Pro-poor Microcredit in South Africa Cost-efficiency and Productivity of South African Pro-poor Microfinance Institutions

This article compares the performance of selected South African microcredit nongovernmental organizations (NGOs) that have a poverty-alleviation focus against various benchmarks drawn from the MicroBanking Bulletin. Donors, governments, and many analysts regard sustainability as the benchmark of microfinance institutions’ (MFIs) performance. However, the most relevant question is whether microcredit NGOs are doing as well as they can in their context. Of particular contextual importance is income inequality in a society. South Africa has the world’s second worst income inequality, after neighbouring Botswana. This creates a situation in which microcredit NGOs must recover “First World” costs, particularly salaries, from revenues based on clients who can only afford loans on a par with Third World countries. Compounding this situation are structural obstacles to microenterprise in South Africa, as well as obstacles to productivity in microcredit NGOs. Taken together, this creates a “salary burden” for South African microcredit NGOs, which is the highest in the world according to relevant benchmarks. South African MFI managers face significant obstacles to improving productivity to compensate for the divergence between staff and client living levels. These include an inadequate skills base, the small scale of the market, rapid labor turnover, and limited resources for capacity development. South African MFIs face the options of moving upmarket (which many have done), Journal of Microf inance Volume 7 Number 1 98 The question of sustainability in microcredit is a subject of ongoing debate. The dominant view is what some call the “Ohio State” school of thought, which is advocated at the university of the same name in the United States. Broadly, this view espouses a market-led, full cost-recovery approach to microcredit, with no subsidies. It holds that sustainability is essential for two reasons. First, the goal of microcredit practice should be to extend the reach of commercial financial markets to the poor and excluded. This requires that microfinance institutions (MFIs) perform well enough to be able to access commercial wholesale finance, preferably sooner rather than later. Second, sustainability is necessary to prevent MFIs from concealing bad practice with ongoing subsidies. (For the purposes of this article, sustainability is defined as: Coverage of administrative cost + Loan loss + Cost of funds + Inflation + Capitalization for growth from operating income.) It is certainly reasonable to ask that the social cost-benefit ratio of resources directed to microcredit interventions should be at least as good as if those resources were applied differently, or even given away (Schriener & Yaron, 2001). There is little point in subsidizing MFIs if the returns for doing so are not at least the same as for alternative uses—over an appropriate period and including “externalities,” i.e., nonfinancial impacts on clients and their communities. For such calculations, absolute sustainability can be established empirically and easily—an MFI either is or is not sustainable. In most cases, however, the question is relative: How sustainable is an MFI compared with other MFIs? Is it headed towards or away from sustainability, and why? Most importantly, for our purposes, is the MFI doing as well as can be expected given the circumstances? Ted Baumann is Coordinator of the Community Finance Network (CMN) and Director of the Bay Research and Consultancy Services, Muizenberg, South Africa. Email address: tedb@cmfnet.org. za adopting methodological innovation or new product development, or closing. Of these, there is a strong argument to be made for supported savings and credit approaches as an alternative to NGO-based microcredit. Such an approach has the advantages of greater voluntary input and social capital formation. Pro-poor Microcredi t in South Afr ica Volume 7 Number 1 99 This last question is rarely raised. In particular, discussions about MFI sustainability performance often ignore national-level specifics. Donors, governments, and analysts routinely compare MFIs in different countries to each other, telling MFI managers what norms they “should” be able to achieve. Yet, as not all variables affecting sustainability are under the control of MFI managers, we should be prepared to ask whether an MFI is doing the best it can in its context. Such a perspective is needed because any microcredit model involves a number of variables, both internal and external. For example, an MFI might vary with the size of a loan group, interest rates, or its incentive policy (internal variables). Or, it may be constrained by national laws, economic and labor market conditions, or political instability (external variables). Some aspects of comparative performance against international benchmarks are under an MFI’s control; others may be determined by external factors that are not. There is also interplay between the two. MFI managers’ decisions about things they can control may be shaped decisively by contextual factors they cannot control. In assessing MFI performance towards sustainability, it is particularly important to take into account the level of income inequality in a society. In some contexts, it might be difficult or impossible to deliver poverty-oriented microcredit services, because the socially determined costs—principally personnel costs—of running a competent MFI are excessive relative to the income levels of client microenterprises and therefore their borrowing capacity. Purpose of the Article With this in mind, the article addresses the matter of context in South Africa. It investigates three issues: • First, it compares the efficiency indicators of four South African microcredit nongovernmental organizations (NGOs), all of which target poor and very poor households with solidarity group-lending methodologies, with relevant international benchmarks drawn from the MicroBanking Bulletin (MBB). (“Poor” households are defined as those living at or below the unofficial but most commonly used South African poverty line, which was about US$67 per person per month at the time of the research in 2002. “Very poor” households are those that have access to half or less than this.) • Second, it identifies contextual factors that undermine the ability of South African MFIs to match such benchmarks. • Third, it considers implications for South African MFIs, the government, and donors. Methodology The MicroBanking Bulletin has provided useful benchmarking tables on the global microcredit industry for some years now and is updated biannually. The definitions underlying the MBB data have been used to gather comparable data on South African MFIs. The main point of comparison is with other African MFIs, particularly those that are small scale and serve a low-income target market. Comparisons are also made with MFIs elsewhere by size (medium to small), methodology (solidarity group), and target market (low income). The South African Microcredit Context One of the most important external variables confronting South African MFIs is the country’s extreme income inequality. Although South Africa’s per capita gross national income (GNI) of US$2,820 1 puts the country in the middle-income band globally, this conceals enormous variation in income distribution. The Gini coefficient is currently about 0.65, which makes South Africa one of the most unequal societies on the planet. The figure improved somewhat after the first democratic elections of 1994. Its relapse since then, however, is linked to a steep rise in unemployment and poorly paid employment. This has been driven by industrial and trade policies designed to improve global competitiveness and a macroeconomic policy emphasizing low inflation and a small government deficit in order to attract foreign capital. Journal of Microf inance Volume 7 Number 1 100 Pro-poor Microcredi t in South Afr ica Volume 7 Number 1 South Africa’s Dualistic Economy The chief cause and manifestation of South Africa’s radical income inequality is the dualism of the economy. An economically “advanced” and globally integrated minority, black and white, coexists with a dependent and marginalized majority, almost entirely black. In South Africa, these are known as the “first” and “second” economies. While the former enjoys a human development index comparable to that in southern Europe, the second economy lives at a level comparable to that in South Asia. The material basis of this dualism is both historical and structural. Unlike peasantries elsewhere in Africa, South Africa’s rural poor lack access to basic means of production, such as land, because of unresolved issues of comprehensive settler dispossession. They live in crowded rural villages squeezed between commercial farmland (no longer exclusively white) and tourist-oriented game reserves. In the urban areas, opportunities for self-employment are severely constrained by South Africa’s manufacturing and retail sectors, the most advanced in Africa, which relegate small-scale trading and manufacturing to the margins. Because of their lack of access to productive resources, South Africa’s poor are almost totally dependent for their survival on the output of the formal economy. The things that sustain and enhance life are only available as commodities. The poor, however, are structurally excluded from access to the cash necessary to obtain these. One outcome of this situation is poor households’ dependence on state transfer payments, such as pensions, disability and childcare grants, and interand intra-household transfers. This is especially marked in rural areas. Another result is a high incidence of predatory economic crime. Microenterprise in South Africa For most of South Africa’s “second economy” poor, microenterprise means small-scale trading/hawking, personal services, and production of specialty items. However, South Africa’s efficient formal manufacturing and r