The Rise and Fall of Microcredit in Post-Apartheid South Africa

Nov 2012
South Africa, November, 14 2012 - Thirty years ago, the international development community was abuzz with excitement. The reason was that the perfect solution to poverty in developing countries appeared to have been finally located — this was microcredit, the provision of tiny micro-loans used by the poor to establish income-generating activities.

As is well-known, microcredit is most famously associated with the work of the US-educated Bangladeshi economist and eventual Nobel Peace Prize winner (in 2006), Dr Muhammad Yunus. Following a number of action-research projects involving microcredit in the village of Jobra near Chittagong, Yunus felt he had found the answer not just to Bangladesh’s poverty, but to global poverty in its entirety. Such was Yunus’s supreme confidence in the microcredit model that he quickly took to claiming that it would ‘eradicate poverty in a generation’ and that our children would have to go to a ‘poverty museum’ to see what all the fuss was about. Importantly, given that in the past many projects involving small-scale finance were associated with leftwing political movements (1), Yunus also took great pains to portray microcredit as a vital way of legitimising and promoting capitalism in developing countries, essentially ‘bringing capitalism down to the poor’. Rather than militating against, resisting or suggesting alternatives to capitalism, the poor could now be given a microcredit and they would become micro-capitalists with an interest in nothing more than acquiring their own small ‘piece of the action’.

Such florid hyperbole, as clearly intended, began to attract the attention of the world. In particular, the main Washington DC-based international development agencies and some US-based right-wing foundations began to seek out Yunus in order to support his efforts. Pretty soon the funds needed to support Yunus’s central idea to establish a ‘bank for the poor’ — what became the iconic Grameen Bank — began to roll in, initially from the Ford Foundation, but soon followed by funding from a whole host of other organisations, including the Bangladesh government. At the beginning Yunus was very clear that he wanted to keep the Grameen Bank’s interest rates as low as possible. Among other things, this would mean that Grameen’s clients could reinvest as much of any surplus generated back into their micro-businesses, rather than simply pay most of it out in the form of interest payment. However, this low interest requirement effectively required Grameen Bank to continue to access subsidies from its large band of supporters, which by the free market 1990s was becoming a much more difficult task. The result was that the Grameen Bank was forced to move to become a financially-self-sustaining microcredit institution. It achieved this feat in 2002 through the so-called ‘Grameen II’ project , a project that introduced a range of revenue-generating techniques not always commensurate with the interests of its poor clients. One important result was that although the Grameen Bank had for a long time been advertising its interest rate as 20%, the reality was probably that it was much nearer to 30%. Still, this was often less than local money-lenders were charging.

With the Grameen Bank now up-and-running, in the 1990s Muhammad Yunus turned himself into what might be called a ‘poverty faith-healer’. Travelling the world to promote his personal ‘belief’ in the effectiveness of microcredit, and that other developing countries could replicate the enormous poverty reduction success he claimed (without any evidence whatsoever) was now underway in Bangladesh, Yunus became the global ‘smiling face’ of the microcredit movement. In no small measure thanks to Yunus’s efforts, by the late 1990s the microcredit model had established itself as the most high-profile and generously funded of all international development policies.

However, the sour reality that has to be faced today is that things simply did not work out as Muhammad Yunus had promised the world — and especially the poor — that they would. Instead of ushering in an historic episode of poverty reduction and sustainable bottom-up development, the microcredit model is increasingly being recognised as a quite devastating ‘poverty trap’. Not unlike the case of central planning, which was introduced in the former Communist states of Eastern Europe with great fanfare and often genuine good intentions, but was later abandoned on account of its sheer inefficiency, the microcredit model too was launched with much celebration and good intentions, and yet it too has failed to improve the lives of the poor to any meaningful extent. Accordingly, the microcredit model also appears to be on a track leading to its eventual demise.

The problems with the microcredit model are many. For a start, independent studies in the growing list of developing countries that accepted the microcredit model have failed to find any real evidence of any positive impact . Even long-time supporters of the microcredit model have had to reluctantly accept this extremely awkward conclusion. Essentially, therefore, the resources invested into non-performing microcredit programs would have been better spent on something else, such as infrastructure, healthcare, education or the promotion of more sustainable businesses, such as small and medium business (see the next point).

