA (BRI) 59

5.4.1 Background 59



5.4.4 Operations 59


5.5 BANQUE DU CAIRE 60

5.5.1 Background 60

5.5.2 Motivation for servicing the microfinance market 60

5.5.3 Funding and technical assistance 61

5.5.4 Operating structure 61

5.5.5 Recruitment 61

5.5.6 Product offering 61

5.6 HATTON NATIONAL BANK (HNB) 62

5.6.1 Background 62

5.6.2 Motivation for going into microfinance 62

5.6.3 Operating model 62




5.6.7 Operations 63


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5.6.8 Challenges for HNB 63

5.7 COMMERCIAL BANK OF ZIMBABWE (CBZ) 64

5.7.1 Background 64

5.7.2 Motivation to move into microfinance 64



5.7.5 Funding 64




5.7.9 Operations 65

5.8 COOPERATIVE BANK OF KENYA (CBK) 66

5.8.1 Background 66

5.8.2 Motivation for entering microfinance 66



5.8.5 Funding 67





5.9 INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI) 68

5.9.1 Background 68



5.10 BANCO DE LA EMPRESA 69

5.10.1 Background 69



5.10.4 Funding 70



5.11 LESSONS LEARNT 71

CHAPTER 6 CASE STUDY: SOUTH AFRICAN COMMERCIAL BANKS 73

6.1 INTRODUCTION 73

6.1.1 Absa Bank 73

6.1.2 Capitec Bank 74

6.2 ABSA MEF CASE STUDY 75

6.2.1 Background on AMEF 75


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6.2.2 Motivation for Absa Bank to consider MEF 75


6.2.4 Funding 78



6.2.7 Delivery model 81



6.2.10 Operations 90

6.2.10.1 Policies 90

6.2.10.2 Using Absa infrastructure 91

6.2.10.3 Credit methodology 91

6.2.10.4 Absa shared services 92

6.2.10.5 Collections 92

6.2.10.6 Information system 93

6.2.10.7 Appraisal of new customers 93

6.2.11 AMEF challenges 95

6.3 CAPITEC BANK – KD 96


6.3.2 Delivery model 96

6.3.3 Funding and technical assistance 96


6.3.5 Selection of potential customers 97

6.3.6 Repayments 97

6.3.7 Competitors 97


6.3.9 Products 98

6.3.10 Policies 98

6.3.11 Challenges faced by Capitec 99

6.4 SUMMARY 100

CHAPTER 7 SUMMARY, CONCLUSION AND RECOMMENDATIONS 101

7.1 INTRODUCTION 101

7.2 SUMMARY OF MAIN FINDINGS 101

7.2.1 Findings in regard to the commercial banks in South African 102

7.3 POLICY IMPLICATIONS 103

7.3.1 Global implications 103


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7.3.2 Implications for South Africa 103

7.3.2.1 South Africa as a country 103

7.3.2.2 Commercial banks in South Africa 104

7.4 RECOMMENDATIONS 104

7.5 FURTHER RESEARCH 106

REFERENCES 107

APPENDIX A: QUESTIONNAIRE 115

APPENDIX B: A FRAMEWORK FOR EVALUATING REGULATION 117


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List of figures

Figure 2.1: Governing principles of a sustainable framework .......................................................... 9

Figure 2.3: Matrix showing performance of MFI ............................................................................ 16

Figure 2.4: Microfinance Banana Skins 2011 ................................................................................ 17

Figure 2.5: Unemployment rate by population group ..................................................................... 20

Figure 2.6: Total employment, 4th quarter 2009 to 4th quarter 2010 .............................................. 20

Figure 2.7: Branches and ATMs in South Africa ............................................................................ 24

Figure 2.8: Suppliers and products categories for microfinance in South Africa ............................ 25

Figure 2.9: Total credit granted and gross debtors’ book at September 2010 ................................ 29

Figure 2.10: Gross debtors’ book – industry type .......................................................................... 30

Figure 2.11: South African financial sector regulation ................................................................... 31

Figure 2.12: State agencies serving the business communities .................................................... 33

Figure 4.1: Microfinance operating model options for commercial banks ...................................... 42

Figure 6.1: Capitec holding subsidiary ......................................................................................... 74

Figure 6.2: Absa microenterprise service centre ........................................................................... 82

Figure 6.3: Customer assessment and approval ........................................................................... 94

Figure 6.4: Comparison of KD and cash and carries ..................................................................... 98


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List of acronyms and abbreviations

ABM Agricultural Bank of Mongolia

AMEF Absa Micro Enterprise Finance

ANC African National Congress

ANCYL African National Congress Youth League

APR Annual percentage rate

ATM Automated teller machine

BASA Banking Association of South Africa

BMC Business Management Consulting

BN Banco do Nordeste

BRI Bank Rakyat Indonesia

BSM Business service management

CBK Cooperative Bank of Kenya

CBU Community Banking Unit

CBZ Commercial Bank of Zimbabwe

CEO Chief executive officer

CFO Community finance officer

CGAP Consultative Group against Poverty

COSATU Congress of South African Trade Unions

CPA Consumer Protection Act

CPI Consumer Price Index

CRES Corporate Real Estate Services

CSFI Centre for the Study of Financial Innovation

CVM Customer Value Management

DAI Developmental Alternatives Inc.

DFID Department for International Development

ECLAC Economic Commission for Latin America and the Caribbean

ELIB Entry Level and Inclusive Banking

Exco Executive Committee

FICA Financial Intelligence Centre Act

FMCG Fast-moving consumer goods

FSC Financial Sector Charter

GDP Gross Domestic Product

GM General Manager

GP Gami Pubuduwa

HNB Hatton National Bank

ICICI Industrial Credit and Investment Corporation of India

IDB Inter-American Development Bank


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IES Income and Expenditure Survey

IFC International Financing Corporation

IMG Inter-Ministerial Group

IT Information Technology

ITC Investment Tax Credit

KD Key Distributors

LSM Living Standards Measure

MDG Millennium Development Goal

MFI Microfinance Institution

MFRC Microfinance Regulatory Council

MIX Microfinance Information Exchange

NAFCOC National African Federated Chamber of Commerce

NCA National Credit Act

NCR National Credit Regulator

NGO Non-governmental organisation

PLC Public Limited Company

PoC Proof of Concept

PoS Point of sale

PWC PriceWaterhouseCoopers

RMO Risk Mitigation Officer

SACP South African Communist Party

SAMAF South African MicroFinance Apex Fund

SARB South African Reserve Bank

SASBO South African Society of Bank Officials

SEF Small Enterprise Foundation

SHG Self-Help Group

SME Small and medium enterprise

Stats SA Statistics South Africa

UK United Kingdom

UN United Nations

USAID United States Agency for International Development

WDB Women Development Businesses


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CHAPTER 1

ORIENTATION

1.1 INTRODUCTION

Of the South African adult population, 23.5 per cent are financially excluded, meaning that they

have never been provided with any formal financial services (Finscope South Africa, 2010). Of the

76.5 per cent of the adult population that is financially included, a percentage are financially

underserved. Those who are financially excluded require financial services, especially credit, to

enable them to cope with unforeseen events. Currently, they tend to obtain funds from such

informal sources as other family members or from loan sharks.

People, in general, are able to save, even though the saving might take an unconventional form,

like buying material things that accumulate value over time, such as livestock or jewellery.

However, the offering of financial services informally raises risks for governance and may

exasperate the situation of the poor and the microentrepreneurs who are normally the market for

informal microfinancial services. As an example, loan sharks charge very high interest rates, as

they fall outside of the regulatory structures. Since the establishment of the NCR, unregistered

lenders are not allowed to extend credit, and if done so, it is prohibited by the NCA. This has

curbed the unfair lending practises employed by the informal money lenders.

The entry of formal financial service providers (such as non-governmental organisations [NGOs],

cooperatives, and banks) has shown the potential of the above-mentioned market. The market

presents opportunities on the micro level to the financial institution, such as market growth, leading

to increased customer reach and revenue growth. On the macro level, research has shown that

microfinance can reduce poverty levels, and improve financial inclusion and economic

development opportunities (Honohan, 2004), which work towards the achievement of the

Millennium Development Goals (MDGs), especially the MDG goal of ‘fighting against poverty’ (UN,

2010).

Commercial banks have been slow entrants into servicing the above-mentioned market, because

commercial banks did not deem the market profitable, and competition in their current markets was

not rife then as it is now. There was also not enough understanding of the market. Microfinance

was also deemed a charity issue, with there being no space for commercial banks, which do

business for profit, lest they be seen as exploiting those who cannot fend for themselves.

Offering microfinancial services to the poor and microentrepreneurs required a change in culture,

policies, structures, governance and systems, which presented challenges that the banks lacked

the ‘know how’ to deal with. Through the brave ventures of the first movers, like the Bank Rakyat of

Indonesia (BRI) and the Grameen Bank (1998), commercial banks have gained the necessary

insight from the lessons learnt by them, and they now want a stake in the microfinance industry.


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Microfinance is perceived as a social initiative, but for a commercial bank, the social aspect of

going into microfinance is still there – however, from the shareholders’ perspective – the line of

business in question also requires being commercially viable in order to ensure that it can, at least,

sustain itself.

Absa Bank is a commercial bank based in South Africa and has a footprint in other African

countries. The largest shareholder is the Barclays Group, based in the United Kingdom (UK). After

doing extensive market research, Absa decided in late 2007 to launch a unit focused on financing

microenterprises. Capitec Bank is one of the most recent banks to be established in South Africa.

To differentiate itself from other existing commercial banks, it has focused on banking the mass

market, coming up with innovative ways to make banking easier and cheaper. As part of such a

venture, they have also devised an innovative way of financially including the microentrepreneurs,

while, nevertheless, curbing the bank’s risk exposure. Such an exercise was conducted through its

subsidiary, Key Distributors (KD). The Absa Micro Enterprise Finance (AMEF) unit and Capitec

Bank have been undergoing changes, based on experiences of what works in the South African

context and what does not, which is highlighted in Chapter Six of the current report.

1.2 RESEARCH OBJECTIVES

The objective of the current research study was to investigate the key factors that require

consideration by commercial banks in South Africa servicing the microfinance market. The key

factors are derived from existing published research reports focused on the subject matter and

were further verified by researching documented and published case studies of commercial banks

that have considered such factors.

The secondary objective of the research was to illustrate how South African commercial banks,

namely Absa and Capitec Bank, have considered the identified key factors involved in providing

microfinancial services to microenterprises.

1.3 RESEARCH QUESTIONS

In order to reach the research objectives, the following research questions were investigated:

Research Question 1: What are the key factors for commercial banks in the microfinance

market?

Research Question 2: How did South African commercial banks consider the key factors in

offering microfinance?

Research Question 3: What were some of the lessons learnt from the South African

commercial banks’ case study and how do they impact on the considered key factors?


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1.4 CLARIFICATION OF KEY CONCEPTS

1.4.1 Microfinance

Microfinance is defined as the financial and social intermediation services (Ledgerwood, 1998) that

are aimed at empowering the poor. The financial intermediation concerned includes the provision

of financial services, such as savings, credit, insurance, and transactional accounts. Social

intermediation includes such initiatives as furthering the financial literacy of the community and

empowering the community to have confidence to raise issues that policy makers should consider

(Ledgerwood, 1998). Robinson (2002) defines microfinance as referring to small-scale financial

services provided to people who operate micro or small enterprises or work, however, they are

classified as those who receive a low income or who are poor. Even though those concerned have

an income, most also operate in the informal sector. Putting the situation more plainly,

microfinance helps to ensure that those at the bottom of the income stream have access to

financial services.

In some of the case studies reviewed for the current research paper, some authors refer to

microcredit or microloans, or might sometimes even use the terms interchangeably. Elahi and

Rahman (2006) observe that the nomenclature could just be an issue of semantics. For the

purpose of the current study, microcredit and microloans are, together, seen as a subset of

financial services that form part of microfinance.

1.4.2 Microenterprise

A microenterprise is mostly identified as an informal business that is normally a one-person shop,

which is usually operated from the owner’s residence. In South Africa, the National Small Business

Act (Republic of South Africa, 1996) characterises microenterprises as those enterprises that

employ fewer than five people, and of which the turnover is less than R150 000 per annum, with

the total gross asset value being less than R100 000.

In other areas, micro business and survivalist business are seen as different; however, there is no

clear indication of what differentiate the two, with it possibly just being that the survivalist business

is not registered, while microenterprises are deemed to be registered. For the purpose of the

current study, reference to microenterprises includes survivalist business. A microenterprise in the

context of the current study, and in alignment with the National Small Business Act (Republic of

South Africa, 1996), is the smallest type of enterprise that one can find, with the majority of them

being run as informal businesses, and, in most cases, without formal registration.


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1.4.3 Downscaling

Commercial banks are said to be downscaling when they expand their service to offering

microfinance to clients who are traditionally served by microfinance institutions (MFI) (Segrado,

2005). Other studies refer to such business as the commercialisation of microfinance (Christen &

Drake, 2001). Upscaling refers to the conversion of an MFI into a commercial bank when it is

provided with finance.

1.5 SIGNIFICANCE OF THE STUDY

The key factors identified and analysed in the study will help commercial banks that want to

downscale or that have already downscaled into microfinance to know what to prepare for, and

how to do so if they are to be successful.

By applying how other commercial banks have downscaled, Absa will be able to review what they

have done so far critically and, where necessary, take some of the lessons provided by the other

commercial banks. It is important to note, however, that context is key – thus, even if Absa were to

take some of the lessons from other commercial banks, they still need to be tested in the South

African context.

1.6 CHAPTER OUTLINE

Detailed below is a synopsis of the rest of the chapters that make up this research report.

Chapter Two provides a literature review, and introduces the key concepts used in this paper.

Chapter Three outlines the specific research methodology employed in the study.

Chapter Four focuses on the identification of the key factors from other research papers.

Chapter Five illustrates how other commercial banks have considered the key factors

identified in the chapter above.

Chapter Six contains the case studies of the Absa MEF Unit and Capitec- Key Distributors,

highlighting how Absa and Capitec has considered the key factor identified in Chapter Four.

Chapter Seven gives the findings, a conclusion, as well as limitations of this study. It also

offers some recommendations for future research.

1.7 LIMITATIONS OF THE STUDY

This study relies on published case studies from commercial banks that have attempted

successfully or unsuccessfully to implement microfinance. There are many other commercial banks

offering a microfinance service, but only a limited number of case studies have been published and

are accessible.

When analysing case studies that were documented by other people, the authors of the case

studies of other commercial banks documented only what they deemed important to prove a


5

certain hypothesis they were making; therefore, some of the case studies might not have the

information that is needed for this research paper.

The author for this research paper works for Absa Bank. The other commercial banks, with the

exception of Capitec, were not willing to participate in the study, mainly because the study leader

worked for the competitor.

To make this research paper accessible to people, sensitive information, such as actual numbers

on the performance of the portfolios for the South African commercial banks, has been omitted,

otherwise the paper would have had to have been classified confidential and not accessible.

The context and objectives for each commercial bank that provides microfinance are different, and,

hence, some of the success factors in one case study might not hold true for the other case

studies. Therefore, it is very important that the context is clearly understood before generalisation

occurs. Commercial banks operating in the same country share the same macroeconomic

challenges, but the microeconomic situation is different, meaning that, when it comes to business

operating practices, there will be differences, due to the different operating contexts in play.

1.8 CONCLUSION

There are few significant differences between the challenges that are faced by commercial banks

serving the microfinance industry. However, the macro environment within which the commercial

banks operate varies. Thus, even though the challenges might be similar, how the commercial

bank deals with them is mostly a result of the macro environment in which the commercial bank

operates. Case studies from other commercial banks serving the microfinance market were

considered, with the objective of highlighting the fact that the commercial banks consider similar

factors, though in different ways. What has worked in one country might not necessarily work in

South Africa. A consideration of the dynamics presented by the macro conditions in South Africa

has to be reviewed.

There are existing reports and research reports on the South African microfinance industry

(Schoombee, 1998; Skowronski, 2008), and others on the financial services industry (Schoombee,

2004; Coetzee, 2005). However, a detailed research report focusing on the key factors discussed

in this paper has been lacking in the past.

The main objective of this paper is, therefore, to:

Identify key factors that commercial banks that downscale need to consider; and

Illustrate how South African commercial banks consider the key factors.

This research report contributes to the existing microfinance body of knowledge, with the focus on

South African commercial banks.


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CHAPTER 2

LITERATURE REVIEW ON MICROENTERPRISE LENDING LANDSCAPE

2.1 INTRODUCTION

The Consultative Group against Poverty (CGAP) and its members at the G8 conference summit

collated the principles of microfinance in 2004 (Helms, 2006). These principles underpin the

literature survey and the rest of the discussions in this research paper, which give an overview of

what microfinance is really about.

Table 1: Key principles of microfinance

1. The poor require a variety of financial services, not just loans. In addition to credit, they require

access to savings, insurance, and money transfer services.

2. Microfinance is a powerful tool for fighting poverty. Poor households use financial services to

raise an income, to build their assets, and to cushion themselves against external shocks.

3. Microfinance means building financial systems that serve the poor. Microfinance will reach its full

potential only if it is integrated into a country’s mainstream financial system.

4. Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor

people. Unless microfinance providers charge enough to cover their costs, they will always be limited

by the scarce and uncertain supply of subsidies from governments and donors.

5. Microfinance is about building permanent local financial institutions that can attract domestic

deposits, recycle them into loans, and provide other financial services.

6. Microcredit is not always the answer. Other kinds of support may work better for those who are so

destitute that they are without an income or any means of repayment.

7. Interest rate ceilings hurt the poor by making it harder for them to get credit. Making many small

loans costs more than making a few large ones. Interest rate ceilings prevent microfinance institutions

from covering their costs, and thereby choke off the supply of credit for the poor.

8. The job of government is to enable financial services, not to provide them directly. Governments

can almost never do a good job of lending, but they can set a supporting policy environment.

9. Donor funds should complement private capital, not compete with it. Donor subsidies should be

temporary start-up support designed to get an institution to the point where it can tap private funding

sources, such as deposits.

10. The key bottleneck is the shortage of strong institutions and managers. Donors should focus

their support on building capacity.

11. Microfinance works best when it measures – and discloses – its performance. Reporting not only

helps stakeholders judge costs and benefits, but it also improves performance. MFIs need to produce

accurate and comparable reporting on financial performance (e.g. loan repayments and cost recovery)

,as well as social performance (e.g. the number and poverty level of clients being served).

Source: Helms (2006).


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2.2 REASON FOR MICROFINANCE

Microfinance is not a new concept. In 1800, Friedrich Wilhelm Raiffeisen (CGAP, 2004)

established the first credit union in Europe. In 1970, the global concept of microfinance started to

spread through Latin America and the Asian countries, with the intention of aiding those living in

poverty. Microfinance was originally provided by MFIs. Commercial banks are a late starter, but

they have seen the opportunities provided by microfinancing.

As said above, microfinance helps to bring into the mainstream economy those who are at the

bottom of the income stream, including the poor, microenterprises, and people who were financially

excluded. Financial inclusion is on the agenda of most of the developing or even developed

countries of the world. As long as there is poverty, there is also deemed financial exclusion. From

big organisations, such as the United Nations (UN), to the national agenda of each country, there

is a wide-spread drive to promote financial inclusion, with microfinance being seen as one of the

tools with which to reduce poverty levels. Fighting poverty is one of the MDGs to which all

developing countries have committed themselves.

However, there should be an understanding that microfinance cannot be used as a tool to fight

poverty among the poorest of the poor – those who are unable to satisfy even their very basic

needs. Segrado (2005:4) puts it well when he says: “Microfinance is not a panacea, but at a certain

stage of poverty, it is likely to be one of the most effective tools to help the poor in a self

development perspective”. This research paper, therefore, promotes and focuses on sustainable

microfinance, meaning that the study will not focus on the microfinance offered and used for

consumption, but on microfinance as used for the expansion of a microenterprise. The sections

below give more details on why microfinance is significant.

2.2.1 Financial inclusion

Sarma (2008:3) defines financial inclusion as “a process that ensures the ease of access,

availability and usage of formal financial system for all members of an economy”. The common

measures that are used for financial services availability include the number of bank branches,

automated teller machines (ATMs) and point-of-sale (PoS) terminals per 1 000 population, which

are recorded in the annual Financial Access Report (Financial Access 2010, 2010).

Consumer protection is one of the drivers for financial inclusion. It is about protecting those who

are financially vulnerable, especially from the informal providers of microfinance. Consumer

protection is also about protecting customers from formal institutions that practise unfair and high-

pressure selling practices and abusive collection practices. The Financial Access report mentions

that, from the survey that was conducted in about 139 economies, consumer protection and

financial literacy issues are high on the agendas of the majority of countries (Financial Access

2010, 2010).


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The government has a role to play in ensuring that there are regulations that promote and reward

financial inclusion (including consumer protection and financial literacy) and that raise as much

awareness as possible. The government can also make sure that targets are set to work towards

financial inclusion and that there is an agency to monitor and govern the set regulations and

targets. Both private and public sector organisations also need to cooperate with the government

to ensure that targets are met.

The framework below, which was devised by Dharmarajan (2010) in consultation with the

Constitution of the Inter-Ministerial Group (IMG), gives a realistic overview of what is required for a

sustainable programme development framework. The framework (as presented in Figure 2.1

below) can be used to develop a comprehensive financial inclusion programme. The proposed

framework for sustainable development is based on four pillars, namely:

People: Ensuring that there is awareness of who the customer is; developing products to meet

the customers’ needs, and also boosting the financial literacy of the customer. To be added to

this is the consumer protection in every service that is offered to the customer.

Technology: Including those who were financially excluded means being able to reach them in

whichever remote area they might be in, and also making it affordable for them to use the

service. All this can be made possible by technology. This can also mean that financial service

institutions need to partner with mobile or technologically savvy companies for the good of the

financially excluded customer. An example is the M-Pesa banking services provided in Kenya

and South Africa.

Channel: Serving those who were financially excluded is about being able to reach them; and

bringing financial services closer to them. This means finding channel partners who are close

to where the customer is. As an example, Standard Bank (Lefifi, 2011), a commercial bank in

South Africa, has embarked on partnering with spaza shop owners to form what are known as

bank shops. The spaza shop owner acts as the traditional banker, accepting deposits and

making withdrawals. This example illustrates that cheap distribution that allows for the more

efficient serving of customers is possible.

Pricing: Serving those who are financially excluded is a costly business. Therefore, pricing is

expected to be at a premium. However, a financial service provider must not exploit the

customer, but should be financially viable to ensure that the financial institution is sustainable.


9

Figure 2.1: Governing principles of a sustainable framework

Source: Dharmarajan, 2010.

A shining example of serving the poor is the Grameen Bank, which was started by Nobel Prize

winner, Dr Muhammad Yunus (Grameen, 2006). The whole philosophy of the bank is to bring it to

those who cannot afford to come to it. The aim is to empower the poor to borrow more wisely. The

bank also lends money responsibly. The borrowers are taught about bank regulations and about

how they can use their money to make their lives better. The bank encourages responsible

borrowing – this is real empowerment.

2.2.2 Poverty

According to the World Bank (2010) report, in 2005 25 per cent of the world population lived in

poverty, meaning on less than $1.25 a day. The percentage is even more in the developing

countries population. In 2000, the world leaders of the different countries adopted the eight MDGs.

The target is that, by 2015, the extent of poverty will be halved in the world, however, each country

has to set its own specific targets (Global Monitoring Report, 2010). Every year each country has

to publish a report on how far it is from meeting the specific targets of the MDG. During UN

gatherings, there are review sessions on how the different countries are doing in working towards

the MDGs.

As said above, microfinance, which is seen as one of the strategies for poverty alleviation, has

been tested and proved in a number of countries. As an example, it is reported that 88 per cent of

the bank’s microfinance customers in Banco del Desarrollo improved their standard of living after

receiving a loan (Srinivas, 2008). Many other studies that have been conducted prove that


10

microfinance can alleviate poverty (Gibbons, 2002; Morduch, 2002; Khandker, 2003; Weiss et al.,

2003; Vincent, 2004).

2.2.3 Economic development

“Microfinance serves as a means to empower the poor, and provides a valuable tool to assist the

economic development process” (Vincent, 2004:2). Microfinance gives an opportunity to those who

would not usually be considered for financial services an opportunity to be included, by providing

them with access to finances to grow their business. The characteristics of the microentrepreneur

are that some of them are functionally literate and the enterprises concerned are usually owner

managed. The financial service offered by most MFIs, in addition to the purely financial, is also

packaged with an educational service that educates customers about how to handle their finances

and the opportunities available to them that can grow their businesses. All such efforts lead to

economic development and to better lives for the microentrepreneurs.

