Cape province
8.6 Alternative finance sources in South Africa
The transformation of the South African financial sector since 1994 is in line with global trends and will continue, bringing with it potential opportunities such as the roll-out of the second wave of Public Private Partnership (PPP) projects; the further development of e-commerce, and the expansion of the micro-lending business – servicing the needs of the
‘unbanked’ majority of the population.
The South African government realised the importance of rural finance and the reports from the Strauss Commission (1996) laid the foundation for the reform of rural financial markets in South Africa. The recommendations impact more on national than on regional level. Neither did the commission deal sufficiently with the retail level to provide details of how to achieve increased access to rural financial services.
The micro-lending industry, servicing the needs of the ‘unbanked’, show strong growth.
Nearly 80% of adult South Africans have no access to conventional financial services and are regarded by traditional financing institutions as ‘unbankable’ (Table 8.1). The major banks currently attempt to integrate these financial services into the broader, formal financial market while ensuring that market driven approaches are followed. The lack of rural infrastructure and high transaction costs might still leave large numbers of the rural poor without proper financial services. The trend amongst the major banks to rationalise and centralise certain services in rural areas as a cost saving measure might serve as an indication that they rather prefer not to serve the rural poor or alternatively, to serve them with other banking structures or institutions. According to Coetzee et al. (2003) ‘not served’ has two broad explanations:
First, not having access due to a lack of physical access, implying that the institution is too far away and that client access comes at tremendous levels of transaction costs, mostly borne by the client. Secondly, it may imply that the physical proximity of the institution is not the problem, but that the products and services offered and the delivery systems are not matched to client demand.
It is estimated that the informal small-scale financial market could be as big as six million people. About two million South Africans currently have micro loans (with an average loan size of R1,186), contributing to a R14 billion turnover. Approximately 2,000 micro-lenders are registered in South Africa. The introduction of a regulatory environment in 1999 provided respectability and legality to this industry (Bbenkele, 2003; Coetzee et al., 2003).
This was a necessary forerunner to the entrance of mainstream banks into the market. The industry has been consolidating itself, with big players buying out or establishing smaller concerns. Ten banks are now registered as micro-lenders, controlling about half of the industry’s loan book.
Financial institutions focusing on rural people in developing countries rely heavily on principles such as joint surety and group membership. Member based financial institutions have been active in South Africa since the late 1800’s. German missionaries already applied the concept of credit unions around 1880 in KwaZulu-Natal. Miracle et al. (1980) described the concept of collective action used in different variants of informal rotating savings and credit institutions throughout Africa as well as in South Africa. Different institutions, based on these principals operate within South Africa. Table 8.2 shows details of the different rural/informal financial institutions. The next section deals with the evolution of these institutions since 1994.
Table 8.1. Categories of bankable and unbankable people in South Africa, 2003 (Coetzee et al., 2003).
Segment Size Urban Rural Banked Un-banked
Employed/partially employed 5.2 m 67% 33% 48% 52%
Unemployed/unsupported 5.0 m 90% 10% 22% 78%
Township youth 3.0 m 100% - 30% 70%
Supported family 2.4 m 5% 95% 33% 67%
Pension/grant 2.2 m 55% 45% 27% 73%
Totals 67% 31% 33% 67%
17.8 m 12.3 m 5.5 m 5.9 m 11.9 m
Table 8.2. Informal financial institutions in South Africa, 2003 (Coetzee et al., 2003).
Institutional format Number Members Savings Credit Source
Stokvels 800,000 8,250,000 R400 m/month ? NASASA
Burial societies Est 250,000 8,000,000 R200 m/month ? FinMark
Financial services co-operatives 62 80,000 R40 m ? NDA
Saccos 28 13,000 R20 m ?
8.6.1 Burial societies8
Burial societies are directed at unemployed and low income poor people in urban and rural areas. The clientele of the burial societies are vulnerable to exploitation because they are less educated and are regarded as the poorest of the poor. Burial societies generally perform important functions as networks of support to its clients and are highly respected amongst the poor communities, irrespective of some examples of exploitation.
Women bear much of the burden of the household and seek both economic and social support in burial societies. It is therefore common to find more women members than men, especially in the rural areas. However, in urban areas, migrant men may form and join a burial society to get support in their economic struggles.
