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REPORT Analysis of the Landscape and Environ ment of the Microfinance and Cooperati ve Sector

With a specific reference to skills development

PREPARED FOR: BANKSETA

PREPARED BY: RUDO CONSULTING

DATE: 03 MAY 2011

AUTHORS: PORTIA SEKATI AND THABO KHANYE

EDITED BY PROF. GERHARD COETZEE Landscape of the SA microfinance and cooperative banking sector - BANKSETA

Table of Contents

Contents Page number Executive Summary 6 1. Introduction 12 Study objectives 12 The structure of the report 13 2. Methodology 14 Scoping interviews 14 Desk Research 14 PESTEL analysis 15 Primary Research 15 The Sample 16 3. Profile of MFI and Cooperative Industry 18 Number of registered lenders 18 Estimated number of employees in the MFI sector 21 Employees race profile 22 Employees education profile 23 Employees gender profile 25 4. Definitions and historical context 26 What is micro finance 26 The historical context of microfinance and cooperatives in 28 SA

5. PESTEL analysis 31 Economic and socio-economic environments 31 The political and social environment 33 The legislative environment 33 Technological factors 35 Key findings from PESTEL Analysis 36 6. The South African microfinance landscape 38

RUDO Consulting 2 Landscape of the SA microfinance and cooperative banking sector - BANKSETA

Sector overview 41 Estimated value of the microfinance sector 41 Types of registrants as per the NCR 42 Types of credit products 43 Profile of NCR registered lenders as per the size of their 44 loan book Provincial distribution of credit activity 44 Credit and loan products held by consumers 45 Provincial activity of low-income microfinance 46 Provincial distribution of branches 47 Key skills development findings 48 7. Sub-segment analysis 50 Profile of the salary based ML sector 50 Types of credit advanced 51 Estimated size of the salary based ML sector 52 Types of low-income microfinance classified according to 55 legal status Challenges faced by salary based ML 57 Skills development requirements 58 Provincial skills analysis 59 Cooperative and cooperative banking sector 65 Membership base of SACCOL 65 Legal landscape of the cooperative sector 66 Skills development requirements in the cooperative sector 67 Specific considerations for rural based cooperatives 67 Micro enterprise lending sector 69 Estimated size of the micro enterprise sector 71 Profile and types of micro enterprise lenders 71 Challenges faced by micro enterprise lenders 71 Skills requirements for micro enterprise lenders 73 Low income housing sector 75 Types of low income housing lenders 75 Size of the low-income housing sector 76 Low income products 77 Skills development requirements 78 References 80

Annexure A: Legislation that apply to the South African 82 microfinance and cooperative sector

ACRONYMS

CPA Consumer Protection Act HRD Human Resource Development ME Micro enterprise MFI Microfinance Institution ML Micro lender MFSA Microfinance South Africa MFRC Microfinance Regulatory Council NCR National Credit Regulator NCA National Credit Act SARB South African Reserve Bank NGO Non-Governmental Institution UP University of Pretoria SACCOL Savings and Credit Cooperative League SSP Sector Skills Plan WSP Workplace Skills Plan SPSS Statistical Package PESTLE Analysis of the Political, Economic, Social, Technology and Legislative and Environmental

ACKNOWLEDGEMENTS

We want to extend our sincere gratitude to Mr. Hennie Ferreira, Mr. Jurgens van Zyl and Ms. Leonie Kirsten from the MFSA who worked tirelessly to provide the team with a clean and usable database for the sampling of the project.

Executive Summary

The BANKSETA embarked on a study from October 2010 until April 2011 to bette r understand the landscape of the micro finance sector in South Africa with the objective to develop skills strategies specific for this sector. A multi-pronged met hodology was utilized for data collection which included an extensive literature re view, face-to-face and telephonic interviews.

The credit market comprises of two main functions, namely the demand for credi t from consumers and supply of credit from credit providers. For a deeper unders tanding of this market, it is important that all aspects of credit be looked at, namely at the macro, meso and micro level.1 The macro level consists of the legi slative and policy environment and its impact on the access to credit by consum ers and the operations and sustainability of the credit providers.

At a macro level an appropriate legislative and policy framework is necessary to facilitate a sustainable microfinance sector. Currently lenders have to adhere to at least 50 pieces of legislation of which the National Credit Act has the most direct impact on their operations. Interaction with lenders through focus groups and interviews indicate that lenders still need capacity on certain aspects of the Act, especially those relating to reporting requirements. For credit cooperatives, the Cooperative Banking Act has, for example, stringent registration criteria and this may have an impact on the sustainability and growth of this sector. The meso level includes the basic financial infrastructure and the range of support services required to reduce transactions costs, increase outreach, build skills, and foster transparency. The meso looks at support structures like training and funding institutions. The micro level consists of retail

1 Helms, Brigit. (2006). Access for all: Building Inclusive Financial Systems. CGAP, the World Bank, Washington DC (access the electronic copy at http://www.cgap.org/gm/document- 1.9.2715/Book_AccessforAll.pdf).

RUDO Consulting 6 Landscape of the SA microfinance and cooperative banking sector - BANKSETA financial service providers that offer services directly to poor and low-income clients.

The impression that can be created is that microfinance is only about credit whilst in reality it is about creating overall financial access to the low-income including savings, credit, micro insurance and transmission services. It is important to understand all facets of the market (supply and demand side) in terms of what is enabling, what is disabling, what the challenges are and what are the skills needs and strategies required to address these needs. If we understand this deeply, it is easy to act at all levels indicated and develop strategies that will address the needs of the sector holistically. Due to the reality that we currently have more information about the credit side of the market, this report emphasises that rather than transactional, savings and insurance aspects. However, the latter will be addressed in forthcoming studies.

Figure 2

Legislation over the past 19 years has created an enabling environment for the a dvancement of smaller loans. This culminated in the growth of a large compleme nt of credit providers. The diagram on the above page illustrates, the landscape of microfinance in South Africa (note that the emphasis is on credit in this diagra m and this report). This landscape identifies a range of players from informal to f ormal. At the bottom of the MFI pyramid is informal lending characterized by bor rowing from friends, family and unregistered lenders normally referred to as mas honisas.

Stokvels also play an important role in the informal side of the market. Stokvels’ main purpose is savings and investments and there are cases where credit is also offered. These entities are self-regulatory as they are exempted from registration and compliance by any Act. The next level of the pyramid is occupied by credit cooperatives and micro-enterprise lenders. The Savings and Credit Cooperatives League of South Africa (SACCOL) indicates that there have 58 registered credit cooperatives with a member base of 26 1642.

Micro enterprise lenders specifically target and provide unsecured loans to micro enterprise organizations. Their target is mostly women and in South Africa most follow the Grameen3 model of group lending. Most micro enterprise lenders are registered as non-profit organizations. The average micro enterprise loan is R5 000 and it is typically disbursed as a group loan. The primary research further indicates that micro enterprise lending is labour intensive and this presents a challenge due to the scarcity of trained loan officers.

2 Analysis of the landscape and environment of the microfinance and cooperative sector i n South Africa, Portia Sekati, Thabo Khanye and Prof Gerhard Coetzee, University of Pret oria, 2010 3 Grameen model is The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as micro credit or "grameencredit"http://en.wikipedia.org/wiki/Grameen_Bank - cite_note-Microcredit- 3#cite_note-Microcredit-3) to the impoverished without requiring collateral. The system of this bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing.

The fourth level is occupied by small lenders who mainly concentrate on 30 day cash loans to salaried individuals. Data from the NCR’s 2010 registration statistics indicate that there are approximately 2 300 small lenders in South Africa with an estimated book of R5bn. These entities have between one or two branches and employ less than 5 people (BANKSETA, 2007). The next category is large micro lenders who also focus mainly on salaried individuals. The NCR registration statistics indicate that there are approximately 300 such operations and most operate nationally, for example organizations like Real People and Onecor.

Clothing and furniture retailers who do not offer cash but offer clothing and furniture on credit for low-income people also make up a category. The next category is a dynamic space occupied by 2nd tier banks like Capitec, African Bank, Ubank and Ithala (also referred to as alternative banks). These entities offer mainly credit and savings, while African Bank remains single product range focused as they concentrate only on credit. These players account for about 70% market share of the micro lending industry and they mainly offer unsecured credit.

Discussions with various lenders and industry stakeholders indicate concern on the sustainability of small lenders as most face stiff competition from players like African Bank and Capitec who have employed aggressive growth strategies, have extensive branch networks and utilise advance technology and systems which enables better risk management and fast turnaround times.

Implications on Skills and Recommendations

In terms of capacity building and training needs the analysis indicated that regardless of their sub segment all salary based lenders require a number of skills. The core skills include debt management, customer care, marketing, and legislation/compliance and risk management. The generic skills related to understanding the customer, ethics and governance, computer/IT skills, management and language skills.

Employees in the cooperatives sector identified a need for basic accounting and bookkeeping skills; basic governance and basic managerial skills. Further they appear to require critical knowledge of the relatively new cooperatives legislation and registration requirements of the various regulators that apply to different cooperatives. Alternative skills development mechanism will have to be explored for this sector as many are rural based. This includes vernacular course development and mentorship programmes. It is recommended that the BANKSETA consult with the Cooperative Bank Development Agency before embarking on any initiatives in this sector as they have recently completed and in depth review (unpublished) of the status of their sector.

Analysis of the micro enterprises identified lack of management and entrepreneurship skills and that development is required at various levels in this sector. Firstly, there seems to be a need to support developmental agencies like SAMAF and KHULA. To effect this a skills review of the development agencies are also recommended. Based on these skills needs, the following are recommended to address the identified gaps:

 That skills development within the microfinance sector be aimed at building careers. There is a need for recognised qualifications which will enable the staff of small scale micro financiers to establish a career path that ultimately migrates them to a formal bank. It is important that skills and courses be clearly linked to standardised titles within a well defined career path.  For this reason a separate SSP is recommended for microfinance. This will enable skills development in this sector and enable the BANKSETA to prioritise the needs of the MF sector holistically.  Develop detailed course material on the 5 most important acts in the microfinance space especially the National Credit Act and Consumer Protection Act. In support of this, supply basic information on the other 45 acts in an easy to access web portal or training book.  Consumer education and education of the informal sector is very important given the fact that informal credit usage is quite common. It is recommended that BANKSETA explores ways to reach the unregistered lenders, stokvels and pawnshop sectors.

 There appears to be a significant role to play by BANKSETA in developing course material and assisting training providers to launch a skills development programme specifically aimed at low income housing financiers and those salary-based lenders who wish to access this market. Further, the research revealed that there is a lack of understanding by traditional salary- based lenders of the incremental housing building and finance process. Here BANKSETA could engage and partner with the NCR and Department of Human Settlements in deriving a specific education intervention.  The approximately 2600 traditional salaried based lenders including large banks must be encouraged to provide more productive or developmental loans to low income people. To this end it is suggested that a special skills fund be developed to be accessed by traditional salary-based lenders who wishes to provide productive credit products.  BANKSETA has an important role to play in skills development in other sectoral SETAs. The furniture retailers and motor finance and micro insurance organisations provide goods on credit and services to low income persons. It is recommended that BANKSETA engage with other SETAs so that the efforts of BANKSETA can be maximised.

Finally, the BANKSETA’s initiatives should support government’s endeavours to reduce poverty by paying special attention to the support of enterprise lenders, co-operatives and low income housing lenders or other lenders who wishes to develop products in these areas.

Introduction and background

In accordance with the Skills Development Amendment Act no 37 of 2008, the Bank Sector Education and Training Authority (BANKSETA) is required to develop a sector skills plan (SSP) within the framework of the National Skills Development Strategy. BANKSETA wishes to develop appropriate and forward looking skills development interventions in the Microfinance industry.

It is perceived that the current sector profile does not fully address the microfinance and cooperative industry. This industry has undergone a serious metamorphosis since the late nineties, and its latest trends and progress have not been fully captured. The essence of this research is to provide a landscape of this sector, provide a segmentation of the prominent groups and the skills needs per group in this sector.

In order to achieve this, the BANKSETA initiated this research project, firstly to gain and understanding of the landscape of the microfinance industry and the particular economic, political and other factors that influence financiers today but importantly will shape them in the future. Secondly the project involves conducting a details skills needs analysis in order to identify critical priority areas.

Study Objectives

The objectives of the project were broken down into three study areas, that is:

• Part 1: Segmentation and profiling of the MFI sector • Segmenting the microfinance and cooperative banking sector • Analysis of all participants in BANKSETA and their skills needs within the context of the broader market segments • Conducting a skills needs analysis

• Part 2: Consolidation of available research results • Consolidate sector profile per segment from previously conducted research • Provide an update for the skills in the sector by consolidating research from other BANKSETA sources including discretionary grant funding and consolidating research conducted elsewhere

• Part 3: Impact of Legislation on the sector skills plans • Analyze the impact of government priorities for e.g., • HRD strategy; National Industrial Policy, Industrial Policy Action Plan, • Land Restitution, Anti-Poverty strategy, Technology and Innovation strategy and other relevant as identified • Evaluation of the current state of implementing transformation

Data was collected through a combination of qualitative and quantitative methods, mainly face-to-face interviews as well as an extensive desk research to consolidate secondary information from past studies.

The Structure of the Report

This report details the analysis of the landscape of the microfinance industry including important sub-segments of the market and their different product profiles. It further provides information about the economic, political and legislative backdrop that influences the operating environment. Information was sourced from an extensive secondary data review, supplemented with primary work that included quantifying the relative sizes of the different sub-segments and skills needs. The report has 5 sections, and this section details the research objectives, the methodology and the analytical framework.

Section 2 describes the historical perspective of the South African microfinance and cooperative sector, detailing the milestones and analyzing the evolution of

RUDO Consulting 13 Landscape of the SA microfinance and cooperative banking sector - BANKSETA credit legislation and its impact on the sector. Section 3 addresses the PESTLE analysis and its impact on skills development within the microfinance sector.

Section 4 details the main findings and the important sub-segments of the sector, namely, Micro-enterprise finance, Low income housing finance, Salary based lending and the financial Cooperatives sector. For ease of use, each section concludes with key considerations and recommendations related to skills development. Section 5 identifies gaps in skills development and areas of support needed in this sector. It further highlights the areas where the BANKSETA can make strategic gains.

Methodology

The focus of the study required an extensive desk research, supplemented with the usage of both qualitative and quantitative methods to collect data. The quantitative research was conducted to expand existing insights, ensure data integrity and statistical representation. The research process was initiated through scoping interviews with selected experts in the industry, followed by extensive desk research. Concurrently, primary data was collected, partly through face to face interviews, mainly through telephone interviews and in some cases self completion questionnaires.

Scoping interviews

A total of five interviews were conducted with individuals considered to be experts in the field of microfinance and cooperative banking. These individuals shared information on the history of the sector, the profile in terms of the players, the products and future trends of the sector, the impact of policy and legislation and skills development in the sector. Data from these interviews also assisted in finalizing the research design, and leads on the desk research.

Desk Research

An extensive desk research was conducted which included a literature review of both local and international research on microfinance and cooperative

RUDO Consulting 14 Landscape of the SA microfinance and cooperative banking sector - BANKSETA banking. Local data from the NCR, erstwhile MFRC, BANKSETA’s past reports, FinScope, FinMark Trust, STATS SA, UP’s Centre for Microfinance and Rudo’s own internal reports were mainly utilised to plot the landscape and the profile of the sector. The MFRC and NCR’s data was mainly utilised to estimate the size and volume of the sector. Credit providers registered with these entities are required to submit quarterly and annual reports on the annual turnover, usage of credit and target market. The NCR does not publish data on the microfinance sector and only data on unsecured credit as granted by African Bank, Capitec and the other banks. Thus there is no up to date data on the larger microfinance sector or the cooperatives banking sector. However, by making use of historic MFRC data, recent registration statistics of the NCR, isolated instances of data publication a by consulting a consumer finance data specialist a reasonable estimate of the size and volume of the microfinance market and its sub segments were derived. This methodology to derive this is discussed in more detail in an analytic framework attached as Annexure B.