2.3 THE CUSTOMERS OF MICROFINANCE

Microfinance customers are the poor, who are looking for financial assistance due to an

unforeseen event that happened, or who have aspirations to grow their microenterprises. They are

typically self-employed owners of home-based businesses. Their businesses are normally one-

person based. Some of the customers are small farmers, especially in the rural areas, where there

is not much economically viable business apart from farming. In the urban areas, the microfinance

client might be street vendors and shopkeepers, or artisans who can do small ‘fix it’ jobs.

2.3.1 The needs of microfinance customers

Microfinance customers normally require credit for dealing with unforeseen events. Helms (2006)

mentions the following life events, as documented in Stuart Rutherford’s book The Poor and Their

Money, life-cycle events, emergency needs, and investment opportunities. The life events include

such events as births, deaths and marriage (including the expensive dowry process), as well as

holidays and Christmas celebrations. Emergency needs are unforeseen events that happen,

including the loss of employment, injury or sickness of the breadwinner, and death. Investment

opportunities include buying a house, land or a business. The opportunities can improve the social

standing of the poor in the long term.

Figure 2.2 below shows the products that a microfinance client might require: savings; insurance;

remittance and transfers; a pension; loans to cover emergency needs; and microenterprise loans.


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Figure 2.2: Needs of the poor client

Source: Helms, 2006.

2.4 THE PROVIDERS OF MICROFINANCE

There are two types of microfinance providers – those who are not regulated (informal) and those

that are regulated (formal). The informal providers include family members; loan sharks, rotating

savings and credit associations, or, as is locally known, stokvels, pawn shops, and others. The

formal sources include cooperatives; credit unions; NGOs; development finance institutions; MFIs;

and commercial banks.

2.5 DOWNSCALING OF COMMERCIAL BANKS

In order to be successful, banks need to balance the three pillars of successful microfinance: high

volume operations; quality client service; and a risk management system (Young & Drake, 2005). It

is costly to serve the microfinance market, however, with high volumes an organisation can

achieve the levels that are required for a sustainable business. Due to increasing competition in

the microfinance market, client services need to be of good quality to ensure that there is customer

loyalty in a market in which switching costs to another financial service provider are very low. In

commercial banks, business also concerns managing risk, protecting the interests of the

shareholders, and ensuring compliance with regulatory requirements.


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2.5.1 Reason for the late market entry

Initially, banks were reluctant to enter the microfinance industry, due to them not understanding the

industry and fearing the damage that might be caused to their reputation when entering the market.

According to Baydas, Graham and Valenzuela (1997), banks did not want to downscale, because

they had three basic concerns, namely that microfinance is too risky and too expensive, and the

socio-economic and sociocultural barriers that counter-productive efforts in the field.

Microfinance is too risky: It was feared that there was too much risk in the field with which a

commercial bank could not deal (i.e. no collateral in most cases and no data available by means of

which to assess the customer). Part of the risks was the concern that regulatory requirements

would be breached if the microfinance market were served (i.e. some of the prospective customers

would lack the necessary collateral required for unsecured loans), which might mean that the

commercial bank ran the risk of losing its operating licence if it was found to be offering loans

without security. The government also needed to come on board to ensure that regulatory

requirements do not prevent banks from serving the microfinance market.

Microfinance is too expensive: Microfinance customers are in areas where there is no branch

network. It is costly to set up an office structure where there is no basic infrastructure (i.e. water

and electricity supply) and the customers transaction are too few and small to cover the operational

costs involved. Commercial banks have to be innovative and form partnerships with the right

organisations (i.e. mobile companies and post offices, etc.) to ensure low-cost, innovative delivery

channels.

Socio-economic and cultural barriers: The potential customers of microfinance have difficulty in

approaching a bank, as they lack proper documentation and might not have the necessary

education. Bankers themselves generally look down on this market, fearing that, if they target this

market – within their existing network – they might lose some of their high-profile customers who

would not want to be crowded out by microfinance customers. If banks are to serve such

customers, some of their own internal policies and staff perceptions of, and attitudes towards,

microfinance customers have to change. In changing perceptions and attitudes, creating more

awareness about microfinance for staff and providing them with the necessary training on how to

deal with such clients can create a pleasurable environment for the staff and customers concerned.

Commercial banks, even though they have enough money to enter microfinance, often do not

understand the basis of how microfinance works, and also lack the patience to work with a


13

microfinance business until it is successful, and have thus labelled microfinance as a no-go zone

for commercial banks. Westley (2006) calls this a revolving-door syndrome – commercial banks

enter microfinance with high expectations and usually leave the industry very disappointed. In

contrast, some commercial banks have made a success out of microfinance

2.5.2 Reason for the downscaling of commercial banks

The above-mentioned reasons for commercial banks not offering microfinance services have not

changed – however, there has been changes in the attitude of commercial banks, and, in other

cases, there have also been regulatory changes. Some of the commercial banks were forced to

consider microfinance due to fierce competition, especially when those serving the market seemed

to be succeeding with microfinance. A commercial bank may choose to enter microfinance for

profit, diversification, social responsibility, cross-marketing or regulatory reasons. The reason for

entering the microfinance market should be clear to everyone involved in microfinance and should

be reflected in the vision of the microfinance operations concerned.

A commercial bank can more easily enter the microfinance market, in comparison to an NGO or

MFI. Banks have funds that are readily available – should the bank want to use its own internal

funds for micro lending, it can easily do so at reasonable rates. A pool of funds is continuously

available, as opposed to what is available to NGOs or MFIs, which are dependent on

unguaranteed donor funds. A commercial bank can also use its vast existing branch network as

distribution channels.

On the downside, the complicated regulatory environment of banks can make it cumbersome to

serve this market. Internal structures and policies can also prove to be an obstacle, and further

delay launching a new product or service on the market.

Table below gives an overview of the motivation for a commercial bank, as well as the relevant

questions that the management of a bank needs to address, to see whether there is strong

conviction in their reason for entering the microfinance market.


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Table 2: Implications for commercial banks entering microfinance

TABLE: ANALYSING THE IMPLICATIONS OF DRIVERS FOR ENTERING MICROFINANCE

If profit is the primary motive:

Are the financial targets and timeframe for reaching profitability realistic and achievable?

Will the bank make the investment and take on the additional costs necessary in a timely manner?

Will microfinance eventually be at least as profitable as the bank’s other lines of business? In terms of

financial margin? In terms of return on investment? In terms of net income?

If risk diversification is the primary driver:

Will the microfinance portfolio be significant enough to have an effect on the institution’s risk diversification?

How will a microfinance portfolio offset or mitigate other risks?

Will the bank be willing to change its risk-management techniques and practices to adjust to the

requirements of microfinance risk management?

If cross-marketing for other products is the driver:

Will the bank try to use existing systems and staff to offer microfinance?

Will the bank make the organizational and methodological changes necessary to service the sector?

Which will take priority in decision-making: existing products or the new, microfinance product line?

Does the bank have a consumer orientation and understand the nature of micro entrepreneurs with business

and personal financial needs?

If internal leadership is promoting the entrance into microfinance:

Is the internal leadership of this program in a position to garner support for microfinance from diverse areas

of the bank and senior and middle management?

Is the bank leaders’ awareness in response to public pressure or a passing fad?

Is the interest based on a firm business analysis, and do the bank’s leaders intend to develop a successful

business for the institution?

If public relations or social responsibility interests are important motives:

How different is microfinance from the bank’s traditional and major lines of business?

Do senior management and the board have a sufficient understanding of the market research necessary, the

sunk costs involved, and the time required to serve low-income clients adequately?

Will microfinance remain a marginal business struggling for the necessary investment and support?

Will bank staff be encouraged to collect on bad debts, or will the bank be troubled by forcing poor borrowers

to repay or turn over collateral guarantees?

If regulatory factors or donor or government initiatives are pressuring the bank to enter microfinance:

Do these external factors place constraints on interest rates, target markets, or other critical operational

elements?

Will microfinance remain a marginal activity established only for compliance, or will it take on a strategic role

as a new line of business

What incentives are being offered to the bank, and how will these affect operations and performance?

Have outsourcing or strategic alliances with microfinance institutions been explored as alternative

strategies?

Will the bank use its own funds and resources to launch and maintain the program, or will it rely on outside

assistance?

– How have other lines of business established for these external reasons performed? Source: Young and Drake, 2005.


15

2.6 THE PARADOX OF COMMERCIAL BANKS AND MICROFINANCE

Historically, offering microfinance service was seen and perceived as a charitable service, which

usually NGOs, most of which were not-for-profit organisations, would offer to their customers. The

main purpose why NGOs were created was to distribute financial aid and to bring financial services

closer to the poor. Therefore, microfinance services were created more for a social purpose than

for profit. Donors contributed money to non-profit NGOs, which then disbursed it.

However, such a route was shown not to be sustainable – because the funds from the donor were

not guaranteed, they could run dry at any time. Some of the NGOs and the MFIs then explored the

option of offering microfinance in a sustainable way, which meant being able to run their operations

without the donor funds and being able to at least break even or, in extremely good conditions, to

make a profit. The MFI consequently came to depend on some donor funds, but mostly on loans

made from other financial institutions or developmental finance institutions. High interest rates

were and are still charged to clients in order to cover the operating cost of the institution. The high

interest rates are one of the acceptable principles of microfinance (Helms, 2006).

The paradox is that the commercial banks have started servicing this market. The objective of

commercial banks, especially where the shareholders are not the state, is to make a profit,

generating return on the investment of the shareholders. Commonly, shareholders do not feel that

microfinance positively impacts on the bottom line, and that microfinance is more suited as a

corporate social investment rather than as a profitable business line.

Any service or product in a business that is not profitable is easily stopped, as it does not bring any

value for the shareholders. However, the reason for a commercial bank to enter into microfinance

has to be greater than profits, as it takes at least three years (Valenzuela, 2001) before a

microfinance business can become profitable. Hence, understanding the reasons for a commercial

bank wanting to go into business is very important. Profit on its own is not a sustainable reason.

In advocating microfinance, Professor Yunus (2009) talks of it as a social business, rather than as

a purely ‘for profit’ business. Though he admits that a social business can make a profit, the profit

needs to be reinvested back into the business or to be used for the benefit of the local

communities. The theoretical matrix that is shown in Figure 2.3 below and which was originally

published in the Handbook of Micro Credit in Europe by Carboni, Calderon, Garrido, Dayson and

Kickul (2010) shows that, in order to create a sustainable microfinance business or a community

development finance institute (as such business is referred to in Europe), social performance has

to be balanced with financial performance. Even though this refers to MFIs, same conclusions can

be made about commercial banks.


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From the matrix, the following types of MFI are identified:

Box A-type MFIs, which are driven by a social mission, engage in extensive partnerships to

ensure they are embedded in the local communities, in order to be close to the

microenterprises that form their market. This characterises new MFIs that are operating in

hard-to-serve markets where customer reach is prioritised over financial performance. The

long-term effect of this approach is that there can be reckless lending (compromising quality

over quantity). For commercial banks, low financial performance does not appeal, as

commercial banks are there to make a profit and if financial performance is not good, the senior

management team may be forced to stop microfinance operations. The only thing that can

keep the operations going is if the social performance has some goodwill associated with it.

Box B can be described as the ideal type of MFI, which is characterised by strong financial

management and levels of self-sufficiency, but which also pursues a social agenda. Very few

MFIs serve in this space. It is about helping the customer in a manner that is financially

sustainable. These MFIs are socially innovative, providing accord with fiscal stability, though

they do not exploit clients financially. For commercial banks, this kind of situation is a win–win

situation for both the customer and the bank.

Box C is the most problematic status, with minimal financial management or too few loans,

accompanied by high central costs (Carboni et al., 2010). Such MFIs frequently close shop, as

there is no business or social case for continuing with this approach. For commercial banks,

operations may continue for longer if funding is sourced internally from the bank – however, if

the loan is from an external source, the same conditions as with the MFI would apply.

Figure 2.3: Matrix showing performance of MFI

A B

C D

Financial Performance

Socia

l Perfo

rma

nce

Hig

h

Lo

w

High Low


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Box-D MFIs tend to be driven by financial sustainability. They believe in the need to be

profitable in order to make a difference. They may accept the need for social objectives, but

this is never at the expense of the bigger business motive – to make profit. The interests of the

shareholders come first. Most of the commercial banks fall in this category.

2.7 CHALLENGES FACED BY MICROFINANCE GLOBALLY

Every year, the Centre for the Study of Financial Innovation (CSFI) conducts global research into

the key risks facing the microfinance industry. The survey has been conducted for the past three

consecutive years. A questionnaire is sent to MFIs across the globe to rank the following risks and

to give a reason and context for their ranking. Figure 2.4 below illustrates the 2010 risk rankings

and the rankings received in 2009.

Figure 2.4: Microfinance Banana Skins 2011

Source: CSFI, 2011.

From the survey, the biggest risk that MFIs face worldwide can be seen as the credit risk. Most of

the other risks are linked to this risk. Due to the increased competitive pressures that were


18

introduced by the economic global distress, many MFIs took bad credit decisions, and, due to

political interference, some of the MFIs had to close down, as the customers were not paying. The

customers themselves, who were over indebted, were offered numerous loans by different MFIs

which they will never be able to repay. The MFIs were hungry for the business, due to the

increased competition. This has left the reputation of the MFIs badly tarnished – it has also left

many of the poor worse off than before.

In India, microfinance was doing really well and it was a shining example worldwide of how

microfinance operations can be successfully implemented. In the state of Andhra Pradesh, there

was tension between government and the MFIs. MFIs became aggressive and offered loans to the

already overly indebted poor. The customers could not repay the loans, which caused some strain

on the poor. The government has encouraged people not to repay these loans. This interference

was necessary, but it also threatens the continued existence of MFIs. The government has also

imposed interest rate caps. The government had a duty to protect its people, especially as they

were being victimised by the MFIs looking for their money. The reputation of the MFIs suffered

badly as a result.

The following comment, made by Annibale and Ehrbeck in the Banana Skins Report (CSFI, 2011),

summarises the state of the microfinance industry:

As this report makes it clear, a lot of people – well-meaning, thoughtful people, who are in or

close to the microfinance industry – are now worried that microfinance has taken a wrong

turn, that it has drifted away from its original mission, that it has been co-opted (or even

corrupted) by the pursuit of size and profitability, that it has become a political plaything... Will

the industry continue to evolve - to grow, to offer new products, to move upmarket - until it is

essentially indistinguishable from conventional financial institutions (banks, consumer finance

companies, etc.)? Or will it rediscover its roots as a more modest source of small-scale credit

to a relatively limited market amongst lower-income groups in generally poor countries?

2.8 SOUTH AFRICAN CONTEXT OF MICROFINANCE

South Africa is an interesting country, as it is the most developed country in Africa and is seen by

the rest of the world and by itself as having the capacity to advance the African agenda. In

addition, its history has resulted in the financial exclusion of some of the population. There is also a

divide between those who have and those who do not, that is shown by the high Gini coefficient.

Certain parts of the population seem to be first world; however, third-world country challenges,

such as the high poverty and unemployment rate, also face South Africa.


19

2.8.1 Historical view of South Africa and the need for microfinance

During the apartheid era in South Africa, racial segregation was imposed on its people, of which

the effects are still being reversed by the current government. During that era, the Group Areas Act

and the Land Act segregated people from one another, determine in which residential areas they

must stay. Black people were also not allowed to stay in, or to frequent, certain areas. There was

also separation in job categories and the participation of black people in the government was

restricted. Black people were split up into their different ethnic groups, which were settled in the

homelands. The homelands were not socially or economically independent, as most of them

lacked the necessary resources that could create employment for those living there (The Espresso

Stalinist, 2011).

The government, to this day, is still having to deal with the legacy of apartheid. The former

homelands lack a basic infrastructure, which makes basic service delivery very hard. This has also

had an impact on the financial inclusion of those living there. In his speech made during the

Freedom Day 2011 celebration, President Zuma said the following:

The notorious Group Areas Act of 1950 designated residential areas according to race, and

many communities were forcefully removed as they were deemed to be living in areas meant

for other race groups… This apartheid urban or town planning led to a situation where poor

people had to travel long distances for many hours to and from work each day.

The government has launched such initiatives as Broad-Based Black Economic Empowerment and

Employment Equity to redress the wrongs of the past. Part of the legacy of apartheid is the low

education level and high poverty rates among South Africans, especially amongst the previously

disadvantaged communities. This translates into people not having the skills set which can be used

in the labour market, and thus exacerbates the unemployment problem. With the current challenge

of lack of employment opportunities, there is a need for small-scale job creation and

microenterprises provide an opportunity of creating such job opportunities,

2.8.2 Socio-economic overview

As at the end of December 2010, the unemployment rate in South Africa was 24 per cent of the

population (Labour Report, 2011). The graph below shows that there has been a significant

decrease in the unemployment rate quarter on quarter, and there has been a 0.2 per cent change

year on year. Figure 2.5 below shows that the unemployment rate is, nevertheless, still high

amongst the Black population group.


http://espressostalinist.wordpress.com/


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Figure 2.5: Unemployment rate by population group

The employment graph in Figure 2.6 below shows that employment has been on the decline for

over two years. However, the fourth quarter of 2010 shows an upward trend in employment. The

downward trend signifies the impact of the global financial crisis. An upward trend in the graph

does not necessarily mean a decrease in the unemployment rate, as the pool of work seekers may

increase, especially if those who have earlier given up looking for work find the courage once more

to look for work, and not all of the additional people are absorbed into the job market.

Figure 2.6: Total employment, 4th quarter 2009 to 4th quarter 2010

Of the employed population, 17 per cent work in the informal sector (Labour Report, 2011).

According to the Labour Report, the informal sector has the following components:


21

Employees working in establishments that employ less than five employees, who do not

deduct income tax from their salaries/wages; and employers, own-account workers and

persons helping unpaid in their household business, who are not registered for either income

tax or value-added tax.

With these components clarified, the microenterprises and survivalist business can be said to

provide employment to 17 per cent of the South African population. This is a significant boost for

the economy, and thus the microenterprises and survivalist businesses must be encouraged to

operate.

The Development Indicators Report, which was published by the Minister of National Planning

Presidency in 2010, indicates that, for the financial year 2009/2010, 3.5 per cent of the gross

domestic product (GDP), which approximates to R80.08 million, was used for social assistance

grants (Manuel, 2010). Such grants include the child support grant (given to children who are 18

years old or under who are in need); the child dependency grant; the foster child grant; the

disability grant; the war veteran grant; and the old age grant. The report also shows that 68.39 per

cent of the recipients of grants were child support recipients and that 28 per cent of the South

African population were in receipt of grants, with the number having increased over the years. This

can imply that there is an increase in the number of children whose parents can only afford to take

care of their child by means of the social grants, and that there is also an increase in the number of

elderly who are dependent on the social grant. Such a situation is not good, as it is not sustainable;

the availability of funds for government to allocate for social grants is very much dependent on the

employed population and companies from which the government derives the majority of its income

through tax. When there are job losses and companies are suffering losses, the government loses

its source of revenue, which poses a threat to the social welfare program. Giving people

opportunities to start up a micro business or even a survivalist enterprise is more sustainable, and

builds the right culture in the society, rather than encouraging a culture of people being dependent

on social grants for their daily living. Social grants are not necessarily bad, but it is the

dependency and the sense of entitlement of those receiving such grants that creates long-term

problems. A similar analogy is that of giving a man a fish (feeding him for a day), as opposed to

teaching him how to fish (giving him skills which he will be able to use to sustain himself and those

around him for the rest of his life).

The Development Indicators report also shows the following (Manuel, 2010):

Based on Statistics South Africa's (SSA’s) Income and Expenditure Survey (IES) data and

Consumer Price Index (CPI) estimates, 22 per cent of the population lives below the poverty

line, which is R283 per month. This also speaks to the 27 per cent of the total population that is

dependent on welfare.


22

Related to this is the HIV/AIDS rate, which is at 10.5 per cent, even though the Ministry of

Health has striven to raise levels of awareness and to stop mother-to-child transmission. With

many parents dying due to HIV/AIDS, homes are left with grandparents (who receive social

grants) and orphans, who qualify for child support. The social grant is usually the only income

in such households, resulting in many living below the poverty line.

The government has also tried to stimulate economic growth by creating jobs and looking for

ways in which to promote and support small businesses. In 1995, the average poor person’s

income was 12 per cent below the poverty line of R283 per month, however, in 2008 the gap

had narrowed to 6 per cent.

The Gini-coefficient is a measure of income inequality, with the closer the coefficient comes to

zero (0), the more income equality there is; the closer it is to one (1), the greater the income

inequality. For South Africa the Gini-coefficient is 0.66, which is unacceptably high. The rich

have been getting richer, while the poor have been getting poorer, or it could just be the pace

at which the rich are getting richer, while not much is being done to assist the poor.

With reference to the Living Standards Measure (LSM), which measures the wealth that people

have (in terms of their assets, as well in the amount of disposal income that they have), the

National Development Indicators report shows an improvement in the average monthly income per

LSM level, The following issues that relate to the LSM levels are also highlighted in the report:

The size of the population in the low LSMs (1–-3) is decreasing, while the upper echelons of

the LSMs are increasing.

The average monthly income for a household for the LSM 1 increased by 87 per cent (from

R742 to R1 386) over a decade, while for LSM 10 the average monthly income increased by 42

per cent (from R13 416 to R26 602). This again illustrates the income inequality.

The growing gap between the rich and the poor can also be seen as the reason for the social

tension that manifests itself as crime. There are studies which have been carried out to explore if

there are any correlation between the factors crime, poverty and unemployment. In studies

conducted by the Economic Commission for Latin America and the Caribbean (ECLAC, 2008) and

Hooghe, Vanhoutte, Hardyns and Bircan (2010), there was evidence of a correlation among the

factors, while other studies could not find any evidence of such. Of note, however, is that such

studies are context sensitive. The same conclusion may not be reached when analysing another

country or even another neighbourhood, as there are other variables that might have an influence

on these factors, such as education levels, HIV/AIDS rate, and income inequality, among others.

2.8.3 Financial inclusion in South Africa

According to the Finmark Trust study in 2010, 23.5 per cent of the South African population was

financially unserved, meaning that they lacked access to any financial product (FinScope South


23

Africa, 2010). The attributes of those who are not financially included, as identified in this study,

include the following:

They frequently have problems making ends meet.

Personal finances are stressful and burdensome.

They often have to go without a cash income.

Limited access to basic amenities is a daily reality.

In the same study, it was found that the adult population (those of 16+ years) relies on salaries and

wages, grants and small business for generating their income. The majority of salaried people

have access to financial services, especially to credit, so that they are able to service their credit.

However, it is the small business owners who are not financially included. One of the major

reasons cited for not being able to afford or to use a financial service is unemployment.

Of the respondents to the Finmark Livelihood survey (Grundling, 2010), 43 per cent had savings, of

whom only 10 per cent of the savings were invested in a bank. Of the respondents, 57 per cent

entirely lacked savings, of whom 47 per cent said that the reason why they were not saving, was

because they were unemployed. This shows that employment is a big challenge in South Africa,

and has a significant impact on the conditions set for financial inclusion. Logically, if people are

unemployed, they have no money and, even though they have financial needs, they lack any

finances or security to approach formal institutions for a loan. That is where there is a gap in the

market – if business and financial skills are offered to people who are currently not working, but

who have the potential and capacity to run a microenterprise, their livelihood may be changed and

they can be graduated from one level of enterprise to another as their business grows.

The commercial banks are trying to do their part in financial inclusion, by ensuring that they bring

out innovative products, so that even those customers who stay in areas that might not have the

right infrastructure can conduct basic financial transactions. Such initiatives include branchless

banking, mobile banking, and bank shops, among others. Such financial servicing is about

exploiting the resources that are already available to the customers concerned. For instance, by

December 2009, there were 236 626 PoS terminals in South Africa, the number of which has been

increasing at a phenomenal rate. Figure 2.7 below shows that there has also been an increase of

over 60 per cent in the number of ATMs that banks make available between 2004 and 2008. The

number could have increased even further if it had not been for the ATM bombings that happen

from time to time in South Africa. The police and commercial banks have taken a tough stance on

ATM bombings, which has resulted in a decline in the number of such incidents. The slow

increase in the number of branches might be due to the fact that it is costly to set up branches, as

well as to the fact that some of the customers to be reached are in rural areas that lack an

infrastructure. This is where the government also needs to contribute, by ensuring that at least a

basic infrastructure is available in the rural areas.


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Figure 2.7: Branches and ATMs in South Africa

Source: BASA, 2010.

The former chief executive officer (CEO) (Nkuna, 2011) of Women Development Businesses

(WDB) summarises the situation in regard to financial inclusion in South Africa as follows:

The people who are poor, living in rural areas, do have savings and transactional accounts

and may have insurance, which is mostly limited to burial services. Banks try to put ATMs

in these rural areas so that people can have access to their savings account. Therefore, in

South Africa the financial exclusion that exists is access to credit. There are not a lot of

formal financial institutions that provide credit. With the credit, the poor people can create

businesses that can help them provide for the basic needs of their family and grow the

business to supply employment to the unemployed people. The access to credit is a bigger

challenge in South Africa.