Two categories of burial societies developed recently. Traditional burial societies differ from commercial ones in terms of structure and operation and their objective is not profit making. African entrepreneurs recognised the profit-making potential in combination with the social and cultural attractions of this system and launched some as profit-making insurance schemes. These burial societies draw members together regularly and offer support and solace during cultural rituals of burial and mourning. Members of commercial burial societies, however, do not have control over the finances of the society. The officials of these societies are appointed and not elected and they have full control over the management of the society. The financial affairs of such a society are mostly closed off to scrutiny of ordinary members. This is in stark contrast to the openness and active participation of the traditional burial societies.
Although the different burial societies operate differently, members join them for the same major reason, which is to be able to afford a decent funeral. Monthly payments to a burial society are therefore viewed not only as a contribution, but also as a saving option. Monthly premiums are affordable and flexible and transactions are done informally, as opposed to the formal procedures and high rigid payments required by formal banks. The support of other members in the society is also highly valued by members, although it is recognised that all the promises are not always fully honored.
Estimated membership of burial societies during 2002 in South Africa was 8 million members (FinMark, 2002). Quantification of the actual size of the movement is not easy due to the fact that many societies operate informally and are not registered. The national average size of a society is about 80 members. The membership numbers is testimony of the importance of the burial society movement in the life of poor people in South Africa.
It might not be sufficient to ensure its survival in its present form, but the formal financing
8 Most of the information are obtained from research published by the DGRV (2003) and a study completed
institutions can use some principles entrenched in the movement to improve their own services targeted at the poor.
A new phenomenon is that a few of the profit-oriented burial societies have started to make loans for other purposes, such as small business.
8.6.2 Rotating savings and credit associations or stokvels9
Ardener, quoted by Schrieder and Cuevas, (1992) define the Rotating Savings and Credit Association (ROSCA) as ‘an association formed upon a core of participants who agree to make regular contributions to a fund which is given in whole or in part to each contributor in rotation’. The principle of ROSCA is well-known all over the world, but it is mostly used and described within the context of developing countries. The most common name for the ROSCA in South Africa is ‘stokvel’. The stokvel is more common in the urban than in the rural areas.
Stokvels are informal solidarity or self-help groups offering nearly all the financial services and some social and cultural needs required by the poor. This includes rotating credit and savings, funeral insurance, social occasions, etc. According to the National Stokvel Association of South Africa (NASASA) there are an estimated 800,000 stokvels, burial societies, and rotating savings and credit associations in South Africa comprising about 8.25 million adults accounting for about R400 million a month in savings.
Management of stokvels is voluntary and they are allowed to take deposits from members because they are exempted under the Banks Act under the ‘common bond’ exemption10. Most of the funds collected within stokvels are also distributed during group meetings.
The National Stokvel Association of South Africa (NASASA) was set up in 1988 as a lobby and umbrella group to represent the interests of stokvels. It is a non-profit organisation that provides education and public awareness programmes to the low income communities, encouraging them to save with the self-managed stokvels. It also develops management-training materials for members of stokvels. Stokvels can affiliate to NASASA at a subscription fee of R1,500 and R850 annually thereafter. As an affiliate, a stokvel has to agree to operate their business according to a code of conduct drawn up by NASASA. NASASA has never developed into a regulatory institution and does not have the capacity to regulate members.
Most significant for the formal banking sector is that NASASA negotiated with commercial banks and other financiers to use the accumulated savings of individual stokvels as a basis
9 Most of the information are obtained from research published by the DGRV (2003) and a study completed by Schoeman, Coetzee and Willemse (2003).
10 GN 2173 of 14 December 1994.
for granting loans. This could formalise the link between the formal and informal banking sector.
8.6.3 Village Banks11
The entry of the International Fund for Agricultural Development (IFAD) in South Africa earmarked the initiation of the Village Bank project. The first two phases of the project saw the establishment of three village banks in the North West Province from 1994 to 1996. A consultative group was formed existing of representatives from various institutions in the North West province to advise and mobilise support for this model.
The inability of private sector financial institutions to provide cost effective financial services in rural areas was the main reason for the village bank concept. High transaction costs and the outflow of hard earned savings without any benefits to local communities initiate the need for alternative banking systems.
