As noted earlier in this report, we have identified a number of major trends in the sector. Many of these trends are owed specifically to the creation of the MFRC and the resulting formalisation of the sector. It is worth discussing these trends to identify the implications for the microlending as a whole. Then we will look at some of the trends by segment of lenders.

Since the creation of the MFRC, there has been the registration of many new firms. A large number of the firms registered with the MFRC have become closed corporations (CC’s) or Pty’s in just the last year. This is a positive trend as it implies that the principal lenders want to operate within the regulatory framework.

Most of the major commercial banks have registered a microlending institution since the creation of the MFRC. In addition, there has been substantial activity in mergers and joint ventures. ABSA has a acquired a controlling interest in Unibank, Theta acquired African Bank to house its different microlending branches (Altfin, King Finance, and Unity), and then African Bank has established a joint venture with Standard Bank. Saambou has increased its exposure in the market significantly (up to R2 billion from R80 million two years ago), using its network of agents. This investment by the formal financial sector demonstrates that the industry has attained a certain status. This trend is occurring primarily among the term lenders.

Funds are being raised on the stock market or through private placement for investment in microlending. For groups such as Theta and Keynes Rational, this implies that they must have an appropriately high return on equity to attract the investors. These investors can also move their funds to other investments if the returns are not being achieved. These funds are being raised for both short term and long term lenders.

In addition to the formal financial sector, the leading retail stores and furniture dealers are becoming active in microlending. For the general retail outlets, such as Woolworths and Edgars, their existing client base, their knowledge of their clients, their existing credit systems and their credit scoring abilities make this a reasonable investment.

For the furniture lenders, another set of issues arises. Considering that the annual furniture sales on credit are around R10 billion per annum, this offers them an alternative way for them to finance the sale of the furniture aside from the Credit Agreements Act It also allows them to lend some additional credit for other purposes. As with the normal retail outlets, they have a solid credit history on most of their clients and know who is a better risk than not There is some debate whether this is being used as just a way to get around the Credit Agreements Act, which is governed by the usury laws, but the furniture traders disagree.

The figures from the Persal system are the best time series data available. They demonstrate that since the increased formalisation of the sector with the creation of the MFRC, there has been an unprecedented push towards increasing the amounts of credit in the sector.

6.1.1 Segment Specific Trends - the 30 day cash lenders

The credit bureaux are very specific on the trend of reduced numbers of operating businesses. This is occuring through a number of operations:

The combination of these factors is leading to a more formalised and modern microlending sector in the 30 day cash lending industry. However the costs of the new regulations are important, without even addressing the interest rate issue. The firms that are on the margin of profitability will either go out of business or will go underground where they will continue to operate completely in the informal sector.

6.1.2 Segment Specific trends: the term lenders

As noted above, there is consolidation of the lending institutions with the mergers and acquisitions that are taking place. These are leading to greater economies of Scale/cost reduction.

Own funds are always the most expensive funds to use for a corporation. Through the consolidation and inclusion into the formal financial sector, the largest institutions are accessing increasing amounts of relatively cheaper capital coming from deposits in the commercial banking sector.

As with the 30 day microlenders, there is the introduction of new products and risk measurement tools. Examples of these include the new software system being introduced by Teba Cash, the trend towards consolidating debt accounts into a single account at a lower interest rate, and the diversification of lending activities and loan products, including adding micro-enterprise lending to the mix of commercial products.

6.1.3 Segment Specific Trends: the housing lending sector

The majority of the term lending originated from lending for housing and home improvements and provisions governing use of provident funds and government payroll (Persal) to guarantee and repay such loans, respectively. While these two limitations are officially still in place, the microlending industry has evolved with time to unofficially cover a wide variety of other uses. However, still focusing on the housing loan sector, we can note a few trends, mostly on the positive side.

6.1.4 Sector Specific Trends: Enterprise and Developmental Lending

Enterprise lending is perhaps the least dynamic section of the microfinance industry in South Africa. At the larger loan sizes, between R10,000 and R50,000, the commercial banking sector is virtually absent, reluctant to make business loans below R50,000. Recognising this, the commercial banks, through the Banking Council, have started a special project (the Sizawani Scheme) to address this range of credit However, the fact that only 13 loans have been approved out of the 127 applicants, demonstrates that the commercial banks will continue to avoid this sector. Khula’s commercial bank portfolio guarantee programme for micro loans has also had few subscribers, to date, but their loan guarantee fund has been seeing increasing use. It is unclear whether the loan guarantee fund is actually stimulating new loans or whether the clients fall into commercially accepted risk parameters for the banks.