2.8.4 The microfinance industry in South Africa

A report on the study conducted by the Finmark Trust and the University of Pretoria’s Centre for

Microfinance in 2009 (Calvin & Coetzee, 2010) classifies the six broad suppliers of microfinance in

South Africa as: primary banks, cooperatives, financial institutions, retail development, financial

institutions, salary-based micro lenders, not for profit microenterprise lenders and alternative

banks. The report also identifies three broad types of products: micro deposit services; salary-

based loans and microenterprise loans.

The micro deposit and salary-based microloans services are reaching maturity, due to the number

of players in the markets concerned, as well as the increased amount of competition, and the

saturation of the market. In contrast, the microenterprise loans market is still in the early stages of

development. Figure 2.8 below shows the product types, the dominant supplier types, and the

stage of development that the market for the product type is in.


25

Figure 2.8: Suppliers and products categories for microfinance in South Africa

The developmental stage, at which the microenterprise loans industry currently is, shows that there

is still much opportunity for those who are prepared to take the initiative and to service the market.

Even though there are several suppliers of microenterprise loans, there are very few significant

suppliers of the loans to the market. As reported in Calvin and Coetzee’s (2010) study, the biggest

three organisations that are serving the market are MFIs, namely the Small Enterprise Foundation

(SEF), Marang Financial Services, and the WDB.

The commercial banks have also moved into serving the microenterprise market with loans. Absa

Bank has made extensive investment in servicing this market, and Standard Bank is also piloting

some of its initiative. Standard Bank has established a Community Banking Division that is also

focused on microenterprise funding, but which is run as a corporate social investment. Capitec and

African Bank, which are commercial banks that focus primarily on the mass market, have also tried

to serve microenterprises. However, after conducting short pilot studies, they both decided to scale

down their service offering by offering a limited number of products and by limiting their risk

exposure. It remains a challenge for commercial banks in South Africa to scale up their operations,

as can be expected from an institution that has all the necessary capital and most of the resources

to invest in this market.

Nkuna’s (2011) view on the MFIs is as follows:

MFIs are only servicing 200K customers and there is a large pool of unemployed people

in South Africa who present a potential market for microfinance. These people cannot

approach traditional banks, as most of them might not have the required collateral in order

for them to secure credit. The potential market is too big to be catered for by the existing

microfinance institutions. There is still quite a large size of the market that is not served.

The MFIs have challenges with regard to the governance, skills and funding and these are

challenges that commercial banks have a resolution for. There is definitely a room for

commercial banks to do microfinance, they have the funds and resources to scale reach

more customers.

To summarise, Porter’s five forces of competition model should help in analysing the industry. The

analysis below focuses mainly on the microenterprise credit market.


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2.8.4.1 Bargaining power of customers

This market is not price sensitive and the customers’ main concern is access to credit. There

are not many formal sources for the funds, but there is an abundance of informal sources (i.e.

loan sharks, stokvels [even though such is not the norm for providing people with credit], family

and friends).

Customers in the market lack room for negotiation, due to the high cost that exists in serving

the market. The customers lack a choice at times, but have to accept the deal that is at hand.

There is an abundance of formal and informal service providers from which the customer can

obtain credit.

2.8.4.2 Availability of substitute goods

Social grants provided by the government can act as a potential substitute, in the broader

sense. The grants are like free money to which most unemployed have access.

The informal sources of funds are also a strong substitute to funds made available by formal

institutions.

Such sources are a very important and strong force in South Africa, where there is high

unemployment and there is a high percentage of people that benefit from the government

social grant.

2.8.4.3 Power of the suppliers

Commercial banks are normally the suppliers of wholesale funds that are used for micro

lending. They can have a dual role, as direct lenders and as wholesale lenders. A commercial

bank that acts as a wholesaler can impose tough prerequisites (high interest rates) on MFIs,

which then pass them on to the customers.

NGOs and MFIs may obtain unguaranteed funds from donor and grants. This places pressure

on the institutions to look for alternative sources of funding, which may come at a premium.

2.8.4.4 Market entry barriers to new entrants

Regulatory environment: In terms of entry for a formal financing institute (i.e. banks, NGOs,

MFIs, etc.), the regulatory environment of commercial banks is much stricter than is that of

NGOs, which places the commercial banks at a disadvantage and encourages utilisation of

informal credit providers (i.e. loan sharks) that are not regulated.

Availability of funds: MFIs and NGOs that lack other means to raise funds might obtain them

from a donor or the government as a grant.

High operating costs: Such costs tend to be an issue for formal credit providers, due to the

fact that they may not be able to charge customers an interest rate that is above the regulated

National Credit Regulator (NCR) development funds rate.


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2.8.4.5 Rivalry among existing market players

Formal competition amongst the banks and MFIs – MFIs have been serving this market for

long, and they have the necessary focus and expertise to conduct efficient business.

Some of the poorest communities are very sceptical of formal microfinance service providers,

so they rather approach the informal market players (i.e. relatives, stokvels or loan sharks),

even though some of these lenders may actually be more expensive than the formalised

service providers. So, the rivalry amongst the formal and informal providers is increased still

further by customer choice.

Collectively, this market is underserved in South Africa and there is some room for other

competitors to enter the field, making the rivalry not that endemic.

2.8.4.6 Conclusion on attractiveness of industry

The microfinance industry is currently marked by presence of strong MFIs who are the significant

players in this market. There is definitely a need for more formal players to enter the industry and

to service this underserved market. Commercial banks can also perform dual roles, acting as the

finance providers directly to the microfinance customer or as wholesale finance provider to MFIs.

The rate of unemployment in South Africa which forces people to look for alternative ways to get

income makes self employment an option. This creates a need for microfinance to assist in

creating job opportunities. There is still strong presence of the informal players, even though

unlawful. This is due to the perception about the formal finance providers, especially commercial

banks, as being not too accommodating of the microfinance customers. Commercial banks have

definitely a role to play in this industry.

2.8.5 Future view of the microfinance industry in South Africa

Currently, South Africa is a seen as a welfare country where there are many opportunities of

obtaining a social grant, as opposed to finding a sustainable source of income. The driving force

for this has been the socialist view, which has been strengthened by the poverty in, and the history

of, South Africa. The possible future state of microfinancing in South Africa is driven by the

prevailing political and economic forces. The social forces are subservient to the above-mentioned

forces. The main driver is the following:

Julius Malema’s viewpoint on the nationalisation of the banks: Julius Malema, the

President of the African National Congress Youth League (ANCYL), has placed the

nationalisation of mines and banks on the national agenda. Some influential people are

supporting him, while others are supporting his viewpoint in principle. The real issue is the

distribution of the wealth of the country to its people, which underlies the issue of inequality of

wealth among its people. If the full nationalisation of banks were to happen, the microfinance

focus of banks would be increased, as the banks would become state institutions. As state


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institutions, the focus of the banks would be on serving the people and on servicing the poor to

bridge the financial exclusion of the past, which would accelerate microfinance on the national

agenda.

Changing economic situations: As more strikes happen and labour becomes more

expensive, due to higher employee demands, certain companies are considering moving their

production line to overseas countries, where labour is cheap and where there is considerably

less unionisation than in South Africa. Such a move would mean that the tax income for the

government will decrease, which means that less spending money would be available, so that

the amount at hand for social grants might be impacted. Without social assistance, people

might be forced to look for other alternatives. Opportunities for formal jobs would be rare, as

companies would exit the South Africa labour market. This would mean that people would have

to start their own businesses, opening up opportunities for microenterprises. The commercial

banks would have to position themselves well to assist microenterprises with financing,

assisting the government to create more job opportunities than were available in the past.

The end of the tripartite agreement between the African National Congress (ANC), the

South African Communist Party (SACP) and the Congress of South African Trade

Unions (COSATU): The probability of this scenario happening is very low, despite there

currently being a power struggle between the three parties. The SACP and COSATU drive a

view that is more socialist, while the ANC is more capitalist. If the ANC were to govern without

the support of its allies, the amount and number of social grants might be decreased, which

would have the same effect as the changing economic situation.

2.8.6 The South African banking industry

According to a study conducted by PriceWaterhouseCoopers (PWC) on behalf of the Banking

Association of South Africa (BASA), it is estimated that the customer base of the top four banks is

about 34.5 million retail accounts, with the number being expected to increase to 42 million by

2012 (BASA, 2010).The South African banking industry is the biggest contributor to the South

African economy, contributing about 21.2 per cent to it. BASA’s broad role is to establish and to

maintain the best possible platform on which banks can do progressive, responsible, competitive,

profitable and sustainable banking.

As reported in the yearly BASA’s report, the banking industry is made up of 19 registered banks, 2

mutual banks, 13 local branches of foreign banks, and 43 foreign banks with approved local

representative offices (BASA, 2010). As at end February 2010, the top four banks in South Africa

represented 85 per cent of the banking assets. The total banking assets, as at June 2010, stood at

R3 021 billion, with 77 per cent of the assets consisting of loans and advances.


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2.8.7 The credit industry in South Africa

Figure 2.9: Total credit granted and gross debtors’ book at September 2010

Source: NCR, 2010.

R75 billion worth of credit was granted up to the third quarter in 2010 (NCR, 2010), with the credit

industry having a total of R1 167 billion outstanding debt (see Figure 2.9 above). As at the end of

the second quarter in 2010, the banks granted over 90 per cent of the credit, whereas the MFIs

falling under the other credit providers category only provided 2.94 per cent of the credit, among

other such organisation types as credit unions and cooperatives (see Figure 2.10 below). This

shows that commercial banks are major players in providing credit. For a commercial bank to

venture into offering microfinance credit service should not be a problem, especially in the

microenterprise market that has potential to grow. However, due to other challenges, possibly

including regulatory challenges, commercial banks might find the market too cumbersome to reach

within the current regulatory requirements. Some of the regulatory challenges are discussed below.


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Figure 2.10: Gross debtors’ book – industry type

Source: NCR, 2010.

2.8.8 Financial regulatory environment in South Africa

In 2000, government created the Microfinance Regulatory Council (MFRC), which was

discontinued in 2007 after the NCR was established. The NCR is supposed to regulate any credit-

offering institution, including MFIs. MFI-related statistics are available for the period 2000 to 2007.

However, since the NCR has taken over from the MFRC no reports have been issued that are

specific to microfinance credit.

Figure 2.11 below shows the schematic presentation of how the different regulatory bodies interact

with one another, as well as their area of responsiblity:

The South African Reserve Bank (SARB) regulates deposit-taking insititutions, which, in South

Africa, are mostly banks.

The NCR regulates all credit providers, including banks. All the credit providers must be

registered with the NCR (see the following section).

The Financial Services Board oversees the whole non-banking financial service industry by

regulating all investments and the provision of financial education.

The Financial Intelligence Centre regulates and oversees any incidents of money

laundering.


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Figure 2.11: South African financial sector regulation

2.8.8.1 The National Credit Act (NCA)

The National Credit Act no. 34 of 2005 came into effect in June 2006. In order to ensure

compliance with the Act and to create governance in the credit industry, the National Credit

Regulator (NCR) was also established. The NCR is an independent body that is subject only to the

Constitution and to the law. In ensuring compliance with the Act, the NCR must perform its function

transparently without fear or prejudice.

Section 12 of the NCA requires the NCR to promote and support the development of an accessible

credit market by ensuring fair, transparent, sustainable, responsible, efficient, effective, competitive

credit. The Regulator particularly addresses the needs of historically disadvantaged persons, low-

income persons, and remote, isolated or low-density communities (NCA; Republic of South Africa,

2006).

As the credit industry regulator in South Africa, the microfinance credit service is also regulated by

the Regulator. In applying the framework to evaluate regulations devised by Genesis and Finmark

in 2004 (See Appendix B), the NCR considers the following:

The promotion of market development (including access to the market) can be achieved by

allowing for reasonable product innovation; by promoting and rewarding those organisatons

that make plans to increase their geographic spread; and by creating an environment for fair

competition.


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The creation of market efficiency can be attained by ensuring that there is proper information

flow to the customer and that there is suitable infrastructure in place to allow for customers to

interact with the market suppliers.

The management of systemic stability can be secured by ensuring that there are reporting

standards and that the relevant institutions submit the required report (i.e. every quarter a

commercial bank has to submit a report to say how many customer accounts are deliquent,

etc,). and to make sure that the organisations adhere to the required levels of liquidity to ensure

that they are able to meet their short-term obligations.

The protection of customers can be achieved by ensuring that the suppliers of credit do not

charge unnecessarilly excessive interest rates, by ensuring that there are agencies (i.e.

ombudsmen) to assist customers with resolving their complaints or appeal, and by educating

consumers about the avilable products and their rights in relation to such.

The promotion of public safety can be attained by ensuring that insitutions as a whole apply

the right type of governance that will not put the customer at risk and that will not harm the

whole credit industry, and by ensuring that no practices promote reckless lending.

The framework points highlighted above all need to be considered in order to create an

environment that is well regulated, but which does not stifle the market players and disadvantage

the customers at the end of the day. If the regulatory environment is too stifling, the current market

suppliers may exit and leave the microfinance customer worse off, or if the right control measures

are not taken into consideration, the financial insitution may need to be liquidated.

2.8.9 The South African government and microfinance

Microfinancing is important in most developing countries’ economies. In South Africa, the

government has recognised that microfinance is a tool that can be used to alleviate poverty, to

reduce unemployment, and to bring financial services to the unbanked population. As was

highlighted earlier, 17 per cent of the South African population is employed in the informal sector.

There is, therefore, much incentive to fund microenterprises to grow their business, because, in

turn, they create more employment and help fight poverty and unemployment. Such funding also

works towards the attainment of the MDG, one of which is to reduce poverty.

The government also recognises that, within the South African economy, there is a first and a

second economy. The middle class and the salaried working class that have sustainable income

form part of the first economy. The following extract from former President Thabo Mbeki’s 2003

speech defines the second economy:

The second economy (or the marginalised economy) is characterised by

underdevelopment, contributes little to GDP, contains a big percentage of our population,

incorporates the poorest of our rural and urban poor, is structurally disconnected from both


33

the first and the global economy and is incapable of self-generated growth and

development.

In the above definition, a divide can clearly be seen between the first and second economy, with

the second economy not being seen as a major player in the economy and needing much

assistance from the first economy. Formal microfinance services can be seen as trying to include

those who were previously sidelined from financial services and as giving them assistance, which

will, in turn, make them more economically active, contribute to the GDP of the country, and grow

them to stages where they can help the government to create more jobs and to alleviate poverty. In

this way, those who form part of the second economy can be helped to become structurally

connected via financial services, so that, in future, they may come to generate their own growth

and development, even though it might take a while to get there.

In South Africa, to show the commitment of government towards the financial inclusion and

promotion of microfinance, two state agencies, namely Khula and the South African MicroFinance

Apex Fund (SAMAF) (see Figure 2.12 below), have been created to help oversee growth in

microenterprises, as well as in small businesses. The agencies’ duty is to ensure that the

environment is right for financial inclusion, and they will go as far as giving loans to MFIs and lobby

the government on regulatory issues that may influence reaching those in the second economy

with financial services.

Figure 2.12: State agencies serving the business communities

Source: SAMAF, 2010b.

2.8.9.1 South Africa Microfinance Apex Fund (SAMAF)


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SAMAF, which was created in 2006 as a wholesale funding institution, provides financial and

technical advice and training to enterprises that service micro and survivalist enterprises, as well

as regulating cooperatives. The reason for the government to make such funds available is to aid

the microenterprises and survivalist enterprises to access funding. As at June 2010, SAMAF had

worked with a total of 49 microfinancing institutions and had distributed a total of R76 million in

loans and grants, benefiting about 61 000 South Africans (SAMAF, 2010a). SAMAF is currently

looking at policy and regulatory issues with regard to how to improve microfinancing in South Africa

2.8.9.2 Khula Enterprise Finance Ltd

Khula Enterprise Finance Ltd is dedicated to the development and sustainability of small and

medium enterprises (SMEs) in South Africa. The agency was created 10 years before SAMAF,

showing that it was only recently that the government focused on microfinancing. The agency,

even though independent, operates under the auspices of the Department of Trade and Industry.

The company is a wholesale finance institution, which operates across the public and private

sectors through a network of channels to supply much-needed funding to small business. The

primary aim of Khula is to provide funding to those SMEs which were, in the past, excluded from

commercial banks in South Africa.

2.9 KEY CONSIDERATIONS BY COMMERCIAL BANK

Mr B. Nkuna is the former CEO of Women Development Bank of South Africa. He has achieved

great success in servicing the microfinance industry. Below are the issues that South African

commercial banks based on his extensive experience, should consider in running successful

microfinance operations:

1) Creating success in microfinance is a process that includes:

Building relationships with the customers;

Managing the cost of running the business, as it is costly at the beginning;

Growing at a rate that is sustainable, but which does not compromise the business. If

commercial banks were to try to grow their business fast, they would grant bigger loans to

many customers, and they would not assess who would be able to repay the loans and who

would be able to use the funds in the right manner (i.e. by growing their business),

2) Offering credit to a microenterprise is a risky market, as the customers concerned lack

collateral, with the human resources being the main asset. Therefore, banks should adopt a

methodology that works for their specific market. If the group lending methodology is used, the

following fundamentals should considered:

Having a group formation process (i.e. group assessment, group orientation, etc.);

The ability of group members to guarantee one another;

Loan utilisation, ensuring that the group members use the loans for the right purpose and

do not merely consume the money;


35

The need for loan supervision; and

The monitoring of group performance for repayments, and, more importantly, the

measuring of success of the group members.

3) The development of those, including staff members and customers, who are involved in

microfinance, entails the following:

The loan officers need to wear a business cap and should know that what they do is not

charity work. They must understand that customers have to repay the loans that are granted to

them, and that it is their responsibility to ensure that customers do repay their loans

The loan officers should also wear a development cap, with the appropriate amount of

empathy with the customer, realising that the money loaned is a way in which the customer

can attain a better life. As it takes some time before a customer is granted substantial loans,

the commercial banks need to be patient and to grow with the customer.

4) In servicing the microfinance market, a strong management team is required that is capable of

providing the following:

Strong advocacy for the microfinance and the assurance that there is understanding of the

concept of microfinance and the target market by the rest of the management team at the

commercial bank.

Operational monitoring. In microfinance, an MFI cannot afford to have a repayment rate below

95 per cent, even though the rate can be lower for commercial banks. If below 95 per cent, new

loans must be stopped, and the team must try to decipher what is causing the bad repayment

rate. Operations should be reviewed, with the findings being consolidated into a revitalised

strategy that will ensure that the problem does not recur.

The development of the customers is also an important part of microfinance. The agenda for

microfinance takes into account the impact of microfinance on the community and the issue of

sustainability of the customer and of the institutions. It is important that the customers know and believe

that the commercial bank is there to help them and that it will help them to grow their business, so that,

as their business grows, they will be encouraged to take bigger loans, which they will pay back on time.

With bigger loans over time, they should also have the confidence to know that their business will

become more sustainable.

2.10 SUMMARY

The South African government has significant challenges when it comes to unemployment, poverty,

education, crime and income inequality. Creating sustainable job opportunities is critical to reducing the

number of people depending on social grants, which currently threatens to make South Africa a welfare

country. Government and corporates in South Africa should work together to overcome these

challenges. The relevance of the challenges in the provision of microfinance is that parents can have a

small business and use the profit gained there from to pay for their children’s education. The

microentrepreneur can also grow their businesses and employ more people. The more people are

employed, the more they can be economically active and contribute to the development of South


36

Africa’s economy, thereby creating more jobs, which will eventually lead to a decrease in poverty and

which might lead to fewer people resorting to crime.


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CHAPTER 3

RESEARCH METHODOLOGY

3.1 INTRODUCTION

This research report followed a qualitative design that was divided into two phases, of which the

first phase consisted of a literature study. The research entailed a study of literature on commercial

banks that provide microfinance. The literature consisted of case studies on how different

commercial banks have implemented microfinance. The objective of the literature study was to

identify the critical success factors through the case studies used. Noor (2008:1604) states that

“examining a number of organizations enhances the accuracy, validity and reliability of the results

by capturing the holistic essence of the subject studied”. By using multiple case studies, we can

validate whether similar key factors are being considered by other commercial banks. The

literature study included both successful cases, in which the commercial banks concerned offered

microfinance successfully, and cases where the commercial bank failed in its microfinance

implementation. The output from this phase was the key factors on which commercial banks based

their provision of microfinance, which gave input to the second phase of the study, which entailed

seeing how Absa and Capitec considered the key factors.

3.2 RESEARCH OBJECTIVES

The objective of the current research study was to investigate the key factors that require

consideration by commercial banks in South Africa servicing the microfinance market. The key

factors are derived from existing published research reports focused on the subject matter and

were further verified by researching documented and published case studies of commercial banks

that have considered such factors.

The secondary objective of the research was to illustrate how South African commercial banks,

namely Absa and Capitec Bank, have considered the identified key factors involved in providing

financial services to microenterprises.

3.3 RESEARCH QUESTIONS

In order to reach the research objectives, the following research questions were investigated:

Research Question 1: What are the key factors for commercial banks in the microfinance

market?

Chapter four (4) addresses this question by looking at documented evidence. The identified key

factors are further validated by how other commercial banks have considered these factors,

documented in chapter five (5).


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Research Question 2: How did South African commercial banks consider the key factors in

offering microfinance?

Chapter six(6) addresses this question by looking at two commercial banks in South Africa,

Absa and Capitec bank.

Research Question 3: What were some of the lessons learnt from the South African

commercial banks’ case study and how do they impact on the considered key factors?

Chapter seven (7) gives the overview of the lessons learnt and recommendations for the

commercial banks and policy considerations.

3.4 THE POPULATION AND SAMPLE

The population for the current research report was South African commercial banks that currently

offer microenterprise financing services. The population also included all the commercial banks

that at one stage were involved in servicing the market, either as a pilot project or as a full

implementation.

In the report, Absa Bank and Capitec are discussed as case studies of South African commercial

banks that currently offer microenterprise financing. The lessons gained from the study can be

used by other commercial banks in South Africa.

3.4 THE INTERVIEW GUIDE DESIGN

The questionnaire or interview guide for the second phase of the study was derived on the basis of

the key factors identified in the first phase of the study. The questionnaire contained open-ended

questions, which were used to facilitate discussion with the interviewee, while the interviewer took

care that the questions did not influence the interviewee to make a particular response.

The questionnaire contained eight themes, with two to seven specific questions under each theme.

The theme gave the context of the questions and, where necessary, a short description to provide

the context of the question. Please see Appendix A for the example of the questionnaire.

3.5 DATA COLLECTION

3.5.1 Choosing case studies for the literature study

To identify the key factors, which formed the first phase of the study (see Chapter Four), a

literature study was first undertaken of published research papers that discuss the key factor for

commercial banks providing microfinance. The papers included publications from projects and

organisations, such as the United States Agency for International Development (USAID)

Microenterprise Best Practice project, the Inter-American Development Bank (IDB), CGAP, and

other regulatory organisations. Chapter Five discusses the documented and published case

studies on commercial banks that service the microfinance market. Most of the published case

studies are on commercial banks that are situated in South America, Asia and Africa, where


39

microfinance is popular. The countries concerned also face a high poverty rate, as is the case in

South Africa.

3.5.2 Interviews

To gather primary data for the second phase of the research study, interviews were conducted with

Absa and Capitec management to see how they considered the key factors identified in phase one

of the study. The questionnaire was distributed with a request for an interview, which was

scheduled to last between 75 and 90 minutes. Despite the inclusion of the questionnaire, the

interview session was more like a discussion session, as most of the questions were really related

thereto, with the interviewee covering more than one question at a time, and, at times, covering

other themes. The questionnaire was used more like an interview schedule to ensure that all the

questions contained therein were discussed. The discussions were recorded where the interviewee

had consented to the interviewer doing so. The reason for the recording was so that the discussion

could be transcribed into the documented case study (see Chapter 6).

The following people were interviewed from Absa:

Bongiwe Tindleni is the current General Manager for the AMEF unit. With her broad

banking experience she is able to give insights to the new strategies being deployed by the

AMEF Unit.

Gerhard Coetzee is the former General Manager for the AMEF unit from its inception. He is

currently assisting with testing new delivery models and products for the AMEF unit. He is

also the director of the Microfinance centre at the University of Pretoria.

Frances Fraser was part of the management team of AMEF. Her input was critical for this

report as she has been with AMEF through the leadership and strategy changes.

Daphne Motsepe is the Chief Executive Officer of Unsecured Retail, of which the AMEF

unit reports into. Her former roles also include being the head of Flexi bank unit, she has

thorough understanding of the market that is being served by the AMEF unit.

