The sustainability of microfinance organisations in rural South Africa

Thesis (DTech. degree in the Business School)--Tshwane University of Technology, 2007.This dissertation seeks to establish whether microlenders in South Africa aimed at the rural poor with the purpose of poverty alleviation are or can be self-reliant, self-sufficient and ultimately self-sustaining. This question arose because typical micro finance clients are low-income persons that do not have access to formal financial institutions. Access to conventional formal financial institutions, for many reasons, is inversely related to income: the poorer you are, the less likely that you have access. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements (Sapovadia, n.d ). A lot of studies have been carried out in other countries, especially developing countries on other similar development microlenders such as the Grameen Bank in Bangladesh that have successfully managed to extend credit to the poor by embarking on alternative or rather unorthodox methods, such as group-lendingthat are not used by formal financial institutions such as commercial banks. Since the poor borrow relatively small amounts that may not even cover all transaction costs, these methods are aimed at among others reaching a huge number of poor people simultaneously to ensure that at least all transaction costs are covered. South African and other development microlenders in the world have attempted to replicate this methodology of lending without the same level of success. The South African situation is further complicated by the South Africa’s economy, which is unique to economies of other developing countries. South Africa has one of the world’s worst income inequalities that have resulted in a dual economy comprising of a first world and third world economies in one country. However donor funding is extended to South African microlenders with basically the same requirements especially with regard to the expectation that the microlenders must attain or promise to be self-sufficient within a certain or specific period in time. “Donors, governments, and many analysts regard sustainability as the benchmark of microfinance institutions’ (MFIs) performance” (Baumann, 2004). This study used requirements by donors as a yardstick to measure the sustainability of development microlenders in South Africa to establish if the alternative method of microlending has yielded the desired results. These results were also critically compared to the microlenders in developing countries to establish specific parallels and contrasts that might be brought about by the South Africa’s unique situation. Data relating to specifically operational and financial self-sufficiency was collected from South African microlenders who are lending for poverty alleviation purposes. This data was analysed to establish whether such organisation are selfsufficient or not. Findings indicated that microlenders in South African in spite of using alternative methods to credit granting such as group lending to exploit social capital that exist in poor communities, most of them are neither self-sufficient or self-sustainable. Further to this it was established that the South African situation does not allow for a direct comparison to microlenders in other developing countries because of South Africa’s dual economy