A PESTLE analysis was conducted by reviewing the Reserve Bank and National Treasury’s economic data, StatsSA’s quarterly employment survey, the Presidency’s Medium term Strategic Framework 2009, and the consolidation of the BANKSETA’S available research data and other secondary resources. Information from these secondary sources was augmented by information collected from the scoping interviews.

Primary Research

Quantitative research was conducted mainly to collect information on the current state of the skills levels and needs in the microfinance and cooperative banking sector. Telephonic interviews were conducted and the information was collected through a questionnaire which included both closed and open ended questions. The information required to complete the questionnaire was not readily available to most respondents, and therefore the questionnaire was emailed prior to the interviews to ensure that respondents had enough time to prepare and package the information. This was followed by telephonic interviews, and in some cases, respondents completed the questionnaires electronically and submitted them. A total of 300 interviews were conducted in 8 provinces and the sample breakdown

RUDO Consulting 15 Landscape of the SA microfinance and cooperative banking sector - BANKSETA is illustrated in the report. Data collected from the 300 interviews was analysed using SPSS.

The sample

A total of 300 lenders were interviewed country wide although the original target was 400. It was envisaged that the 400 would be drawn from the overall BankSeta database.4 However this information was outdated and inadequate and after repeated attempts it was clear that we would not be able to fulfil the sample this way. The sample was therefore drawn from the SACCOL, RHLF, NCR, BANKSETA and MFSA databases and also decreased to 300 due to the new process and time constraints. To ensure representation, the sample was stratified according to credit usage per province and the distribution is indicated in the table below:

Figure 3: Sample Distribution Province *% of credit disbursed per Total sample interviewed province Gauteng 45% 137 Western Cape 15% 45 KZN 13% 40 Eastern Cape 6.5% 20 Mpumalanga 6% 18 North West 4% 15 Free State 3.8% 13 Limpopo 3.7% 12 Total 300 Source: NCR 2nd Quarter Credit Report

4 Note that the BANKSETA have to look at the quality and completeness of their stakehol der database as it will jeopardize their work going forward if this is not corrected.

Figure 4: Sample per sector

Source: Primary Research Interviews

The three databases that were utilized for sampling did not provide details on the different sectors of the MFIs, and to ensure that all the sectors were represented in the sample, a quota sampling approach was adopted. Quota sampling is a sampling technique that includes a pre-selection of research participant numbers to ensure that each segment of the population has fair chance to be represented. In this instance 11 interviews were conducted with cooperatives who were sampled from the SACCOL list, 8 low cost housing lenders sampled from the RHLF list, 7 NGO lenders and the rest of the sample was obtained from the NCR, MFSA and the BANKSETA’s databases. This mixture of databases allowed for randomization that normally brings credibility and validity to the research5.

Project risk The information was collected within a short space of time, which put pressure on the fieldwork, and this was exacerbated by the BANKSETA’s database which was difficult to work with. A huge pool of fieldworkers had to be utilised to ensure that quality data is collected which also impacted on the budget.

5 All credit provider have to register at NCR thus the NCR database provide high level contact information. Many also are logged on the BANKSETA database. However these databases does not explicitly flag for example enterprise and housing lenders. Thus in order to identify participants in these important sub segments, wholesale funders like RHLF and industry associations were approached.

Profile of the MFI and Cooperative Banking Industry

Data from the primary research as well as secondary information from the NCR, MFRC, the different bank’s sustainability reports and the Centre for Microfinance were used to determine the profile of the industry in terms of the number of the registered MFIs, the number of employees in the sector, the racial and gender mix as well as the educational qualification of employees in the MFI sector.

Figure 5: Number of Registered Lenders

Source: NCR Register, August 2011

Data on the NCR register (31 August 2010) indicate that there are 4 298 registered credit providers. Of these, 4 providers can be classified as 1st tier banks and include FNB, ABSA, Standard Bank and Nedbank who provide personal loans with a maximum term of 48 months. This is followed by what could be called 2nd tier lenders or alternative banks consisting of 4 major players that is African Bank; Capitec; U-Bank and Ithala. Below this tier is what we call large micro lenders, whose core business is micro lending serviced through branches throughout the country.

This is followed by approximately 3000 small lenders, who would include small micro lending companies, cooperatives and micro enterprise entities. Most of these companies have one or two branches in one province and employ less than 5 employees. Of these lenders, it is estimated that 700 are entities like butcheries, pharmacies, flower shops who registered because they also offer credit of some sort. 6

There is little data on the provincial analysis of MFI activity in South Africa. The most reliable statistics for this sector are from the NCR which are based on the s ubmitted returns as per the NCA requirements. The reporting requirements are based on the size of credit providers as follows:  Large credit providers with annual disbursements of more than R15 millio n are required to submit quarterly returns  Small credit providers with annual disbursements of less than R15 million are only required to submit annual returns.

The NCR’s consumer credit report of which most of the statistics are derived fro m is based on the quarterly returns of 40 most significant credit providers. The fi gures for small credit providers are largely excluded from the NCR’s data and thi s sector’s analysis is largely based on extrapolations from the significant provide rs’ data as well as data from the MFSA.

Figure 6: Provincial distribution of credit activity

6 Businesses that offer monthly accounts mostly fall under incidental credit and are not required to register with or report any data to the NCR. The NCA largely does not apply to these types of accounts apart from the fact that they may not charge more than 2% interest on overdue accounts.

Source: NCR’s Consumer Credit Market Report: 4th Quarter, December 2010

Figure 6 provides an indication of the provincial perspectives on personal credit activity in South Africa. The NCR provincial distribution chart shows credit agree ments disbursed every quarter by the 40 largest lenders in different provinces. T hus it provides a provincial distribution of the rand value of disbursements for th e largest 40 lenders in South Africa (mainly, banks, retailers and motor financier s) as a proxy for the credit industry. The NCR does not publish provincial activity according to book size, and this distribution is thus telling of provincial distributio n of the activity of the very large players and excludes the smaller lenders. Howe ver, it is believed that it is a fair proxy for a demand side picture of credit usage across different provinces. One could postulate that if one were to draw a chart t hat shows the presence of branches of all credit providers that the chart would p robably show a little bit more activity in provinces like Limpopo, and Eastern Cap e simply because in smaller towns a micro lender would be present although a b ank will not have a branch. As it stands now the available NCR information indica tes that Gauteng has the highest credit distribution at 44%, followed by the Wes tern Cape at 15% and KZN at 14%. If one had to exclude large banks from the e quation, it is believed that the provincial distribution of credit will be consistent with the micro lending activity in the country. There is little credit activity in the Free State, Limpopo, North West and the Northern Cape.

Figure 7: Estimated number of MFI Employees

Estimated Number Number % distribution of entities employed staff Small enterprise financiers (mostly not for profit) <20 914 3.8% Cooperatives <60 232 1.0% Incremental/Low cost housing <15 120 0.5% Small micro lenders 2600 9,100 37.3% Large micro lenders 300 6,000 24.6% Furniture lenders 174 ? 0.0% Alternative banks (African Bank/Capitec/U-Bank) 2 8,630 31.6% Large/Commercial Banks 6 300 1.2% Total formal lending to low income persons 3577 25,296 100.0% Source: NCR Registration August 2010 with RUDO estimates

No formal statistics exist on the total number of people employed in this sector. The sources utilised to estimate this number included available sustainability reports, annual reports, the NCR’s registration data and reports from FinMark Trust and the UP’s Centre for Microfinance. The data indicate small lenders accounted for the highest number of employees in the sector as they employ an estimated combined total of 9,100 employees, which is 37.3% of the microfinance workforce. This is followed by 2nd tier banks (African Bank, Capitec, U-Bank), who employed a combined total of 8,630 employees (as reported in the 2009 financial/sustainability reports), this is 31.6% of the MFI workforce. Capitec reported a total of 4,200 employees, followed by African Bank at 3,500 and U-Bank Bank 930 employees. Large micro lenders account for 24.6% of the MFI workforce, as they have an estimated total of 6,000 employees. Micro enterprise lenders only have 914 employees, whilst large banks and cooperatives have the smallest representation of employees in this sector. There was no available data on the number of staff employed by furniture lenders. It is therefore estimated that the total MFI workforce is about 25,296 employees and it has to be noted that this figure excludes furniture lenders. Although the number of people employed in the 2nd tier banks is reasonably accurate, the numbers of people employed in large and small micro lending companies are estimates based on both the primary and secondary research and should therefore be viewed and quoted with caution.

Figure 8: Employees’ Race Profile

In terms of the employees’ race profile of the MFI industry, the primary research from a random of 300 lenders indicates that almost 49% of people working in the micro finance industry are white, with 95% of them owning the small micro lending outlets where they work. This is followed by 40% of African and Coloured and then Indian employees. There seem to be a drop in the intake of African employees in this sector, as a BANKSETA MFI skills audit conducted in 2005 reported that 42% of Africans were employed in the industry at that time. It would be interesting to find the reasons for this drop.

Figure 9: Employees Race profile per province

Province African White Indian Colored Total

Gauteng 46% 40% 4% 9% 100% Western Cape 23% 47% 0% 29% 100% KZN 39% 40% 21% 0 100% Eastern Cape 45% 47% 3% 5% 100% Mpumalanga 56% 43% 0% 0% 100% Free State 19% 81% 0% 0% 100% Limpopo 46% 53% 0% 0% 100% North West 43% 45% 2% 9% 100% Total 40% 49% 4% 7% 100% Source: Interviews conducted within the sector: October 2010

The provincial racial analysis shows that:  Gauteng and North West are the most racially balanced provinces with Gauteng mainly constituted by African employees at 46% with North West having the reverse scenario.  As with the StatsSA racial distribution, Western Cape mostly employed Whites followed by Coloured employees  KZN is one of the four provinces where there are no Coloured employees, with an equal amount of Africans and Whites followed by Indian employees  Mpumalanga, Free State and Limpopo were represented by African and Whites with no representation of Indian and Coloured employees.  Free State had the highest concentration of White employees in the country at 81% who mostly are Afrikaans speaking

Figure 10: Employees’ Educational Profile

The primary research also indicates that 2nd tier banks employ 30% of staff with diplomas and 18% with degrees. This picture changes concerning small micro lenders. Most of their employees have Matric only and very few have a tertiary education. The picture was even worse with regards to cooperatives, with most of the employees having only Matric. However it must be noted that most of the cooperatives are based in rural areas, where the brain drain is most apparent as most educated people leave these villages for the cities.

Figure 11: Employee educational profile per province Matric + Province No Matric Certificate Diploma Degree Post Total Matric only graduate Gauteng 4% 33% 5% 13% 35% 11% 100% Western Cape 6% 55% 8% 11% 16% 4% 98 KZN 5% 57% 6% 13% 11% 8% 100% Eastern Cape 9% 61% 2% 22% 6% 0% 100% Mpumalanga 7% 62% 4% 23% 4% 0% 100% Free State 7% 55% 4% 24% 8% 2% 100% Limpopo 5% 50% 6% 35% 2% 2% 100% North West 6% 59% 5% 24% 6% 0% 100% Total 6% 54% 5% 20% 11% 3% 100% Source: Interviews conducted within the sector: October 2010

The quantitative analysis indicate that larger micro lenders and 2nd tier banks like African Bank employ graduates and most of these are situated in the regional or head offices. The education profile per province shows that:  The Gauteng analysis indicates that it enjoys a relatively educated workforce, with most of graduates and diplomats employed in this province. It also has a high representation of employees with post graduate degrees.  The Western Cape and KZN has a similar educational profile. Although most of their employees only have Matric, few were graduates and some with post graduate degrees.  Rural provinces like Limpopo and Eastern Cape had the least number of graduates  Mpumalanga which employs a majority of African employees, had a highest representation of Matriculants

The educational profile of the provinces is reflective of the credit consumption and financial activity in the individual provinces. Gauteng, regarded as the financial hub of the country, with a concentration of banks and 2 nd tier banks employs a more educated workforce. However rural provinces like Limpopo and the Eastern Cape employs staff mainly with Matric only. The focus groups conducted in the Eastern Cape indicated that lenders have two main challenges regarding staff, that is,  Graduates prefer to migrate to Gauteng, Western Cape and KZN to look for employment leaving them with a small pool from which to recruit

 That graduates are expensive to retain and they require higher salaries and that these employees are poached by banks and organizations like African Bank and Capitec

The gender profile was tilted to more women, at 57%, working in the industry. If this is read together with the race profile, it means that white female workers are the biggest group of employees in this sector.

Definitions and the historical context

There are different definitions and meaning of the term microfinance, which in most cases has led to confusion amongst analysts and practitioners in the microfinance sector. It is therefore critical that there be a standard definition used so that the research team and users of this report can move forward with a common understanding.

What is microfinance?

‘Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and micro insurance. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.’ CGAP, 2010. The Centre for Microfinance applies a fairly broad definition for microfinance (University of Pretoria, 2010), namely ‘the provision of formal financial services to low-income households’.

For the purpose of this report we identify microfinance as the provision of financial services that includes providing finance or credit, deposit taking facilities, money transfers/remittances and insurance products for low-income people. Further, to clarify, finance to low income persons includes credit that is applied at the discretion of the consumer and could be example for the purpose of starting a business, building a house, paying for education or for general consumption purposes.

Low income people access these products through different channels which include 7micro lenders, 8alternative banks; banks (although traditionally banks shun away from servicing the low-income group9) and other providers

7 Micro lenders refer to organizations who provides loans to employed individuals with a regular salary 8 Alternative banks refer to ‘alternative banks’ who provide a variety of credit products and in some instances even take deposits 9 ABSA and Standard Bank have since the 1990’s offered savings and transactional products to the higher end of the-low income market

RUDO Consulting 26 Landscape of the SA microfinance and cooperative banking sector - BANKSETA who traditionally work with poor people like 10NGO lenders, 11micro enterprise lenders and 12cooperatives. In South Africa, there are different methodologies for the provision of financial services, especially credit to consumers who earn a salary resulting in a dynamic, unique and vibrant sector with its own needs and challenges. Unfortunately, finance and savings products for the very poor economically active people who do not earn a salary are an extremely underdeveloped part of the microfinance sector. The table below illustrates that a relatively small percentage of the lower FSMs are banked, picking up significantly from the LSM 4-5 level.

Figure 12: Demand of financial products by low-income people Demand – Low Income Market FSM Total Population 16+ Formally Employed Banked Categories (millions) Total 32m 1 4.1 3.70% 1.20% 2 5.1 6.00% 10.30% 3 5.1 17.30% 50.30% 4 5.1 26.60% 87.40% 5 5 47.40% 98.00% 6 3.7 57.40% 100.00% 7 2.5 73.30% 100.00% 8 1.2 79.90% 100.00% Source: UP Centre for microfinance adapted from Finscope 2009.

If a bird’s eye view of the South African microfinance sector is taken, salary based lending accounts for the bulk of financial service activity in this sector. Discouragingly the review indicates fairly low activity in the micro-enterprise lending, low income housing and cooperatives sectors.