Carl Fischer is part of the executive management committee of Capitec Bank. Carl is also

part of KD’s non executive directors. He has an extensive understanding of how KD

actually operates and how it interfaces with Capitec.

Ben Nkuna is the former Chief Executive Officer of Women Development Bank. He has

comprehensive knowledge of the microfinance industry and this is illustrated by how he

grew WDB in the years that he was the CEO.

3.6 DATA ANALYSIS

A matrix of all the commercial banks studied during the first phase and their key factors is

summarised in Chapter 5. The questionnaire that was used in the second phase included open-

ended questions, so that the responses received would be unstructured, as befits views obtained

from different independent individuals. Consequently, the interview sessions were more like


40

discussions, with more than one question and theme sometimes being covered at once. The

responses obtained then required coding to provide a logical flow of all the discussions with the

different interviewees, with the output forming the case study in Chapter 6.


41

CHAPTER 4

KEY FACTORS

4.1 INTRODUCTION

Commercial banks are late entrants in providing microfinance service to microenterprises. At first,

banks did not understand the market and their regulatory environment did not allow them to take

such a risk. A number of documented research papers and case studies have been funded by the

worldwide advocates for microfinance, namely the World Bank, the CGAP and USAID. There are

common themes (even though they sometimes have different names) within the published

documented papers and case studies, and for the current research, the sources were organised in

terms of the key factors that commercial banks need to consider when serving the microenterprise

market with microfinances. Another important issue is that a commercial bank must decide on what

is motivating its entry into the market, as that influences the bank’s motive to stay or exit the

market when the market and business dynamics change.

4.2 OPERATING MODEL

Once the leadership of a commercial bank has decided to service microenterprises, it is important

that the bank should consider how they would like to operate in the market. In different papers, the

outcome of such consideration is identified as an operating model (Curran et al., 2005; Delfiner &

Peron, 2007), an operating structure (Westley, 2006), an administrative structure (Baydas et al.,

1997), or an organisational structure (Valenzuela, 2001; Curran et al., 2005). Attali (2006) identified

the following types of relations between commercial banks and microfinance:

1. A bank supports microfinance through a donation. A bank can choose which MFIs it would

like to donate to, whether over a period of time or once off.

2. A bank allows an MFI to use its infrastructure. If the infrastructure of a bank allows it, the

bank can rent out some of its space to the MFI

3. A bank refinances the MFI. A bank can offer a loan, which the MFI can then use to fund its

customers. In such instances, the bank acts as a wholesaler.

4. A bank invests (equity) in the MFI. A bank may create a subsidiary that specialises in

microfinance, or, alternatively, a bank may buy into an existing MFI

5. A bank launches and manages mutual funds for microfinance. A bank may have mutual

funds dedicated to microfinance or, alternatively, a component of the mutual funds might be

dedicated to mutual funds.


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6. A bank downscales its operations to microfinance / SME banking. A bank may choose to

offer microfinance as part of its in-house operation.

Furthermore, Young and Drake (2005) identify four types of operating models: internal unit; the

subsidiary company; the service company; and the strategic alliance. A commercial bank may

choose any one of the four types of model in terms of which to enter the microfinance market.

Choosing the right operating model that suits the commercial bank concerned depends on such

factors as the risk appetite; regulatory implications for each model; and the cost implications

associated with each model. The business can evolve into other models as its operating

environment changes. Figure 4.1 below elaborates on the different operating models, using the

Isern (2005) model to give a schematic presentation of the different operating approaches. The

model is a hybrid of the Young and Attali models.

Figure 4.13: Microfinance operating model options for commercial banks

Source: Isern, 2005.


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4.2.1 Internal unit

When microenterprise financing is undertaken internally, either a department or a unit focuses on

microenterprise financing. Even though the internal microenterprise financing unit is set up, the

senior executives have to decide on whether the service or product offerings will be integrated

within the current service offering to clients as another product, which means that the current staff

at the bank may be used to sell the product as well. This has its own implications, such as that

there is no dedicated focus in offering the microenterprise financing products. Other implications

include no dedicated strategy to the product offering; the reporting is shadowed by other products

that have different characteristics to the portfolio, which might mean that the commercial bank

might not be able to determine the profitability of the products focused on in the microenterprise

market. The other factor is that the current bank staff may not understand how better to serve the

market, as it is so different from the market that they have traditionally served.

The biggest challenge is that the target market for the services does not approach banks, as they

were traditionally sidelined by banks, so the traditional approach to banking, in which a customer

approaches a bank, having identified their need for its services, might not work. As an alternative,

even though the unit is part of the commercial bank, a separate unit with its own staff,

management structures, policies and systems could be set up. Such a move would ensure that the

internal unit chooses a delivery model that suits the intended target market and that the operations

can be scaled up, based on the performance of the business line. The more specialised and

independent the microfinance unit is, the easier it is to institute appropriate microfinance lending

methodologies, policies and procedures to avoid interference from the broader bank culture.

The main advantage that is associated with following the operating model is that it is quicker to set

up, and allows for a saving of up to 10 per cent in the start-up costs in comparison to the other

models (Westley, 2006). The major disadvantage of the operating model is that the bank might not

have the necessary patience, understanding and knowledge of the new market to be able to run

the unit based on good microfinance principles. However, the disadvantage can be overcome by

seeking technical advice from organisations (e.g. ACCION, Developmental Alternatives Inc. [DAI],

etc.) that have worked in other countries deploying microfinance.

4.2.2 Financial subsidiary

A subsidiary is usually a company that is owned by the bank, and, within the context of the current

paper, services the microenterprise financing unit of the bank. The bank can also form a subsidiary

company with another institution, namely an institution that can share in the risks and returns of the

subsidiary. If it is an experienced company, like ACCION or ADI, the partner company can also

bring its experiences as to how to service the market profitably and, in the long term, sustainably.

Through the financial subsidiary model, the bank can limit its exposure to the risk of entering into

servicing microenterprise financing, especially when it has a partner in forming the subsidiary. In


44

addition to being independent, a subsidiary is also able to develop its own strategy, mission,

policies and procedures. The regulatory requirements and set-up requirements for setting up a

subsidiary might encounter start-up delays for which most banks lack an appetite. To overcome

such delays, the bank can enter into negotiations while fulfilling some of the requirements (such as

drawing up a memorandum of understanding between the different shareholders); the subsidiary

can also continue market analysis simultaneously.

4.2.3 Service company

A service company can be a non-financial company that provides administrative services to the

bank (ranging from origination to collections). The service company and the bank then enter into

an agreement on the fees to be charged the bank for the services offered. A service company is

neither regulated nor supervised by banking authorities, thus it is quicker to set up in comparison to

a financial subsidiary. The major challenge in creating a service company lies in agreeing on the

pricing and the risk sharing between the bank and the service company.

4.2.4 Strategic alliance

A strategic alliance is an alliance into which the bank enters with another institute, usually an MFI,

whereby the bank finances certain portfolios and the use of the bank’s infrastructure, or the MFI

acts as an agent offering some of the bank’s microfinance products. An agreement is required on

the distribution of costs, risks, responsibilities and return involved. The major challenge with the

model is the selection of good partners, and the possibility of rivalry arising, as there can potentially

be competition for the same clients (Young & Drake, 2005)

Once the operating model has been decided on, the context of the rest of the factors that needs to

be considered depends mostly on the operating model.

4.3 FUNDING

Based on the operating model, there might be a need for funding. In the case of an internal unit, in

most cases the bank will fund the microenterprise financing operation and the loan portfolios,

although doing so also depends on the risk exposure that the shareholders are willing to take. If

there is a third-party involved, and the bank does not offer the loans to the customers directly, the

commercial bank can partly fund its share in the strategic alliance or in the subsidiary, based on

the agreement with the third party.

The funds are to be used for starting up the microenterprise financing operation, as well as for

expansion service, once there is conviction that the market is a viable business option for the

commercial bank. Sources of funds can be donations from donor foundations, grants from the

state, and loans from other commercial banks or organisations, such as the World Bank or USAID.

According to Valenzuela (2001), the availability of loans funds is not a requirement for establishing

in-house microenterprise financing services. However, depending on the risk appetite of the


45

executive team and also depending on how much they believe that the programme will be a

success, the executive team may choose to partner with another organisation. They would then

split the costs and share the risk involved (e.g. the Commercial Bank of Zimbabwe (CBZ) (Bell,

Harper & Mandivenga, 2002)).

Funding also speaks to service or product pricing. If the cost of acquiring financing funds is high,

then the high costs are passed on to the customer. However, if financing funds are acquired

internally, the costs charged to the customer are not expected be as high. Even though price is not

one of the factors that microfinance customers look at, because they are without choice, in a

competitive market, the interest rate charged a customer can act as a huge lever on competitors.

In order for a microfinancing operation to grow, money must be channelled into the business from

loans, grants or donations. For more self-sustaining operations, a microfinance business can also

offer savings products, which can then be used as funds for loans, rather than relying on funds that

are more erratic. Offering savings services creates a sustainable source of funding that is more

prudent.

In the case of a commercial bank offering credit to a subsidiary, the former can be subjected to

lending limits. There are also limits as to how much capital investment a bank can make in a

subsidiary (Westley, 2006).

4.4 TECHNICAL ASSISTANCE

Such organisations as ACCION, ProCredit, Profund, ECIAfrica, EQI, and PlanetFinance have

specialised experience and knowledge of how to run microfinance operations. Usually, commercial

banks create subsidiaries with the organisations and make sure that the organisations are

represented on the board or among the directors of the subsidiary. Due to their vast experience

with diverse institutions in different operating environments, the organisations can contribute to the

governance of the organisation. Technical assistance that brings experience from other

environment can be coupled with the local team’s knowledge of the market, and can successfully

foster knowledge of which products best suit the needs of the customers concerned. The

commercial banks can also learn from the organisations, so that they can avoid making costly

mistakes themselves.

In a study undertaken by Valenzuela (2001), 78 per cent of the sample had received some form of

technical assistance. The organisations have knowledge of best practice in setting up microfinance

operations, and can also provide consulting services, market studies, and organisational

structures. They can identify strategic alliances and product development, pricing, training and

financial support. In sharing such knowledge with an organisation, the transfer of best practice

methodology can take place, with technical assistance ranging from one to ten years (Baydas et

al., 1997).


46

4.5 HUMAN RESOURCES

When establishing an internal unit for microenterprise financing, an important consideration is

whether to use existing internal staff or to recruit a new staff member. Working on microfinance

differs from working on mainstream products, as the loan officer is more of a field agent and is not

usually bank bound, like in a typical bank set-up. The loan officers are also remunerated and

incentivised based on their performance. In a highly unionised organisation, like most

organisations in South Africa, a bank cannot change the remuneration structure without extensive

negotiations taking place with the unions. The conditions of employment would also differ. With

such constraints, the bank is better off hiring new people to focus on the portfolio in their work,

rather than using the existing staff to do so.

4.5.1 Acquiring

Being a microfinance loan officer is about creating relationships with the customer base.

Preferably, for the loan officers, people should be sought from the same community as the target

market, so that they will understand the dynamics of the situation, or someone who can speak the

local language(s). In some instances, the choice of loan officer should be someone who is not a

local, so that there is no temptation or pressure to award bad loans. The loan officer needs to

know where the existing clientele stays and how to find them. The loan officer also needs to know

where to source potential customers who will make suitable clientele.

Of the different models tested on the above, some focus on recruiting university graduates (ABT,

2011), even though the majority of MFIs and commercial banks recruit those with secondary

schooling. However, for better results, a recruit should have at least some higher learning

qualification and be able to carry out such tasks as information gathering and analysis, as well as

sales, negotiations and problem-solving (Young & Drake, 2005). Being a microfinance loan officer

is labour intensive, and thus requires dedicated workers.

4.5.2 Development

Training, which is an important part of creating a sustainable operation, enables officers to develop

an understanding, and helps them to look after the quality of their portfolio. The officer needs to

develop such basic skills as negotiation and problem-solving. Career path mapping is required to

keep loan officers loyal to the bank. The challenge in developing an employee is that they may

leave after being trained, so that the bank may not recoup the value of having trained the

employee concerned. However, the cost of not developing staff for fear that they might leave is

also high.

Training methods can include the training that is provided by a technical advisor, as well as that

which is provided when a new employee joins. An employee can be teamed with an experienced

employee for on-the-job training and, after a certain period, say one or two months, the new


47

employee can be given their own portfolio. The only disadvantage is that for the period concerned

a salary must be paid to a resource that is not yet fully productive.

Loan officers should also not be loaded down with non-value adding work, such as balance

enquiries, to ensure that their production is measurable and that it makes a difference to the

business. On average, the loan officer to customer ratio should be 1:300.

4.5.3 Retention

As said before, the microenterprise financing service is about building relationships and retaining

staff is crucial, as it takes time to build up a relationship. Employees should, therefore, be well

remunerated, as well as incentivised. Most employees are remunerated based on their

performance; however, once again, performance management must drive the right behaviour. For

example, if an officer were only evaluated on how much new business they have brought in, they

would focus only on the quantity of business, without worrying about the quality of their portfolio.

Other important measures are profitability, teamwork and customer satisfaction.

Baydas et al.’s (1997) study shows that more than 60 per cent of the respondents surveyed had

incentive schemes. The challenge lies in incentivising client-facing staff, while knowing that the

staff that help with the back office are not that well incentivised. The situation can create tension,

which, however, can be curbed by having another incentive scheme for the back-office staff that

focuses on their performance metrics.

4.6 INSTITUTIONAL COMMITMENT

Issues relating to who will head the microfinance unit, to microfinance having strong support on the

board level, and to having senior and line managers who believe in microfinance are all important

issues that create great advocacy for microenterprise financing. For an external microfinance unit,

especially a subsidiary, it is easier to focus the attention of the board, because the reason for their

existence is microfinance, whereas, with an internal unit, microfinance has to fight for attention

together with other units that are more profitable and less risky.

When microfinance is governed by someone who sits at board level, it shows how important

microfinance is considered in the bank concerned. The board champion for microfinance needs to

believe in microfinance and to be able to influence other people, so that the board remains

committed to microfinance. As previously discussed, it can take at least three years for an MFI to

become profitable, thus making the rest of the board still believe in the programme is important.

That this is also the real reason why the bank went into microfinance in the first place deserves

reiteration.

An operational champion is also required, in the form of a staff member who is involved in the

running of the programme. The employee who understands the vision of microfinance and who will


48

be able to influence the operations and ensure that there is alignment between executive vision

and what actually happens in operations should prove invaluable to the organisation.

4.7 PRODUCT DEVELOPMENT

Technical assistance can provide input information regarding what products or services should be

provided to the microenterprises. For a new market, a survey can be conducted to find out the

needs of the target market, which currently provides financial services to the market segment, and

how the bank can position itself in terms of existing competitors. Banks are regulated environments

and normally have structures that help to ensure compliance with new product or service offerings.

Product development includes looking at the product and service (as regards savings, loans,

insurance, etc.) being considered to offer the target market; devises how to segment the products

for the different market segments; and works out how to assess and, where possible, scrutinise

related risk, so that pricing can be right for creating a sustainable business.

4.7.1 Product types

Microfinance focuses on offering such financial services as savings, loans, insurance and money

transfer. The offering of savings is normally readily available in most commercial banks. As an

example, in South Africa the government made sure that the commercial banks made available

Mzanzi accounts (low-cost savings accounts), and had to report on the number of new savings

accounts they opened. There are ample savings products available, including those owned by the

banks themselves. Salaried customers may also obtain loans, insurance and money transfer

services.

When focusing on the microenterprises market, there is a need for microentrepreneurs to secure

access to funds in order for them to expand their businesses. This is where the gap in the market

lies. Commercial banks should conduct detailed surveys and studies to grasp the needs of

microenterprises. It is also important to decide on the loan size to offer the potential customers,

which requires understanding the market’s overall business cycle. Obtaining such an

understanding should help in coming to know how long the long repayment duration should be, as

customers may only be able to pay the bank back after a period of six months. The repayment

duration is also dependent on the business cycle. As an example, if the nature of the business is

such that it only makes a profit during spring and summer, then that means that the loan

repayment duration should overlap this period, otherwise entrepreneurs might find themselves

unable to meet their weekly or monthly loan repayments. Even though the immediate need for

microentrepreneurs might be loans, other product types (e.g. savings and micro insurance) are

also important.


49

4.7.2 Pricing

Principle number 4 of the Key Principles of Microfinance states “Microfinance can pay for itself, and

must do so if it is to reach very large numbers of poor people” (Helms, 2006:14). The ability of an

MFI to pay for its costs and to be able to generate its own internal funds speaks to the

sustainability of the institution’s operations. This talks to creating a model to ensure that

microfinance is a viable business, and that the business can grow to reach even more of the poor.

It is also very clear that it is costly to serve this market and that it might take some time before the

business takes off.

In running a sustainable microfinance operation, pricing plays an important role. There are,

however, industry benchmarks as to what is considered to be fair pricing, although the fairness of

such pricing is also dependent on each organisation, as operating and delivery models tend to

differ from one another. The following costs have to be taken into consideration for sustainable

loan pricing (Helms & Reille, 2004):

Financing cost (cost of funds) is defined as the cost of the acquired funds, which is used to

fund the loans. Some of the funds can be money that is raised internally from sources such as

savings, whereas other funds can be credit borrowed from other institutions.

Administrative or service costs involve the day-to-day running of the operations, including costs

from customer applications and screening, the processing of applications, and the disbursing of

funds. The charge is directly charged to the customer as the initiation fee.

Risk exposure cost or provision for bad debt loss might be employed by the institution if the

portfolio concerned has a high delinquency rate.

The last two cost factors (administrative and risk exposure cost) can largely be controlled by the

commercial banks when they ensure optimised operations. Commercial banks have to be

innovative in devising ways in which to reduce administrative costs, by ensuring leaner operations

and re-looking at the delivery model. Efficient operations also mean that loan officers work their

books to ensure that risk exposure does not increase or is minimised, meaning that the risk

exposure risk can be minimised.

Customer protection is very important in the microfinance market, because the market is

vulnerable to some unscrupulous finance providers. Commercial banks are, however, more

prudent in their dealings with this market, due to the fact that they need to uphold their good

reputation. Challenging issues when it comes to pricing concern the interest rates. One of the key

principles of microfinance is that capping the interest rate is not good for the market. as it may

mean that the organisations offering micro loans are not able to recoup their costs and may be

forced to close down their operations, thus disadvantaging the microfinance customer.

By the same token, there is much more focus on the interest rates transparency to ensure that

organisations do not charge excessive interest rate due to terms in the contract being unclear.


50

Organisations are encouraged to disclose how their interest rates are calculated (whether on a flat

rate or by the diminishing balance method). The Microfinance Transparency Agency was created

to try and encourage organisations to be transparent about their interest rates, and to offer tools

that can help organisations calculate their interest rates.

The bigger challenge is that microenterprise owners are not necessarily educated in understanding

the interest rates, and most of the time the microenterprise owners feel that they are at the mercy

of the person who granted them the credit. In most contracts, the interest rate terms are written in

small print. In South Africa, the government has introduced the Consumer Protection Act (CPA)

(Republic of South Africa, 2008), which came into effect in April 2011 to protect vulnerable

consumers. In terms of the CPA, customers have the right to disclosure of information and also to

contracts being written in simple language that they can understand.

4.7.3 Collateral

It is difficult to obtain assets that can be used as collateral for a microentrepreneur; some lack

assets, and those who do have assets might lack the documents to verify that the assets do,

indeed, belong to them. If male entrepreneurs are married, their wives cannot sign surety, due to

them not being legally married but rather co-habiting (Segrado, 2005).

Deposits in savings account can also be used as security when credit is requested. Some banks

require their customers to deposit a certain percentage of the requested loan amount as security,

with the money not being allowed to be withdrawn while a loan is still outstanding. Alternatively, for

customers who only have a savings account with the bank, the balance in their savings book can

be used to evaluate the amount for which the client qualifies, with the larger their savings, the

larger the loan for which they qualify.

As customers require more loans from the same organisation, their track record of their ability to

pay also grows. The more trustworthy a customer is, based on their historical performance, the

more likely the customer is to be able to obtain more funding. The customers’ historical ability to

repay can act as surety for them. Using the Grameen model, the members of the group can

become surety for one another, or what is called ‘social surety’. However, such surety is applicable

to arrears where the group-lending methodology is used.

In order for all the above to be possible, the regulatory environment needs to act as an enabler. In

addition, commercial bank policies also are required to allow the right level of collateral for the

market, as greater understanding of what collateral is available and permissible within the

regulatory environment is gained.


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4.8 OPERATIONS AND DELIVERY MODEL

Microfinance business is a high-volume, low-value portfolio; Operations in microfinance differ from

those in a normal bank. Traditionally, microfinance thrives on decentralised decision-making, as

those in the field come to understand the customer better than do those at head office. The

delivery model supports the operating model, it is how the customers are going to receive and

experience the services and products offered. It is about looking at who the customers are and

what products would meet the needs of the customer. The livery model though has to be cost

effective to ensure that the products and service are still offered to the customer in a cost effective

manner.

4.8.1 Credit methodology

Credit methodology refers to the credit process involved in identifying the need to manage the

customer. In microfinance operation, loan officers are responsible for securing new customers, for

analysing a business to check whether a customer qualifies, for monitoring of loan performance,

and for collecting on the portfolio, whereas, in normal banking operations, different employees are

responsible for each of the above-mentioned functions. The loan officer has to create a

relationship with potential customers, understand their needs, and sell them a product that meets

their needs, whereas, in the mainstream banking environment, the customer comes to the bank

with their need already identified. To optimise the time of the loan officer, more focus should be

placed on responsibilities that either grow the portfolio or that improve the quality of the portfolio.

4.8.2 Lending methodology

Research shows that the lending methodology depends on the cultural background of the country

concerned. There are countries where group-based lending will work and others where individual-

based lending is ideal. Commercial banks need to ensure that if they are going to use both of the

lending methods or to choose one of them, systems and policies need to support and be aligned

with the chosen lending methodology.

4.8.2.1 Group-based model

The group-based model was made popular by Grameen Bank. The group consists of between five

and eight people. How the group lending method works is that, as an example, three people in the

group would be given credit and, based on their payment of their loans, the others in the group

would then be offered credit. In South Africa, as well as in many other parts of the world (Calvin et

al., 2010) the group-based methodology has yielded more success than has individual-based

lending for the MFI in the microenterprise loans market. The top three MFIs in South Africa (SEF,

WDB, and Marang) focus more on group-based lending than on individual-based lending (Calvin &

Coetzee, 2010).


52

The reason why the group lending methodology tends to be more successful than individual-based

lending is due to the accountability that is placed on the group that, if a member cannot repay the

loan, the whole group becomes accountable for it. Therefore, all members of the group try their

best to repay their loans, due to the pressure and the embarrassment that they might suffer if they

cannot do so.

4.8.2.2 Individual-based lending

Individual-based lending is not a popular way of offering credit to microenterprises. The individual

is granted credit based on their microenterprise performance. The commitment to repay is not as

high as with group-based lending, thus making it a less favourable lending methodology. In certain

cases, individual lending might only be offered to a customer who was part of a group lending and

who has graduated to a level that cannot be covered by what is offered to groups, but which

cannot be serviced by the other traditional bank products. However, as was previously said, this

depends on the culture of where the commercial bank operates.

4.8.3 Loan appraisal

In the majority of countries, there are no credit bureaus for microentrepreneurs, which mean that

microenterprise-financing institutions have to find other means in which to evaluate whether the

customer is creditworthy and would be able to repay a loan. The loan officer has to assess the

microenterprise, using the inventory and any other documentation that is available to prove that the

customer does honour repayment obligations. The loan officer can also interview some of the

neighbours or microenterprise owners who operate within the same vicinity. When the

microentrepreneur is a repeat customer and the bank has adequate information, it is easier to

assess the performance of clients based on their historical performance.

4.8.4 Collections

The relationship between the loan officer and the customer is a high trust relationship. Delinquency

rates of customers for microfinance have reportedly been very low, with the worst case generally

being 5 per cent (Oberdorf, 1999; Valenzuela, 2001). This is due to the diligence of the loan

officers involved, and because non-payment impacts directly on the remuneration of the loan

officer. Customers can pay their monthly instalments at a branch, by means of a debit order or, in

other countries, where is no infrastructure, to the loan officer concerned.

From the day that the payment is due, the loan officer should follow-up with the client if payment

has not been received. Depending on the collection policy, the loan officer might try for 30 days, for

example, to contact the customer to make a payment. Should there not be any collections within

this period, the account can be handed over to the collections department or to a third party who


53

will try to recoup the money. However, the collection on a delinquent loan may remain the

responsibility of the loan officer, depending on the policy of the commercial bank.