The concept of the Village Bank was to create a financial institution that would decrease transaction costs of savings, increase the circulation of resources within the communities, and that could provide loans for re-investment in the communities where the savings are mobilised from. The Village Bank system was built on member ownership and control and relied heavily on the experience gained from stokvels, burial societies and other collective action institutions. This was seen as the means with which rural community could get access to a comprehensive range of financial services at more affordable transaction costs.
The initial project was completed in 1996 and the Financial Services Association (FSA) as a centralised support structure was established. The first Village Banks were legally registered as service co-operatives. The FSA obtained recognition for the Village Bank concept under a special exemption from the Banks Act during March 1998 from the Registrar of Banks.
Due to the self-regulating requirements as contained therein the FSA had to assume the responsibility of regulating its member Village Banks. A regulating framework was developed in conjunction with the Registrar of Banks which led to the formal acknowledgement by the Registrar of Banks of the FSA as a self-regulating body for its member Village Banks.
Expansion of the village bank concept commenced during 1999 with the assistance of a grant of R7,000,000 from the Department of Social Welfare for the establishment of 70 Village Banks in 7 provinces. This grant enables the FSA to establish proper structures and capacity. 29 Communities were assisted to successfully establish their own financial services co-operatives during the funding period. Due to the lack of proper management
11 Most of the information are obtained from research published by the DGRV (2003) and a study completed
and inexperienced staff, funding was not renewed resulting in the operational closure of the FSA in 2001/2002.
Another village bank model called the FINASOL model developed from the South African Sugar Association’s Financial Aid Fund (FAF). The original intension was to transform FAF funding into Village Banks registered as financial service co-operatives.
USAID supported the project and FINASOL was registered in January 1999 as a non-profit association under Section 21 of the South African Companies Act. The FINASOL model was based on a ‘franchising system’ whereby FINASOL was linked to Village Banks established on the same principles as developed in the Village Bank pilot project. The franchise system requires high levels of integrity, standardised procedures and policies as well as products from Village Banks. In return, these banks receive start-up capital to kick-start the Village Banks.
FINASOL was also recognised by the Registrar of Banks as a regulatory body with more or less the same functions previously allocated to the FSA. Due to a lack of funding the FINASOL operations seized to exist from July 2002. Most of the Village Banks established by FINASOL however continued to operate, as was the case with those established by FSA.
Currently no formal support services are rendered to the 62 Village Banks registered with the Registrar of Co-operatives. Thirty-two of these were members of FSA and 30 were members of FINASOL. The Co-operative Banks Act (Act 40 0f 2007) was signed by the President on 22 February 2008. This Act formalises and place new impetus on the number of applications to the Registrar of Co-operatives for registration as financial co-operatives.
Many other rural communities are presently organising themselves with the purpose to register community based Village Banks. Membership of the existing Village Banks is estimated at between 60,000 to 80,000 members with a total portfolio of between R30 million and R40 million. Some Village Banks are continuing to expand their portfolios.
One example is Motswedi with 1,552 members and a savings portfolio of R1.8 million.
The National Department of Agriculture (NDA) presently support the activities of the Village Banks. The grass root need for a Village Banking system is tremendous, so are the need to empower and train communities to manage these structures properly at community level.
8.6.4 Accumulating Saving and Credit Association
Accumulating Saving and Credit Associations (ASCAs) are essentially informal, small-scale, localised financial services associations. The main difference with stokvels is that ASCAs don’t distribute regular payouts, but establish a pool of accumulated savings out of which loans are made to members on demand. ASCAs are less common than ROSCAs, partly because they require higher skill levels than the latter. Thousands of ASCA’s are operating
in South Africa. The Homeless People’s Federation, for example, is based on ASCAs, and has over a thousand members in all parts of the country. Several newer NGO initiatives in the Western and Northern Capes have begun to support networks of ASCAs.
ASCAs’ most significant features are that they are cheap to operate, they provide access to banking facilities on a collective basis and they build social assets, particularly amongst women because most ASCA’s are founded and run by women.
8.6.5 Credit Unions and Savings and Credit Co-operatives
Savings and Credit Co-operatives (Sacco) are financial self-help and member driven organisations. This means that a Sacco sought its own funding from its members and re-apply it back into the community. The controlling body for Sacco’s in South Africa is the South African Credit Co-operative League (SACCOL) that subscribe to recognised principles of the international Credit Union movement.
