Hope for the unbankable

For the majority of South Africans, accessing finance through registered financial institutions is impossible. This is because most South Africans are unable to meet the criteria to qualify for credit. Historically, loan sharks (called mashonisas in Zulu) have been the only option for the unbankable.

Making the poor poorer

Circumstances such as restricted income, lack of collateral or proximity to banks, make bank financing difficult to attain.

Mashonisas, meaning “to make poor”, are informal moneylenders who loan money at exorbitant interest rates. Although loans from mashonisas may be readily accessible, repayment is not an easy task.

Mashonisas live up to their name and frequently disregard legislation such as the National Credit Act – making unrealistic demands on customers. They are notorious for using ruthless methods to force defaulters to pay. Many of their customers end up in a worse financial situation than before.

Finding an alternative

Recently, an alternative source of finance has become available to the previously unbankable. Based on the Grameen Bank model, micro-finance institutions (MFIs) provide low-income individuals with loan financing.

South Africa has embraced the rise of MFIs. With the ideal of seeing their clients break out of poverty, MFIs provide group and individual financing to low-income clients who are then able to fund small businesses, buy food for their families, and pay for education, housing and other basic needs.

Importantly, MFIs employ fieldworkers who build relationships with clients that are not only centred on debt collection, but also focus on improving their clients’ standard of living. This holistic and more personable approach has a positive impact on repayment rates and, in many instances, a lower default than most conventional banks.

The downside of MFIs is that the costs to deploy fieldworkers means that higher interest rates are charged to recoup these costs – a criticism MFIs are all too aware of. However, unlike mashonisas, the interest rates are within legislated requirements, and debt collection occurs through legal channels.

Even within formal supply chains such as furniture and clothing stores, customers can find themselves trapped by overwhelming amounts of debt.

MFIs do not aim to provide access to quick riches, but to give their clients the opportunity of improving their living standards and boost businesses through financing, training and mentoring. Blending these essential tools with an accessible relationship between client and fieldworker improves the probability of success for this model.

How micro-finance is working

Based in Mpumalanga, the Phakamani Foundation provides micro-finance loans, along with training and support to its clients, who have been able to add to their household income and improve their living standards.

One such client, taking care of a family of nine, lived off two child grants totalling R500 a month. After receiving a loan from Phakamani, she was able to support her home-based spaza shop. The loan was used to fix the freezer and purchase stock. She hopes to extend her house and move her business into a small shop on her property.

Good intentions

Loans can meet the financial needs of those who request them. However, the conditions around which they are given can influence whether loans are intended to have a positive impact in the long term. The knowledge that micro-finance loans ultimately seek to create positive change in business and lives, is a model that is founded on good intentions.

GreaterCapital hopes to see South Africa embrace the MFI model as one effective way of distributing wealth and bridging the vast divide between the haves and the have-nots.

Mmamohau Tswaedi