4.8.5 Supportive branch network

It is important that branches are close to where the microentrepreneurs are. Every branch must

have a manager who understands the targets of the bank and who ensures alignment with the

general policy of the institution. Even though the work of the loan officers is 90 per cent in the field,

the branch network assists with ensuring that, if there are any administrative tasks (e.g. signing of

contracts or issuing of account statements), they can be carried out at the branch, to let the loan

officer focus on working their portfolio.

4.8.6 Support services

Other services, such as legal, marketing, internal audit, compliance, and information technology

(IT), can be provided by the bank to the microenterprise financing unit, if an internal operating

model is chosen. In the case of a strategic alliance or service company, the bank should agree on

what service it will make available to the partners and at what cost. All this information should be

documented in the Memorandum of Association.

4.8.7 Decentralisation and internal controls

The separation of duties at financial institution is very important. Banks are heavily regulated,

because they handle large amounts of money on behalf of people, so the service offering, as well

as autonomy in executing duties, has to be present. Loan officers work in a decentralised structure

and have to drive the performance of their own portfolio. This means that if the loan officer has the

function of making the final approval on their own customer loans, there would be many corruption

cases. Good governance has to be practised at all times. There is, therefore, the need for a

separate entity from the loan officer to validate that the necessary paperwork has been completed

correctly.

4.9 SUMMARY

The above-mentioned key factors (operating model, funding, technical assistance, human

resources, institutional commitment, product development, operations and delivery model) are the

key consideration points for commercial banks considering entering the microfinance market. This

chapter has addressed the first research question, which was to identify the key factors that

commercial banks need to consider. The next chapter contains the review of how other

international commercial banks considered the key factors.


54

CHAPTER 5

CASE STUDIES OF INTERNATIONAL COMMERCIAL BANKS

5.1 INTRODUCTION

This chapter illustrates how other international commercial banks have considered the key factors

discussed in Chapter Four. The content is based on the documented and published case studies

that were accessible at the time of the study. The case studies were documented by different

authors, and for their specific objectives. It is remarkable, though, how some of the key factors

were documented in all the case studies.

5.2 BANCO DO NORDESTE (BN)

The following key factors considered by BN are based on the case study documented in the CGAP

Focus Note No. 23 (2001)

5.2.1 Background

BN is a Brazilian state-owned bank that has over 357 branches throughout Latin America. BN

microfinance business has been successful due to the strong commitment from its leadership and

also because of the expansive outreach in the north-east regions of Brazil, which has the highest

rate of poverty compared to other regions of Brazil.

After four months of launching internal microfinance operations, the management of BN were so

excited about the performance of the loans portfolio that they announced that the programme

would be expanded to 50 branches, and that, by the end of the year, they would have 100 000

customers. Such expansion took place against the advice of the World Bank CGAP and the

technical advisors. The expansions initiatives had disastrous effects. The loan officers rushed to

offer new credit, but were slack on securing loan repayments. Two months after the decision was

made to expand, the cabinet chief instructed all operations to halt lending and to focus on loan

recovery. Loan losses of US$2 million were incurred by BN.

Despite the lessons learnt from their rapid expansion, BN management still showed commitment to

the programme, which led the World Bank and ACCION to continue supporting the programme. To

illustrate their support, the World Bank made a US$50 million loan to BN to ensure that the

programme ran smoothly for the next five years.

5.2.2 Technical assistance

In 1996 the World Bank and CGAP decided to provide assistance to the CrediAmigo microfinance

programme of BN in the form of a loan that would help BN to secure technical assistance. In this

way, access to funds was ensured, as well as that best practice was applied at BN. The assistance


55

received by BN from the above-mentioned institutions exposed BN to high-quality international

expertise and enabled it to learn from the experiences of countries with similar experiences. BN

also appointed ACCION as consultants to help BN with technical assistance, due to ACCION’s

experience with solidarity group lending schemes. ACCION also helped BN with market research

to ensure that the products provided were aligned with customer needs.

5.2.3 Human resources

5.2.3.1 Staffing

For staffing, BN outsourced microfinance loan officers, as the current staff within the bank were

neither qualified nor experienced to service the microenterprise market. The other hurdle was that

the current workforce was highly unionised, thus making any changes to how they were

remunerated a challenge. BN only played an administrative role and ACCION played the role of

technical advisor.

5.2.3.2 Remuneration

Remuneration was based on the staff’s performance, thus making the employees take personal

accountability for the quality of their books and the new business they brought in.

5.2.3.3 Training of staff

The World Bank arranged for a US$900 000 Japanese grant to be used for the training of the loan

officers, the development of an information system and for technical assistance. ACCION was also

available to provide on-the-floor retraining.

5.2.4 Product development

5.2.4.1 Product segmentation

ACCION conducted a survey on behalf of BN to determine the need for informal microenterprises,

and this input was used to say which loan products would be suitable to the target market

concerned.

5.2.4.2 Product types

It took 13 months before the first test product was launched to the market. The product was a 90-

day loan offered to a solidarity group, which was made up of five group members to ensure that

they cross- guaranteed each other. The product was only offered to five branches, just to test the

market. The interest rate was about 6 per cent per month higher than the rate charged

conventional customers, but it was still much lower than the rate charged by informal money-

lenders. Incentives were given to encourage customers to repay their loans. The incentives


56

included reduced interest rates and new loans within 24 hours if everyone in the group performed

well.

5.2.4.3 Pricing

High interest rates were charged in order to make up the high operating costs, and also to make

the business not dependant on grants or donations (which are not sustainable) to finance the

shortfall. The challenge was that the government had also introduced maximum interest rates that

could be charged on micro loans. Capping the interest rate meant that some of the operating costs

could not be covered, which threatened the sustainability of the business

5.2.5 Institutional commitment

Even though BN was a state bank, there was, surprisingly, very little political interference in the

operations. The president of BN supported the acquiring and implementation of best practice for

microfinance and also committed himself to staying on for an additional five years to ensure that

the launch of the CrediAmigo programme was successful. This was critical, due to changes in

leadership sometimes meaning that new leadership lacked the same vision about the programme

and could stop the programme. The senior executive commitment made it possible for World Bank

and CGAP to continue working with BN even after the dismal failure of the early stages of the

CrediAmigo programme. BN appointed its cabinet chief to oversee the whole programme, and was

also given a mandate and freedom to recruit top talent from the bank.

5.2.6 Operations

5.2.6.1 Information system

BN used part of the $900 000 Japanese grant towards the development of an information system.

The system ensured that high-quality information on the historical transactions of customers and

their repayment behaviours could be used as a gauge of whether to grant an existing customer

additional funds. With this credible information, it was also easier to assess the performance of the

overall loan portfolio for the CrediAmigo programme. When the World Bank granted the afore-

mentioned US$50 million loan to BN, the high quality of the CreditAmigo information system made

the appraisal very easy.

5.2.6.2 Loan repayment

The management of BN is deeply committed to securing high loan repayment. After learning its

lesson shortly after the launch of the programme, BN management ensured that they did not

compromise the loan repayment.


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5.3 AGRICULTURAL BANK OF MONGOLIA (ABM)

The following key factors considered by ABM are based on the case study documented by Dyer et

al. (2004)

5.3.1 Background

ABM is the largest provider of financial services to those in the rural areas of Mongolia. It has the

largest network of branches in the country. It started as a public bank, was then unsuccessfully

privatised, made public again, and then finally successfully privatised to a Japanese company in

2003.

The turnaround of the ABM happened in 1999, when the World Bank made it a condition that the

bank had to be reformed when the World Bank launched the Financial Sector Adjustment Program

for Mongolia. The bank was placed under the management of DAI from Maryland in the United

States to ensure that a USAID-funded turnaround and transformation happened in the bank.


When ABM was placed under the management of DAI, the management of the bank signed a

memorandum of understanding with the government to ensure that there would be no political

interference while the company was being prepared for privatisation.

The DAI team brought strong leadership, as well as vast wealth of experience from other countries

experiencing similar challenges. Local people who had the most experience were also recruited.

This ensured that the business understood the local markets and culture, which is very important in

turnaround situations. However, the internationally experienced managers also helped to ensure

that best practice was adhered to. With such a strong leadership team, setting a culture of high

performance within the organisation was illustrated.


The turnaround at ABM was only possible due to the conditions set by the World Bank when they

launched the Financial Sector Adjustment Program. The World Bank and USAID ensured that the

right decisions were taken and that technical assistance was provided.


5.3.4.1 Staff development

Because ABM used to be a state bank, the management of the rural branches was slack and thus

incapable of making decisions that would make the overall business profitable. Through training

and becoming more accountable, management came to understand that the institution needed to


58

be strong in how it operated, so that it could increase its outreach to other areas and thus stimulate

the growth of the country’s economy.

In order to ensure that the turnaround worked well, new staff members with the right qualifications

and experience were hired, and staff members who were redundant or underperforming were

retrenched.

Staff members working in the rural braches were embedded, together with their families, in the

communities where they worked. This was to make sure that they understood what happened

there and that they knew how to find reliable borrowers.

5.3.4.2 Training

Training was focal to what DAI was trying to achieve. An independent training company was hired

to ensure that a training department was established and that there were professional trainers who

would ensure that employees were equipped with practical skills, as well as with knowledge of the

products and service that they were required to sell to customers. Staff training at ABM ensured

that the staff applied more prudent lending practices, which increased the amount of revenue for

ABM exponentially.


Staff members who strove to perform at their maximum were rewarded and recognised. Staff were

remunerated, based on their performance.


New products were identified by managers, rapidly tested and thereafter rolled out nationally. To

support the roll-out of the product, policies and procedures governing the product had to be

finalised before a pilot exercise was performed. The rapid testing of products can shorten the time

to market. However, in a risky market, the testing of products needs to be done thoroughly.

5.3.6 Operations

5.3.6.1 Management information system

A paper-based reporting system was used in order to monitor portfolio performance. Even though

the case study mentions that, with this method, they were able to detect fraud, the exercise would

not have been easy without an electronic system. This worked well for the bank, as the branches in

the rural areas lacked computers. However, the consolidation was a nightmare, as the data had to


59

be recaptured into a consolidated paper-based system. Using an optimised electronic system

facilitated the process, as the data did not have to be recaptured, but could just be consolidated by

taking the input from other branches and automatically populating it into the master electronic

copy. As the business expanded, ABM would need an electronic system.

5.4 BANK RAKYAT INDONESIA (BRI)

The following key factors considered by BRI are based on the case study documented by Maurer

(2004).

5.4.1 Background

BRI is the largest institution in the world to facilitate microfinances. It has more than 27 years in the

industry. BRI has more than 3 855 units, which are BRI outlets that are spread out throughout the

rural areas of Indonesia. BRI is financially self-sustainable, as it provides both credit and saving

services, thus making it not reliant on donor funds. BRI has more savers than borrowers, with ratio

of the former to the latter being 10:1 (Maurer, 2004). The business is very healthy, as it does not

rely on either credit funding or grants.


In the early days of BRI, technical assistance was provided by the Harvard Advisory Group. The

World Bank and USAID provided the funding for the Group to be able to provide the required

technical assistance.


5.4.3.1 Staff remuneration

A standardised management information system was introduced to all the units, with key

performance indicators for every employee. Employees are remunerated based on their

performance, a record of which is captured on the management information system

5.4.4 Operations

The BRI units are spread throughout the rural areas of Indonesia, with a unit, which covers

between 16 and18 villages, servicing about 10 000 savers and just over 1 000 borrowers. The

units are situated close to the customers. The employees working at the units have close relations

with their customers. Even during difficult financial crises, the customers still pay their loans and

the BRI continues to ensure that they still offer kupedes (loans) to existing loyal customers.


60


5.4.5.1 Products offered

The following products are offered to the BRI microfinance customers:

savings, in the form of simpedes;

loans, in the form of kupedes; and

student saving accounts, in the form of tabanas.

5.5 BANQUE DU CAIRE

The following key factors considered by Banque du Caire are based on the case study

documented by Segrado (2005) in the paper titled, The involvement of commercial banks in

microfinance: The Egyptian experience.

5.5.1 Background

Banque du Caire is one of the leading public sector banks in Egypt. Together with other three

banks (the Banque Misr, the National Bank of Egypt and the Bank of Alexandria), they control over

50 per cent of the banking assets in Egypt. Nevertheless, in early 2001, the bank found itself on

the verge of bankruptcy. A new board of directors with international exposure was appointed with

a mandate to turn the bank around. One of the opportunities identified was to serve a potential

microfinance market. In June 2001, the bank’s management team therefore decided to enter the

world of microfinance.

5.5.2 Motivation for servicing the microfinance market

The reasons for entry into this new market were both internal and external (Segrado, 2005),

including:

Labour absorption: There were excess employees after the company had automated some of

the business processes, which led to the availability of redundant staff who needed to be

engaged in some work.

Risk diversification: By entering the market, a larger number of clients in a wider

geographical area could be served.

Profit-making: The microfinance market was large and offered potential for profits.

Competition: The bank needed to mark its presence in this market, which was traditionally

serviced by NGOs. The other commercial banks were making the move at the same time to

service this market. The bank realised that there was a market that needed to be served.


61

Limited risk exposure: Due to the financial support given by USAID, as well as the technical

assistance given by EQI, the number of mistakes that the bank could make in servicing the new

market was limited.

The decision to enter the microfinance market was, therefore, strategic and supported by the

executive management team.

5.5.3 Funding and technical assistance

Regarding the Banque du Caire receiving funding from USAID, in the case study there is limited

information about for how long and how much the funding was. In some cases, a donor might be

willing to fund the first phase, but might not be happy with the funding expansion plans of a bank,

especially if they do not believe in the viability of the market concerned.

5.5.4 Operating structure

An internal unit was formed to focus on the microfinance service offering.

5.5.5 Recruitment

The existing staff members that were redundant were redeployed as loan officers. Due to the

restructuring exercise that the bank was going through, 660 of its staff members volunteered to join

the microfinance programme.

5.5.5.1 Staff development and incentives

The redeployed staff was trained well in order to ensure that they were equipped with the right

skills and knowledge to serve the microfinance market. As an incentive, the microfinance

employees were paid substantial performance bonuses. The employees also had internal

motivation, as they felt that, for once, they could participate in meaningful activities at the bank.

5.5.6 Product offering

When the Banque du Caire started the microfinance programme, the only product that the bank

offered was microcredit. In 2003, the bank realised that it had too few products to target the

traditional microfinance customers in Egypt. The bank then, accordingly, decided to expand its

product offering to other micro products, including the following: savings; insurance; consumer

loans; and university funds.


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5.6 HATTON NATIONAL BANK (HNB)

The following key factors considered by HNB are based on the case study documented by the

United States Agency for International Development (Curran et al., 2005).

5.6.1 Background

HNB is based in Sri Lanka, and has corresponding banks in India, Pakistan, Bangladesh, Nepal,

Indonesia, and the Philippines. In 1998, HNB decided to serve the bottom of the economic pyramid

by offering microfinance. A programme called Gami Pubuduwa (GP) was launched, which is still

running to date. The products offered under the programme have increased, and include micro

savings, loans, money transfers and insurance. The GP programme took the form of 107 banking

units across the country, with the majority of the units being based in the rural areas.

5.6.2 Motivation for going into microfinance

The chairman of the HNB board said that the objective for the GP programme was to bring the

banking services to the rural communities, in which about 70 per cent of Sri Lanka’s population live

(Curran, Natilson & Young, 2005). In terms of the GP’s long-term commitment to social and

economic development, the programme can be seen to have been very successful, despite

profitability not being a critical driver. The motivation for the bank was that they believed that, if

they focused on reaching out to, and developing, the remote regions and transforming the

individuals there into bankable customers, in the long term the venture would be profitable.

The primary factors that led HNB to enter the microfinance market were the following, according to

Curran et al. (2005:16): “poverty alleviation, rural entrepreneur development and rural

infrastructure development”. These social commitment led HNB to stay in the market, even though

it was not profitable.

When commercial banks offer microfinance, especially with it being such a small portfolio

compared to the total bank’s assets, normally it attracts little focus, if it is profitable. Only when the

economic situation is in crisis do the commercial banks tend to review their microfinance portfolio.

5.6.3 Operating model

The HNB chose to integrate microfinance as part of its existing banking operations, instead of

choosing a service company or subsidiary to perform the function for them. Their operating model

is somewhat unique, in that it consists not of a unit that was created specifically to focus on

microfinance, but the GP product is offered within the Development Banking Unit, which falls under

the Personal Banking Division, and is integrated into existing branch operations. Before 2002, the

GP programme formed part of the Project Finance Unit, which focuses on small and medium

businesses.


63


The managing director and chairman of the board was the champion of the programme, who was

very involved in designing how the programme would run. The biggest challenge was that other

senior executives were not initially convinced of the value of the GP programme, especially when

looking at the bottom line.


The GP programme initially offered the microloan product, with the clients being encouraged to

open a savings account, although this requirement was not enforced. Over the years, the bank has

increased its product offerings to include micro savings, remittance and micro insurance.

On pricing, at the beginning of the programme the board did not want to charge interest rates

higher than those charged by MFIs, which led to the GP programme not being sustainable, as it

could not cover its costs. However, the board is now comfortable with charging higher interest

rates just to ensure that costs are covered.


The loan officers for GP, who are called GP field officers, not only offer the GP products, but also

offer rural credit (which is a loan that is about 40 times larger in value than the GP loan). The

challenge lies in how the cost of staff per product line is seen, especially if little is known about how

much time they spend focusing on each product.

The responsibilities of the field officers include acquiring new customers, analysing the customers’

portfolio performance, and collecting overdue payments.

5.6.7 Operations

Although the loan was offered to individuals, rather than to groups, there were exceptions, with

community groups functioning within the same industry being considered eligible for a group loan.

The banks concerned anticipate that clients of the GP programme will grow their needs, so that

they have, inevitably, to be graduated to the Project Finance Division, which offers loans to small

and medium businesses.

5.6.8 Challenges for HNB

The challenge for HNB is that the shareholders expect an acceptable return on their investment,

while the GP programme is regarded as a corporate social investment programme The profit

margin of the GP programme in 2004 was 1.10 per cent, while the profit margin for the overall HNB

was about 10.31 per cent, which makes it difficult to argue that the GP programme is anything

more than a social investment programme. The managing director, who is also the chairman, has

said that the GP programme is a business venture just like any product line that is offered by the

bank and that it will ultimately be profitable and contribute to the bottom line of HNB (Curran et al.,

2005).


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5.7 COMMERCIAL BANK OF ZIMBABWE (CBZ)

The following key factors considered by CBZ are based on the case study documented by Bell et

al. (2002) and published in the Small Enterprise Development Journal.

5.7.1 Background

CBZ is the third largest bank in Zimbabwe, and includes the government among its shareholders.

5.7.2 Motivation to move into microfinance

When the competition in the corporate client industry was tight, the senior management of CBZ

saw an opportunity to enter the microfinance space by targeting microenterprises. Due to an

increase in unemployment, the market was seen to be growing.


An international NGO, called CARE International, wanted to enter the microfinance industry in

Zimbabwe. The NGO was looking for a partner with which to enter the market. All the other

commercial banks, except for CBZ, were not interested in a partnership. CBZ and CARE formed a

partnership together to serve the microfinance market in Zimbabwe, with the former becoming the

first commercial bank in Zimbabwe to enter the market.

An internal unit called the Community Banking Unit (CBU) was created within CBZ. The unit fell

within the Credit Division.


CARE had extensive experience in microfinance globally, and could thus provide technical

assistance to the CBZ, with the financial assistance of the Department for International

Development (DFID).

5.7.5 Funding

Due to the territory being unknown and the risk perceived being great, CBZ was not prepared to

make the initial investment itself. However, the British government’s DFID agreed to provide

funding. Thus an opportunity was created to showcase to other commercial banks in Zimbabwe, as

well as in the rest of Africa, that microfinance could be profitable.


Although the managing director of CBZ was fully committed to the initiative, most of the

management team were not convinced of the profitability of microfinance, and hence they were not

keen to invest the shareholders’ money in the venture.

Further challenges with the senior staff within CBZ arose from them not taking the CBU’s activities

and clients seriously, which led to a lack of cooperation and delay in daily operations. As the senior


65

staff gained more understanding of microfinance, they came to appreciate the importance of

increased cooperation.


The CBU offers loan and savings products, in terms of which it can disburse loans ranging in size

from very small to relatively large, the latter of which are granted to deserving individuals. Every

customer who wants to borrow from CBU is required to have a savings account. The challenge

presented with such accounts is that the CBZ has its own savings account, which caters for very

low balances, so that there seems to be a conflict in these two products. However, the CBZ

savings account offers better returns to the customer than does the CBU saving account, so that

there is little incentive for the customer to open a CBU savings account.

5.7.7.1 Pricing

Customers have to pay a loan application fee, with higher risk loans, such as loans that are used

for consumption purposes, carry higher interest rates. The banks charge an additional charge for

amounts that are overdue and another additional charge for extra follow-up visits.


An existing manager at CBZ was chosen to head the CBU. All the field officers were recruited

externally, with some being professionals in industries, while the remainder were experienced field

officers recruited from MFIs. For training purpose, the new recruits were paired with an existing

loan office for a period of three months.


Although the CBU staff are paid from donor funds, they are on record as part of the bank’s staff,

which allows them to qualify for a normal bank staff salary. As the salaries concerned are higher

than what the local MFIs pay their staff, it is a good motivator for employees to stay with the bank,

so that it tends not to lose its best people to other MFIs.

5.7.9 Operations

The microfinance unit (CBU) uses the existing bank’s outlets and other functions, such as its

administration department, its management information system, and its audit, marketing and

human resources. A 10 per cent administration fee is factored into all accounts to cover what CBZ

makes available to the unit.

The CBU staff members are situated in CBZ branches, and use the CBZ tellers for deposits and

withdrawals. New accounts are opened and a client advisory service is provided at premises that

are separate from the branches, in order to ease congestion.


66

The unit started offering its services in one branch as a pilot run, which was done to ensure that

the unit could learn from, and replicate the model at other branches, once success had been

achieved.

5.7.9.1 Lending methodology

The CBU, which offers loans mainly to solidarity groups, has very strict rules, such as that no

additional loan is given to a member of a group that contains a defaulter, which results in the other

group members suffering when a member cannot repay the loan. Such a system is problematic

when a member cannot make repayments due to sickness or death.

Individual loans are granted to successful repeat borrowers who have outgrown the normal CBU

group loans, but who cannot, as yet, graduate to mainstream loans. A prerequisite for such a loan

is that it be secured by a physical business asset.

5.8 COOPERATIVE BANK OF KENYA (CBK)

The following key factors considered by CBZ are based on the case study documented by Bell et

al. (2002) and published in the Small Enterprise Development Journal.

5.8.1 Background

Even though the CBK is a cooperative, it not only provides services to cooperatives, but to all

individuals and large business. In short, it is the first large bank in Kenya.

5.8.2 Motivation for entering microfinance

The primary motivator for CBK to enter the world of microfinance was the increase in the amount of

competition experienced in regard to the traditional banking customers.


An internal unit, called the Micro Credit Unit was established. The unit, however, used the current

existing infrastructure and the network of branches to service its clientele. What is different about

the model is that the bank acknowledged from the beginning that there might be challenges with

setting up an internal unit, and decided to test the programme with microfinance agencies. The

agencies, accordingly, basically operated small outlets located in areas where there was a high

density of microenterprises.

One branch was selected for a test run. What was unique about the branch was that the branch

manager believed in the importance of microfinance and wanted the microfinance products to be

offered at his branch. The success of the programme at the branch aroused the interest of other

branches, which facilitated the integration of the programme into the CBK network.


67


The managing director was supportive and believed in the microfinance programme, having been

exposed to it during study tours to Indonesia and Bolivia.

5.8.5 Funding

The CBK contributed most of the capital and operational expenses required to start up the unit,

with additional funding for technical assistance also being obtained from the DFID. USAID also

provided financial support by agreeing to pay for study tours overseas.


The DFID provided funding for technical assistance, and the consulting company, Bannock

Consulting, was contracted to provide technical assistance.


Existing bank staff was appointed into managerial roles within the micro credit units. The credit

officers were all new staff members who were recruited solely to focus on microfinance products.

New credit officers are offered classroom training and on-the-job training, during which they are

paired with experienced credit officers. In the early years, this presented a challenge, because the

number of new recruits was limited to the number of existing credit officers with whom they were

paired. An approach in which credit officers who have been in the job for over a year are promoted

into supervisory roles has proved to be more successful, as the supervisors are required to have

extensive field experience. Every credit officer has a clear career path, which makes it easier for

CBK to retain their staff and thus to circumvent the costs associated with new staff acquisition.


CBK only offers individual-based products, because the management team decided that it lacks

sufficient knowledge to manage groups, although they can efficiently service individual clients.

Clients are required to have some collateral, which can be a combination of household and

business assets.


The microfinance programme offers micro credit and micro savings products. The savings product

is well placed to serve customers at the very low end of the market.


