The unsecured lending bubble has already claimed the scalps of African Bank (now rescued from oblivion) and a clutch of retailers such as Stuttafords and Edcon, which are in various stages of reconstructive surgery.
Part of the blame lies with amendments to the Usury Act more than 20 years ago that lifted the ceiling on interest rates that micro-lenders can charge. Out of this grew many of the lending horrors of which we have become familiar – the epidemic of garnishee orders, interest rates of 30% a month, confiscation of borrower’s ID books and debit cards, even the 2012 Marikana massacre, where 34 striking miners were shot by police. The miners complained of being drowned in debt, living from one micro-loan to the next.
Figures from the National Credit Regulator show unsecured lending has ballooned to R167 billion from R54 billion in 2009. Unlike mortgage or car loans, lenders have no collateral to call on in the event of default on these loans. Nearly one in five credit-active customers has some form of credit impairment and, though the figure is improving slightly, it remains stubbornly high by international standards. The unsecured lending boom is largely to blame. While mortgage and vehicle financing is flat or declining, unsecured lending grew 12% in the first three quarters of 2016. This has prompted some to argue that we should expect the unsecured lending bubble to claim a few more scalps in the coming years.
In the banking sector, bad debt provisions as a ratio of total advances vary from 0.01 for Absa to 0.13 for Capitec, with the others scattered in between. Capitec has a sizeable unsecured lending book relative to the other banks, so one would expect a larger provision against bad loans.
How, then, does one explain the extraordinary bad debt record of the Small Enterprise Foundation (SEF), which lends to the poorest of the poor and has written off just 0.24% of the cumulative loans disbursed since it opened its doors in 1992?
Since inception it has disbursed R5.5 billion in loans to nearly 158 000 people, 99% of them women taking their first step on the economic ladder. None of these loans require any form of collateral from the borrower, yet SEF has a bad debt ratio that is the envy of the banking world.
How does it do it? “Our lending works on peer pressure,” explains John de Wit, the founder and CEO of SEF. “We follow a group lending approach very similar to that pioneered by the Grameen Bank of Bangladesh which, together with its founder Professor Muhammad Yunus, received the Nobel Peace Prize in 2006. All our borrowers must be introduced by an existing client, and they form part of a group or cell where all members of the cell take responsibility for the loan repayments of everyone else.”
Mainstream banks have attempted with varying degrees of misfortune to target this market. It seems their business model, based on branch networks, electronic delivery and collateralised lending, simply cannot adapt to the requirements of the ultra-poor. This is a market that requires an extensive team of consultants on the ground to survey and monitor loan activity. Miss a payment by one day and you will likely receive a visit by one of the loan consultants, not to harass, but to offer assistance. Other members of the group will then be required to cover the defaulter’s loan, which creates considerable peer pressure. The result is that no-one wants to miss a payment and will move heaven and earth to make sure the loan repayments are met on time.
“The earlier you jump on non-payment of a loan, the better,” says De Wit. SEF, a non-profit organisation, started in Limpopo, but now has operations spanning five provinces, and will soon cover the entire country. De Wit says SEF works to reach not simply the poor, but the very poor – those living below roughly half the poverty line.
The typical enterprises which are started by SEF clients include peddling of fruit and vegetables and new or used clothing, small convenience shops, and dressmaking. On average, each business employs 1.1 individuals, including the owner, on a full-time or part-time basis. Very poor families are able to afford three meals a day rather than one. Other families pay school fees and buy uniforms to send their children to school – even to college or university.
After several loans many families electrify their houses or expand their business to hire employees. In addition increase in income, sense of independence and self-reliance result in significant empowerment for clients.
SEF has won a clutch of local and international awards over the years, including the Small Business Promotion Pioneer Awards in the microfinance category in 2015.
The Usury Act was amended in 1993 to lift the ceiling on interest rates charged by micro-lenders in the hope that this would stimulate small business growth. On the one hand it created the unsecured lending boom we are now witnessing. On the other, it gave rise to the SEF and a few other micro-finance organisations with a track record that should be the envy of the banking world.
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