On the micro-enterprise side, after nearly a decade of investment in micro-enterprise finance programmes and four years of intensive support from Khula, the results are still underwhelming. Statistics from Khula, which monitors the sector very closely demonstrate that very few of the operations have achieved operational sustainability. Some of the key trends that have been:

Few. of the micro-enterprise lending institutions have sorted out proper governance and ownership structures. With many of them starting as. projects with outside funding there has been little emphasis on achieving profitability quickly. This retards their developing commercially viable systems and controls. Also removes investor incentives. At the same time there is not the same professionalism that exists in the much of the rest of the microlending sector, which has hired bankers to manage their operations and do respond to investor incentives.

While many argue that Khula has been overly demanding on the sustainability side and trying to push the RFI too quickly, it has been very strict with its clients (retail finance institutions) recently. Khula has recently withdrawn its support for a number of RFI, which has effectively put them out of business, reducing the overall outreach to microenterprise clients in the country. When the recent round of closings is complete, roughly 25 percent of the microenterprise lending clients will have lost their lenders.

The low level of operational sustainability found among the microenterprise lenders demonstrates that they do not have their cost management structures and their interest rates in synch. While many of the RFI have tried charging interest rates much lower than the rest of the microlending sector, they are not able to control their costs and generate sufficient revenue to reach sustainability. Only three out of 26 RFI have reached sustainability, including Ithala and SCF (these latter two ate not true microenterprise RFI as they have average loans outstanding of 45,000 and 300,000 respectively). Start-up fund, the largest RH, had seemingly reached operational self-sufficiency. They had been charging an effective interest rate of 415 percent on its smallest loans, decreasing as the loan size got larger.

The one interesting finding from the analysis of the Khula statistics is that for Khula’s clients (the RFI) there is a higher correlation between loan size and operational self-sustainability (64 percent) than there is between repayment and sustainability (34 percent) and number of clients and sustainability (23 percent). Considering the trend in the commercial banking industry in terms of ignoring loans below R50,000, this demonstrates that there is potential at that level if done properly.

Since the Strauss Commission finished its work in 1997, there has been little effective increase rural finance in the country.

In 1994, there were more than a dozen parastatal retail lenders involved in developmental finance. Today there are only a few that are operating profitably (Ithala, Land Bank, Eastern Cape Development Agency, and the Eastern Cape Agricultural Bank).

6.1.5 Other Informal Lenders

In stark contrast with the other sectors that are either booming or in regression, the informal sector has been relatively unchanged by the recent regulatory financial changes. Most of the clients of the informal lenders are those who cannot qualify for microloans through the semi-formal and formal lenders which rely on salaried employment and bank accounts.

The 25-30,000 informal township lenders continue to operate as they always have, charging effective interest rates in the 360-600 percent range for relatively small loans. Despite this, they are earning relatively little in absolute terms, as their average loan book is quite small because they have few clients (15-20) and small average loans (less than R500). They continue to meet the emergency demands for credit from the bottom end of the spectrum, those who cannot access semi-formal or formal finance from the 30-day and term lenders.

The pawnbrokers continue to operate as second hand goods dealers, under the supervision and regulation of the South African Police Department which monitors the second hand goods businesses. The pawnbrokers continue to meet the need for short-term emergency finance, though much of their business revenue is actually derived from the sale of the goods.

Despite the efforts of NASASA to organise the Stokvels, they remain virtually completely informal and technically outside of the law. But they meet the needs of their members and will continue until there are better systems for their members to access these services elsewhere. An increasing number of Stokvels appear to interact with the formal financial sector by depositing their savings there, increasing their security and adding a little bit of revenue.

It is impossible to conclude and provide recommendations for this study without first making a range of observations. These observations are important as we would like to create the context within which we would like to make the recommendations.