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5.9 INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

The following key factors considered by ICICI are based on the case study documented by Harper

(2005)

5.9.1 Background

ICICI is the large private-owned, and the second largest, bank in India. The head office for the

bank is in Mumbai. The bank has a network of 2 529 branches and 6 102 ATMs throughout India,

as well as having a presence in 19 other countries (ICICI Bank, 2011). ICICI follows a much-

centralised decision-making model. All the lending decisions need to be approved at the head

office, using sophisticated credit scoring scorecards. The bank entered the microfinance market in

2002.


In 2001, the ICICI purchased the Bank of Madura, which had a significant portfolio of self-help

groups (SHGs), about 600 in all. ICICI wanted to integrate this portfolio as part of its business

model. The SHG portfolio bore witness that the market was willing to pay high interest rates for

good-quality service. The ICICI management team also expressed a belief that microfinance

customers would move into mainstream banking, thus they saw microfinance as a form of

customer development.

As one of the largest banks in India, ICICI wanted to show its commitment to the social and

economic development of those who were less fortunate than themselves.


ICICI formed strategic alliances with MFIs. The microfinance team within ICICI thoroughly

investigated an MFI before acquiring it as a customer. In order to protect its exposure to risk, the

ICICI required that the MFI should deposit money into an account, which could be used as security

should the MFI default on its loan. An internal officer is allocated to each MFI, once an agreement

is reached with the MFI. The officer has to monitor the performance of the MFI and to warn the

ICICI should the MFI experience difficulties that might impact the on the MFI’s loan payment ability.

Although it has not been the intention of the ICICI to be shareholders with the MFIs with which it

enters into partnership, such has happened in exceptional cases. For example, the ICICI has a 2.8

per cent stake in the BASIX-Holding Company.

In terms of this model, the following applies:

ICICI loans funds to the MFIs, acting as a wholesaler.


69

ICICI gives an opportunity to MFI that would have been weak without the capital support of the

ICICI.

With this model, ICICI limited its exposure to the risk of entering the market directly.

The MFIs have a better reach than ICICI has had on its own.

There are no internal issues concerning the following: clashes of staff; differences in the

culture of staff serving the traditional mainstream customers and the microfinance customers;

lack of exposure; and not fully understanding the market of the existing staff.

5.10 BANCO DE LA EMPRESA

The following key factors considered by Banco de la Empresa are based on the case study

documented by Wenner et al. (1998)

5.10.1 Background

Banco de la Empresa is a privately owned commercial bank that operates in Latin America. The

case study shows how the government can create an environment that is conducive to

microfinance providers (i.e. providing incentives and being amenable to collateral requirements).


Leadership decision: The bank management saw the opportunity presented by microfinance,

and began discussions with the central bank, NGOs and the IDB, on the basis of which there

was an agreement that the market was viable.

Increased competition: Latin America liberalised its financial system, leading to the opening

of many foreign and small local private banks. This meant that there was strong competition for

the traditional mainstream clients.

Regulatory change allowed private banks to serve customers with personal checking accounts,

which had previously only been permissible for state banks. However, the government placed a

condition that a commercial bank could only offer personal check accounts if it opened up rural

branches, or made sure that at least 10 per cent of such accounts were with small and

microenterprises.

The Reserve Bank also relaxed the rules around the collateral requirement for loans below

US$22 000, which made it easier for banks to engage in micro lending without fear of contravening

the Reserve Bank’s regulatory requirements.


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The Banco de la Empresa chose to buy an NGO, CREDIGOLFO, which was a government-

funded NGO operating in the rural areas and focusing on farming. The NGO had vast experience

and a sizeable portfolio of agricultural lending. The Banco de la Empresa also decided to open up

branches in the rural areas in close proximity to its new target market.

5.10.4 Funding

The Banco de la Empresa obtained a loan from the MicroGlobal Loan programme, which was run

by the IDB. The MicroGlobal loan programme offered loans that were given to commercial banks

that wanted to serve microenterprises. The central bank was also involved in this programme to

ensure that commercial banks received better rates than they might otherwise have done, which

would then be passed through to the customer.


Business Management Consulting (BMC), a consulting company with extensive experience in

microfinance globally, offered technical assistance and training assistance, for which the

MicroGlobal Loan programme paid. The technical assistance provided consistency and continuity

of the microfinance programme while internal restructuring of the microfinance department was

taking place. BMC provided on-the-job training and maintenance of the system that IDB had made

available, which enables microfinance-offering commercial banks to track the performance of their

portfolio.


When Banco de la Empresa acquired CREDIGOLFO, they decided to retain the NGO’s staff as

well. The appointed credit officers became responsible for the entire value chain, from finding new

customers up to collecting on non-performing loans. In order to ensure the transference of best

practice in microfinance, BMC provided on-the-job training, concerning not only operational

business, but also training in how to use the system, which was given by IDB to commercial banks.

High school and college graduates were recruited for the new microenterprise branches that were

being opened.


The microenterprise employees were paid less than the other branch employees, although they

were still eligible for performance-based bonuses.


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5.11 LESSONS LEARNT

From the commercial banks analysed above, the following lessons were learnt:

Human Resources:

Under special circumstances (e.g. the retrenchment of redundant staff), internal staff can be

trained to service the microfinance market. In highly unionised areas, such training would

require extensive consultation with the unions.

In most cases, the salaries of employees working in the internal microfinance internal unit are

less than the other employees of the bank. However, by having the right incentives to reward

the right behaviour, employees can still feel motivated and committed to their jobs.

Turning around an ailing business and its culture is possible. Employees are crucial to achieve

this and they must have sound business and local market knowledge.

Institutional Commitment

Strong senior management support and buy-in is important to run a microfinance business.

By offering savings product, a microfinance business can be made self-sustainable.

Under difficult economic situations, customers can still continue repaying their loans, although

this is only possible if strong relationships are built with them.

Product Development

Matching products with customer needs is important. ABM proved that it is possible to make a

profit, even in sparsely populated rural areas, by ensuring that the products meet customer

needs.

Operations

As rapid expansion does not support sustainable operations, when operations expand too soon

and too quickly, the quality of loan portfolios is compromised, which leads to detrimental

effects.

When engaged in wholesale financing, it is important firstly to execute a due diligence with the

MFI in order to gain an understanding of its financial position and its risk exposure. The other

important factor is to understand how the MFI actually conducts its business, because if it is

engaged in reckless lending or devious collection methodologies, the commercial bank may

open itself to the risk of being seen as supporting such behaviour.

Funding

Donor funding can facilitate entry into the microenterprise market. The board of a commercial

bank might not want to expose the bank to the risk of this market, but would gladly invest in the

market if they have at least some proof of viability. Donor funds come in handy in providing

funds during the start-up phase.


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Technical Assistance

Technical assistance is very important, as it helps with imparting best practice procedures in

serving the microenterprise market.

Government Involvement

The government can intervene in motivating commercial banks to serve microenterprises by

offering incentives (e.g. tax cuts) to those that do.


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CHAPTER 6

CASE STUDY: SOUTH AFRICAN COMMERCIAL BANKS

6.1 INTRODUCTION

The South African commercial banks considered in this research report are Absa Bank and

Capitec Bank. Absa was formed from the merger of the following South African banks: Volkskas;

United; Allied (in 1991); Trustbank; and Bankfin (in 1992). Absa has operated as a single brand

from 1998 onwards (Absa, 2011). Capitec Bank, which started operating in 2001, has successfully

focused on banking in the mass market. Capitec Bank is, reportedly, attracting about 70 000 new

customers per month (Kamhunga, 2010). Capitec Bank is known for its innovative initiatives that

entail making banking simpler and cheaper than it would otherwise be. The initiatives undertaken

by Capitec have caused the traditional mainline commercial banks to review the mass market.

6.1.1 Absa Bank

Absa Bank is the second largest commercial bank in terms of assets, having over 11 million South

African customers (BASA, 2010). Barclays Public Limited Company (PLC), the main shareholder,

owns 57 per cent of Absa. Being part of Barclays means that Absa not only has to comply with

South African regulations, but also with UK regulations. Absa is establishing itself in other African

countries, currently having a presence in both Tanzania and Mozambique. Barclays has formulated

what is called the One Africa Strategy and has entrusted the Group CEO of Absa with also

overseeing Barclay’s Africa operations, which means that Absa’s footprint in Africa, via Barclays, is

increasing.

Absa is committed to promoting financial inclusion by “providing innovative, appropriate and

sustainable financial service to those historically excluded” in the countries where it operates (Absa

Annual Report, 2010). In order to promote financial inclusion, Absa has launched the following

initiatives:

An Entry Level and Inclusive Banking (ELIB) Unit was created to provide financial services to

customers who earn less than R10 000 per month. To cater for the needs of the customers in

this market, Absa has created customer-friendly branches; employs branchless banking,

including in-store banking that makes use of PoS terminals; and uses cell-phone-based

technology for remote account opening services. Of Absa’s South African customer base, 64.9

per cent are ELIB customers (Absa Annual Report, 2010).

Absa has also been working with the government on a project to assist those who earn less

that R15 498 per month with an end-to-end housing solution. A 60 per cent increase in the

number of affordable home loans extended took place from financial year 2009 to financial year

2010.


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Absa launched the Micro Enterprise Finance unit as a way of servicing micro enterprises. From

financial year 2009 to financial year 2010 there was a 53 per cent increase in the number of

AMEF-approved loans (Absa Annual Report, 2010), which shows the commitment of Absa to

serving this market. The case study will focus in this unit.

To promote responsible and sustainable financial services, customers are educated on all aspects

of the product or services that they want or from which they might benefit. Absa is committed to

enhancing product offerings to the historically financially excluded markets through evolving

innovative tailor-made products.

6.1.2 Capitec Bank

Capitec Bank Holdings Ltd has two active subsidiaries, namely Capitec Bank Ltd and the KD (Pty)

Ltd(see Figure 6.14 below).The size of KD is insignificant when compared to that of Capitec Bank

Ltd. For example, in the 2010 financial year, the assets of KD were 0.19 per cent of Capitec Bank’s

Ltd assets, comparatively speaking (Capitec Annual Report, 2011). In the same year, KD made a

loss of R1.2 million, while Capitec Bank Ltd made a R473 million contribution to group earnings

after tax. However, the loss made by KD was insignificant to Capitec Bank Holdings compared to

the earnings that Capitec Bank made.

Capitec Bank Ltd started operating in 2001, targeting customers at the lower end of the market.

This commercial bank (which mostly focuses on retail products), has branded itself as an

innovative bank that uses technology to create affordable, simple and accessible offerings to the

customer.

Even though Capitec’s target market is the consumers at the bottom of the economic ladder,

microentrepreneurs were not specifically being served. When Capitec acquired KD in 2004, it saw

an opportunity to use this fast-moving consumer goods (FMCG) company as a channel through

which to serve the microentrepreneur in the FMCG market, in respect of their small shops. At the

time of the study, Capitec Holdings owned 75 per cent of KD, while 25 per cent was owned by the

executive directors of KD. KD has an important role to play in ensuring that Capitec Bank

increases its market share in the microenterprise market, which the following case study illustrates.

Figure 6.14: Capitec holding subsidiary


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6.2 ABSA MEF CASE STUDY

6.2.1 Background on AMEF

In 2007, Absa launched the AMEF Unit, for which the target market is the self-employed. The

annual turnover of the targeted microenterprise is between R15 000 and R300 000 per annum.

Whereas the Small Business Act classifies a microenterprise as an enterprise that has a turnover

of less than R150 000 per year, Absa has extended the upper limit of such a classification to

R300 000.

According to Absa (Coetzee, 2009), microenterprise finance is defined as:

Financial services that target the self-employed, those with a low income, and the poor;

Including savings, credit, insurance and transaction services;

Evaluating clients based on business history and acumen, financial behaviour, income and

expenditure; and

Primarily lending for productive purposes and asset accumulation.

The approach in creating the AMEF unit within Absa was to learn by doing. Therefore, since its

implementation, the business strategy has evolved, as more experience is gained and new lessons

are learnt. Learning by doing is an expensive model, as it has many risks associated with it. This

was new terrain for Absa, and entailed the learning of many new lessons. A contributing factor to

the situation is that, at the time of entry into the market, there were no available documented

lessons or case studies from other South African commercial banks that served the

microenterprise market, as the market was newly identified. From servicing this market, Absa has

successfully grown its AMEF operations, having gained exposure and experience in serving the

market. The challenge, though, remains that some of the experiences are linked to particular

employees, so that, if the employees concerned leave the unit, their experience is lost to the

organisation, unless knowledge management and transfer has become an integral part of the

business.

6.2.2 Motivation for Absa Bank to consider MEF

In 1999, Absa management decided to enter the low-income market to serve those who were

historically financially excluded from formal banking. Flexi bank, which was created in 2000,

offered customers transactional, micro savings and micro insurance products. The Flexibank

product offerings mostly targeted consumers who required financial service, in most cases for

personal consumption. In 2000, Absa acquired a 51 per cent stake in Unibank Investment

Holdings Ltd (‘Unifer’), a microlending service provider. Absa increased their stake to 61.3 per cent

in 2001. The Group Executive of Absa at the time, Bert Griesel, mentioned that Absa made a


76

strategic decision to increase its presence in the microlending market (DataMonitor, 2000). The

acquisition of Unifer made this possible at a rate faster than would otherwise have been possible if

the bank had depended purely on organic growth.

Through this deal, Absa gained some exposure to the microlending world. However, the whole

Unifer–Absa deal imploded in 2002, when Absa had to close Unifer down. Some of the reasons

cited for the implosion were that there was “conflict of interest among the management;

unsustainable growth in the volume of loans; unauthorised granting of loans; executives receiving

inappropriate payments from brokers; and a breakdown in critical controls through the

unauthorised provision of override codes for credit control systems” (Financial Markets Directory,

2003). Absa learnt valuable lessons from this experience, which were taken into consideration

when the bank decided to finance microenterprises. Absa has recovered from the setback and has

established a microfinance unit, forming part of unsecured lending division which is a substantial

player in lending to the lower end of the market. In 2006/2007, Absa saw an opportunity in the self-

employed market, which was a section of the market that they were not financing at the time. Absa

was willing to enter this market on its own.

The primary reason for entering the market was that, as a result of the market research studies

that were conducted by research companies and by Absa, the bank’s management acknowledged

that the self-employed microenterprise market was, indeed, a viable market, which they were not

currently serving. The formal mainstream market was saturated, as the amount of competition had

increased. Absa saw the opportunity presented by the market, in that the market could actually be

a feeder into what might, in future, become customers for the SME portfolio of the bank.

The secondary reason for entering the market was that Absa, as a responsible corporate citizen,

recognised its responsibility to promote financial inclusion by providing financial access to those

who had previously sidelined by the system.

Since the outset, Absa executives of Absa have had a double bottom line objective for AMEF, to

be commercially sustainable, while having a social impact. The GMs were clear from the first that

AMEF was not a corporate social investment initiative, but needed to be a commercially

sustainable business, while also developing local communities. The prevailing situation is

dichotomous, being not a question of either/or, but requiring the presence of both commercial

sustainability and community development. Initiatives that promote social development put Absa in

good stead as a responsible corporate citizen and will eventually turn into profit.

Another business imperative is that the AMEF operations (and other products that are focused on

serving the low-end market), even though they may not be bringing in many customers with big

loan accounts, do open up doors to an increased number of business opportunities, especially with

the government. When a business bank tenders for a job with the government, 80 per cent of the

related discussion tends to be about what the bank is doing about community development


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(Tindleni, 2011). The government prefers to support businesses that promote its community

development initiatives.

Microenterprise financing is about giving the entrepreneur an opportunity to grow their own

business. Absa’s management also saw an opportunity for microentrepreneurs to do so with the

help of the financial services that they offered, which would enable the microentrepreneur to

graduate into the formal business products offered to small business in future, so that the bank

could save on acquisition costs later.

Although, at the time of the current study, four years had elapsed since the AMEF operations

began, AMEF was still not a self-sustaining business, having yet to at least break even, however,

the management of Absa was still committed to the AMEF. Such commitment was demonstrated

by the 53 per cent growth in the portfolio from financial year 2009 to financial year 2010 (Absa

Annual Report, 2011). Clearly, Absa is committed to social development, however, the profit

motive is still there in the long term. There is a belief that one day the business would be self-

sustainable. As noted above from the Unifer lessons learnt, unsustainable growth of loan volumes

was one of the reasons that led to the implosion of the Unifer deal. From this lesson, AMEF is

cautiously increasing volumes at a steady rate, so not to compromise the quality of the book for the

sake of increased loan volumes.


In the first business case draft devised by Absa management in 2008, a management company

approach was suggested. The main reason for the suggestion was that, in order to establish a

successful microenterprise financing operation, the basic microfinance operation principles went

against the grain of the commercial banks. For example, commercial banks do not support

decentralised decision-making, due to the risk of non-compliance. The use of a management

company would have given Absa a much leaner business model. Absa would still provide the

finance for the loans, while the management company only acted as a go-between. However, Absa

management did not support the management company approach, as they also wanted the

venture to carry their name and branding.

As Absa wanted to learn by doing, they decided to set up an internal unit, so that they could gain

exposure to, and own the full value chain. Currently, the unit is part of the Unsecured Lending unit

in the Retail Banking Division. The unit used to be part of the Small Business Division until

February 2010. As an Absa internal unit, AMEF carried Absa’s name and could use the bank’s

extensive footprint to launch the operations. This meant that the set-up time was quick, as there

was no need to set up a separate legal entity. The AMEF Management team only had six months

to get the whole business up and running, which was made possible by the unit leveraging some of

the services from the existing units. However, due to the lack of understanding of microfinance


78

among the existing policy-makers, AMEF management had to tailor most of the policies and

procedures for them to suit their business.

Being just a unit within such a large commercial bank as Absa presents its own challenges, which

MFIs or NGOs will not face, or which they might face, but not to the same degree.

Some of the stringent regulatory requirements to which commercial banks must comply are

costly to implement for microfinance operations. Other regulatory requirements (i.e. FICA)

make it impossible to serve the target market concerned. For example, the proof of address

that a customer is required to have when opening an account is not available to all

microfinance customers. The cost of compliance is high, with it being especially so since the

current global financial crisis first broke out. In the case of microfinancing, there are more

regulations with which a commercial bank is required to comply than with normal banking.

The delay in time to market with a new product or service offering can be onerous. A change in

products or services needs to be approved by various risk and compliance committees, so that,

by the time that the AMEF is ready to enter the market, you may find that other competitors

have already taken a significant chunk of the market.

Being part of a commercial bank carries an inherent cost. Each unit within Absa charges for

any services that it offers to other departments. The AMEF unit also has to pay the transfer

costs for the shared services at an unchangeable rate that is similar for all customers, in

accordance with the model according to which Absa runs its business.

Third-party agreements that were drawn up might not suit microfinance. Microfinance loan

officers are generally paid lower rates than are formal bank employees. In Absa, the minimum

salaries are agreed upon with the union. The salaries for AMEF are below the minimum

salaries agreed upon with the South African Society of Bank Officials (SASBO), which is the

union that represents the majority of Absa employees, requiring AMEF management to conduct

further negotiates with the union.

The benefits of forming part of a commercial bank are the following:

For AMEF, there is no issue with supply of capital; their challenge is to create a demand in the

market, whereas the endless access to capital poses a challenge to the MFIs, as they tend to

run out of funds.

Those forming part of such a bank have access to vast amounts of intellectual capital within the

bank, which they would not have if they were part of a stand-alone organisation.

6.2.4 Funding

South Africa is not a favourite funding destination for such international funders as USAID or World

Bank, because of its middle-income economy, as per World Bank classification (OECD, 2008). In

the present instance, the other potential funders approached were not interested, and asked why


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the bank was unwilling to invest in their own initiative. However, the bank has been investing

heavily in the AMEF venture, and the Absa management and shareholders have shown great

support for it. Funding capital comes from within Absa and is offered at a reasonable rate, with

funding being the least of the problems of AMEF management. However, a challenge arises when

it comes to funding to build proof of concepts (PoCs) for new products.

Even though the senior executives of the bank have no problem with funding the venture, requests

for funding have to go through a stringent channel of committees and to compete for funding with

other, more viable, initiatives. The bigger challenge with developing new products is that there is

no clear understanding of the market by the stakeholders who sit on such committees. There is

also no clear understanding of the new products, and without a proper understanding of the

product, risk is implied for the stakeholders concerned. The amount of time that it takes before a

new product is launched presents the threat that other competitors might already have gained a

bigger share of the market. Such a delay is due to the rigid structures to which the new product has

to be presented and receive approval from.

For one of the products offered, the AMEF management team managed to find funding from an

external source to do the proofing of the concept. When approaching the executive committee

(Exco) concerned, the PoC was given the go-ahead, as the funding had already been secured

from elsewhere.

Bank structures are not geared to deal with unknown risks and might have a problem in realising

funds towards a risky venture. However, when they see the PoC is successful, banks are highly

likely to scale up the venture.


While conducting the above-mentioned business case study, the AMEF management team

collaborated with the International Financing Corporation (IFC), which provided R1.5 million

towards technical assistance. The funds helped with the initial set-up regarding the creation of

credit manuals, the training of trainers, and the field research. Although Absa could have funded

the business case stage, having the IFC as a partner in creating the business case carried more

weight with the Absa Exco than if it had just been a business case undertaken by an internal unit.

In short, partnering with the IFC was a strategic move, so that the Exco might consider the

business case more favourably.

Going forward, Absa has also imported and paid for consultants who have extensive experience in

the microfinance space to do some of the research for them, and to advise them on the best

strategies and on what can work going forward.


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The Absa Group deputy CEO and the Unsecured Retail CEO (i.e. Daphne Motsepe) gave

considerable support to the AMEF initiative. The general manager (GM) of AMEF was given the

necessary support when so required. The Unsecured Retail CEO used to head the Flexi bank unit,

so she has a background in and understanding of the market. The level of commitment from the

executive team has kept the business in existence, but there is still pressure on AMEF

management to scale up the business and to make it profitable.

To show the commitment to this market and to AMEF, the Retail CEO looks for opportunities for

the business unit concerned and creates powerful networks for the business to create flexibility in

the business, based on the delivery model.

6.2.6.1 Management change

Businesses go through different phases of the business cycle, and changes in the business cycle

might lead to a need for change in the focus of management, as was the case with the Absa AMEF

operations. Before February 2010, the GM of the unit had gained an extensive background in

microfinance, and was with the unit from its inception. In February 2010, a new GM was appointed

who had an extensive banking background. This could be an indication that, perhaps during the

start-up phase, a business requires someone with a strong understanding of the market and

product offerings, however, because the services are offered within the bank, there is also a need

to bring in a management team with a strong banking background. Whilst it is important how the

market works, there are contextual differences when functioning within the confinement of a bank.

To provide for a balanced approach and for business continuity (in terms of microfinance and

commercial banking), a GM with knowledge of microfinance should be able to provide assistance

as an advisor and also to test the new product in the market.

Between 2008 and early 2010, the AMEF management team appointed a portfolio manager who

was a microfinance specialist to help create some of the new products and with the delivery

models as well. In addition to assisting with giving guidance on what needed to be done, the input

from the portfolio manager and the role that he played in the process was vital for the

implementation phase of the business. However, as the business grew and the focus changed,

there was a need to appoint a person with a strong sales and marketing background.

Consequently, the portfolio manager was replaced by a sales and marketing manager in early

2010. In future, as the business cycles change, there might be a need for a portfolio manager.

6.2.6.2 Business alignment

At the beginning of the AMEF venture, very ambitious targets were set, which seemed possible for

the AMEF management team to meet, as it seemed that it would be easy to scale up operations in

a commercial bank. However, there were so many challenges that the ambitious targets that the


81

Exco wanted were not achieved. Nevertheless, the Absa Exco was very understanding of the team

challenges. At the time of the current study, there was a need for a yearly alignment session

between Exco and the AMEF management team, despite the business case still being there.

However, certain assumptions that were held during the business case altered the business case.

In order to create operational alignment with Exco expectations, the AMEF GM planned

communication sessions with the operations team to ensure that the team understood the larger

vision.

6.2.7 Delivery model

The delivery model that supports the operating model has evolved over the years, as was

expected. As Absa learns and improves on what has previously been done, the delivery model

evolves.

Scoring information is required in servicing the mass market, but the market does not have

information available, so one needs to look for available sources of information. Although credit

reports for most customers can be obtained from the credit bureau, information concerning their

business performance is not, generally, available. As about 70 per cent of businesses run from

home, Absa decided to take the bank to the people.

The first approach involved taking a proactive outbound approach to reaching customers, which

required that the community finance officers visit the communities in which the microentrepreneurs

are based. The approach is expensive, compared to the branch approach, in terms of which a

customer comes to the branch with an already established need, versus the loan officers going out

to the potential customers, in whom they have to create a need. What has influenced this approach

is that the microentrepreneurs normally run a one-person business, so that they cannot leave their

business unattended to go to the bank.