10 NGO lender refers to poverty focused lenders 11 Micro enterprise lenders refers to lenders who provide loans to very small businesses 12 Cooperatives refer to member owned financial institutions

The historical context of microfinance and cooperatives in South Africa

Prior to 1992, access to credit for most people was restricted to informal channels like mashonisas and stokvels. Towards 1992 government realised that the Usury Act and its stringent limitations on the cost of credit had, unfortunately, contributed to inadequate access to credit for the majority of the population of the country and specifically to informal micro enterprises. In order to promote more access, they introduced, in 1992, the first Exemption Notice to the Usury Act (GN 3451 of 31 December 1992) which exempted all loans that were below R6 000.00 from the Act.

This Exemption Notice was the main cause that precipitated the establishment of a formal micro finance industry. Whilst the 1992 Exemption was successful, to some extent, in providing more access to credit for most people, government was concerned about certain abuses and malpractices that developed in this unregulated environment; like the retention of bank cards and pins and identity documents by the micro lenders as well as abusive collection methods that were being used as well as the reality that the original intended target, the informal micro enterprises, did not get more access to financial services.

Government revised the Exemption Notice in 1999 and 2002. In terms of this notice, micro financiers were still permitted to charge unlimited fees for credit disbursed but they were required to register with a regulatory entity the Micro Finance Regulatory Council (MFRC). The later exemption notices also prescribed minimum standards of conduct, and registering of loans on the National Loans Register. The MFRC was given authority to monitor and enforce compliance with these standards. The Exemption was limited to loan agreements where the disbursed amount was R10 000.00 or less and the repayment period did not exceed 36 months. The Exemption Notice was later repealed and substituted by the National Credit Act of 2005.

The regulation of the microfinance industry was in many ways a precursor to the National Credit Act, for instance: . It introduced the registration process for micro financiers, . Micro financiers, unlike other creditors were regulated by an appointed authority - the MFRC. Any non-compliant conduct of a micro financier could be investigated and prosecuted by a disciplinary committee established in terms of the Exemption Notice. . The Rules of the MFRC and subsequently the Exemption Notice introduced the concept of reckless lending into the credit market. The purpose of this was to deal with over-indebtedness, . A National Loans Register was introduced in order to assist micro lenders in affordability assessments to combat and avoid the granting of reckless loans, . The conduct of agents of micro lenders was also regulated.

Although this exemption solved some issues of access to credit, it was quite obvious that a comprehensive credit legislation review was necessary. As early as 1994 a number of research reports13 identified weaknesses in the then consumer credit legislation and identified the need for a single statute that regulated the credit industry. The Credit Law Review Committee (that conducted background research and managed the drafting of the Consumer Credit Bill as it was know when first introduced) also concurred with the views expressed by the Law Commission. The fragmented legislative approach was not sustainable, for instance, for the following reasons:

 There were many inconsistencies and overlaps with regard to the scope of the various legislations,  The inconsistencies resulted in dissimilar standards of protection for various consumers,  The multiplicity of laws resulted in confusion for both those who were bound by the laws and those who were protected by it,

13 The Law Commission’s 1994 review of the Usury Act, the Strauss Report on Rural Fina nce, The National Small Business Regulatory Review by Ntsika Enterprise promotion Age ncy in 1999, the Policy Board Report on SME Finance (Falkena Report, 2001) and the MF RC Review of the Legislation on Consumer Credit 2002.

 The fragmentation made enforcement of the laws difficult,  There was inadequate monitoring of compliance with the law and non- compliance was rife,  The fragmented approach never complied with international standards.  There were undesirable practices which resulted in damage to the consumers such as: o Expensive Credit life insurance was included in the pricing, blacklisting of consumers in the credit bureaus, negative option selling, o Misleading disclosure, extreme interest rates, inflated credit prices, extreme over-indebtedness, o No effective debt rehabilitation

This background resulted in the promulgation of the NCA. Although this Act drastically changed the South African credit market, its promulgation has been generally well received and it provided better hope for the regulation of the industry.

A study conducted by FinScope in 2006 indicated that about 49% of adult population in Republic of South Africa did not have access to banking services. Moreover, the South African banking institutions introduced Basel 11 in January 2008 and the gap between the “banked and unbanked” widened as this system required more prudence in granting credit to those regarded called risky. This put further barriers for the unbanked to access financial services. This meant, for example, a group of miners with their informal savings would find it difficult to access credit and other financial services from the formal financial institutions.

Following the lobbying from different political organizations, position papers and engagement with different government institutions discussions towards the establishment of a Cooperatives Bank Act were set in motion. The aim of this Act was to bridge the divide between the banked and the unbanked masses of South Africa by providing a sound legislative framework within which cooperatives and cooperative banks can provide financial services to their members, thereby enhancing the accessibility of financial services to all South Africans.

Analysis of the Political, Economic, Social, Technology and Legislative and Environmental analysis (PESTLE Analysis)

Economic and Socio economic environment

South Africa’s economy moderated in the second quarter of 2010 with the Gross Domestic Product (GDP) increasing by 3.2% compared to 4.6% in the first quarter of 2010 (South African Reserve Bank, September 2010). This followed a weaker 2009 where the GDP on average shrunk by 1.8%. During 2008 GDP grew by 3.1%, a bit lower than the 5% average for 2005-2007 14. Despite the relatively robust economic growth over the past 10 years, close to 40% of the South African population live below the poverty line (Van der Berg, 2009) and the Gini coefficient at 0.72 (Van der Berg, 2010) indicates very high levels of inequality between rich and poor South Africans.

Depending on whether you apply a narrow or broad definition, between 25% and 48% of economically active people in South Africa are unemployed (Van Aardt, 2010). As mentioned in the review of the microfinance sector (University of Pretoria, 2010), in the second quarter of 2009 13.4 million or 43% of the 31 million adults of working age in South Africa were employed, of them, 60% were employed in the formal sector, 30% informally and 10% as domestic workers in private households. Disconcertingly this means that only 26% of adults of working age are employed in the formal sector and thus that 74% of adults in South Africa would not able to produce a salary slip should the need arise to access credit.

The Table below, from the StatsSA’s quarterly employment survey (QES), illustrates that the financial services sector has shed a number of jobs in the past year or so, since an employment level high reached in the September quarter of 2008.

Figure 13 14 Presidency. (2009). The Strategic agenda of goverment: A summary. Pretoria: The Presidency.

Source StatsSA QES June 2010

Political and Social Environments

The Presidency spells out in its Medium Term Strategic Framework for 2009 -2014, 10 priority areas of which the following 5 are particularly important to this project (Presidency, 2009):-  Speeding up growth and transformation to create decent work and sustainabl e livelihoods  Massive programme to build economic and social infrastructure.  Comprehensive rural development strategy linked to land and agrarian refor m and food security  Strengthen the skills and human resource base  Build cohesive, caring and sustainable communities (Address inequalities and halve poverty and unemployment by 2014)

The Government’s strategic framework is aimed at alleviating poverty, job creation and redistribution of wealth. In addition in his state of the nation address at the start of 2010, Pres. Jacob Zuma announced an intention of government to make a guarantee fund of R1bn available for low income housing finance purposes. This and other subsidy initiatives via the department of human settlements indicate the important role and focus on housing delivery.

Legislative environment

The diagram below indicates the extensive list of different pieces of legislation that micro financiers need to adhere to.

Figure 13: Acts that need to be adhered to by microfinance players

Source: MFSA/ CreditReform, 2010

The diagrams above indicate that there are about 50 different Acts that micro financiers need to adhere to. One can imagine that compliance with all these acts is no mean feat for any organisations in this sector, especially so for the 2600 or so smaller lenders. The National Credit Act (NCA) is central to most micro financiers. Interviews with micro-lenders indicate that the National Credit Act, its regulations, reporting requirements (i.e. Form 39 and the annual compliance report) and especially the new debt counselling process are still struggled with every day. Two areas pose particular challenges, namely, limits on interest and fees and debt counselling.

As elaborated upon in the dedicated section on salary-based micro- lenders, two representatives from the salary-based micro-lending industry space indicated that they find it increasingly difficult to operate profitably under interest and fee limits stipulated by the NCA. Further they find the new debt counselling procedures especially hard to deal with which have an impact on their arrears management. The NCR task team on Debt Counselling have recently rewritten procedures, responsibilities and rules of restructuring which is critical for a credit provider to know if he wants to maximise his collection effort on his arrears portfolio. As discussed in the section on the Cooperatives sector many cooperatives simply are not able to meet registration criteria of the new registrars created under the new Cooperative Banking legislation.

Technology factors

The desk work revealed an important theme around technology and that is; competitiveness through technology. It emerged that relatively advanced technology implemented through extensive branch networks by players like Capitec and African Bank provides them with advantages over less equipped smaller entities. Not only does the technology improve the turnaround times and customers experience, sophisticated tools assist large players to make better lending decisions.

According to the MFSA, smaller micro-financiers struggle to gain suitable technology solutions for their segment of the industry that are both cost effective and functional for their specific environment. Further, below we elaborate on the fact that technology advantages of larger players appear to be marginalising smaller players. According to the MFSA, the National Loans Register which was established under the old Exemption Notice is deteriorating rapidly and no longer a source of up to date information on client exposure.

This register was compulsory under the old Exemption Notice and supported by the MFRC. Now data submission is no longer compulsory and the NCR does not support or monitor the functions of the register. Unfortunately the new register envisaged in the NCA is not operational yet and thus key decision making information is lost in the interim. The cooperatives sector displays a mix in application of technology. A review of cooperatives show that rural based cooperatives have mostly manual systems as they do not have computer technology or knowledge to assist them with managing their books electronically according to Mbeza, 201015.

He adds that there are others that have acquired a sophisticated custom designed software package from a foreign company but does not use it as it seems too sophisticated for them. The deskwork identified that prior to finalising the intervention mechanisms in the cooperative’s sector the technology applications (or non-application thereof ) may need further investigation as this aspect has not been thoroughly documented in the primary research thus far.

Key Finding from the PESTLE Analysis

The key considerations and recommendations for skills development from the landscape and PESTLE Analysis are discussed below. Please note that these are some broad findings that appear to be applicable to most of the different sub- segments of the market. Further on in the report we provide more detail on many of the PESTLE factors mentioned above as it pertains to a specific sub- segment of the market.

15 Mbeza, R. (2010, 10). Head of Cooperative Capacity building CBDA. (Notes from interviews with M. Heymans)

BANKSETA initiatives should support government’s endeavors to r educe poverty by focusing on how it can enhance micro enterprise and housing microfinance: The analysis above and a more detail discus sion below on micro enterprise and housing microfinance show that BANK SETA should consider these two sub-segments of the market as priority ar eas for BANKSETA resource allocation. As indicated further below in the re port, there is a significant skills development need for those micro-enterpr ise lenders, low income housing financiers and credit and savings cooperat ives as very few of them operate profitably at scale. However, our hopes s hould not only be on them to provide an answer for the poverty alleviation aims of South Africa.

Part of the solution would be to ensure to focus on skills development effo rts also at banks and traditional salaried based lenders in order to empow er them to tackle product development head-on for the low income marke t especially housing, enterprise lending and savings products.

It is thus recommended that BANKSETA should back various horses so to speak and allocate resources in broadly two different ways.  For dedicated low-income housing, enterprise lenders and cooperatives there is a clear need for staff development and ensuring a good understanding of the basic skills, governance matters and their specialist areas of lending.  For salaried-based micro-lenders skills development should focus on training them in the art of providing productive debt. More information is supplied further on in the report.

The NCA and Consumer Protection Acts seem to be priority areas b ut wider legislative knowledge is crucial: It is important that practitio ners in this market have a basic understanding of most of the acts, given t hat there are almost 50 pieces of legislation of which 40 are applicable at a time to any one financial services provider. This leads to a recommenda tion that although it will be impossible to dedicate detail programs for eac h piece of legislation; BANKSETA may still intervene in two ways.

Firstly, it will assist greatly if BANKSETA can develop an information portal that summarizes these Acts and how they impact on micro financiers. Secondly to develop course material that provides a summary of key items of each act, and detailed modules on the most relevant acts.

Thus, practitioners can access key information as they realize the need. H aving said that the National Credit Act and Consumer Protection Acts warr ant more hands on initiatives and should therefore be prioritized. As far as the NCA is concerned there seems to be a pressing need for training on de bt counseling and debt collection matters.

The South African Microfinance Landscape

Figure 14: Source - RUDO

The diagram above ilustrates on a high level the landscape of microfinance in South Africa. On the far left hand side one finds Informal lending from mashonisas, friends and family. This part of the market is diffcult to quantify as no offcial statsitics are available although we have some inidcation of uitlisation. The Finscope 2010 survey states that 14% of consumers in South Africa make use of informal borrowing compared to 24% who make use of formal borrowing.

16Stokvels are next in line. They operate on a more structured basis than that of the mashonisa but are excluded from compliance and registration under the National Credit Act. A recent number of stokvels in Sourh Africa is not known, but a 2003 estimate of the National Stokvel Association puts this at about 800 000. Next up are dedicated microenterprise lenders (of whom the bulk are registred as not-for profit, Section 21 organisations) who provide unsecured loans for small business and mostly in the form of group loans to women. There are not more than 20 such lenders that combined have a book estimated at about R250m17.

Next in the landscape continuum are the cooperatives, of which there are about 58 in South Africa whose members are community or employee groupings. It estimated that their lending book is about R90m, and that they have savings of between R30-R50 million18. Incremental housing lenders are a combination of not for profit and for profit lenders that provide unsecured finance linked to the procurement of building supplies so that low-income conumers can build houses incrementally. There appear to be less than 15 such lenders in South Africa and it is estimated that their book totals about R400m19.

Then there are small microlenders of which there are about 230020 in the country.These 2300 lenders have an estimated book of about R5bn which is very small when compared to African Bank and Capitec (who have a book of more than R20bn), however they probably account for more than 50%21 of all loans granted. Thus in terms of book size they are small, but in terms of client interaction they feature very strongly in this landscape.

16 Stokvels are clubs or syndicates in South Africa where members contribute fixed sums of money to a central fund on a weekly, fortnightly or monthly basis. 17 Source: 2007 MFRC data adapted and updated with sample information of survey by UP Centre for micro finance on select micro-enterprise lenders. 18 Source MFRC 2007 data adapted and updated together with SACCOL publications. 19 Estimates derived from NHFC Housing microfinance Bulletin 2004, RHLF 2009 and NHFC 2009 annual report 20 2010 NCR registration statistics adapted to exclude an estimate for service providers whose core function is not the provision of finance i.e. doctors, pharmacies. 21 2007 MFRC data adapted and updated supported by number of loans disbursed as provided by 2010 NCR data.

Operating at a larger scale but with the same for-profit motive and focused on salaried indivudals are the large microlenders. There is an estimated 300 of these lenders who account for a further 5bn of salary-based lending.22 Then one finds large Furniture Groups and non-bank motor financiers who provide loans for the purchase of furniture and cars for low income persons. The low income furniture book in South Africa is close to R35bn There is very little information available to judge the book size of low income vehicle finance , but this is estimated at between R2 and R5bn.

African Bank and Capitec warrant their own grouping as they are the two biggest sources of unsecured loans for low income finance in South Africa accounting for about R20bn in unsecured finance to low income people.23. Published data from these two banks indicate higher book values. For the purpose of this report we have exludes the furniture book in thi section and also exluded a portion of the book that is accounted for , by loans to people earning more than R10K a month.

