BUSINESS NEWS - All major banks have at various times attempted to tap the low end of the banking market, and all – to a greater or lesser extent – have withdrawn from it. Most are involved in payroll-based lending to the low income market, but outside of that have failed to make this a viable business.
Their lending models rely on proof of income and collateral, something the poor simply do not possess.
One lender that has upended the conventional banking model is the Small Enterprise Foundation (SEF), a South African micro lender modelled on the hugely successful Grameen Bank in Bangladesh.
Founded in 1992 by John de Wit and Matome Malatji, it has disbursed R8.7 billion in loans to people who do not qualify for traditional bank loans – and created 200 000 jobs in the process.
The percentage of its portfolio at risk is just 0.2%, a fraction of that of the very best of the commercial banks.
Overall, about 3% of SA banks’ combined loan books are non-performing, according to a 2018 PwC analysis of the banks. Last year Capitec, which has the highest exposure to unsecured lending among the commercial banks, reported a 12.2% provision for doubtful debts as a percentage of gross loans and advances.
Figures from the National Credit Regulator show unsecured lending has multiplied four-fold to R200 billion since 2009. Unsecured lending grew 21% last year, a rate of growth that should be a cause for concern. Nearly four of 10 South Africans qualifying for credit have impaired records.
Shining in a troubled sector
How does SEF manage to shine in a sector where others have burned their fingers? Borrowers are introduced by existing and trusted clients, which serves as the first line of credit defence. They are then allocated to a cell of five or six other borrowers. Every member of the cell undertakes to cover the loan repayments of the others. This peer pressure keeps cell members honest and ensures loans are recovered.
SEF targets not just the poor, but the ultra-poor: those who live below the poverty line.
What really differentiates SEF from other lenders is that it is not trying to make a profit. Surpluses are ploughed back into new loans and a highly effective poverty reduction programme that involves financial education and savings mobilisation.
Getting the poor started
“What we do is get the poorest of the poor started on their journey in business,” says de Wit. “But it is not good enough just to lend money without also providing the tools and education that go into making a successful business.”
SEF clients have accumulated net savings of R109 million as a result of its education intervention, which is almost 25% up on the previous year.
SEF has been in operation for almost three decades and the bad debt ratio remains very low.
It started off in Limpopo, but now offers loans in seven of the country’s nine provinces (the Western Cape and Free State are not yet covered). What’s also interesting about SEF’s business model is that it actively seeks out borrowers through a network of nearly 600 loan development facilitators.
The average loan size is about R4 000, and 84% of clients re-borrow after paying back the initial loan. The average rate of interest is 32% a year, which is well within limits defined under the Usury Act.
Bear in mind that SEF is targeting what is generally considered the highest risk segment of the market. Some 99% of borrowers are poor, black women.
There are some astounding success stories.
Some micro entrepreneurs have gone on to run decent-sized businesses, including furniture factories and fleets of taxis.
The major banks that tiptoed around unsecured lending have seen decent improvements in credit loss ratios in the last three years: the ratio was 0.73% for Absa in 2018, 0.8% for FirstRand, 0.53% for Nedbank and 0.56% for Standard Bank.
Traditional banks’ business models, based as they are on collateral and legal processes to recover debts, have been unable to crack this market.
At the first sign of trouble, SEF facilitators contact the borrower and see what intervention is required to get the borrower up to date on repayments. In some cases, payment obligations are rescheduled, particularly where the client is unable to meet payment obligations due to long-term illness.
Rescheduling can hide a lot of poor quality lending, and is regarded as something of a last resort. It is this flexibility and hands-on intervention that makes the difference between success and failure in the micro-lending market.
The unsecured lending boom took off in earnest in 1993 with the amendment of the Usury Act, which lifted the ceiling on interest rates with the express intention of stimulating lending to the poor. This contributed to the collapse of African Bank (now back on its feet again) and battered retailers such as Stuttafords and Edcon. At the other end of the scale, SEF has shown what can be done with a fresh approach to lending and debt recovery.
“There is a way for banks to get involved in this market and make it work,” says de Wit. “We would be willing to collaborate with them and share our hard-won knowledge. But our experience tells us they cannot ditch their traditional approach to lending, which involves credit assessment and collateral. Probably a better way for them to participate in this market is to give us the money to lend on their behalf.”