Consequently, the CFOs have to go door to door and to create a demand for the product or

services that are on offer. Most target market customers do not know about such services or how

they can benefit them, hence the need for this approach.

When the AMEF unit began operating, it used its own outlets, due to the fact that the Absa

branches were not in the areas that were targeted by the AMEF. Even if there had been branches,

they were intimidating to the potential customer. Absa-branded containers were, consequently, set

up in target townships (see Figure 6.2 below for an example of such a container). The areas were

gridded and allocated to a particular CFO, in order to ensure that the CFOs did not overlap one

another’s areas. The CFO had to play a relationship manager role, and was thus required to be

part of the community.


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Absa was evolving at the same time, and was opening up branches in the townships, resulting in,

over time, some of the AMEF operations being run from Absa branches. AMEF requires relatively

little floor space in the branches, because most of the AMEF operations are outbound; the CFOs

are usually busy in the field and are hardly ever in the branches, unless to do some basic

administrative tasks. The customers only go the branch to sign documents or to make deposits.

Unfortunately, the door-to-door, outbound approach has proven to be very costly, as not all the

households visited result in business.

Figure 6.2: Absa microenterprise service centre

Source: Coetzee, 2009.

The challenge with the door-to-door approach was that the business was not scaling up, as the

loans were so small that the only way in which to scale them up was to increase the loan volumes.

In order to increase the volumes in terms of the current delivery model, more CFOs were required

than before. With staff costs being 80 per cent of the operating cost, adding more CFOs would not

have been a viable option.


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As the door-to-door approach was not going to help the business scale, AMEF management came

up with a bulk acquisition strategy to access more customers without having to go door-to-door.

The strategy entails a number of business entities being exposed to potential AMEF customers.

The entities can consist either of a supplier or an association (e.g. the National African Federated

Chamber of Commerce [NAFCOC]) that interacts with the customers. So, instead of speaking to

one customer at a time, a CFO can access up to 100 members at one go. In addition, Absa

currently offers the Hawker loan, which is still a new concept, but which looks very promising

Additionally, what makes the new model more appealing is that customer information can be

collected much more easily than it could be in the past, and from reliable sources. Collecting

information from the microfinance market tends to be difficult, as there is no available business

performance documentation, so in evaluating the customer the CFO has to recreate the data

based on invoices and observed sales patterns. This opens Absa up to risks, as some of the data

might not be reliable. In terms of the new model, the supplier can provide information on the buying

patterns of the customer, which can provide useful and credible information for accessing clients’

creditworthiness. The NCA requires that, before making a credit decision, the finance provider

requires a basis on which to make decisions about the customer’s affordability, in order to ensure

that reckless lending is not promoted. In such a light, without reliable information being at hand, a

bank can be seen to opening itself up to risk.


The microenterprise market is not cheap to serve, as the selling mode in the market is through the

creation of relationships. As the GM has put it (Tindleni, 2011), “If you are going to sell

relationships, you need people to build those relationships”. It is important, therefore, that the right

people are appointed, trained and retained.

6.2.8.1 New staff acquisition

Having only six months in which to set up the business, there was no time in which to do the

recruitment internally. The internal human resources team felt that they lacked the right skills and

knowledge to hire the right staff who could serve this market. The first recruitment drive was,

therefore, outsourced to a labour broker. However, the quality of the prospective employees was

inferior, and Absa saw that they needed to be more stringent about their entry requirements and

that they might need to use more than one labour broker, so that they would have to compete

against one another to secure the right personnel.

The entry requirement for new staff was that they had to have at least completed Grade 12 or the

equivalent National Qualifications Framework 4 qualification. A labour broker was used to appoint

new staff members, who were all appointed on a temporary basis, with their contracts being with


84

the labour broker. After six months, they stood a chance of being appointed as a full-time Absa

employee. For temporary staff to be appointed, they had to go through a rigorous recruitment

process.

The potential temporary workers had to succeed in overcoming the following hurdles before being

appointed as temporary workers:

They had to pass a numeracy test, with a required pass mark of 50 per cent, in order to

continue to the next level.

As a field test, the potential temporary employee had to spend one working day with a CFO in

service, on which he or she had to do a presentation.

A formal interview was then conducted with the team leader/manager.

A personality test was then conducted to identify the best fitting candidate. However, due to

expense involved, such a test is no longer applied.

At any stage of the process, a candidate could be eliminated, based on what the requirements

were for the candidate to qualify to proceed to the next level. A very high number of candidates do

not succeed overall, with the rate of failure being as high as 90 per cent. Because labour brokers

are involved in the process, it makes it costly and causes tension between AMEF management

and the labour brokers, as candidates that are brought forward might not be seen as having the

right requirements, and hence the low conversion rate from candidate to appointment as a

temporary employee.

Another reason for the low conversion rate is the lack of knowledge regarding microenterprise

finance in the country generally, however, as the levels of knowledge and awareness increase, the

quality of the candidates might improve. The lack of basic numeracy skills in South Africa is yet

another challenge on which the government is still working. Hiring temporary employees with

reasonably high levels of qualification, such as a degree or diploma, is unfeasible, as such

candidates are highly unlikely to stay in the job for long. Such employees are likely to use the job

as a stopgap until they find a better paying job.

At one stage, AMEF Management decided to conduct recruitment internally, in an effort to curb the

cost of recruitment via a broker, and in order to work around issues that the AMEF had with the

poor quality of candidates that the brokers were bringing to the table. However, the quality of those

who were recruited internally was worse than when the brokers had done the recruitment. This was

because the branch manager or team leader was responsible for appointing the person, but, due to

the amount of work that they had, they tended to make hasty decisions, due to the pressure to

appoint CFOs. Consequently, AMEF management then decided to return to using the labour

brokers.


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The current agreement between Absa and the labour broker is that the temporary CFOs who

perform excellently stand a chance of being appointed as permanent Absa staff members, after

being on the job for six months. In order for such a process to work, negotiations were also held

with the unions, as the minimum salary offered to a CFO was lower than the agreed-upon

minimum salary offered to prospective Absa staff. The agreement concluded resulted in the CFOs

having access to all the normal Absa’s staff benefits, which was translated into high staff costs,

which are currently a challenge for AMEF. The other challenge is that labour is not cheap in South

Africa, and is very strongly unionised. Even though lower salaries have been negotiated for the

present, in the next salary negotiation, the unions and the workers might not be so amenable, as

has proved to be the trend in the past.

AMEF management might benefit from remodelling the employment strategy so that the

employment ratio is 30 per cent permanent to 70 per cent temporary staff. The business is also

cyclical in nature and requires the temporary staff to be available when needed, and, when

business is slow, for the bank to be able to reduce their number. Such flexibility cannot be gained

with permanent staff, as the union does not allow it.

6.2.8.2 Training

At first, after successfully passing through all the stages of the recruitment process, the applicant

was appointed as a temporary CFO, and had to go through the following training:

For the first two weeks, training was classroom-based. The staff members were booked into a

venue, where they underwent an induction into microfinance and were introduced to what they

actually needed to know to carry out their jobs effectively.

The new recruits then went out into the field for a period of four weeks, during which they were

paired with a CFO.

They then returned to the classroom for another week and a half, in which they consolidated

their learning and had to write an examination.

Six months after appointment, their performance was checked against the targets set.

The high attrition rate that was experienced with the AMEF operations meant that much money

was spent on training those who, within a month of training, left the organisation without AMEF

being able to recover their costs. To combat the high training costs, AMEF management decided to

simplify the training model. Once appointed, the new staff member would be allocated to a branch

and work with a CFO to obtain experiential learning. After four to six weeks, the employee would

undergo classroom training for a period of two weeks, during which they consolidated all that they

have learnt in the field. The downside of such an approach was that the CFO would now also play


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the role of a teacher, thus adding to their responsibilities, and the quality of the work of the

temporary worker depending on the CFO with whom they were paired.

Accordingly, it might be beneficial to consider only candidates with prior work experience and a

knowledge of microfinance operations, as they require little training. However, as was discussed

above, they might be tempted to seek better paying work elsewhere.


The current Absa basic salary is more than the total salary package for a CFO. Due to the

complexities of a commercial bank, it took about two and a half years to have the Absa human

resources team and unions accept the remuneration criteria for the CFOs. For that period, the

CFOs were only recruited as temporary workers. When the agreement was finally concluded

between Absa human resources and the unions, the temporary CFOs could be offered permanent

jobs, some of which included access to such benefits as a medical aid and a pension fund, among

others.

The current pay structure for the CFOs is basic remuneration plus commission, with the latter

being based on the volume of loans on book and the arrears rate. The reason why the arrears rate

is also considered is to make sure that the CFO focused on the quality, rather than merely the

quantity, of their portfolio.

6.2.8.4 Incentives

The initial approach entailed appointing temporary CFOs only using a labour broker agency.

When AMEF took this approach to the CFOs, the attrition rate was high. Only after the agreement

between Absa Human Resources and the unions had been concluded could AMEF management

change the procedure to allow for a temporary staff member who had been working for Absa for six

months and who performed well to be considered for permanent employment with Absa. Offering

such an incentive to non-Absa temporary staff has led to a slight decrease in the attrition rate. The

initiative involved was one that was implemented to try to motivate employees to want to stay a

while longer with Absa. However, the introduction of such a process has had its own problems, as

AMEF salaries are less than the normal branch employee salary. As a result, when the temporary

AMEF staff members are made permanent Absa staff members, they tend to look for better paying

jobs within Absa.

Another initiative undertaken was to promote employees internally, so that, when a position came

up for a team leader, a CFO was given an opportunity to apply. There are only two levels of

promotion though, as a team leader and then as an area manager, which might not be enough to

motivate the employees concerned. When new branches open, experienced staff members are

needed, so that the current staff can be promoted to fill some of the senior positions there.


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The AMEF GM conducts communication sessions with the team, motivating them to be pioneers

regarding the new model. Stories about the difference that the team is making in the lives of the

microentrepreneurs concerned are also shared with the team. Such sessions are sometimes held

in the field, and sometimes at head office, which most of the team members appreciate, as they

spend most of their time in the field and might otherwise not see the head office. During the

training sessions, the GM meets with the new intakes to ensure that the vision of AMEF is shared

with them and that they are suitably motivated.

6.2.8.5 Staff member who leave Microfinance is a relationship business, and relationships take

time to build. Therefore, it is important that there is a contingency plan at hand for when a CFO

resigns. The high attrition rate among such employees was a major challenge within Absa, with

most of the CFOs leaving without even serving a notice period. As part of the current training

process, new intakes are taught the importance of serving their notice as part of their professional

conduct, which has resulted in many of the CFOs serving their notice period.

The current contingency plan to ensure that there is a continuation of the relationship with the

customer entails the team leader keeping tabs on what each CFO does. Team leaders, who should

spend about 60 per cent of their time in the field, look after the CFO portfolios after they have left

the organisation, and hand them over to the new CFO, once they are appointed. The team leader

has to take accountability for the portfolios, because if even one portfolio is not performing well, it

affects the total team leader’s portfolio.


6.2.9.1 Product segmentation and lending methodology

Absa decided to enter the microenterprise market by offering credit financial services. Using the

business service management (BSM) segmentation to segment the market, Absa decided which

products to offer which BSM segments. Following on the BSM segmentation, a further customer

needs analysis was done to find out how the customers in the different segments spent their

money.

The first choice was to offer a retail product focusing on individual products. Absa management

decided to enter into group lending as well, which meant that Absa ran two lending methodologies

simultaneously, using the outbound approach. The group lending scheme was between 35 per

cent and 40 per cent more expensive than were the MFIs and NGOs. AMEF management then

decided to exit the group lending market and to focus only on individual loans. According to the

review completed by Fraser (2011), group lending was not successful at Absa for the following

reasons:


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Group lending was driven by the assumption of social cohesion, which was not recognised as a

risk mitigator. Investment tax credit (ITC) checks were conducted on customers. If there was

one person in the group who did not qualify (based on ITC/bureau checks), the group members

had to find someone else to be part of the team, resulting in such a team only returning after

several months.

Group lending required intensive investment in time, training, skilling and teaching of the team,

before the team could obtain, and start repaying, the loan. This meant that, in terms of the

financial investments that went into running the business based on this lending methodology,

AMEF had to sustain the operating costs for a long time before any revenue was received from

the exercise.

Absa asked clients to deposit their money individually, with the system used by AMEF only

allowing for individual payments and not for the processing of group payments. This promoted

the making of individual payments rather than group payments, which worked against the

social cohesion principle, which is the fundamental principle for group lending.

Operationally, group lending did not receive much attention from management, as more focus

was paid to individual lending.

In group lending, group members are assessed collectively, rather than individually. The CFO

in the field should assess the team and their social cohesion collectively. At Absa, the credit

officers based at head office conducted the final assessment, having neither seen nor met with

the group.

Group lending requires a local structure for decision-making, allowing for its decentralisation.

However, this is not how commercial banks work, as they have a centralised structure. With

individual loans, Absa could offer bigger loans for longer loan terms. The challenge faced with the

individual loans is that they do not scale up.

As the outbound model was proving to be expensive and not scaling up to make the business

sustainable, AMEF management decided to try an inbound approach, in terms of which AMEF

could access more than one customer at a go. It took a year to convince Absa management to give

R100K to conduct a pilot. At the time of the current study, the pilot was in progress. As it has been

running since February 2011, it has only been in action for a few months, but the approach is very

promising.

During the initial start-up phase, AMEF also offered wholesale loans to MFIs, which is a common

model amongst Latin America and Asia commercial banks. This initiative was tried with the Kuyasa

and SEF MFIs, but was discontinued, as the funding went through Absa commercial bank and no

one in the unit was attuned to microenterprise lending, which led to the cessation of the wholesale

funding model. Motsepe (2011) believes that there is an opportunity for AMEF to offer wholesale


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funding again, as there is now more understanding of the market concerned as a result of having

played there in.

6.2.9.2 Products

When Absa offered the retail products together with credit products, a challenge was the lack of

customers and their businesses. There was a need to test the market and to build customer

information, as the customers borrowed bigger loans than they had previously done. The first

product was more to start the customer off with a small loan, then to graduate him or her to a larger

loan amount. The product was called Yanda loan. Only after six loan application cycles (i.e. having

taken out and repaid six loans) would the customer reach the levels that were required in the

business case to run the business more sustainably. In the first year, 13 000 customers were

reached, which was a good measure, but insufficient to meet the Exco’s ambitious targets. In the

first year, the business case made allowance for 30 per cent on bad loans; however, the Customer

Value Management (CVM) unit, which manages and owns the credit model and strategies, only

wanted 8 per cent. The product was closed, as it was seen as non-performing, based on this

criterion. CVM wanted AMEF to be more stringent in their loan appraisals.

In September 2009, a new product called Siza was launched with processes that were more rigid

and more in line with the classical microfinance model. It had, built in, the different requirements

considering the issues that the different units within the bank had (i.e. CVM, compliance, and risk).

The CFO had a 15-page questionnaire to complete, which also had assessment guidelines on how

the CFO could obtain the required information. The Siza loan is still being offered to customers

using the outbound approach.

AMEF has launched another product, called the Hawker loan, which is based on the inbound

approach. This product, as was said above, is still being piloted. However, the results from the loan

look very promising. Potential customers are scored based on their historical buying behaviour.

The information can be obtained from the supplier, which is a far more reliable source than others

that have been used in the past. The customer who qualifies receives a loan in the form of a

buying account, on which he or she has to make weekly repayments.

The wholesale product offering was not successful, due to the lack of understanding regarding the

microfinance market by the funder, which, at the time, was the commercial bank.

Customers are asked to open a saving account, which is used for the disbursement of funds, and

customers are not forced to save. The current challenge is that the AMEF unit cannot launch its

own savings account, as there are other products offered by the retail bank that cater for the low-

cost saving requirements of the customer. Therefore, it would be challenging for AMEF to offer this

service to the customers at a cost less than what is currently available.


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6.2.9.3 Pricing

In South Africa, in order for an NGO to break even, it needs to charge an annual percentage rate

(APR) of 80 per cent as the interest rate. If an NGO, which uses donor funds and government

grants, needs to charge an APR of 80 per cent, how much more must the organisations that

borrow their funds. This reflects the cost of making business. In order to at least recoup some of

the cost in offering the financial service, the AMEF has to price the loans to cover the cost of

capital, the administration costs, and the risk exposure, or as internally referred to, the impairment

cost.

The pricing strategy employed by AMEF currently means that it actually offers the financing to

microenterprises at a loss. The revenue received from current operations, in terms of the current

operating and delivery model, is insufficient to cover all the costs involved. Absa has been willing

for the past few years, since the inception of the business, to give the business a chance to

stabilise. However, the other main thing that has kept the business running is because it can win

Absa other business opportunities in government, which will put Absa’s opportunities in tendering

for the new business in good stead. Another aspect to consider is that the total portfolio exposure

for AMEF is insignificant, compared to the total exposure for Absa, thus making the losses in the

AMEF portfolio not significant enough to make a huge financial impact on the overall Absa financial

positioning. This also signifies the possibility that Absa is currently following the loss leader pricing

strategy for AMEF, even though it doing so is not by deliberate design. The change in the pricing

strategy will be evident when the business can produce a positive turnover instead of running the

business at a loss, as is currently done.

A service centre can break even in 15 to 18 months. If the additional costs of the area manager

and the team leaders are added in, the area can break even in 26 months. However, when head

office costs are added in, the business will only break even after 44 months. With the outbound

model, AMEF might never even break even, as the business is not scaling up. When Yanda was

still offered, the APR was about 65 per cent for small loans and the interest rate was about 18 per

cent for bigger ones. Currently, with the Siza loan, an interest rate is charged as per the NCR

guideline of developmental credit. AMEF has found that, though customers are more interested in

how much they are going to have to pay every month with this information, including the interest

rate that they are going to pay. To promote transparency and access to information, the interest

rate information is available in a brochure for anyone who requires it.

6.2.10 Operations

6.2.10.1 Policies

When the AMEF business was started, the management of the unit were given the freedom of

doing whatever it took to ensure that the unit could function. As the offering was new on the


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market, there was not much understanding of existing structures within the bank as to what to do.

AMEF was given credit policies, and asked to stay within their guidelines. However, over time this

was not possible, as the existing policy did not cater for the market concerned. The current policy-

owners could not write the policies, as they also lacked knowledge of the market. This meant that

the AMEF unit had to write their own policies, but had to present them to the relevant bodies for

alignment. Policy alignment issues took 6 to 9 months to be resolved and signed off. Absa policy-

owners simply lacked sufficient understanding of the market.

With the maturing of the business, there are now policies that are specific to AMEF.

6.2.10.2 Using Absa infrastructure

In 2007, AMEF approached Absa Retail Estate Management Company, called Corporate Real

Estate Services (CRES), to engage them to find available Absa real estate that could be used. At

the same time, Barclays was busy with its 115 Points of Presence rollout. As part of that project,

AMEF was given two containers of which the interior resembled that of head office, at a premium

price. AMEF had no choice but to accept the structures, despite them being 150 per cent above

the cost of office space allocated in the business case. CRES little understood what AMEF was

really about and how to assist them.

The problem was that there was about 15 per cent to 18 per cent overlap between the areas where

the potential customers were and where the Absa real estate was. The cost of the containers was

also too high for the unit. The other challenge was that, if the branch manager had to choose

between AMEF and home loans, the branch manager would have chosen home loans, which

brought big business to the branch. Therefore, to cater for the AMEF infrastructure needs, the

following office structure strategy was devised:

Firstly, identify an area with potential customers.

Secondly, determine whether there is an Absa presence in the area.

Thirdly, determine whether the Absa presence is appropriate (e.g. in the case of a branch or

loan centre, whether there is sufficient space for AMEF employees).

If there is nothing available on the current Absa property, the following approach is adopted:

Firstly, check to see whether there is a ‘brick-and-mortar’ dwelling that can be rented.

Secondly, if there is no brick-and-mortar dwelling to rent, erect a small dwelling.

The current model, which relies more on finding one’s own real estate than was previously the

case, has brought the cost down to 46 per cent below the business case estimated figures.

6.2.10.3 Credit methodology

In a commercial bank, decision-making about credit is centralised, with most credit decisions being

made at head office level. However, in traditional microfinance operations, the credit decision-


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making is decentralised. The decision-making in a traditional MFI depends on the local

committees, and incentives are based on the good credit decisions taken by the CFOs. Clearly,

there is a clash between the culture of the traditional commercial bank and that of microfinance. In

the case of the former, due to the strict regulatory requirements imposed, certain things cannot

change, with centralised decision-making being one of those areas in which banks do not

compromise.

The AMEF used to have local credit committees do the approving of loans. However, other internal

units, such as Absa CVM and the compliance team, did not agree with this model. A local pre-

assessment committee’ had, therefore, to be created to replace the local credit committee. Once a

credit application is pre-assessed, the credit application is sent to head office for approval, which

poses challenges, as the CFO in the field cannot respond agilely enough to customer needs

without having first to take the decision to head office, which impacts negatively on the turnaround

times concerned. Although the final credit decision is made at head office, the CFO is held fully

responsible for the loan, should the customer default.

6.2.10.4 Absa shared services

In Absa, the departments that provide a service to other services in Absa can charge the service

consumer at an internally agreed-upon rate, based on the consumption of service. The process is

called transfer pricing. AMEF has to pay for the shared services that Absa offers, including rent of

the branches and head office; the marketing of Group IT Support; Group Finance; and Group RBIT

for training. For AMEF, doing so is burdensome, as some of the services can actually be

performed more cheaply outside Absa. For a small unit such as AMEF, which is cost-sensitive,

such expectations place much pressure on AMEF Management, and does not give them much

room to look for services elsewhere that are within the budget of an institute providing services to

the microenterprise market.

6.2.10.5 Collections

At the beginning, collection on delinquent AMEF accounts was handed over to the Absa internal

collections team. However, this was not successful, as Absa’s collection strategy entailed first

calling the customer, which was seen as a less pressured approach, and one that did not

encourage the customer to want to pay the account. Due to this mismatch of collection strategies,

the AMEF unit currently has undertaken to do its own collections. The collections process that the

AMEF was following until recently was the following:

Two days before the account is due: A courtesy call is made to the customer to remind them of

the commitment.

Day +1: The CFO does a follow-up call on the account, if it has not been paid.

Day +3: A letter of demand is generated and sent.

Day +15: The customer is visited by the CFO, together with the team leader.


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Day +30: A section 129 letter is issued.

Day +60: The account is outsourced to external attorneys for summons.

Day +120: The account is handed over to the law firm.

The management team has made the following changes to the above procedure:

Risk mitigation officers (RMOs) have been introduced to focus on the collections, with them

being made responsible for managing the collections process from one end to the other.

Area managers no longer form part of the collection process.

The RMOs become involved much earlier on in the process, to ensure that the customer is

reached early rather than late.

The CFO is still responsible for ensuring that the customer pays, as poor paying customers

negatively affect the quality of the CFO’s portfolio and may detract from their bonuses.

For Hawker loans, the customer has to make frequent repayments on a weekly basis. Such a

requirement helps to curb risk exposure. If the client does not pay, the buying account is stopped.

However, this means that the AMEF processes for identifying overdue accounts is up to standard,

because they cannot afford to have non-paying customers continuing to use their buying cards.

6.2.10.6 Information system

AMEF uses its own system for loan originations and collections, which does not depend on the

systems used in Absa. This has proven to be very costly, and does not fully meet their

requirements. For example, the group-based loans could not be handled by this system. During its

life-span of four years, the unit has had to change software systems, due to the maintenance costs

and the functional fit of the system. In future, the unit is looking at using systems that are currently

being used at Absa.

6.2.10.7 Appraisal of new customers

The assessment of customers to ensure that they are creditworthy is a critical process for credit-

lending institutions, entailing conformance with certain regulatory requirements. For example,

clients have to come to the branch to sign their contracts, as they have to be FICA-ed (i.e. have

their identities verified, in conformance with the Financial Intelligence Centre Act). This process

involves verifying that the customer has a valid residential address and checking to see that the

customer is who they say they are, by verifying their identity against their documentation. An ITC

check must also be performed on all new applications to check whether a customer is not

blacklisted, or has not been blacklisted for an insignificant incident. In the latter case, which bear

no increased risk exposure to the bank, the unit may, nevertheless, elect to grant credit to the

customer. The listing on the ITC can be seen as a form of financial exclusion of the customers, as


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sometimes customers may be blacklisted without their knowledge and not through their own

wrongdoing.

Obtaining data to do the assessment is very challenging in this market. Data have to be recreated

from invoices, stock counts, and interviews with suppliers, neighbours and customers. For a Siza

loan, the assessment is an onsite-structured appraisal, which consists of a 15-page assessment

guide that helps the CFO to collect the information. The guide helps the CFO, at the end of the

day, build financial statements for the business. The financial statements provide input regarding

the decision about the client’s ability to afford the loan. Figure 6.3 below illustrates the various

approval bodies that an application has to go through on completion. The turnaround time for this

process is 100 per cent more than the turnaround times for such a process in the MFIs (Nkuna,

2011).