At the far right of the landscape are larger banks, that mostly offer loans to salaried individuals although some like ABSA and Standard have microenterprise divisions. The combined unsecured lending book to low income individuals (excluding) low income mortages is estimated at about between R5bn-R10bn. This is quite small given that African Bank and Capitec alone account for about R20 billion.

Sector overview and landscape analysis

22 Estimate based on NCR registration statistics according to fee category 23 Note that the R25bn excludes the furniture portfolio of African Bank and an estimate of the unsecured credit granted to persons earning more than R10 000 p.m.

The diagram before provides a high level landscape and to provide another view we illustrate the relative size of the different landscape players for ease of use.

Figure 15: Estimate of the value of the MFI lending

Number of MFI -Lending Book in % of total MFI entities Rand million lending Informal ? ? Stokvel ? ? Small enterprise lenders <20 250 0.4% Cooperatives <60 90 0.1% Incremental housing lenders <15 400 0.6% Small micro lenders 2600 5 000 7.0% Large micro lenders 300 300 0.4% Furniture lenders 174 40 000 56.3% African Bank/Capitec 2 20 000 28.2% Large Banks 6 5 000 7.0% Total formal lending 3577 76 040 100.0% Source: RUDO estimates based on data from MFRC (2007 adapted for 2010), and NCR (2010)

The table above estimates that low income financing in South Africa is worth approximately R76bn or about R36bn when one excludes furniture finance. The development finance sector as represented by small enterprise lenders (mostly not for profit Section 21), Cooperatives and incremental housing lenders account for less than 1.5% of the total lending book. According to the National Credit Act all organisations that advance credit to consumers and small businesses24 need to register at the National Credit Regulator. The NCR is thus a good source of information about the different organisations that supply any form of finance to consumers in South Africa.

This provides an alternative and slightly more detailed view of the landscape of micro finance as illustrated in Table 2. We estimate that of the 4168 registered lenders at least 90% have developed products for low income persons. This not

24 The NCA protect all loans granted to small businesses where the owner trades in his personal name. Further the act applies to a small business when the business is a juris tic person with an asset and turnover value of less than R1m. In instances where the c onsumer is a juristic person with a turnover or asset value below R1m, but the agreem ent is a mortgage or above R250 000in value then the agreement will fall outside the s cope of the National Credit Act.

RUDO Consulting 41 Landscape of the SA microfinance and cooperative banking sector - BANKSETA only include an estimated 2600 micro lenders, but the likes of furniture stores, clothing retailers and motor dealers (providing second hand car finance). Figure 15 indicates that there is a significant increase in the number of smaller entities that have registered since the days of the MFRC when there were about 1200 small micro-lenders.

The NCR’s mandate goes further than micro-lending and would include a number of small outfits like a butcher, doctor, pharmacy or employer who as the normal course of their business provide goods or services on credit. It is probably these entities that account for a portion of the 3400 small financiers mentioned in the table. The NCR indicates 34 Cooperatives as registered. This appears to be a combination of agricultural and credit cooperatives. (The 58 Cooperatives under SACCOL, discussed below, are not all registered at the NCR, likely as not all advance credit.)

Figure 16: Types of registrants at National Credit Regulator Type Number Type Number Local Banks 21 Clothing Retailers 48 Foreign Banks 2 Food Retailers 7 Mutual Banks 2 Furniture stores 174 Agri/Credit Cooperatives 34 State Enterprises 14 Housing Lenders 11 Securitisation vehicles 55 Short and long term financiers 3396 Colleges and Universities 31 Pawnbrokers 241 Life Insurers 17 Motor financiers 115 Total Core lenders 3707 Total Non-core lenders 461 Total 4168 Source NCR annual report 2010

Figure 17: Types of credit products Housing and land loans Vehicle and Asset finance Credit facilities Agricultural property (farms Agricultural vehicles and etc.) equipment Overdrafts

Vehicle finance (new and used High to Low end mortgages vehicles) Credit cards Unsecured/Incremental Equipment (medical Clothing /durable goods store housing construction etc.) cards Pension backed loans Other secured Food store credit Bridging finance Furniture loans Other Personal /group lending Education loans(sometimes (mostly unsecured) Agriculture production loans secured by guarantee) Middle -high end loans Insurance policy loans Lending by pawnshops Micro-loans (consumption) Lending by state enterprises Micro finance (SMME loans) Sources: NCR and Rudo Consulting

Figure 17 illustrates the wide variety of credit products on offer by banks, microfinance institutions, cooperatives and other organisations that provide finance, to low income consumers and small businesses in South Africa.

Figure 18: Profile of NCR lenders registered according to size of the debtors b ook Debtors book size Credit Provider Outlets Average outlets 1 = Bigger than R15 billion 8 13215 1651.9 2 = R5bn-R14.9bn 8 1584 198.0 3 = R1bn-R4.9bn 47 6845 145.6 4= R100m- R0.99bn 97 2288 23.6 5= R5m - R99m 381 2025 5.3 6= R1m-R4.99m 599 1316 2.2 7= R1m 3158 6424 2.0 Total registered (31 August 2010) 4298 33697 7.8 Source NCR Registration, 31 August 2010

The table above provides an indication of the stratification of different sized entities registered at the NCR. It is evident that 3757 or 87% of the total registered entities are lenders that have a book of up to R5m and that these are smaller outfits with an average of 2 outlets/branches. It is believed that these are mostly micro financiers. The primary research, backed by BANKSETA report (2007) indicates micro-financiers have on average 6 employees in general with small micro-financiers employing less than 5 employees. Data from the Microfinance Regulatory Council (MFRC) although dated leads one to conclude that the bulk of these entities would be Closed Corporations and with quite a few trading in a persons name.

Figure 19: Provincial distribution of credit activity BANKSETA geo-profile of Province NCR geo-profile of credit employees granted Gauteng 60% 46% Western Cape 12% 15% KZN 11% 13% Eastern Cape 5% 6% Free State 3% 4% Mpumalanga 3% 6% Limpopo 3% 4% North West 2% 4% Northern Cape 1% 1% Total 100% 100% Source BANKSETA and NCR consumer credit report 3rd quarter, Sept 2010

Figure 19 provides an indication of the provincial perspectives on financial and credit activity in South Africa. The BANKSETA geo- profile indicates a large amount of employees in the Gauteng province driven by the head-office presence of most banks in South Africa in this province. The NCR provincial distribution reflects a demand side picture of credit usage across different provinces with Gauteng topping the list at 60%, followed by the Western Cape at 12% and KZN at 11%. If one had to exclude large banks from the equation, it is believed that the provincial distribution of microfinance activity probably is closer to the NCR credit usage profile.

Figure 20: Credit and loan products held by consumers Formal 24% Informal 14% Store card 19% Loan from family or friend 12% Credit card 8% Mashonisa 2% Home loan 5% Stokvel 1% Vehicle finance 4% Spaza shop 1% Personal loan from bank 3% Loan from retail store 3% Overdraft facility 2% Personal loan from smaller bank 1% Source FinScopeTM 2009

Figure 20 illustrates that 24% of consumers surveyed in the FinScopeTM 2009 (FinMark Trust, 2009)25 made use of a formal credit product whilst 14% of

25 Survey of nationally representative sample of 3900 consumers of 16+ years.

RUDO Consulting 44 Landscape of the SA microfinance and cooperative banking sector - BANKSETA those interviewed borrowed informally. Store cards feature prominently in the life of a low income consumer.

It is challenging to provide a provincial distribution of the R37 billion book size as this data is not reported or published anywhere. An estimate is detailed belo w. This estimate uses the NCR distribution according to disbursements as a sta rting point. However, two adjustments have been made. Firstly the NCR data is dominated by secured credit finance to higher income individuals. They do not provide a breakdown of the provincial distribution of unsecured credit only all c redit combined. However it is known that the per capita income of urban consu mers is higher than that of rural persons. This necessitates an adjustment to s how that the low income provincial distribution will likely move away from Gaut eng, KZN and Western Cape where economic activity is strongly centered arou nd the big cities in these provinces.

Figure 21: RUDO estimate of the provincial activity of low income micro finance. % per province distribution of Disbursements by the 40 largest Rudo estimate of lenders NCR Q4 NCR registration low income m/f Province 2010 statistics Aug 2010 distribution Gauteng 44.2% 33.0% 35% Northern Cape 2% 4% 3% KZN 14% 11% 11% Limpopo 4% 7% 6% Eastern Cape 7% 9% 10% Mpumalanga 6% 9% 10% North West 4% 6% 7% Western Cape 15% 13% 12% Free State 4% 8% 7% Total 100% 100% 100% Source: NCR’s Consumer Credit Market Report: 4th Quarter, December 2010 an d RUDO’s estimate of book size as shaded item

The extrapolated data therefore indicates that the bulk of the low-income book (35%) is consumed by Gauteng consumers. Western Cape and KZN follow suit with the value of their unsecured credit estimated R4.4 billion and R4 billion re spectively. These are the provinces with large metropolitan areas and the

RUDO Consulting 45 Landscape of the SA microfinance and cooperative banking sector - BANKSETA lenders like Capitec, African Bank, and Bayport will play a significant role in servicing the consumers in these areas. However the areas within these provinces which are beyond the metropolitan areas will be serviced by short term non-bank micro lenders. African Bank and Capitec will grant loans terms up to about 60 months and thus the average deal is usually in excess of R10 000. A One month micro lender does not have access to capital and will specialise in one month lending that are typically in the region of R1000 in size.

Figure 22: Provincial distribution of branches NCR geo-profile of branches NCR geo-profile of registered Province lenders Gauteng 17 106 1 398 Western Cape 3 913 579 KZN 2 820 458 Eastern Cape 2 253 384 Mpumalanga 1 723 393 Free State 1 791 359 Limpopo 1 656 295 North West 1 687 265 Northern Cape 742 163 Total 33 697 4 298 Source: NCR Registration Stats 2011

Figure 22 above indicate that these credit agreements are disbursed through a network of approximately 33 697 branches countrywide. This branch network from the NCR includes a couple of thousand branches from furniture retailers. Every small to medium sized town in South Africa will have more than 2 furniture stores. The NCR was unable to provide a provincial split excluding the furniture retailers. RUDO estimates that excluding the furniture retailers the micro lender branches are manned by approximately 25 296 MFI employee s. Big banks do not have branches in small towns and non-metropolitan areas.

However, small micro-lenders do. Banks naturally enjoy the biggest branch foo tprint although their interaction with consumers is multifaceted to include ATMs cell phone and internet banking.

Primary data indicate that 2nd tier banks and other lenders still depend primaril y on branches to interact with their clients and distribute their products. 2nd tie r banks further utilize the banking ATM network for cash withdrawals. This ana lysis further indicates that the largest network of branches is represented in Ga uteng, followed by the Western Cape and KZN. The BANKSETA geo- profile indicates a large amount of employees in the Gauteng province driven by the head-office presence of most banks in South Africa in this province.

General skills development findings

Below we set out some high level findings about skills development matt ers stemming from the landscape analysis. Note that different sub-segm ents of this market operate very differently and thus are discussed in det ail later in the report.

 Regardless of sub-segment, all lenders need generic skills associated with the business of lending: Regardless of the main activity of each of these different sub-segments all players mentioned in our landscape analysis require generic skills to run the business of providing financial services.  Size of entity dictates design of a skills intervention: It would appear that in terms of size the microfinance landscape can be divided into 3 broad categories  Banks and microfinance banks (About 10 that service low income segments),  Large non-bank micro-financiers (About 200-300)  And then more than 2600 small players which include micro lenders and development finance institutions.  There is a broad skills needs differentiation between these groupings. For instance, banks will have compliance divisions with specialists that deal with different acts, whilst a small micro lender with 3 staff members will be hard pressed to get a grip on 50 pieces of legislation.  BANSKSETA has an important role to play in skills development at other sectorial SETA constituencies whose members provide finance. The landscape analysis shows that personal and small business finance matters for low income consumers is not ring-fenced within the domain of the BANKSETA constituency. The microfinance landscape includes credit providers that are not members of BANKSETA but who could significantly benefit from valuable skills development initiatives by BANKSETA. It is recommended that BANKSETA interfaces in this regard with other SETAs that look after the retail, clothing, motor dealer,

pawnshops, universities and other education institutions, agricultural and insurance sectors to co-ordinate skills development specifically related to the provision of personal and small business finance. Not to be forgotten is the myriad of state enterprises that require capacity building. Here we specifically refer to agencies like provincial development offices on not only the likes of Khula and SAMAF.  Education of the informal/less formal sector is important: In this study we have drawn from research mostly related to the formal financial services sector, but the deskwork revealed that one in 2 persons that borrow money do so from a family or friend and that a significant portion of enterprise lending happens via informal sources. BANKSETA has an important role to play to educate and develop the Mashonisa and Stokvel sectors. Research should be conducted on how to reach these informal operators. As always, consumer financial education should remain a key focus area.

Sub-segment analysis

Below is a sub-segment analysis based on the literature review and primary research starting with the biggest grouping that is the salary-based micro lenders. The PESTLE and landscape analysis concluded that the development of small businesses and low income housing are key priorities for South Africa in order to ensure that the country can address the high levels of poverty and assist asset accumulation in the form of houses for low income persons. The sub-segment thus deals with these two low income finance sectors namely finance for the purpose of enterprise lending and finance for the purpose of low income housing (also known as housing microfinance or incremental finance).

We conclude with an overview of the credit cooperatives sector, which is small in size but judging by international peer analysis should be a much more vibrant sub-segment of the market. The salary based micro finance sector

It is important to note at the outset of the section that follows on salary based lenders, that very little is known about this market segment outside of the lending activity of large banks, Capitec and African Bank. This is because the last available data on micro lending was published by the NCR for the quarter ending May 2007. The NCR currently publishes disbursement and book data for unsecured lending however only loans as advanced by the 4 large banks, Capitec Bank, U-Bank and African Bank. It does not include in its reports any data on the smaller micro lenders or even substantial micro lenders like Real People and Bayport Financial Services. Thus, at present no data is published on the rest of the estimated 2600 or so micro lenders. To quantify this market segment we have thus made use of available data from the NCR to quantify the very large players but made use of extrapolation techniques to project change in the market for smaller entities by using May 2007 data as a base.

Table 8 below reflect data as published by the NCR for unsecured credit granted by the banks registered at the NCR.

Figure 23: Unsecured credit advanced to persons earning less than R10 000 per month NCR Data Q3 2010 Annualised Unsecured Short Term Total p.a. Disbursed less than 6 months term R 450 976 000 R 5 381 012 000 R 5 831 988 000 Disbursed more than 6 months R 53 539 201 024 R 53 539 201 024 Rand value disbursed to persons earning less than R10 000 R 25 560 444 000 R 3 351 068 000 R 28 911 512 000 Number disbursed to people earning up to R10 000 2 470 856 3 586 860 6 057 716 Ave deal to a person earning less than R10 000 R 10 344.77 R 934.26 R 4 772.68 Average deal to a person earning more than R10 000 R 23 111.96 R 1 249.93 Rand value Disbursed to persons earning less than R10 000 as % of total unsecured credit disbursed. 48% 60% Total unsecured book published by NCR R 66 173 578 000 R 668 029 000 R 66 841 607 000 Estimate Book that applies to low income persons R 26 469 431 200 R 367 415 950 R 26 836 847 150 Source NCR Consumer Credit Market report September 2010 and RUDO estimate of book shaded item.

Table 8 illustrates that the large banks including Capitec and African Bank disburse close to R30bn per annum to persons earning less than R10 00 per month. The NCR publishes all unsecured credit in two categories. “Short term” credit refers to credit granted that is unsecured, for a term not exceeding 6 months and which is not more than R8000 in loan size. If a loan is above R8000 in size or below this but more than 6 months in term it is classified as “Unsecured”.