Even more damning evidence against the microcredit model then began to come from a growing number of development economists, and — astonishingly — from some thoroughly mainstream international development institutions with their own microcredit programs. The arguments made here centre around the fact that microcredit institutions everywhere are increasingly monopolising scarce financial and other resources, which they then use in order to churn out rafts of largely unsustainable and no-growth informal microenterprises and self-employment ventures. Meanwhile, those enterprise projects we know from historical experience are associated with the successful promotion of sustainable local economic development and broad-based poverty reduction — innovative, capable of operating at minimum efficient scale and above, able to productively link up with other enterprises both vertically (sub-contracting) and horizontally (clusters, networks, etc), and organisationally more complex, small and medium enterprises — inevitably end up with much less, if any, financial support in comparison. In such a manner, a region or country is essentially steered back into an historic pre-industrial and largely pastoral past. Essentially, the problem is that the microcredit movement has built into the local financial system an ‘adverse selection’ bias, one that had inevitably led on everywhere to the gradual primitivisation, de-industrialisation and informalisation of the local economy in which microcredit dominates. In turn, this can only lead to the local community’s further descent into generalised poverty and under-development.

And it gets even worse. It now very much appears that the commercialised microcredit model that emerged in the 1990s is even more destructive than the subsidised version initially associated with Muhammad Yunus. Like a lot of other naïve people before the 2008 global financial crisis, those behind the promotion of the commercialised microcredit model were taken in by the belief that profit incentives and Wall Street-style operating methodologies would always and inevitably lead to the highest possible level of organisational efficiency. Introducing such features into the world of microcredit, so the argument ran, could only lead on to far superior outcomes for the poor. They could not have been more wrong. The eventual outcome of the microcredit model has been enormously destructive for the poor communities receiving microcredit, though, as we will see, very often hugely profitable for the much smaller number of individuals and institutions supplying this microcredit. Starting in Bolivia in 1999, and followed by Nicaragua, Pakistan, Morocco, Bosnia and, most spectacularly, the state of Andhra Pradesh in India in 2010, the most developed microcredit sectors across the world fell foul of hugely destructive and largely greed-driven Wall Street-style ‘boom-to-bust’ episodes. Financial sector ‘insiders’ are now predicting similar destruction is coming soon to Mexico, Kyrgyzstan, Cambodia, Peru, Colombia, Ghana and Nepal, among other microcredit ‘saturated’ countries. Just as in the US with its sub-prime lending catastrophe, the defining feature of the commercialised microcredit model also appears to be the unstoppable search by senior managers and investors for maximum profit and their own private enrichment , no matter what the eventual consequences for the local community and society at large.

South Africa is now seen as the latest casualty of microcredit

In spite of many Yunus-like pronouncements down the years as to the ‘power’ of microcredit to transform Africa, notably in 2009 an incredibly naïve and ill-researched contribution from the Zambian economist Dambisa Moyo, the generally depressing global experience just noted has essentially been repeated right across the continent. South Africa is one of the continent’s countries that has perhaps been most badly affected by the arrival of the microcredit model. In a country desperately trying to escape from the appalling legacy of apartheid, the international development community made it a priority in post-apartheid South Africa to ensure that microcredit was one of the main local financial instruments. Microcredit supporters all agreed that South Africa’s poor would quickly be liberated from their historic poverty, exclusion and deprivation. But the abundance of microcredit conjured into existence since the mid-1990s has to date achieved nothing more than reproducing almost exactly the same disastrous outcomes as elsewhere.