First, this study was carried out in the midst of a process of rapid evolution. South Africa started to change at a rapid pace 10 years ago. This is true for all facets of society and economic life. in the microfinance sector (as broad as we have defined it) this rapid change and evolution is vividly evident The sector is adjusting and changing and growing like any other sector following the removal of extreme controls. in the process, some organisations reaped tremendous profits, which often happens for those first going into profitable new markets. All along things are slowly improving. More institutions entered the market and competition forced the improvement of services and more people started to get better services. Clients are also experiencing painful lessons and gaining experience. A large proportion is already locked into debt, yes, but more people are handling debt with caution, some people even stand away from the sector for a few months because they do not need continuous debt The essence is change, evolution, competition and experience.

Secondly, this is a sector full of variety. institutions range from age old informal money lending businesses that have been serving the same clients for years, in a variety of rural and urban settings, to highly developed technologically innovative institutions financed by issuing shares on the Johannesburg Stock Exchange. it ranges further from reformed government parastatals providing savings and loans (and applying for banking licences) to powerful commercial banking groups buying up microfinance institutions. it ranges from small loans of R10 for a day, to large R10 000 loans over 36 months. Anything is being financed,fromaRlOinventoryofaruralspazaownertoaRl0000eXtensiontoanurban home, from educational fees for the new grade one student to university fees for the oldest sister.

Thirdly, like elsewhere in the world, South Africans also need to be far more informed about the advantages and disadvantages of the use of credit Alt countries studied have some type of Consumer Credit Protection Legislation in place or are planning to implement This is true for industrialised and developing countries. in the USA, they are discussing the phenomena of pay-day lenders at the moment This is similar to our cash lenders. in Australia they are emphasising the need for and applying resources to educate and inform people. This is the same in Europe, Brazil, Argentina and India and many more. They emphasise education and information, not only to the clients, but also to employers and providers of services. They also emphasise access points where consumers can bring their complaints. Then, complaints can be acted on.

Fourthly, most of the regulatory discussion about this sector is about interest rates. However, the key issues from the borrowers perspective are about access, convenience and monthly payments. This is an important difference. When people are looking in from outside the sector they make observations, all they see are high interest rates. This drives most of the discussions on the sector and is seen as the one variable with which the sector can be influenced, if the sector is studied closely, it is clear that transaction costs are the most important aspect Clients look at interest rates yes, but they look harder at how near is the service, how quickly can the service react, is it friendly and does ft understand their needs. This is then weighed against the monthly payment to obtain a specific amount of capital.

In the survey in the Northern Province, only 8.9 percent of people could tell what interest rate they are paying on their loans. Meanwhile all of them could clearly provide the monthly payment On the side of the financiers, interest rates play a minor role as a component of costs. We have shown that administrative costs are the biggest contributor to expenses and that aspects that influence administrative costs are important We have also shown that the majority of loan volume and clients are not interacting with the cash lenders (those asking the "highest" rates), but with the term lenders (those asking the "lowest" rates). When we study the clients of the term lenders we see most of the problems of over indebtedness. We have studied pay slips of numerous people from the PERSAL system. There are many cases where one term lender will have two or more loan contracts with one client where take home pay is less than l0 per cent of gross (and sometimes negative), and where some people have up to 10 loans. We have also seen responsible term lenders who do not provide a loan if the client has any other outstanding loan.

We therefore conclude that merely fixing an interest rate at a specific level is a naïve approach to regulating this sector. This sector is much more complex. Fixing an interest rate ceiling will not address the indebtedness of the people already trapped. it will not increase competition, leading to lower prices. Interest rate ceilings have never worked in other countries and will not work in South Africa. People already in debt will suffer more, since ceilings will drive many of their providers underground, out of public scrutiny. Even if a ceiling is fixed, no amount of resources will ensure a complete monitoring of the sector.

No, we argue a far more pragmatic approach, based on the reality of the sector, the assumption that we do not want to stifle the sector with legislation. We also do not propagate unlimited freedom to microlenders and we believe in transparency and the strong vested interest that the larger lenders have in developing this into a sound market

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[16] Increased costs come from the fee to the MFRC, the fees associated with registering as a company, the costs of having a certified audit; and the increase in bad debt due to forfeiting the bank card and pin number