The NCR does not publish the portion of the unsecured book advanced to persons earning less than R10 000. But as shown in the table, this can be reasonably estimated by applying a percentage to the total book provided by the NCR. As “Unsecured” disbursements account to persons earning less than R10 000 for 48% of total we estimate that the portion of the book that apply to low income people is of the order of 38%.26 Loans provided to persons earning less than R10 000 pm accounts for 60% of the short term portion. We believe that this translates into about 55% of the portion of the book.

Figure 24: Size of the salary based micro-lending book % Annual Number of loans distribution disbursements disbursed number of Average Book (R000) (R000) annually loans Disbursement

Estimate of total unsecured book to low income persons as derived above 26 836 847 28 911 512 6 057 716 29% R 4 773

Large non-bank microlending companies (etsimated 300) 5 000 000 4 000 000 3 685 345 18% R 1 085 Rest of the microlending market about 2300 entities 5 000 000 10 400 000 10 862 845 53% R 957 Total 36 836 847 43 311 512 20 605 906 100% R 2 102

Source: NCR and shaded areas estimated by RUDO based on extrapolations of 2007 mid-year data.

The salary based micro-lending book is estimated to be about R37 billion with annual disbursements of more than R40 billion. In order to derive the contribution of the non-bank lenders data published by the NCR of lenders registered under exemption notice as at mid 2007 were used as a starting point. It must be noted that this data had to be adjusted first to exclude for example furniture traders, section 21 companies and cooperatives as elaborated upon further below and then extrapolated to estimate 2010 equivalent values.

26 The average deal to higher income people is much higher and usually for a longer term thus would proportionately account for a bigger portion of the book. One would thus have to adjust the disbursement proportion downwards before applying it in a book context.

As far as African Bank, Capitec Bank and Teba Bank is concerned, in mid-2007 they accounted for an estimated 60% of the book and clients of total bank data but closer to 70% of the rand value of disbursement and probably more than 80% of number of disbursements of banks. It is believed that the relative dominance of especially African Bank and Capitec Bank in this bank sector is probably still intact if not strengthened in 2010. Banks account for about R26bn of the R37bn book. Further African Bank and Capitec account for an estimated R20bn 27 of the R26bn.

Despite the fact that African Bank and Capitec are combined such a dominant force in this market it would appear that the non-bank micro lenders still account for the bulk of client interaction events. This can be seen from the fact that the non-bank micro lenders account for about 70% of the number of loans disbursed in the total salary-based market. Thus the public face of micro lending, especially for the poor end of the low income market is carried by many small entities. Below, we provide more detail on the non-bank segment of salary based lending. Albeit dated information going back to mid- 2007 its still provides useful information about this important sub-segment. In May 2007, there were 2346 lenders registered to benefit from the Exemption Notice as indicated in Table 10.

If one excludes for this purpose the enterprise lenders (Section 21), the credit cooperatives, and the furniture lenders, which were registered as private companies, one is left with 2294 such entities of which 8 are Banks (4 Big banks, African Bank Capitec Bank, Teba) about 284 larger micro lenders and 2000 smaller ones as at mid-200728. Our estimate of 2600 thus assumes that the non-bank micro lending market has grown by about 300 entities between mid 2007 and late 2010.

Figure 25: Types of low income micro-financiers classified according to legal s tatus MFRC Registration Statistics at 31 / 05/ 2007

27 As noted before this R20bn refers to the unsecured portion of loans provided by Capitec and African Bank and excludes 28 http://www.ncr.org.za/Statistical_releases.php 31 May 2007 Exemption Notice statistics

Table A By By Percentage of Number Registered Percentage of Number of Branches Industry Industry Industry 2 346 100% 9 751 100% Banks 8 0.3% 3439 35.3% Public Companies 5 0.2% 16 0.2%

Private Companies-Large micro-lenders 284 12.1% 852 8.7% Furniture stores and banks subsidiaries Private Companies* 6 0.3% 2343 24.0% Close Corporations 1927 82.1% 2865 29.4% Trusts 70 3.0% 138 1.4% Cooperatives 27 1.2% 47 0.5% Section 21 Companies 19 0.8% 51 0.5% Source NCR and adapted by RUDO including furniture retailers as separate item

Figure 26: 2007 Disbursement Statistics from the Microfinance Regulatory Co uncil for the quarter ending May 2007 NCR May 2007 % of % of Quarterly Number of loans Industry by Industry by Disbursements disbursed in quarter value number Industry R 8 200 531 062 100% 4 641 480 100% Banks 3 590 001 194 44% 1 275 165 27% Public Companies 25 244 731 0.3% 45 566 1% Private Companies Estimate for furniture stores and bank subsidiaries 2 200 000 0000 26% 954755 21% Private companies (larger 1 002 998 479 micro-lenders) 12% 737069 16% Close Corporations 1 165 141 586 14% 1 458 730 31% Trusts 68 790 527 0.8% 120 123 3% Cooperatives 83 106 495 1.0% 21 582 0% Section 21 Companies 65 248 050 0.8% 28 490 0.6% Source NCR and RUDO own estimates including furniture stores based on listed information

Figure 27: 2007 Loan book Statistics from the Microfinance Regulatory Counci l Loan Book Statistics MFRC May 2007 % of Average size Number of Loan Gross loans outstanding Industry by of loan accounts value disbursed Industry R 29 308 616 727 100% 8 265 621 R 1 767 Banks 14 628 216 344 49.9% 3 163 066 R 2 815 Public Companies 64 245 243 0.2% 28 000 R 554 Private Companies Estimate for furniture stores and bank subsidiaries 10 000 000 000 35% 3126593 R3 198 Private companies (larger 10.5% micro-lenders) 3 385 516 521 1093998 R3 094 Close Corporations 701 416 145 2.4% 677 586 R 799 Trusts 42 906 292 0.1% 44 214 R 573 Cooperatives 388 335 270 1.3% 69 861 R 3 851 Section 21 Companies 97 980 911 0.3% 62 304 R 2 290 Source NCR and RUDO own estimates including the furniture sector

Figure 28: Range of lenders and product profiles Estimated number of Examples Products entities

1 Tier Banks FNB, ABSA, STD,NED Typical Loans of up to 48 months 4 Capitec, African Bank, 2nd Tier Banks Teba, Ithala Discussed in detail below 5 Loans of up to 12 months. Will Larger Micro Real People, Bayport, charge close to maximum allowed lending groups. OneCore, Thuthukani, interest and fees. With some Book in excess of Barko Financial Services, concessions for repeat customers & R10m Net 1 Group maximum allowed rates 300

Smaller micro- lending Loans of up to 3 months. Months, companies with but mostly 1 month lending. .Would book size less typically charge maximum allowed than R10m fees and interest 2300 Source: RUDO Consulting

African Bank offers unsecured personal loans of up to R100 000 over a period of up to 72 months. They structure other loans terms of 3, 6, 9, 12, 24, 36 and 60 months. In addition they offer three credit cards. The entry level Blue Classic with a credit limit for up to R20 000, A Silver card with a limit up to R27 000 and a Gold card with a limit of up to R36 000.

As at August 2010, African Bank’s net advances including that of furniture transactions in the Ellerines division was R22 billion. It has a staff compliment (outside of Ellerines) of more than 3500 who service about 1.8 million customers through more than 400 branches. Ellerines was acquired in 2008 and employs 13500 staff that via more than 1000 stores countrywide. (African Bank, 2010)

Capitec Bank offers unsecured personal loans of up to R100 000 for terms ranging from 1-48 months. Although it has a book of about R5bn it advanced R8.6 billion in the 2010 financial year29. Apart from providing credit it also offers deposit taking services with about R2.3 billion in depositors’ money. It has 2.1 million clients serviced through 401 branches and 1238 ATMs. The staff compliment is 4154 (Capitec, 2010)30.

Below the African Bank and Capitec Bank tier, there are a number of large Micro-Lending groups like Real People, Bayport, and Onecor etc. These lenders would typically offer loans in addition to one month lending of 3, 4, 6, and 12 months loans charging fairly close to maximum allowed interest rates on a big portion of their books. The micro-lending book is the core of their operations although some like Real People and Blue Financial Services have expanded into low end mortgages with loan values of up to R350 000 and formalised education loans. These two lenders have applied the lending methodology of Edu-Loan the largest independent education lender on South Africa where money is disbursed directly to an education institution as opposed to the borrower. As with Capitec and African Bank they market other products as home improvement loans. In a few instances money is paid to an approved

29 African Bank Investment analyst presentation 30 Capitec Investment analyst presentation

RUDO Consulting 56 Landscape of the SA microfinance and cooperative banking sector - BANKSETA building supplier, but mostly the loans are to be used at discretion of the borrower. The bottom tier of micro lending market consists of about 2300 micro lenders that have between 1 and two branches. Judging by the fee category registration data at the NCR, the majority of them will run a book of less than R1m and would typically have 2 outlets (NCR, 2010) and employing less than 5 persons. (BANKSETA, 2007)

Challenges faced by salary-based micro lenders

The challenges faced by different sub-segments of this salary-based segment are similar but also different, depending on the size of the lender including:-  A struggle to access capital  Small lenders finding it difficult to operate profitably given fee and interest c onstraints of the NCA  Access to good quality information about the exposure of their client base, now that the old National Loans Register has become less reliable and the new NCA register is not up and running yet.  Struggling to adhere to multiple pieces of legislation as discussed in the PES TLE analysis above.

In various discussions with and presentations by the Micro Finance Association of South Africa a key message relates to concerns about the sustainability of the smaller micro financier. The reasons for these concerns include all the items listed above, but further is related to smaller lenders increasingly facing competition from the likes of African Bank and Capitec which:-  Grow their client base and branch networks aggressively  Have relatively easier access to capital  Employ advanced information technology systems which allows better qu ality decision making and fast turnaround times.

Appropriate technology and electronic systems is a particular concern for smaller micro lenders. They further, face reputational challenges which impact their advocacy powers.

Skills development requirements for salary-based micro lenders

 Develop skills associated with enterprise and low income housing le nding: As highlighted on various occasions in this report, it is important tha t traditional salary based lenders learn more about enterprise and low-inco me housing finance. As indicated by the MFSA, traditional micro-lenders can simply no longer be “a one trick pony” (Ferreira, 2010)

 Consider having a dedicated skills fund for developmental credit: In order to give effect to the importance of developmental credit it is suggeste d that a dedicated skills fund is put in place for this purpose.

 Legislative training: The regulatory environment remains a heavy b urden to carry. Broad knowledge of general acts is required, but there are pressing needs related to the NCA and Consumer Protection Act. However, knowledge all the rest of the 50 or so applicable acts need to be conveyed i n an accessible way even for smaller outfits.

 Skills development aimed at building careers: There is a need for skills developments and recognized qualifications which will result in staff of a mic ro lender being able to establish a base and career path which could ultimat ely see him migrating from a micro lending office to a bank for example. Th ere is a need for skills development aligned to clearly defined positions (wit h standardized titles).

 The following scarce skills were identified during both the primary and sec ondary research:  Credit and debt management including debt counselling implications  Customer Care  Marketing skills  Compliance and legislation training

 Both representatives of small and large micro lenders indicated that they id entify a real need for some of the following generic skills related to consu mer /loan officer interaction including:-  Understand the customer better, in order to make a better call on wheth er the loan will be repaid (risk management) but also so that the loan off icer understands that it will not cause over-indebtedness and more hards hip.  Good, corporate citizenship. Understanding by loan officer of the social r elevance of his job, if he gets it wrong he can destroy a family. If he get s his right he could help build someone a house.  Ethics and governance - Understanding what fraud is, how incorrect com pletion or false signatures by a loan officer could lead to the contract bei ng annulled by a court and involve a person going to jail.  Equip staff to subtlety part with consumer education messages – a direct approach does not work well as consumers are at point of sale only inter ested in getting money.

 Other generic skills identified include:  “Understanding the world of credit”  Computer and IT skills  Language skills in particular African languages  Management  Bank assurance skills (which requires training modules developed under the insurance SETA)  Communication skills

Provincial analysis of Skills in the Salary based lending market

To fully understand the skills needs of MFI employees, it is crucial to understand the environment in which they operate. As already pointed out the MF industry is represented at four different levels, that is banks, 2nd tier banks, large and small lenders. The four 2nd tier banks are operated from head offices mainly based in Gauteng. These head offices typically consist of Finance Division, Operations, Administration and IT. Few of these 2nd tier banks have internal marketing divisions as mostly outsource this function to advertising and PR companies.

Head office functions are represented in regional offices in the nine provinces whilst lending occurs in branches. These 2nd tier banks account for 50% of the branch outlets in this sector. Large lenders have similar set-ups although the IT and Operations divisions are usually combined. Large lenders offer loans of up to 12 whilst 2nd tier banks typically disburse long term (up to 48 months) and larger loans of up to R50 000 with lenders like African Bank going to a maximum of R100 000.

Small lenders on the other hand mostly have an average of one branch. The branch is managed by a branch manager who is responsible for general management, operations as well as authorising loans. Then there are loan officers who are responsible for capturing loan applications. At the bottom end are runners or admin clerks who are responsible for screening, interviewing and assisting the clients to complete the loan application forms. The analysis further indicate that two types of loan products are disbursed by small lenders; that is the one month cash loan and short term loans of up to 3 months. The average cash loan is R3 000 with a maximum of R30 000 reported in some cases.

Table 6: Scarce skills Marketing Compliance Risk Credit/Debt Customer skills and Manage Province Management Care legislative training Gauteng 69% 60% 51% 50% 39% Western Cape 66% 63% 50% 48% 50% KZN 63% 55% 54% 46% 54% Eastern Cape 65% 60% 55% 52% 41% Mpumalanga 60% 57% 53% 54% 30% Free State 68% 56% 54% 50% 43% Limpopo 70% 61% 53% 55% 38% North West 63% 59% 52% 51% 40% Total 65% 59% 53% 50% 42% Source: Interviews conducted within the sector: October 2010

Most small lenders mentioned that they battle with debt recovery partly because they utilize basic technology and also because they do not have access to quality information to base their decisions on.  At provincial level the skills needs identified were mostly the same with provincial nuances visible on few occasions. Gauteng’s skills needs were skewed towards credit management which was articulated as debt management, debt recovery or debt collection. This was followed by customer care and marketing. Most lenders mentioned that Gauteng is a very competitive province with sophisticated customers and thus skilled marketers were needed. Risk management was rated low in Gauteng mainly because 2nd tier banks and large lenders hire specialists and lenders with a decentralised system have a strong internal audit function.  Western Cape and KZN recorded almost a similar skill needs profile with credit management rated as a critical need, followed by customer care and marketing. Unlike Gauteng, these two provinces placed an importance on risk management probably because small lenders struggle with internal fraud and theft.  Like with other provinces debt management in Limpopo was identified as a critical skill. The analysis further indicates that compliance and legislation skills were also important especially for small lenders. The NCA’s strenuous reporting requirements have put a burden on most small lenders. Most lack the skills to interpret and understand these compliance requirements and

unlike big lenders don’t have enough capacity who can specifically handle compliance.  The Eastern Cape also recorded a need for debt management followed by customer care and marketing skills (mainly for increasing sales). The NCA has put strict requirements regarding the advertising and marketing of credit. As a result most small lenders reported that they resorted to ‘word of mouth’ as they don’t have the capacity to comply with the requirements of the Act.  The North West like Limpopo is largely a rural province with a high representation of small lenders. Debt management also featured mainly in this province, followed by customer care and governance.  Free State which is largely constituted by White employees also identified debt management followed by customer care and marketing.