The most immediate microcredit-driven problem in South Africa is that it has added considerable impetus to the already dangerously high level of consumer debt. Nearly half of the 19 million credit active consumers in South Africa are described as having ‘impaired’ credit records (meaning they are three or more months in arrears), while a further 15% are described as ‘debt-stressed’ (meaning they are one or two months in arrears). This translates to more than 11 million (more than 60%) of all credit active consumers in South Africa now being defined as over-indebted. The current situation is quite unprecedented , and the anti-social results are becoming increasingly apparent to all South Africans. With a long history of informal financial systems, from the mashonisas (local moneylenders) to stokvels (burial societies) through to many rotating savings and credit associations (ROSCAs), the pre-apartheid financial system actually offered many opportunities for those in the poorest black communities to access small sums of credit. What the modern microcredit movement in South Africa has succeeded in doing, however, is turning what was once an occasional awkward household task — accessing a microloan — into an almost everyday activity with none of the previous social embarrassment or fear. And with everyone enamoured of microcredit, what could possibly be wrong with the poor taking up as much as is being offered? The potential for a gradual slide into over-indebtedness should have been obvious, especially to those who really had the interests of the poor in mind.

Of course, it is not good that so many of South Africa’s poor appear to have voluntarily taken on so much debt with no clear idea how they might repay it. However, most of the blame for the manifest over-selling of microcredit must lie with the microcredit institutions themselves. They began to aggressively ‘push’ microcredit right from the start and, unforgivably, in precisely the direction of those poor individuals who were most likely to get into real personal difficulties. Safe in the knowledge that relatively high interest rates mean that they can remain highly profitable even when there are high default rates, South Africa’s microcredit institutions have gone out of their way to lend to individuals that are clearly already in serious micro-debt. It also has to be said that rising micro-debt levels have been quietly tolerated by the South African government as a form of short term demand stimulus in the context of the global financial crisis. Significant pressures in favour of over-indebtedness are thus already hot-wired into South Africa’s microcredit system. The overarching problem now, of course, and if it can be done, is to ‘turn off the tap’ and encourage South Africa’s poor to avoid further microloans, as well as begin to repay their existing micro-debt overhang. Purchasing needed goods and services with expensive microcredit is an almost uniquely risky strategy for South Africa’s poor, and certainly it is no long-term substitute for liveable incomes provided by employers and collective service provision by the state.

But apart from the serious short-term over-indebtedness problem, there also remains the fact that the standard microcredit model has not contributed anything to real long-term progress in South Africa in terms of sustainable job creation and income generation. One of the problems here relates to history. With an already extensive informal microenterprise sector in the oppressed black communities stretching back into the apartheid past, today the poverty-push entry of rafts of simple informal microenterprises largely serves only to displace this existing raft of microenterprises and their employees. Many desperately poor people are trying to make a living out a simple micro-business, very often including refugees from neighbouring countries, but the local market soon becomes saturated with their output. After all, the local market can only support so many tiny shops (spazas), street sellers, cross-border ‘shuttle traders’, ‘barrow boys’, informal taxis, and so on. It is simply not the case that the level of local demand for simple items and services will automatically rise to meet the level of microcredit-induced supply. Famously, this was a crux issue that Muhammad Yunus fatally misunderstood right from the beginning . In fact, with a continued ‘poverty-push’ inflow of precisely such low capital and simple to operate informal microenterprises, thanks to South Africa’s microcredit institutions, the reality is that local prices tend to soften, turnover per individual microenterprise falls, and the average financial return gradually falls to near-zero. The poor do not escape their poverty at all, but overwhelmingly end up trapped in very low productivity businesses that will only ever facilitate an escape from poverty for a very tiny number of them.

Even worse, the artificially heightened competition between incumbent and incoming microenterprises has long been found to be a factor in the growing violence, illegality, turf wars and criminal activities taking place in the poorest communities in South Africa. When existing microenterprises are displaced by incoming microenterprises, little benefit accrues to the local economy, and for the poor individuals already involved in micro-business there may be even greater hardship thanks to the new and largely unnecessary competition. Microcredit advocates simply ignore this process. Also overlooked here is the fact that very many new microenterprises quickly go out of business. As a result their hapless owners not only have to repay a microcredit taken out for a business project that no longer generates any income, they also stand to lose any other household assets invested into the venture (savings, land, housing, vehicles, etc), as well as important social contacts and reputational capital.