Figure 6.3: Customer assessment and approval

With the Hawker loans, the information that forms part of the credit application process is derived

from the suppliers’ database, based on the buying and paying patterns of the customer. This

process is much quicker than the Siza loan approval process, even though the decision is still

made at head office. This is due to the fact that the risk exposure can quickly be minimised by

stopping the buying card if the customer does not pay.


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6.2.11 AMEF challenges

Even though AMEF has been active for four years and is the pioneer in serving the microenterprise

market, the following issues still pose a challenge to the AMEF operations:

Although senior management within Absa does not question that there is a microenterprise

market, they do wonder about AMEF not reaching the required levels of operation after four

years.

AMEF management’s current challenge is to reduce the operating costs, of which 80 per cent

are staff costs. AMEF needs an innovative way in which to solve the problem, which may entail

the adoption of an inbound approach as opposed to an outbound one. The cost containment

drive is not only applicable to the AMEF unit in Absa, but to Absa as a whole. During the last

financial year, Absa’s cost to income ratio was 57 per cent (Absa, 2011).

The mode of selling for AMEF is very different from that of traditional banking initiatives. AMEF

is about building relationships, which requires the hiring of more employees, and consequently

more costs.

Gaining the support of the executive team in Absa demands as much effort as gaining approval

of a concept. However, a request or proposal has to be further presented to all the other units

and committees in Absa, to ensure that certain regulatory and operational requirements are

met. For example, the compliance and risk units might not understand how the AMEF unit

works, nor understand the microenterprise market. So, in presenting some of the business

ideas to them, all that they are concerned with is in ensuring AMEF compliance with the

regulations and the internal policies. To illustrate this, the AMEF management team might

come up with an idea and share it with the Deputy CEO, who, even if he approves the idea,

then has to have the funds released by the finance department, who might already have

committed some of the money elsewhere.

Due to the lack of understanding of the AMEF operations, it takes a long time to get the

relevant stakeholders in the bank to sign off on policies, so that it can take up to six or nine

months before policies are finalised.

The support functions provided by Absa have been reduced to checking functions, instead of

requiring an understanding of the needs of the customer who uses their services and who is

seeking ways in which to meet their needs. For example, Human Resources is not concerned

with ensuring that the policy is suitable for all its internal customers, but only with its duty to

ensure that all of its customers follow the set policy.

After 60 days, an outstanding account is handed over to an attorney, who proceeds with

serving the summons, and who later, if necessary, conducts the remaining litigation process.


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However, the AMEF loans are very small, and do not justify legal action, as the cost of the legal

action tends to cost more than the value of the loan.

The outbound model has proved to be costly and heavily resource exhaustive for operations to

upscale. Consequently, wholesale lending may require resuscitation, with a greater focus

being placed on the inbound model.

6.3 CAPITEC BANK – KD

Offering credit financial services to microentrepreneurs was one of the markets that Capitec

wanted to serve. KD was founded in 2001, however, only in 2004 did Capitec acquire 71 per cent

of KD from the PSG Group. KD is an FMCG company that merchandises and distributes goods via

its five depots (KD, 2011). The business is based on granting stock credit to the potential

customers, so that they are able to buy more stock.

The customer-funding model has evolved over the years to a far more simplistic and limited stock-

funding model, which is innovative, as it also limits the risk exposure of Capitec Bank.


Capitec acquired KD and made it its subsidiary with the intention that KD could be run as an

independent company. However, having the financial backing of Capitec where needed, it acquired

the distribution company with the aim of funding microenterprises.

6.3.2 Delivery model

Capitec wanted to assist entrepreneurs by funding a portion of the stock that is sold in spaza

shops. A spaza shop, which is an informal convenience shop that sells everyday household items,

is usually run from home. The approach is outbound, with the representative having to visit

potential customers, to whom they market the service offering. The business is driven from the

supply chain point of view. KD has five depots that distribute goods throughout the townships and

informal settlements of the following provinces: Limpopo, Mpumalanga and Gauteng. The depots

are actually warehouses that are run like any ordinary warehouse, with the driver delivering the

goods to the customer. The KD representative acts as an intermediary between the depot and the

customer, by placing the customer order and ensuring that, if stock credits are used, that the

customer makes the necessary repayments. Over the three provinces, 2 500 spaza shops were, at

the time of the current study, being serviced by the depots and the representatives in the field.

6.3.3 Funding and technical assistance

While running the pilot, no funds were sourced from external sources, as Capitec funded the entire

initiative. There was also no need for technical assistance, as most of the management team from


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Capitec had the necessary background to understand the market and how KD was supposed to

run in order to service it.


The management of Capitec is committed to servicing the microentrepreneur via KD. To ensure

that there is alignment between what happens in KD and Capitec, two executives from Capitec

Holding Groups are part of the non-executive directors of KD. As Capitec funds are used to loan

the customers, Capitec needs to ensure that there is proper governance, and that the quality of the

lending portfolio is upheld. To ensure that the executive directors of KD act in a manner that is

favourable to the company, the directors were awarded a 25 per cent shareholding in the

company.

6.3.5 Selection of potential customers

Data are collected on the buying and paying patterns of the customer from KD Distribution centres,

from which the customers would have normally purchased their inventory. Based on the volume

and type of products that the customer buys, one can estimate the customer’s turnover, because

most of the spaza shop owners sell the products within a similar margin. A turnover calculation per

customer is done.

The customer data are then given to the Capitec customer analytics department to calculate the

propensity of the customer to pay if credit were to be offered to the customer. The filtered list of

customers with a high propensity to pay is then given to the KD’s representative servicing the area.

The representative is then required to conduct a site visitation to carry out a thorough assessment

of the business and the owner. The representatives are given exhaustive assessment guidelines to

help them with assessing the business.

6.3.6 Repayments

If customers do not pay their latest instalment, the stock credits are stopped and they are not

granted any more credit until they have redeemed themselves. This limits the risk exposure of

Capitec and, at the same time, promotes responsible lending and discourages customers from

becoming over-indebted.

6.3.7 Competitors

Competitors with this kind of model are other wholesale merchandisers, such as Makro. However,

KD targets customers who are mostly in the rural areas, where there are no wholesale outlets in

the close vicinity. In most cases, the entrepreneur might not even have transport with which they

can go to the nearest Makro.

The difference between KD and other same concept cash and carry business lies in KD’s focus on

creating a relationship with the customer by understanding the customer business and offering


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advisory services, where they are needed. There is, therefore, a high degree of customer loyalty,

compared to the traditional cash and carries. The customer goods are delivered to their outlet.

Restocking is relatively easy, as the entrepreneur can just call their KD representative to place an

order. However, doing so is unnecessary most of the time, as the representative in mostly in the

field and does site visits to see how the business is doing. Figure 6.4 below shows the comparison

of KDs and the cash and carries.

Figure 6.4: Comparison of KD and cash and carries


Credit, in the form of stock credit, is offered to the individual spaza owners. This ensures that,

rather than just granting the credit to the microentrepreneur, KD ensures that the entrepreneur

uses the funds for the right purpose (i.e. purchasing stock).

6.3.9 Products

During the pilot, Capitec experimented with offering credit to microentrepreneurs directly, as well

as wholesale funding to MFIs. Although such offerings did not provide an unacceptable return to

Capitec, the bank decided to only offer credit through stock credits. KD was the trusted channel for

doing this. With its current model, Capitec has reduced its risk exposure significantly.

6.3.10 Policies

Capitec uses its internal policy team to derive policies for KD. To ensure that the policies are

relevant to the market, the KD warehouses and representatives are given a policy for a month to

test and review. After a month, the feedback received is used to amend, where necessary, the

draft policy, after which the policy is instituted.


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6.3.11 Challenges faced by Capitec

In order to get the microenterprises funding right, the following has to be handled correctly

(Fischer, 2011):

The management of the customer evaluation process: The evaluation process for this

market uses mostly unconventional ways of evaluating the customer. To address this issue, the

data collected from the warehouses on customer behaviour provide Capitec with data that have

integrity and which is reliable enough to allow for performing statistical probabilities on potential

customers. The representative uses the data to target their potential customers, but the

representative has to assess the business thoroughly, based on the guidelines provided by

Capitec.

Provision of assistance to the microentrepreneur on sound basic business principles:

The business is normally run by the owner, who is required to have the ability to be in control of

their businesses (i.e. to ensure that the right stock items are ordered, and that the basic

accounting skills are applied, etc.). The reality in South Africa, where there is a low level of

education, is that the microentrepreneur does not always have these skills. To address the

problem, the KD representative watches closely how owners run their business, advising them,

where possible, as well as helping to ensure that the businesses are based on sound business

principles, so as to ensure that the customers can meet their loan repayment commitments.

Ensuring that the business is sustainable: A microenterprise is normally seen as a ‘gap

between formal employment’ opportunity. Most of the owners were not previously formally

employed, and were just running their business while they waited for a job opportunity to arise.

As soon as a job opportunity came available, the business would close. To address the issue,

as part of the business evaluation, the KD representative is required to assess how long the

business has been in existence, as entrepreneurs who have been in business for longer are

preferred for loans to new entrepreneurs.

The non-separation of the owner’s life from his or her business: Most of the owners live off

their business, which poses a challenge in making sure that the owner does not drain the

business. For instance, if the owner has a car that breaks down, most of the earnings from the

business will be put towards fixing the car rather than towards buying more stock.

The representative is required to be mobile so as to be able to visit the customer. The

representative must also be able to impart expertise to the customer. In order to address the

costliness of this approach, the cost of providing such services to the customer are included in

the funding cost that is passed on to the customer, in order to ensure that the business is

sustainable.


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6.4 SUMMARY

Commercial bank can serve the microenterprise market, the model that it chooses for entering the

market is very important. A wrong model can create complications for a commercial bank and

might lead to management wanting to exit the market. The factors that are considered by

international commercial banks are also considered by commercial banks in South Africa.


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CHAPTER 7

SUMMARY, CONCLUSION AND RECOMMENDATIONS

7.1 INTRODUCTION

Microfinance is not a solution to all poverty. Some of the poor lack a basic education, as well as the

skills to access what will satisfy their basic needs, as are depicted in Maslow’s hierarchy of needs

(Maslow, 2009). For such people, microfinance might do more harm than good. It is better to offer

microfinance for business growth rather than for personal consumption, and hence the focus in this

research report has been on microfinance for microenterprises.

Even though the NGOs and MFIs are the traditional microfinance providers, commercial banks

internationally have proven that they can successfully offer microfinance to microenterprises. Albeit

that there are clashes between the traditional banking model and the microfinance model, the

quest is not just for commercial banks to make profits, but for them also to be socially responsible,

in terms of the double bottom-line objective. Absa and Capitec in South Africa are commercial

banks that have offered microfinance to microenterprises, even though there are still challenges

involved, which impact the business not scaling up as expected yet. However, the two commercial

institutions have gained considerable insight into how to service the microenterprise market, which

is a market that was previously not served by the commercial banks.

7.2 SUMMARY OF MAIN FINDINGS

The South African government has challenges pertaining to employment, poverty and education

and the unequal distribution of wealth amongst its citizens. The microenterprises provide an

opportunity to at least address some of the challenges with which the South African government is

faced. Currently, South Africa is seen as a social welfare state, with 27 per cent of its population

receiving social grants. As such a situation is unsustainable, the government needs to develop

alternatives that can assist the poor. One possibility is microfinancing, which entails offering credit

to microenterprises.

The key factors identified for international commercial banks are also prevalent in commercial

banks in South Africa. However, the difference is the context in which the key factors are

considered. However, even in the international commercial banks, not all factors are considered to

the same extent.

The operating model mainly dictates the direction taken by a commercial bank. If the

microenterprise financing operations are run as part of internal operations, the situation differs from

when the operations are run by a subsidiary. Other factors mainly depend on the operating model.


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7.2.1 Findings in regard to the commercial banks in South African

From the Absa MEF and the Capitec–KD case study, the following lessons were learnt:

The support and patience of the senior management of a commercial bank is crucial, especially

during the formation phases. Such support may be required for a period of up to four or five

years.

If a commercial bank service microenterprises through a subsidiary, the bank has to ensure

that it has representatives on the board of the subsidiary to take care of the interests of the

bank.

Providing services to microenterprises goes beyond just providing credit, as the commercial

bank agent or officer has to keep close tabs on the entrepreneurs to ensure that they make

sound business decisions that will enable them to grow their businesses, as well as to see that

they are able to repay their loans.

Starting small is a good idea, especially when entering an unfamiliar territory or market, in order

to limit risk exposure and to create a safe environment in which to learn. Cutting back on

unprofitable services or product offerings is also advisable.

The ‘doing by learning’ approach for which Absa opted is a sound approach. However, the

approach might have led to delays in scaling up operations and to high costs of operation.

Some of the lessons learned or insights gained could have been imparted by organisations that

had the capacity to provide technical assistance. The advice of such organisations is available,

even though at a cost. However, in the long term, such investment would have paid off well.

Choosing a model to which the senior management of a bank is accustomed makes it easier to

secure their buy-in and support. The adoption of such a model also facilitates the fine-tuning of

the model to ensure that it works optimally. For example, most of the senior executives in

Capitec had experience in running FMCG concessions, which made it easier for them to

understand the running of KD.

Other units that work together with the microenterprise-focused unit tend to have difficulty in

comprehending how the market actually works, which leads to challenges regarding the

formulation of policies.

Having an internal unit that focuses on serving the microenterprise market, as opposed to

forming an alliance with an MFI, is challenging, as there is much divergence between the

traditional bank operations and microfinance operations, especially in regard to the centralised

versus decentralised method of decision-making that is required in microfinance.

Commercial banks have operating costs, of which most are staff-related, so that a change in

the delivery model might be beneficial, with a greater focus being laid on the inbound, rather

than on the outbound, delivery model.


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Commercial banks can have branches all over the country, however, the branches might not be

situated in strategic enough areas to target the microenterprise market, so that the

microenterprise operation team has to create their own points of presence close to the target

market.

Applying individual and group-lending methodologies together during start-up phases might be

too strenuous for commercial banks. Group lending operates on terms that are radically

different from normal banking practices, such as granting loans to groups rather than to

individuals, and accepting group payments.

7.3 POLICY IMPLICATIONS

7.3.1 Global implications

Microfinance is an accepted global answer to poverty, and different countries are using it to

promote financial inclusion, as well as improve the lives of the poor. In the context of the current

research report, microfinance has been seen not only as an offering that can be provided to

microenterprises to help fight poverty, but also as a means of helping to create employment for the

poor. Other secondary or even tertiary impacts include increasing education levels and decreasing

crime levels.

The flagship of microfinance globally, India, is currently enduring immense pressure, which is

raising concerns about the motives of microfinanciers, and thus leading to the questioning of the

motives of microfinance providers and the effects of microfinance on the poor. This is not just an

attack on India, but it requires World Bank intervention to create stability and sound policies based

on the crisis. The UN has been punting for microfinance as a tool that can help promote financial

inclusion and reduce poverty. The lesson from the Indian situation should be documented, and

guidelines should be drawn up to ensure that other countries do not fall subject to the same threat.

7.3.2 Implications for South Africa

7.3.2.1 South Africa as a country

The Financial Sector Charter (FSC) has been the accelerating point for financial inclusion for those

parts of the community that were previously not financially included in the mainstream. The FSC

can assist in driving more commercial banks to open their doors to microentrepreneurs, by making

such endeavours a sizeable weighting on the scorecard, which would encourage more

microentrepreneurs and ultimately result in more jobs being created.

Since the MFRC closed in 2007, no statistics specific to the microfinance industry have been

available. Many MFIs have also exited the market, due to operational difficulties, while the

established ones mentioned above have grown. The NCR, which took over from the MFRC, did


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some reporting on the credit industry. However, the reporting did not offer the reporting specific to

the microfinance industry that the MFRC could give, thus making it difficult for researchers and

policy-makers to see whether an intervention should occur in the industry.

There is a need for the government to promote the market, so that more formal players enter it.

The challenges facing South Africa are too major for the government to try to deal with them alone.

There is a need for organisations to assist the microentrepreneurs with more than just cash or

loans, but with business and finance skills as well. Although commercial banks are in the space of

providing finance, the technical business knowledge and linkage of the entrepreneurs to the

markets that they can provide would make it relatively easy for them to finance more

microenterprises that are credible and sustainable.

The Central Reserve Bank and BASA should work together with the commercial banks to

accommodate unconventional ways of managing collateral and determining the creditworthiness of

microentrepreneurs. This could be done by encouraging more research, by seeing what other

countries are doing, and by making certain regulations to accommodate this market segment.

7.3.2.2 Commercial banks in South Africa

Traditional policies set for commercial banks are not suited to the microfinance market, which

poses a challenge to the commercial banks running with such service offerings. However, it could

help if the executive team of banks took time to understand the market and the service offering

concerned. Technical assistance for policies is necessary, which should be supported and

embraced by the executive team of the bank.

Offering small loans that are ideal for microenterprises becomes a challenge, as they are not

profitable enough, and the administrative costs are also high, due to the outbound delivery model

that is usually applied. If commercial banks were to increase the size of the loans, the target

market might not be catered for, which might lead to them not being served. However, if

commercial banks were to continue to offer only relatively small loans, then they should increase

the volume of loans offered, so as to be able to be financially sustainable. The commercial banks

should scale up their service offerings to reach more people, in order for their service offering to

have an impact.

7.4 RECOMMENDATIONS

Responsible lending must always be promoted, so that South Africa does not find itself in the same

situation as India. The South African government should ensure that it promotes the transparent

reporting of microfinance service, especially regarding extension of credit. The National Credit

Regulator (NCR) is already setup to ensure that reckless lending does not happen. To complete


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this, there is a need for industry reporting on the microfinance industry and more especially, the

MFIs. The last reporting was done when the MFRC still existed in 2006.

At the time of the current study, the informal economy was creating employment for 17 per cent of

South Africa’s population. Such a percentage could grow if the government and private companies

were to work together to promote microfinance. Such partnerships have previously been

successful in terms of the launching of Mzansi accounts, which offered savings products to the

mass market. However, it is the availability of credit to the microenterprises that is still proving to

be a challenge.

A forum is required for the reporting of microfinance services that are reaching the poor globally, to

which each government should ensure that its microfinance service providers report. Microfinance

Information Exchange (MIX) and MFI Transparency offer certain metrics; however, not all countries

report their metrics to such organisations. All governments should make it compulsory for their

microfinance providers to report their metrics on such portals.

Microfinance must evolve to become more than just credit, but to offer other financial products,

such as micro insurance, micro savings and micro life policies, as well. As a service offering, it

needs also to offer business skills development and financial development, to ensure true

transformation and empowerment of microentrepreneurs.

7.4.1 Absa Bank

At the time of the current study, AMEF operations had been running for close to four years,

without yet breaking even. The current microfinance model should be evaluated to see why it

has not yet been able to get off the ground. A re-evaluation should be conducted to see

whether the microfinance business can be run as an internal unit in Absa, or whether there is a

need to set up a subsidiary to Absa to run the microfinance end of microenterprise operations.

The outbound model is too costly, as 80 per cent of the costs are staff costs. The current pilot,

which focuses on evaluating the inbound model, might be the model for the future. This model

also limits the risk exposure of the bank, as the stock credits involved are stopped the moment

the customer misses a payment. The model is also very similar to the model that Capitec Bank

uses with KD.

Functioning as a wholesale microfinance provider might also be more viable than individual

lending. The former could be closely aligned with traditional bank lending methods. Through

the lessons that Absa has learnt in operating in this market, they are now in a better position to

reconsider offering wholesale lending than they previously were.

Even though the senior executives of the bank offer strong support of the microenterprise

financing operations, the prioritisation of a focus on microfinance has had to compete with more

financially viable options with the rest of the bank.


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7.4.2 Capitec Bank

The model that Capitec uses has been refined to reduce risk exposure. The model can be

expanded by making the service offering available to more customers. There might be an initial

capital outlay to allow for the setting up of distribution warehouses closer to the customers and

finding agents to work with enterprise owners; however, doing so is necessary to increase the

reach of, and to upscale, the business.

7.5 FURTHER RESEARCH

More research is required to aid the South African commercial banks with making a breakthrough

in servicing the microenterprise market. There is a need for more research into formal institutions

that provide credit services to microentrepreneurs, which would help to ensure that lessons are

well documented and that more players can come to an understanding of the industry. This might

stimulate more entrants into servicing customers with the micro credit services.

Empirical research should be undertaken to determine the extent to which the key factors were

considered and to create a model for future commercial banks, which can then be linked to the

performance of their portfolios.

Determining the correlation between the key factors and the success of the microfinance

offering in commercial banks can be done. However, success would also have to be defined,

as it might be relative to a commercial bank, such as whether it refers to breaking even, or to

the number of customers reached, for example.


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APPENDIX A:

QUESTIONNAIRE

KEY FACTORS FOR COMMERCIAL BANKS FINANCING MICROENTERPRISES

For the context of this questionnaire, MEF = Microenterprise financing

1. Motive: Motivation for the commercial to consider MEF

What were the reasons that led the commercial bank to offer finances to micro enterprise?

Have the reasons for the motivation evolved over the years?

2. Operating model: Set-up of the structure

What operating model did your company decide on when starting up (internal/unit or external

[service company or subsidiary])?

Has the operating model evolved during the life of your MEF operations?

What factors influenced the evolution?

3. Funding: Funding to sustain operations

What is the source of the funding that you use for providing loans?

How has this evolved over the years of operation?

4. Technical assistance: Assistance from organisations or institutions that specialise in microfinance that

would normally have aided numerous commercial banks in setting up the microfinance operations.

Did you receive any technical assistance?

If yes, from which organisations or institutions?

What did the technical assistance entail?

How long did you have technical assistance?

5. Human resources: Acquiring; Development; Retention of staff for servicing MEF

During set-up, did you redeploy existing staff or were new people appointed to work in the

microenterprise finance?

What has worked in acquiring new staff?

How do you develop your staff to ensure that they grow in performing their jobs?

How do you remunerate the staff working in MEF?

How do you promote retention of your staff?

6. Institutional commitment: Executive and operational champion support

Is there an executive champion who supports micro enterprise financing?

Is there a representative at board level who is an advocate for micro enterprise finance?

Operationally, is there a champion who ensures that the executive vision for MEF is executed?

How was alignment between the executive expectations and actual operations performance

managed? (Especially during the start-up phase, when the MEF was not yet profitable, what

motivated the executives to still give (or not give) MEF a chance?)

7. Product development: Products; Product segmentation; Interest rates

How did you find out what products/services to offer to customers?

Have the products evolved over the duration of their use?

If yes, how and based on what?

How did you decide on the interest rates to charge?

What methodology do you use for determining the repayment rates (flat rate or declining balance

method)?


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Do you encourage interest rate transparency and how do you ensure that those entering into a

credit agreement with you understand the implications of your interest rate methodology?

8. Operations: Policies; Credit methodology; Infrastructure; System; Loan appraisal; Collections; Support

services

What lending methodology are you using (i.e. group/individual)?

What influenced you to use this methodology?

Do you have policies that are specific to micro enterprise finance?

Do you have your own information system, or do you use the bank’s current existing system?

How do you reach your customers?

How do you appraise customers who want to borrow funds for their business?

How are collections on overdue accounts done?


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APPENDIX B: A FRAMEWORK FOR EVALUATING REGULATION

Driving forces Facilitative factors Potential outcomes

Systemic

stability

Prudential regulation,

Compliance requirements,

Minimum capital

requirements,

Reporting requirements

Positive: Stable, healthy

system;

Negative externalities of failure

minimised

Negative: Compliance cost and

barriers to entry meaning

potentially less competition

Market

development

(including

access)

Improved competition

Improved infrastructure

Allowance of space for product

innovation

Allowance of space for

organisational growth

Development of capacity of

informal sector

Liberalisation in terms of global

market

Consumer education

Positive: Diversity of suppliers,

geographic spread and

products;

greater access, increased levels

of savings

Negative: Potentially more

systemic and product risk

Protection of

consumers

Increased disclosure

Creation of protective

institutions and redress

Improve information flows

Consumer education

Positive: Greater faith in more

inclusive market

Negative: Potentially higher

compliance costs;

stifling of distribution

channels to low-income market

Market efficiency Improvement of information

flow

Improvement of infrastructure

Positive: Lowering of costs for

consumer

Public safety Customer identification

Risk management

Positive: Reduced criminality;

increased confidence in system


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Compliance requirements

Reporting requirements

and suppliers; international

connectivity

Negative: Reduced access to

financial systems; increased

costs

Source: Genesis and Finmark Presentation (2004).


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