Generic skills

Five key generic skills were identified during the primary phase of the research with ‘understanding the clients’’ needs topping the list at 46%. Lenders indicated that customer care and understanding the clients’ needs was quite critical in running an MF business. Lenders indicated that runners/admin clerks were mainly responsible for most of the client interaction as they are the first point of contact with clients. These runners are responsible for the initial contact with the clients (screening) and completion of the application form. The application of credit includes ‘a credit assessment’ and requires an in- depth analysis of the client’s credit portfolio.

It was in this light that lenders mentioned that ‘understanding credit’ training should include an in-depth understanding of credit so that these runners should sell the credit products appropriately. This type of content will not only allow runners to identify clients who won’t be able to pay but will also assist runners not to give loans that will result in clients being over-indebted. ‘Staff has to understand that credit is poison, and should take that into consideration when selling this to clients’, Industry Expert.

Table 7: Generic Skills Ethics Computer/IT Management Customer Language skills Province Skills understanding Gauteng 48% 55% 57% 52% 45% Western Cape 50% 56% 54% 56% 29% KZN 44% 50% 51% 48% 40% Eastern Cape 40% 46% 49% 55% 44% Mpumalanga 46% 49% 45% 51% 25% Free State 38% 45% 48% 58% 61% Limpopo 53% 52% 50% 49% 33% North West 56% 50% 53% 56% 38% Total 47% 50% 51% 53% 39% Source: Interviews conducted within the sector: October 2010

The similarity in all provinces was the importance of management skills and ‘understanding the world of credit’ skills. The literature review indicates that the biggest skill need in the microfinance sector is management skills to sustain these operations. Note that the lack of management skills and experience for managing micro enterprise finance and lending portfolios is the most important area of need. This has been identified by the local surveys, as well as by the Banana Skins report of 2008 and 2009. This is probably the most important area of focus for both micro lenders and micro enterprise lenders (G. Coetzee, 2010).  The most identified need in Gauteng was management skills followed by computer skills, understanding credit and ethics. Sophisticated systems are the cornerstone of competition in this sector, and probably that is why Gauteng with the most educated staff in the sector will still have computer skills as important. Language skills did not feature prominently in this province probably because Gauteng multi-lingual communities with most people speaking and understanding two or more languages.  The emphasis in the Western Cape was computer skills, management followed by ethics.  Management and Computer skills were identified as critical generic skills in KZN.  A major need in the Free State was African languages probably because most employees in this province are White. Most micro lending clients are low-income clients with little understanding of basic financial and credit knowledge. As a result the manner in which lenders communicate with

these clients become vital. Runners and loan officers should be able to communicate in the language that these clients understand, and able to explain the product risks and obligations. This was followed by computer skills and ethics. The analysis further indicates that most small lenders employ unskilled people who lack basics like computer and communication skills.

Anecdotal evidence indicates that successful lenders have the following characteristics:  These companies have excellent recruitment processes and strategies. They recruit the best candidates in the industry  These companies invest in training their employees and have internal training academies with targeted training programs for specific types of employees  They have good transformation and BEE strategies

However most small lenders are understaffed and lack funds and therefore resort to training their staff internally. Most of this training is not accredited and is delivered by employees who are not properly trained themselves. For the BANKSETA to add value and be effective in this sector they have to develop targeted training for specific occupation bands, including targeted material and the manner in which the courses are conducted.

Education and training for the informal and unregistered sector is very imp ortant given the fact that informal credit usage is quite common in this sector. It is recommended that BANKSETA explores ways to reach the unregistered len ders, stokvel and pawnshop sectors. This package should include credit manag ement, legislation training which highlights the advantages of being legal and r egistered and issues of governance. The training package should appeal to the se lenders so that they can proactively apply for these courses as targeting the m will be quite difficult.

Cooperative Financial Institutions

Box- SACCOL Annual General Meeting, Message from the Chairperson, Patson Ngwevela South Africa still ranks high in the world poverty scale at number 23 with 50% of the population living below the poverty line. This is where Savings and Credit cooperatives should be making the difference. Our unemployment rate is still very high at 25, 3% with a life expectancy of 49 years. These statistics show the kind of challenges the country has and pose a challenge to us as cooperatives to intervene by making a difference in people’s lives. It is for that reason that we invite all institutions that are involved in the provision of financial services to poor communities to join hands with us in a fight for financial inclusion and poverty.

The message from the chairperson of the Savings and Credit Cooperatives League of South Africa (SACCOL) is a serious and sombre note. South Africa has a shockingly low penetration rate of credit union activity, with only 58 credit Unions with a member base of 26 164 (SACCOL, 2010). This is the lowest penetration rate of 22 African Countries according to a WOCCU statistical report. (WOCCU 2008 as quoted by the University of Pretoria, 2010)

Figure 31: membership base at SACCOL Mar-10 Mar-09 Urban Peri Rural Total Urban Peri Rural Total Full members 11 5 9 25 11 5 9 24 Provisional members 5 3 25 33 4 3 13 12 Paying members 16 7 34 58 15 14 7 43 Source: SACCOL

A review of the list of SACCOs that are members of SACCOL shows that this market can be largely split into two segments. Firstly those cooperatives comprising of employer groups which are mostly in urban areas and known as SACCOs and secondly community based cooperatives that reside in rural areas known as financial services cooperatives (FSCs). As discussed below, the generic skills needs of these two sub-segments are the same, however differ

RUDO Consulting 65 Landscape of the SA microfinance and cooperative banking sector - BANKSETA slightly when it comes to use of manual vs. technology driven systems. The SACCOL member base loan book is about R90 million. It is difficult to track a source of the value of savings held by these institutions, however we estimate that this is between R30 and R50 million.

Legal landscape of cooperatives sector

The financial cooperative sector in South Africa can be divided into three distinct categories by virtue of different size operators and sub segments of financial cooperative legislation. Apart from the fact that all cooperatives are required to register with the National Credit Regulator, cooperatives are further subject to the Cooperatives Bank Act. Depending on their size they are further required to register at and report to four different regulators as indicated below.

Figure 32: The Cooperatives Regulatory Framework Regulatory Framework

All financial cooperatives Subject to Cooperatives Bank Act Register and report to either the South African Micro- Finance Apex Fund (at Dept. of Trade and Industry) or the Savings and Credit Cooperatives League of South Small cooperatives Africa (SACCOL Apply for registration as a cooperatives bank at the Cooperatives with -200 members and Cooperatives Bank Development Agency (CBDA at deposits of between R1m -20m. Treasury)

Cooperatives Bank with deposits Register at the South African Reserve Bank, Cooperative exceeding R20 million banks Supervision Source: RUDO

 The SACCOL website (SACCOL, 2010) indicates that SACCOL have registere d 18 cooperatives out of a membership base of 28. It is not known how ma ny entities have registered under SAMAF.  The CBDA is busy reviewing about 15 eligible cooperatives that potentially c ould be registered at the next level. Of these, less than 5 would be registere d in the near future, one of which falls above the R20m threshold which req uire registration at the Reserve Bank.

Skills development requirements in the Cooperatives Sector

At time of this publication an in depth sector and skills review conducted by the CBDA was not available in the public domain. It is strongly suggested that BANKSETA engage with the CBDA on the findings of their research before embarking on skills development in this sector. However, the landscape analysis, interviews with the CBDA and Reserve Bank (Mbeza, 2010) (Rossow, 2010) and responses form cooperatives themselves indicate the following skills development requirements.

Generic requirements  Basic accounting skills both manual and computer driven  Debt collection skills  High level regulatory requirements of various credit and financial services a cts, I.e., NCA and specially provisions on compliance, reporting and debt col lection.  In depth knowledge of the Cooperatives Banks Acts including the requirements for registration at the different regulatory authorities.  Regulators emphasized that in many cooperatives they see a lack of govern ance skills including skills related to proper roles and responsibilities of Board members and appropriate running of board proceedings and recordi ngs thereof.  Regulators have picked up that annual financial statements are not prepare d thoroughly or are far behind and that many cooperatives lack important s kills to prepare source documents in order for their accounting service provider to draft proper annual financial statements.

Specific considerations for FCSs- rural based cooperatives

Cooperatives based in rural areas, many of whom are part of tribal organisations require all of the above mentioned skills development, but in addition the following must be taken into account when designing effective skills intervention mechanisms:-

 Rural areas are not easily accessible both geographically and have limited in ternet access.  The language medium for training should preferably be in the local languag e.  According to the CBDA these FSCs require very basic skills (accounting, gov ernance, lending and collecting and manual bookkeeping systems).  It is proposed that on-site mentorship programs may be necessary for man y of these organizations. The most effective intervention would be for exam ple to place an accountant for 3 month on site. This person must get the bo oks up to date and whilst (s)he is there provide some mentoring and trainin g on a wide range of issues.

Micro enterprise finance landscape

The 2010 FinScopeTM South Africa Small business survey31 (FinMark Trust, 2010) found the following about the small business landscape in South Africa. Although this survey related to small businesses with employees of up to 200, as opposed to micro enterprises it is believed that the results give at least some indication of finance options available for smaller enterprises in South Africa. The survey found that:-  There are 5.6 million small business owners in South Africa indicating that 1 in 6 individuals generate an income through a small business activity. Only 17% have registered businesses.  79% of small businesses are traders (sell products) and 62% of them on-se ll products as they bought it. A further 16.5% depend on nature to grow/re ar what they sell.  Two thirds of small business owners have not completed secondary school a nd are more likely to be female than male.  One in two small business owners started their business because they could not find a job or because they lost their job.  65% of small businesses did not borrow money to start their own business and those who did borrow start-up money did so from partners, family or fri ends.  One in 2 business owners borrow from family and friends  Of the businesses surveyed, 10% make use of credit of which 9% of the 10 % are formal credit whilst 1% uses informal sources.

A previous FinScopeTM survey conducted in 2006 in the Gauteng province found that 70% of all micro enterprises were linked to a home in some way. Micro enterprise could be housing based such as the purchase or development of primary or secondary rental accommodation, (Gardner, 2008). It is important to note here in order to develop the micro-enterprise market of South Africa; one may need to amongst other first unlock the housing microfinance market

31 Finscope small business survey conducted nationwide via 5676 face to face interview s and identified a small business as business owners with less than 200 people employ ed

RUDO Consulting 69 Landscape of the SA microfinance and cooperative banking sector - BANKSETA as explained in more detail later in this report. When a consumer want to access finance for a small enterprise they could, approach a range of different types of lenders as illustrated in Table 15. It starts from informal borrowing from friends and family right up to formal finance from a bank. In Table 15 we endeavour to provide indicative information regarding the value of the micro- enterprise and finance book in South Africa.

It must be noted that this is micro-enterprise as opposed to small business finance which is a far bigger market. Unfortunately, there is very limited information available in this regard; however pockets of information provide some pieces of the puzzle. It would be safe to say that the total book is probably a bit above the 1.5bn indicated below, but sadly probably unlikely to be more than R5bn. From the table below it can be seen that dedicated micro enterprise lenders, the bulk of which are Section 21 not for profit lenders, account for of the order of 16% of total micro enterprise finance.

Figure 33: Estimated supply of the micro enterprise finance sector Book (Rand Percentage Estimated size of micro enterprise market million) distribution Loans from family and friends 400 26% Micro enterprise lenders (SEF, Marang, WDB and RFIs including New Business, provincial development agencies- Mostly Section 21, not for profit lenders, ) 250 16% Leakage from consumption loans by African Bank and African Bank 32 730 47% Leakage from small consumer micro lenders 120 8% Supply chain finance(Large corporate lending to small enterprises in their supply/value chain) 300 19% ABSA and Standard Bank dedicated enterprise lending divisions 10

Business Trust, Eskom Foundation and supply chain finance etc.33 150 10%

Total 1550 100% Source: MFRC data adopted, annual reports of banks, University of Pretoria an d RUDO own estimates

32 MFRC research 2004 indicating 5% of loans applied for small enterprise, adapted for 2010 33 FinMark Trust Supply chain finance 2010

Profile and types of micro enterprise lenders

As elaborated in a review of the microfinance sector (University of Pretoria, 2010) the dedicated micro enterprise lending sector remains woefully underdeveloped. It is estimated that there are about 21 dedicated micro enterprise lenders in South Africa and review report (University of Pretoria, 2010) in collaboration with the primary research reveal the following important information about their profile and reach:  Most of these lenders focus on loans aimed at poverty alleviation and thus a ll of them except for Marang are not for profit Section 21 organizations.  Only 3 of the 21 lenders have more than 20 000 active clients and they all e mploy group lending as primary means of extending credit. They are Maran g Financial Services, The Small Enterprise Foundation and Women’s Develo pment Business.  4 have between 1 000 and 3 000 clients  There are no lenders with a client base between 3 000 and 20 000  The lenders that focus mostly on group lending operate at scale

Marang is the only operation that have migrated from a Section 21 not for profit legal status to a company and also changed their business model to assist individual borrowers that have previously been a beneficiary and payer under a group loan. The group loan amounts typically advanced by these lenders range from 500 to R5000 but loan values up to R15 000 are advanced from time to time. Micro enterprise lending is labour intensive and group lending taxing on the duties of loan officers. Most operate as not-For profit organisations, which constrains their ability (and willingness) to grow.

They face many challenges including:  Application of non-traditional forms of collateral are particularly costly given judicial system of South Africa (Vulindlela/Kunene, 2009)  The upfront investments required to establish an institution and reach scale can be as high as R30m (University of Pretoria, 2010)  The Mix Market database reveals that operating costs of South African micr o-enterprise lenders are some of the highest in the world due to relatively h igh salary levels of staff, markets are less dense with further distances to tr

avel for market reach, security costs higher and repayment disciplines are h arder to enforce (University of Pretoria, 2010)

Key Finding from the micro enterprise lending sector

It would appear that BANKSETA may consider focusing initiatives in the following areas and manners as far it concern the development of micro and small enterprise lending to low income consumers.

Support efforts of Samaf/Khula, their beneficiaries but also c onsider interventions for traditional salary-based lenders who want to finance micro enterprises: Although wholesale funders like SAMAF and Khula focus on capacity building, much can still be done to assist these organisations to help their constituencies better. As mentioned before, the same applies to provincial development agencies that require significant support in order to provide finance and assist small enterprises in their provinces. In order to effect this a skills review of the development agencies is probably called for and we strongly recommend that BANKSETA review this as a priority project.

Continue to support the likes of Marang and the Small enterprise sector however, it is important to be open-minded regarding the traditional salary- based lenders.

Innovative ways to assess clients and reduce costs: A large mi cro lending bank have found that they manage to successfully lend t o unsalaried people based on scorecards specifically designed for this purpose (without having even to look at business plans, budgets and cash flow statements). Thus it would appear that application of scori ng tools could reduce loan officer effort and cost. It would be helpful if BANKSETA can develop skills related to smarter ways of using scor ing tools in the micro enterprise sector.

Partner with variety of local and international organizations t o assist with capacity building: As indicated in the review of the microfina nce sector(University of Pretoria, 2010) stakeholders in the micro-en terprise sector in South Africa will find significant benefit if they were to partner with local and international organizations that are able to provide on-going capacity building initiatives. It is thus important tha t prior to finalizing training material or appoint services providers tha t that local and international programs are first investigated thoroug hly.