SACCOL was established in 1993 by the savings and credit co-operatives and credit unions in South Africa. SACCOL is owned and controlled by its member credit unions, which exercise proportional voting rights according to the size of membership. SACCOL is recognised as the representative of savings and credit co-operatives and credit unions in South Africa in Government Notice 2173 of 14 December 1994.
SACCOL received funding to the amount of US$ 1.3 million from 1994 until 2001 and adopted a self-sufficiency strategy. However, self-sufficiency levels were very low when USAID seized their support which compelled the movement to change its strategy to a bottom-up approach. Staff numbers at SACCOL level were reduced from 15 to only 4 which sees an increase in self-sufficiency from only 2% to 80%. Most of these staff was re-deployed by the individual Sacco’s.
8.6.6 Summary of ‘alternative’ rural financial institutions
Table 8.3 is a comparison of ‘alternative’ institutional types and services provided in rural areas (Coetzee et al., 2003).
8.7 Recommendations
8.7.1 Institutional setup and management concerns
The situation regarding the smaller financial services suppliers, including the informal entities involved in supplying financial services to small-scale operators in farming and related activities, has become rather disorganised. This is illustrated by the termination of operations by the Financial Services Association (FSA) and FINASOL. The supply of
Table 8.3. Comparison of ‘alternative’ institutional types and services provided (Coetzee et al., 2003). ServiceStokvelsBurial societiesVillage banksSaccosNGOs Savingmostly rotation savingsmostly target savings to cover burial costunlinked savingsmostly credit linked savingsmostly forced savings Creditsome inter-group lendingno credit unless also operating as a stokvelsubject to risk capital and leverage abilitysubject to risk capital and leverage abilitysavings linked credit Transmissionsno transmissionsno transmissionspossible with link-bank relationshippossible with link-bank relationshipno transmissions Cash transactionno cash transactionscash collections and paymentscurrent accountno cash transactionsno cash transactions Insuranceplanned group schememostly not underwrittengroup or individual schemesgroup schemeno insurance Economic empowermentgroup and individual empowermentgroup and individual empowermentgroup and individual empowermentgroup and individual empowerment individual empowerment Social empowermentpersonal cohesionpersonal cohesionsustainable group structuresustainable group structureopportunity cohesion Leverageability lowno leverageability highability highno leverage Marketunlimitedunlimitedprimarily ruralprimarily urbanmission target Originorganicorganicexternal interventionexternal interventionexternal intervention Gender openopenopenopenmission target Legal entityno legal entityno legal entityco-operativeco-operativeno legal entity Ownershipinformalinformalformal sharesformal sharesinformal Group dependencygroup specificgroup specificnot a specific groupnot a specific groupgroup specific Group use of a formal bankgroup accountgroup accountgroup accountgroup accountmostly no group account Individual use of a formal bankminority, not compulsoryminority, not compulsoryminority, not compulsorymajority, mostly compulsoryminority, not compulsory Accommodation of subgroupsnotnotencouraged also include stokvelsnotnot Physical facilityinformalinformalformalformalinformal Cohesioninter-groupinter-groupmembers to bankmembers to bankinter-group Financial sustainabilityall cost absorbed by the groupall cost absorbed by the groupincome dependenceincome dependencecost absorbed by the NGO Social sustainabilitygroup ownership and controlgroup ownership and controlgroup ownership and controlgroup ownership and controlbenefit dependence
financial services will probably improve in many respects, should some institutional network be formed to aid the operator(s) provided this network will effectively promote the interests of the participants, be well managed and deliver services – such as advice, training and representative services – to the participants. This network should be free from interference from governmental bodies and the commercial banking sector (which in South Africa is highly concentrated), although some linkages will be advantageous. There is a question as to the most appropriate form of organisation for lender groups whose members are the main source of funds.
Small to medium sized cooperatives may form a good institutional form, and such cooperatives may form a network; the network may establish a unit that can supply the needed services to the member cooperatives. In some European countries, such loan cooperatives have over time evolved into specialised credit institutions which cooperate mutually but retain their
Small to medium sized cooperatives may form a good institutional form, and such cooperatives may form a network; the network may establish a unit that can supply the needed services to the member cooperatives. In some European countries, such loan cooperatives have over time evolved into specialised credit institutions which cooperate mutually but retain their