As Mike Davis brilliantly sums up the situation globally , the entrepreneurial ‘hot-house’ conditions generated by the microcredit model in virtually all developing countries, including in South Africa, simply adds to the general poverty, misery, deprivation, anger and alienation of the poor. The microcredit industry’s cynicism in publicising a tiny number of successes — so-called ‘Donna Maria stories’ — in order to justify, or simply to cover for, the reality of an overall failure to promote meaningful poverty reduction at the community level, is simply breathtaking.

Microcredit is now destroying the lives of miners and threatening the political system

Recently, even worse impacts essentially arising from microcredit have become apparent in South Africa. The programmed over-supply of formal microcredit is increasingly taking place in some of the most vulnerable and restive communities of all, notably in the mining regions around the city of Rustenburg. Disaster almost inevitably awaits.

The deep problems in Rustenburg are no secret. The city is the focal point for much of South Africa’s hugely important mining industry. Both South African and, increasingly, foreign investors generate huge profits from the mining of gold, platinum and other rare minerals. However, the individual miners, as well the local community in which the mining takes place, tend to benefit very little from the extraction of such resource wealth. Rustenburg is part of the Bojanala District Municipality, which has an unemployment rate of around 40%, yet the bulk of the miners are actually migrant labourers brought in from the rural areas to the north and west of Rustenburg by labour brokers hired by the mine-owners. The reason for this preference is easily apparent: migrant labourers coming from these very poor areas are much cheaper and more tolerant of abuse and poor working conditions than mineworkers recruited locally. But away from home and their families, with a generally low disposable income thanks to the necessity to support two households (the family household in the rural areas and their lodgings at the mine), working under very harsh and dangerous conditions, and also all too often financially illiterate, many of the migrant mine-workers are especially vulnerable. As such they are seen by the microcredit institutions as ‘perfect targets’.

Indeed, the presence of so many obvious ‘perfect target’ clients in Rustenburg has drawn formal microcredit institutions to this city like bees to honey. Consider that in the city of Rustenburg alone, alongside numerous self-described payday lenders and mashonisas, a total of 81 formal microcredit outlets operate to provide financial services to a population of around 250,000 people. This number includes ABIL, Capitec, the big four South African banks, Blue Financial Services, Bayport, Real People, Finbond and Old Mutual, almost all of which are registered on the Johannesburg stock exchange. Given a population of around 250,000 in Rustenburg, and if we assume a total of 3 persons per household making 83,000 households, we find that we have one formal microcredit provider operating in Rustenburg for every 1,024 households (83,000/81 operators). This is a simply staggering number of formal microcredit outlets in such a small area, way beyond even the most liberal interpretation of the supposed need to support local micro-entrepreneurs and achieve ‘financial inclusion’. This is about maximizing profits, nothing more.

Pointedly, several of these microcredit institutions have actually located their outlets in the mineworkers’ hostels or on the mine itself. And, almost unbelievably, the National Union of Mineworkers (NUM) also decided to get in on the borrowing frenzy underway, through its part-ownership of UBank, one of the largest and most aggressive microcredit institutions operating in Rustenburg. For a member-based institution that should be helping its members to get out of indebtedness problems, not putting them into one, the NUM has displayed a stunning lack of concern for the real interests of its members. Not surprisingly, defections to the local unofficial mine-workers union — the Association of Mineworkers and Construction Union (AMCU) — have been running at record levels. In fact, many see the growing rivalry between the NUM and the AMCU as yet another a factor helping to precipitate the recent violence, with the AMCU seen as more willing to defend the miners and work to achieve a fair and lasting settlement. The NUM, on the other hand, is seen as more concerned about helping out the ruling party, the African National Congress (ANC), an impression that has only been confirmed to many as a result of the NUM’s entry into exploitative microcredit activities involving its own members.