Skills requirements for the micro enterprise lending sector

Acumen required to identify real entrepreneurs: In a study on Supply chain finance (Rudo Consulting, 2010) more than 20 enterpri se development manager and SMME funding experts were interviewe d. All parties interviewed mentioned first and foremost that the pers on running the SMME must have entrepreneurial flair and a strong wi ll to make the business work and grow. No amount of finance or men toring and technical assistance can make up for instances where the principal of the SMME does not have the entrepreneurial flair or tech nical capabilities. It is thus critical that small business financiers are trained in identifying the true entrepreneurs from people that have n o intension to make a business survive and grow. In addition the methodology for assessing businesses used by financiers for individual lending is lacking in South Africa and this should also be a focus area.

Impart knowledge on available support to small businesses: The FinScope Small Business survey (FinMark Trust, 2010) revealed that 76% of small business owners were unable to name any organisation that support and give help to small business and 94% have never used any support organisation. Organisation like SEDA, KHULA, National Youth Development Agency (NYDA), Banks, SARS, SETAs and various business trusts and

RUDO Consulting 73 Landscape of the SA microfinance and cooperative banking sector - BANKSETA foundations have all developed supporting mechanisms for small businesses. Loan officers should have detail knowledge of different support organisations and which would be more suitable to support their client base.

Profile of for-profit micro enterprise lending: When one looks at Ta ble 15 it is clear that bigger impact and reach of enterprise lending ste ms from ordinary loans granted by African Bank, Capitec Bank and the 2 600 or so smaller micro-lenders which is used by consumers for enterpri se purposes. Research by the Micro Finance Regulatory Council indicates that about 5% of funds borrowed from a micro lender are used for the p urpose of enterprise development (MFRC , 2004) The estimate for Africa n Bank and Capitec in the table above is conservative, assuming that onl y 3% of their books are utilized for enterprise purposes.

Management Skills: the Banana Skins report of 2008 and 2009 ha s identified the lack of management skills and experience for managi ng micro enterprise finance portfolios is the most important area of n eed. This is probably the most important area of focus for this sub-s ector of microfinance

Low income housing sector

A comprehensive report on the status, challenges and prospects of the housing finance market in South Africa provides valuable information about the low income housing market landscape (Gardner, 2008) as elaborated upon below. According to Gardner (2008), most households in South Africa cannot afford the most inexpensive, entry level new home which would require a household income of about R11, 500 per month.

The housing subsidy programme by the Government applies only to those people earning less than R3500 a month. This means that about 2.7 million households or 22% of the population fall in a segment for a market where they are too ‘rich’ to qualify for a subsidized loan and too poor to go to a bank and

RUDO Consulting 74 Landscape of the SA microfinance and cooperative banking sector - BANKSETA qualify for a very basic small new home. These 2.7 million households are known as the gap market. They have nowhere to go for finance except for making use of incremental or housing microfinance. Banks are simply not providing finance to this part of the market and Gardner concluded that housing microfinance has the potential to facilitate new housing delivery on an incremental basis in both the subsidy-eligible and gap market.

Types of housing microfinance lenders

There are different tiers of housing microfinance in South Africa (Gardner, 2008) including a first tier of high end banks, a second tier of non-bank MFIs and a third tier of informal lending by mutual societies and unregulated money lenders.

Figure 34: Types of low income housing lenders

Types of financiers Examples Informal money lenders Mashonisas Mutual entities, community based shelter funds Stokvels, SA Homeless Peoples supported by donors Federation, Fedup Credit Cooperatives and credit Unions (typical members of SACCOL) Alrode SACCO, NEHAWU SACCO, Beehive Dedicated housing micro financiers - about 10 such institutions supported by housing DFIs such as Rural Housing Loan Fund and National Housing Finance Corporation Lendcor, Kuyasa, Norufin, Indlu. Microfinance banks (unsecured) loans up to R100 000 on offer by African Bank African Bank, Capitec Bank (Unsecured) , Agricultural Cooperatives and Landbank loans to Landbank, Afgri, Senwes, Vrystaat small scale farmers usually secured Kooperasie

All main banks, Alexander Forbes, Teba Pension backed lending Bank, NRB, Cape Pension Fund General micro loans by commercial banks ABSA, Standard, FNB and Nedbank Low income mortgages by banks ABSA, Standard, FNB and Nedbank Source RUDO and Gardner adapted 2008

Size of the low income housing sector

When assuming that between 10% and 33% of all microfinance in South Africa is applied to housing in some way it would imply a housing related microfinance portfolio of between 3.2bn and R10.6bn. Most housing microfinance finds its way to a consumer by default and not by design, (Gardner, 2008). Thus the likes of African Bank and Capitec, indirectly play a significant role the housing finance market. In addition there are mainstream banks that provide low income mortgages and housing related finance. According to banks about R42bn was advanced for affordable housing under the Financial Sector Charter, the first phase came to an end in 2008.

Low income housing products

According to Gardner the low income housing landscape includes a number of components including, buying land, accessing services, constructing a complete dwelling or building incrementally. Loans are typically to individuals (rather than groups) and are mostly unsecured. Incremental lenders would typically advance loans between R800 and R10 000 with loan terms between 12-36 months.

Figure 35 Box: Lendcor Lendcor is a housing-focused micro-lender operating in rural KZN and the Eastern Cape. Most of Lendcor’s client base earns less than R3 500 a month with 35% of the clients earning less R1500 a month. Lendcor has credit sales arrangements with 750 independent building supplies outlets in rural areas. Store owners and salespeople from these buildings supplies stores are trained and incentivised to originate credit amongst their customers. Lendcor has a loan book of more than R70 million, comprising around 26 000 loans. Over 4100 of these loans have been combined with housing subsidies. While originated in-store, clients are allowed to pay via debit orders, payroll deductions or through payments in a 4000 collection point strong network.

Source: Replicated from Gardner (2008) from an Interview with John Aitkin from Lendcor.

Skills development requirements for the low income sec tor

The research points out the following important skills development needs in the low income housing finance.

Review the framework of Housing Development Financial Institut ions: In order to realize the full potential of housing microfinance, it is n ecessary to review the Development Finance Institution framework in or der to improve the levels and types of support available to entities provi ding or contemplating providing housing micro finance. Thus the retraini ng of staff at the housing development financial institutions (NHFC and R HLF) may be needed, so that they can better support the financiers in th eir network.

Put in place facilitative and supportive programs at provincial an d local government, NGO and low income housing lenders to edu cate borrowers:

Facilitative and support programmes should amongst others aim to educate households about:-  the incremental housing building process,  assisting to identify finance sources and eligibility for subsidies and  Knowledge on building materials and technical assistance.

Train traditional salary-based banks and micro lenders to becom e another version of a Lendcor: The example of Lendcor enlightens many who believe that it is impossible to provide housing finance to pers on earning less than R3 500 p.m. Although the process involves various role players, it is possible. For South Africa to provide houses to more th an 2.4 million households in the gap market, we need banks and micro l enders to start operating like Lendcor. Thus what is urgently needed is h ousing finance training programs in order to develop the skills of housin g specialist loan officers.

Develop institutional training capacity for low income housing fin ance skills development programs: The desk work and primary inter views with housing finance experts revealed that there is no dedicated lo w income housing finance course available in South Africa. The UP Certif icate Programme in Microfinance Management includes some reference t o microfinance for housing as a special product line in their training mod ule, this is however a very small part of the overall curriculum.

Unlike the micro enterprise finance sector where there are a couple of te rtiary institutions that offer courses, dedicated low- income housing fina nce courses are not available. One would expect that a wealth of lessons learned resided with lenders like Lendcor and the affordable housing divi sions of banks. There appears to be a significant role to play by BANKSE TA in developing course material and assisting training providers to laun ch a skills development programme specifically aimed at low income hou sing finance.34

Consult with developments in urban land and urban land markets: There are various training and skills development initiatives underway i n the land development sector. This is elaborated upon in detail in a rep ort ‘Strategy for professional development in urban land and Urban Land markets (Zack, 2007). It will be important to investigate these efforts at it will dovetail well with housing microfinance skills development efforts.

34 WISER, at Wits University has expressed an interest in developing a course for low in come housing finance, although this is still in a planning stage at present.

References

1. African Bank. (2010, November). Retrieved from http://africanbank.investoreports.com/africanbank_ar_2009/who-is- abil/profile/

2. BANKSETA. (2007). Sectoral Analysis.

3. Capitec. (2010). Retrieved November 2010, from http://www.capitecbank.co.za/personal-banking/credit

4. Ferreira, H. (2010). Trends in Micro finance . Micro Financiers Association of South Africa.

5. FinMark Trust. (2009). FinScope South Africa. FinMark Trust.

6. FinMark Trust. (2010). Finscope South Africa Small Business Survey. FinMark Trust.

7. Gardner, D. (2008). Housing microfiannce in SOuth Africa: Status, challneges and prospects. FinMark Trust and HIVOS Foundation.

8. Mbeza, R. (2010, 10). Head of Cooperative Capacity building CBDA. (M. Heymans, Interviewer)

9. MFRC . (2004). Overview of the microlending market. Micro Finance Regulatory Council.

10. 11. NCR. (2010). Annual Report.

12. Presidency. (2009). The Strategic agenda of goverment: A summary. Pretoria: The Presidency.

13. Rossow, P. (2010, November 2010). Supervision Cooperative Bank Divsion SARB. (M. Heymans, Interviewer)

14. Rudo Consulting . (2010). Supply Chain Finance to small businesses. FinMark Trust.

15. SACCOL. (2010). SACCOL. Retrieved 2010, from http://www.saccol.org.za/annual_rep.php

16. South African Reserve Bank. (September 2010). Quarterly Bulletin . SARB.

17. University of Pretoria. (2010). A review of the South African Micro finance sector. UP, Centre for Micro-finance.

18. Van Aardt, C. (2010, November). Prof. (M. Heymans, Interviewer)

19. Van der Berg, S. (2010). Current Poverty and Income Distribution in South Africa. Stellenbosch: Bureau of Economic Research.

20. Vulindlela/Kunene. (2009). Investigation into Collateral Options for lending to Micro and Small enterprises. FinMark Trust.

21. Vishwas Satgar. (2007). The State of the South African Cooperative Sector. Cooperative and Policy Alternative Centre

22. Report on Costs and Interest Rates in the Small Loans Sector. (2004).

23. Cliffe Dekker Hofmeyer. (2008). the Cooperative Banks Act; Summary of the Cooperative Bank Act

24. Blade Nzimande. (2003). Forward to a People’s Cooperative Bank. SACP

25. Department of Agriculture, Forestry and Fisheries. (2009). Savings Mobilization Strategy. Directorate: Agriculture Development Finance

Expert Interviews

1. Mr. Hennie Ferreira – CEO –MFSA 2. Mr. Johan de Ridder – Director – African Bank 3. Mr. Robert Mbeza – Head: Cooperative Banking Capacity Building – CBDA 4. Mr. Peter Setou – Senior Manager: Education and Strategy – NCR 5. Mr. Rajeen Devpruth – Manager: Research – NCR 6. Prof Andre van Aardt - UNISA

Annexure A- Legislations that apply to the South African microfinance sector ACT NAME YEA NR IMPACT OBJECTIVE R .

1. Banks Act 199 94 Entity To provide for the regulation and supervision of the 0 specific. business of public companies taking deposits from the public; and to provide for matters connected there with. Main benefit is the legalization of regulated deposit taking practices.

2. Basic Conditions of 199 75 General. To give effect to the right to fair labour practices Employment Act 7 referred to in section 23 (1) of the Constitution by establishing and making provision for the regulation of basic conditions of employment; and thereby to comply with the obligations of the Republic as a member state of the International Labour Organization; and to provide for matters connected therewith.

3. Broad-Based Black 200 53 General. To establish a legislative framework for the promotion Economic 3 of black economic empowerment; to empower the Empowerment Act Minister to issue codes of good practice and to publish transformation charters; to establish the Black Economic Empowerment Advisory Council; and to provide for matters connected therewith.

4. Close Corporations 198 69 Entity Act soon to be replaced by Act 71/2008. Act 4 specific. To provide for the formation, registration, incorporation, management, control and liquidation of close corporations; and for matters connected therewith.

5. Companies Act , 197 61 Entity To consolidate and amend the law relating to 1973 3 specific. companies; and to provide for matters incidental thereto.

6. Companies Act, 200 71 Entity To replace 1973 Companies Act. 2008 8 specific. To provide for the incorporation, registration, organisation and management of companies, the capitalisation of profit companies, and the registration of offices of foreign companies carrying on business within the Republic; to define the relationships between companies and their respective shareholders or members and directors; to provide for equitable and efficient amalgamations, mergers and takeovers of companies; to provide for efficient rescue of financially distressed companies; to provide appropriate legal redress for investors and third parties with respect to companies; to establish a Companies and Intellectual

Property Commission and a Takeover Regulation Panel to administer the requirements of the Act with respect to companies, to establish a Companies Tribunal to facilitate alternative dispute resolution and to review decisions of the Commission; to establish a Financial Reporting Standards Council to advise on requirements for financial record-keeping and reporting by companies; to repeal the Companies Act, 1973 (Act No. 61 of 1973), and make amendments to the Close Corporations Act, 1984 (Act No. 69 of 1984), as necessary to provide for a consistent and harmonious regime of business incorporation and regulation; and to provide for matters connected therewith.

7. Compensation for 199 13 General To provide for compensation for disablement caused by Occupational 3 0 occupational injuries or diseases sustained or Injuries and contracted by employees in the course of their Diseases Act employment, or for death resulting from such injuries or diseases; and to provide for matters connected therewith.

8. Consumer 200 68 Limited To promote a fair, accessible and sustainable Protection Act 8 marketplace for consumer products and services and for that purpose to establish national norms and standards relating to consumer protection, to provide for improved standards of consumer information, to prohibit certain unfair marketing and business practices, to promote responsible consumer behaviour, to promote a consistent legislative and enforcement framework relating to consumer transactions and agreements, to establish the National Consumer Commission, to repeal sections 2 to 13 and sections 16 to 17 of the Merchandise Marks Act, 1941 (Act No. 17 of 1941), the Business Names Act, 1960 (Act No. 27 of 1960), the Price Control Act, 1964 (Act No. 25 of 1964), the Sales and Service Matters Act, 1964 (Act No. 25 of 1964), the Trade Practices Act, 1976 (Act No. 76 of 1976), the Consumer Affairs (Unfair Business Practices) Act, 1988 (Act No. 71 of 1988), and to make consequential amendments to various other Acts; and to provide for related incidental matters.

Does not apply where National Credit Act regulates, or where FAIS regulates.

9. Cooperative Banks 200 40 Entity Act 7 specific. To promote and advance the social and economic welfare of all South Africans by enhancing access to banking services under sustainable conditions; to promote the development of sustainable and responsible cooperative banks; to establish an appropriate regulatory framework and regulatory institutions for cooperative banks that protect members of cooperative banks; to provide for the registration of deposit-taking financial services cooperatives as cooperative banks; to provide for the regulation and supervision of cooperative banks; and to provide for the establishment of cooperative banks supervisors and a development agency for cooperative banks; and to provide for matters connected therewith.

Legalize deposit taking practices.

1 Cooperatives Act 200 14 Entity To provide for the formation and registration of 0. 5 specific. cooperatives; the establishment of a Cooperatives Advisory Board; the winding up of cooperatives; the repeal of Act No. 91 of 1981;and matters connected therewith.

1 Debt Collectors 199 11 Limited To provide for the establishment of a council, known as 1. Act 8 4 the Council for Debt Collectors; to provide for the exercise of control over the occupation of debt collector; to amend the Magistrates’ Courts Act, 1944, so as to legalise the recovery of fees or remuneration by registered debt collectors; and to provide for matters connected therewith.

