Just 6% of South Africans borrow money to start a business, according to FinScope 2005, a national household survey of financial services, needs and usage. For the rest, borrowing is geared towards consumption - 13% borrow to pay for food (see graph).
Though trade & industry minister Mandisi Mpahlwa says microfinance can be a means to break out of the cycle of poverty, the experience in SA is that small-scale lending is rarely used to develop micro-enterprises.
The UN declared 2005 the Year of Microcredit, to draw attention to the practice and give impetus to microfinance programmes around the world. UN secretary-general Kofi Annan says: "Microfinance has proved its value in many countries as a weapon against poverty and hunger."
In SA, microloans to the so-called second economy are crucial to assist the 40% of the population that live in poverty. Microfinance includes basic financial services - such as credit, savings and insurance - that give the poor and unbanked an opportunity to borrow, save and invest. It is designed to empower borrowers by giving them the means to establish small businesses. The loan usually doesn't require collateral and is paid back over a period of up to a year.
But according to the Global Entrepreneurship Monitor survey, SA's level of entrepreneurship is half the global average. Its 2004 total entrepreneurial activity index ranked SA 22nd in the world, with a rating of 5,4%. This is compared with the global average of 9,3%. The country lags significantly behind other developing countries, with Peru at 40,3%, Uganda at 31,6%, and Ecuador at 27,2%.
In a bid to encourage savings and introduce the unbanked to the sector, Mzansi accounts were introduced last year. The accounts improve access and affordability for entry-level clients.
The number of people in SA with a bank account rose by 4% - that's 550 000 more accounts in the past year, according to FinScope. Many of these are Mzansi account holders.
Stokvels, a traditional method of saving in groups, are also popular in SA.
But microlending has been hampered by weak collateral, poor credit guarantee schemes, poor collection mechanisms, a shortage of formalised institutions, lack of access to capital markets and high interest rates, says Prof Mthuli Ncube of the Wits Business School. With little income or collateral, the poor are seldom able to borrow money from formal financial institutions. Many rely on informal financial relationships like village money lending and loan sharks, which often come with highly inflated interest rates.
Demanding collateral is unnecessary and often excludes many people. "Banks need to be more innovative. They can collateralise the entrepreneurial project," says Ncube.
Microfinance institutions internationally have overcome these traditional barriers with innovative solutions.
Bangladesh's Grameen Bank, a micro- lending institution, has been emulated in many developing countries. It aims to lift people out of absolute poverty by giving microloans to fund entrepreneurial activity. The bank began in 1983 with a few loans of US$27. By July 2004, it had 3,7m borrowers, 96% of whom were women.
SA's Small Enterprise Foundation (SEF), a section 21 company based in Limpopo, is modelled on the Grameen Bank. Since starting in 1991, SEF has granted 220 000 loans worth R240m, recording loan losses of just 0,4%.
SEF aims to give the poor access to a microloan using the prime interest rate. Participants have no collateral, no credit history and no business records. Clients form groups of five selected individuals. Each person receives a loan for their own business. The group acts as the guarantor of each member's loans.
Though identifying participants is important, SEF also emphasises loan supervision and basic business skills development. In this way, the poor have a better chance of making a success out of their micro-enterprises.
The department of trade & industry launched the SA Microfinance Apex Fund (Samaf) this year. Through local organisations, the fund will provide loans of up to R10 000 for microenterprise activities. Micro-entrepreneurs and households that have an income of less than R1 500/month will be targeted. Samaf will also provide other financial services, and will encourage saving through structures such as co-operatives, burial societies and stokvels.
At its North West province launch in May, Mpahlwa said microfinance presented the poor with choices.
"Microfinance is known to have an important effect on stimulating and activating development at the local level, thereby creating employment, increasing incomes and expanding economic opportunities. It provides households who are usually excluded from the banking sector with access to financial services," he said.
In Africa, microfinance initiatives like the Uganda Woman's Effort to Save Orphans (Uweso) have a strong focus on social upliftment. The organisation gives credit to women who look after children, most orphaned by HIV/Aids. Loans accompany compulsory saving, training and insurance. Uweso works with HIV prevention and women's organisations to provide testing and counselling services.
The National Credit Bill to be passed in July 2006 will create one regulatory framework and will replace SA's older laws that govern credit and interest. It will also govern credit transactions, like credit cards, microlending, pawnbroking and mortgages.
"This legislation could make a major contribution in integrating the SA credit industry and in ensuring greater access to all sectors of the population," the Micro Finance Regulatory Council says.
But though projects to finance the creation of micro-enterprises do exist, poverty alleviation is often more pressing, and may overshadow entrepreneurial development.