The result of this massive step-up in formal and informal unsecured micro-lending is that very quickly large numbers of mineworkers in Rustenburg have ended up with very high levels of un-repayable micro-debt. In turn, this has precipitated dangerously high levels of anger, resentment and feelings of having been betrayed by the ANC leadership and the formal trade unions. The mine-workers eventually decided that they had had enough, and they went out on strike to demand better pay. At least partly, the motivation for seeking higher pay was to help them escape from the serious levels of micro-debt they now found themselves trapped in. But encountering very determined resistance from the mine-owners working hand-in-hand with the state authorities — just as under apartheid - the situation soon got out of hand. On August 16th at the Marikana mining complex, a shaky stand-off was tragically met with extreme force, and a massacre of 34 striking miners took place in post-apartheid’s most bloody incident to date.

In many respects, one might argue, the carefully programmed over-indebtedness of so many mine-workers in Rustenburg played a very important role in helping generate the conditions that gave rise to the Marikana Massacre. When stratospherically high levels of individual over-indebtedness are overlaid upon other pressing economic and social problems, why would we be surprised to find that the resulting pressure can only be contained for so long?

The microcredit industry operating in Rustenburg has now begun to replicate some of the worst cases of microcredit profiteering and manifest abuse of the poor found elsewhere around the world. Perhaps the most notable parallel is with the situation in the state of Andhra Pradesh in India prior to the almost complete collapse of the microcredit sector there in 2010. Although the individual over-indebtedness in Andhra Pradesh worked itself out along a different trajectory — aggressive loan collection techniques leading to widespread fear and some suicides, and then a mass default movement — the overarching mechanism at work is essentially the very same one: financial elites seeing a way to get extremely rich by lending out expensive funds to the very poorest.

Consider that one of the most important of the formal microcredit providers in South Africa is the microcredit institution Capitec. In many respects Capitec is an almost perfect clone of India’s infamous microcredit institution, SKS, an institution that also led large numbers of the poor in the state of Andhra Pradesh, especially its women, into huge over-indebtedness. This over-indebtedness was required in order to maximise turnover and profits at SKS, and so also the salaries and bonuses of the CEO, Dr Vikram Akula. Just like SKS, Capitec has effectively led the way in pushing out massive volumes of microcredit into the very poorest communities, thus making huge profits for its senior managers and outside shareholders. Like SKS, Capitec also has a high-profile CEO at its helm, Riaan Stassen, who may even top Dr Akula in terms of the personal wealth he has acquired as a result of pushing the poor into expensive micro-debt. Awarded in 2004 a personal shareholding of 167,645 shares priced then at R7.61 per share (i.e., a total value of around R1.3 million), in mid-2012 Stassen off-loaded a fifth of his shares for nearly R100 million (around $US11.5 million) at a price per share of around R220, with nearly R400 million (around $US46 million) of Capitec shares still held by his private investment company. The share price of Capitec has gone up massively in recent years, so the outside shareholders are also doing just great, though the poor miner-clients are just getting into more and more debt.

Moreover, and once more as in Andhra Pradesh, the anti-social activities of loan sharks, payday lenders and other semi-parasitic services have actually been enhanced in South African communities thanks to the ubiquity of microcredit. Also not helping is the related refusal by the South African government and other relevant organisations, notably even the Small Enterprise Foundation (SEF), to tolerate greater transparency in, and robust regulation of, the microcredit sector. Many mineworkers now more than ever engage with informal microcredit institutions, including payday lenders, in order to repay instalments due on the formal microloans taken out from the traditional microcredit institutions. By the same token, many mineworkers in serious micro-debt to local payday lenders can now refinance these loans with a lower interest rate offered by the formal microcredit institutions. And, finally, hovering over both types of microcredit are so-called ‘collection attorneys’, individuals with some legal experience and whose sole task in the mining communities is to aggressively collect on unpaid micro-debts in return for a large fee.

South Africa is a country on the edge. Rather than ameliorating a rapidly deteriorating situation, still less resolving it, the microcredit model today stands accused of having extended many of its worst dimensions. Given the currently fragile state of South Africa’s democracy, as graphically shown by the appalling events at the Marikana mine complex of August 16th, the eventual damage caused by out-of-control micro-lending in these most fragile of areas could prove to be far greater than this. Unless urgent action is taken right away in South Africa to make the local financial system the servant of the community, and not vice versa as at present, it may soon be too late for everyone.


Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More