The focus is to establish a code of conduct and fee structure binding on debt collectors.

“ debt collector” means (a) a person, other than an attorney or his or her employee or a party to a factoring arrangement, who for reward collects debts owed to another on the latter’s behalf; (

b) a person who, other than a party to a factoring arrangement, in the course of his or her regular business, for reward takes over debts referred to in paragraph (a) in order to collect them for his or her own benefit;

(c) a person who, as an agent or employee of a person referred to in paragraph (a) or (b) or as an agent of an attorney, collects the debts on behalf of such person or attorney, excluding an employee whose duties are purely administrative, clerical or otherwise subservient

to the actual occupation of debt collector;

1 Electronic 200 25 Limited To provide for the facilitation and regulation of 2. Communications 2 electronic communications and transactions; to provide and Transactions for the development of a national e-strategy for the Act Republic; to promote universal access to electronic communications and transactions and the use of electronic transactions by SMMEs; to provide for human resource development in electronic transactions; to prevent abuse of information systems; to encourage the use of e-government services; and to provide for matters connected therewith.

1 Employment 199 55 General To provide for employment equity; and to provide for 3. Equity Act 8 matters incidental thereto. The purpose of this Act is to achieve equity in the workplace by promoting equal opportunity and fair treatment in employment through the elimination of unfair discrimination; and implementing affirmative action measures to redress the disadvantages in employment experienced by designated groups, in order to ensure their equitable representation in all occupational categories and levels in the workforce.

1 Financial Advisory 200 37 Limited To regulate the rendering of certain financial advisory 4. And Intermediary 2 and intermediary services to clients; to repeal or Services Act amend certain laws; and to provide for matters incidental thereto.

Limited to credit providers supplying insurance products and intermediary services.

1 Financial 200 38 Limited To establish a Financial Intelligence Centre and a 5. Intelligence Centre 1 Money Laundering Advisory Council in order to combat Act money laundering activities and the financing of terrorist and related activities; to impose certain duties on institutions and other persons who might be used for money laundering purposes and the financing of terrorist and related activities; to amend the Prevention of Organized Crime Act, 1998, and the Promotion of Access to Information Act, 2000; and to provide for matters connected therewith.

Limited to certain entities and deposit taking practices and investments.

1 Financial Services 199 97 Limited. To provide for the establishment of a board to 6. Board Act 0 supervise compliance with laws regulating financial

institutions and the provision of financial services; and for matters connected therewith.

Limited to financial institutions.

“ financial institution” means any pension fund organisation registered in terms of the Pension Funds Act, 1956, or any person referred to in section 13B of that Act administering the investments of such a pension fund or the disposition of benefits provided for in the rules of such a pension fund; any friendly society registered in terms of the Friendly Societies Act, 1956, or any person in charge of the management of the affairs of such a society; a collective investment scheme as defined in section 1 of the Collective Investment Schemes Control Act, 2002, a manager, trustee, custodian or nominee company registered or approved in terms of that Act, and an authorised agent of such a manager; any “exchange”, “authorised user”, “stock-broker”, “settling party”, “clearing house”, “central securities depository”, “participant” or “nominee” as defined in section 1 of the Securities Services Act, 2004; any “long-term insurer” as defined in section 1 (1) of the Long-term Insurance Act, 1998), and any “short-term insurer” as defined in section 1 (1) of the Short-term Insurance Act 1998; any “independent intermediary” or representative as defined in section 1 (1) of the Short-term Insurance Act, 1998 or regulation 3.1 of the Regulations under the Long-term Insurance Act, 1998; any “Lloyd’s underwriter” as defined in section 1 (1) of the Short- term Insurance Act, 1998, and referred to in section 56 of that Act; and any person rendering or who is to render services contemplated in section 23A (1) of the Insurance Act, 1943; any “authorised financial services provider” or “representative” as defined in section 1 (1) of the Financial Advisory and Intermediary Services Act, 2001; a bank as defined in section 1 (1) of the Banks Act, 1990, a mutual bank as defined in section 1 (1) of the Mutual Banks Act, 1993, or a cooperative bank as defined in section 1 (1) of the Cooperative Banks Act, 2007, which deals with trust property as a regular feature of its business; any other person who or which deals with trust property as a regular feature of his, her or its business, but who is not registered, licensed, recognised, approved or otherwise authorised to deal so in terms of any Act, other than the Companies Act, 1973, the Close Corporations Act, 1984, and the Trust Property Control Act, 1988 .

1 Financial Services 200 37 Limited To provide for the recognition of financial services 7. Ombud Schemes 4 ombud schemes; to lay down minimum requirements Act for ombud schemes; to promote consumer education with regard to ombud schemes; to co-ordinate the activities of ombuds of recognised schemes with the activities of the Pension Funds Adjudicator and the Ombud for Financial Services Providers; to develop and promote best practices for complaint resolution; to empower the Ombud for Financial Services Providers to act as a statutory ombud in certain cases; and to provide for matters connected therewith.

Limited to financial institutions partaking in the scheme.

1 Home Loans and 200 63 Limited To promote fair lending practices, which require 8. Mortgage 0 disclosure by financial institutions of information Disclosures Act regarding the provision of home loans; to establish an Office of Disclosure; and to provide for matters connected therewith.

Limited to Pension fund secured loans and other secured home loans.

1 Income Tax Act 196 58 General To consolidate the law relating to the taxation of 9. 2 incomes and donations, to provide for the recovery of taxes on persons, to provide for the deduction by employers of amounts from the remuneration of employees in respect of certain tax liabilities of employees, and to provide for the making of provisional tax payments and for the payment into the National Revenue Fund of portions of the normal tax and interest and other charges in respect of such taxes, and to provide for related matters.

2 Insolvency Act 193 24 Limited To consolidate and amend the law relating to insolvent 0. 6 persons and to their estates.

Focus on debt collection

2 Inspection of 199 80 Limited To provide for the inspection of the affairs of financial 1. Financial 8 institutions; the inspection of the affairs of

Institutions Act unregistered entities conducting the business of financial institutions; and for matters connected therewith.

If the registrar has reason to believe that a person, partnership, company or trust which is not registered or approved as a financial institution, is carrying on the business of a financial institution, he or she may instruct an inspector to inspect the affairs, or any part of the affairs, of such a person, partnership, company or trust.

2 Labour Relations 199 66 General To change the law governing labour relations and, for 2. Act 5 that purpose—to give effect to section 27 of the Constitution; to regulate the organizational rights of trade unions; to promote and facilitate collective bargaining at the work-place and at sectoral level; to regulate the right to strike and the recourse to lock-out in conformity with the Constitution; to promote employee participation in decision-making through the establishment of work-place forums; to provide simple procedures for the resolution of labour disputes through statutory conciliation, mediation and arbitration (for which purpose the Commission for Conciliation, Mediation and Arbitration is established), and through independent alternative dispute resolution services accredited for that purpose; to establish the Labour Court and Labour Appeal Court as superior courts, with exclusive jurisdiction to decide matters arising from the Act; to provide for a simplified procedure for the registration of trade unions and employers’ organizations, and to provide for their regulation to ensure democratic practices and proper financial control; to give effect to the public international law obligations of the Republic relating to labour relations; to amend and repeal certain laws relating to labour relations; and to provide for incidental matters.

2 Long Term 199 52 Limited To provide for the registration of long-term insurers; 3. Insurance Act 8 for the control of certain activities of long-term insurers and intermediaries; and for matters connected therewith.

Focus is on maximum remuneration of intermediary and policyholder protection.

2 Magistrates’ 194 32 Limited To consolidate and amend the law relating to 4. Courts Act 4 Magistrates’ Courts. Focus on collection of debt.

2 Matrimonial 198 88 Limited To amend the matrimonial property law and to provide 5. Property Act 4 for matters connected therewith.

Focus on spousal consent to enter into credit agreements and other transactional consents.

2 National Credit Act 200 34 General To promote a fair and non-discriminatory marketplace 6. 5 for access to consumer credit and for that purpose to provide for the general regulation of consumer credit and improved standards of consumer information; to promote black economic empowerment and ownership within the consumer credit industry; to prohibit certain unfair credit and credit-marketing practices; to promote responsible credit granting and use and for that purpose to prohibit reckless credit granting; to provide for debt re-organisation in cases of over- indebtedness; to regulate credit information; to provide for registration of credit bureaux, credit providers and debt counselling services; to establish national norms and standards relating to consumer credit; to promote a consistent enforcement framework relating to consumer credit; to establish the National Credit Regulator and the National Consumer Tribunal; to repeal the Usury Act, 1968, and the Credit Agreements Act, 1980; and to provide for related incidental matters.

2 National Payment 199 78 Limited To provide for the management, administration, 7. System Act 8 operation, regulation and supervision of payment, clearing and settlement systems in the Republic of South Africa; and to provide for connected matters.

2 Occupational 199 50 General To provide for the health and safety of persons at work 8. Health and Safety 3 and for the health and safety of persons in connection Act with the use of plant and machinery; the protection of persons other than persons at work against hazards to health and safety arising out of or in connection with the activities of persons at work; to establish an advisory council for occupational health and safety; and to provide for matters connected therewith.

2 Pension Funds Act 195 24 Limited To provide for the registration, incorporation, 9. 6 regulation and dissolution of pension funds and for matters incidental thereto.

Limited to pension secured loans – sec 19(5) of the Act.

3 Prevention and 200 12 General. To provide for the strengthening of measures to

Combating of 4 prevent and combat corruption and corrupt activities; Corrupt Activities to provide for the offence of corruption and offences Act relating to corrupt activities; to provide for investigative measures in respect of corruption and related corrupt activities; to provide for the establishment and endorsement of a Register in order to place certain restrictions on persons and enterprises convicted of corrupt activities relating to tenders and contracts; to place a duty on certain persons holding a position of authority to report certain corrupt transactions; to provide for extraterritorial jurisdiction in respect of the offence of corruption and offences relating to corrupt activities; and to provide for matters connected therewith.

Take specific notice that any person who holds a position of authority and who knows or ought reasonably to have known or suspected that any other person has committed the offence of theft, fraud, extortion, forgery or uttering a forged document, involving an amount of R100 000 or more, must report such knowledge or suspicion or cause such knowledge or suspicion to be reported to any police official.

3 Promotion of 200 2 General To give effect to the constitutional right of access to 1. Access to 0 any information held by the State and any information Information Act that is held by another person and that is required for the exercise or protection of any rights; and to provide for matters connected therewith.

The head of an entity must compile a manual and keep it updated with certain prescribed information relating to its business and recorded information. A copy of the manual to must be sent to the Human Rights Commission, and must also be published.

3 Promotion Of 200 3 General To give effect to the right to administrative action that 2. Administrative 0 is lawful, reasonable and procedurally fair and to the Justice Act right to written reasons for administrative action as contemplated in section 33 of the Constitution of the Republic of South Africa, 1996; and to provide for matters incidental thereto.

Focus is on decisions of an administrative nature

made, proposed to be made, or required to be made, as the case may be, under an empowering provision, including a decision relating to making, suspending, revoking or refusing to make an order, award or determination; giving, suspending, revoking or refusing to give a certificate, direction, approval, consent or permission; issuing, suspending, revoking or refusing to issue a license, authority or other instrument; imposing a condition or restriction; making a declaration, demand or requirement; retaining, or refusing to deliver up, an article; doing or refusing to do any other act or thing of an administrative nature, and a reference to a failure to take a decision must be construed accordingly;

3 Promotion of 200 4 General To give effect to section 9 read with item 23 (1) of 3. Equality and 0 Schedule 6 to the Constitution of the Republic of South Prevention of Africa, 1996, so as to prevent and prohibit unfair Unfair discrimination and harassment; to promote equality Discrimination Act and eliminate unfair discrimination; to prevent and prohibit hate speech; and to provide for matters connected therewith.

3 Protected 200 26 General To make provision for procedures in terms of which 4. Disclosures Act 0 employees in both the private and the public sector may disclose information regarding unlawful or irregular conduct by their employers or other employees in the employ of their employers; to provide for the protection of employees who make a disclosure which is protected in terms of this Act; and to provide for matters connected therewith.

3 Protection of 0 0 General Proposed legislation (Bill): 5. Personal Information Bill To promote the protection of personal information processed by public and private bodies; to introduce information protection principles so as to establish minimum requirements for the processing of personal information; to provide for the establishment of an Information Protection Regulator; to provide for the issuing of codes of conduct; to provide for the rights of persons regarding unsolicited electronic communications and automated decision making; to regulate the flow of personal information across the borders of the Republic; and to provide for matters connected therewith.

3 Second- Hand 195 23 Limited proposed repeal by Second-Hand Goods Act, No. 6 of 6. Goods Act 5 2009 (provision not yet proclaimed)

To regulate the business of dealers in second-hand

goods.

3 Second -Hand 200 6 Limited Commencement: To be proclaimed. 7. Goods Act 9 Applicable inter alia to pawn brokers, who must register as a dealer in order to carry on business. Registration will be valid for a 5 year period.

A dealer must keep a register in the prescribed form and record in the register the prescribed particulars regarding every acquisition or disposal of second-hand goods.

3 Short Term 199 53 Limited To provide for the registration of short-term insurers; 8. Insurance Act 8 for the control of certain activities of short-term insurers and intermediaries; and for matters connected therewith.

Focus is on maximum remuneration of intermediary and policyholder protection.

3 Skills 199 97 General To provide an institutional framework to devise and 9. Development Act 8 implement national, sector and work-place strategies to develop and improve the skills of the South African workforce; to integrate those strategies within the National Qualifications Framework contemplated in the South African Qualifications Authority Act, 1995; to provide for learnerships that lead to recognized occupational qualifications; to provide for the financing of skills development by means of a levy-financing scheme and a National Skills Fund; to provide for and regulate employment services; and to provide for matters connected therewith.

4 Skills 199 9 General To provide for the imposition of a skills development 0. Development 9 levy; and for matters connected therewith. Levies Act

4 South African 198 90 Limited To consolidate the laws relating to the South African 1. Reserve Bank Act 9 Reserve Bank and the monetary system of the Republic; and to provide for matters connected therewith.

Focus on supervision of banks and inspections on persons not registered as a bank or mutual bank but who is carrying on the business of a bank or mutual bank – e.g. deposit taking.

4 Supreme Court 195 59 Limited To consolidate and amend the laws relating to the 2. Act 9 Supreme Court of South Africa and to provide for

matters incidental thereto.

Focus on collection of debt.

4 Unemployment 200 63 General To establish the Unemployment Insurance Fund; to 3. Insurance Act 1 provide for the payment from the Fund of unemployment benefits to certain employees, and for the payment of illness, maternity, adoption and dependant’s benefits related to the unemployment of such employees; to provide for the establishment of the Unemployment Insurance Board, the functions of the Board and the designation of the Unemployment Insurance Commissioner; and to provide for matters connected therewith.

4 Unemployment 200 4 General To provide for the imposition and collection of 4. Insurance 2 contributions for the benefit of the Unemployment Contributions Act Insurance Fund; and to provide for matters connected therewith.

4 Value-Added Tax 199 89 General 5. Act 1 To provide for taxation in respect of the supply of goods and services and the importation of goods; to amend the Transfer Duty Act, 1949, so as to provide for an exemption; to amend the Stamp Duties Act, 1968, so as to provide for an exemption from stamp duty and to discontinue the levying of certain stamp duties; to repeal the Sales Tax Act, 1978; and to provide for matters connected therewith.

Source: MFSA /Credit Reform Consultancy

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