At DMA, we use the term development microfinance to describe the services that our members provide. This is distinct from the consumer microcredit sector and salary-based lending (so-called pay-day loans) that are more well-known in South Africa, and which are often used synonymously with the term microfinance in our country.
Helping People Help Themselves
Development microfinance is the practice of making very small loans to poor entrepreneurs so they can build and grow microenterprises to sustain their families. It is a practice that has had great success in unleashing the talents and energy of previously unbanked people across the globe, particularly when coupled with training and other kinds of support. Here in South Africa, tens of thousands of self-employment jobs have been created in this way.
Various non-profit, community banking, and even commercial lending/training models have developed for this kind of microfinance in different countries. Services have also expanded to include agricultural loans, housing loans, education, “green” product loans, and more. The goal is to provide appropriate financial products and services that have been traditionally unavailable to people living in the informal economy – and to thereby help them improve their own lives.
Sustainable and Scalable
The popularity of this approach as a way to assist the poor has stemmed also from its inherent sustainability and potential for scaling up. When a development microfinance institution (DMFI) is well run, the entrepreneurs pay back their loans, with appropriate interest, and this helps cover the operating costs for microloans and training for the next group of entrepreneurs. The same principle can apply to developmental loans for housing or other purposes.
In South Africa, developmental lending directly to the poor is still a nascent sector in which growth has been slow. DMA members have proven, however, that it can and does work. Some member organisations have existed for many years while others are more recent and still working to expand to a sustainable level.
Not Payday Loans
Salary-based microlending is different from development microfinance and also more widespread in South Africa. It refers to the provision of small, short-term consumer loans for low-income individuals who have regular salaries (which can be garnished in case of non-payment.) This is what many South Africans think of as microfinance although, globally, it is a small part of a much wider picture.
Salary-based microlending tends to be a purely commercial offering without specific development objectives. It plays an important role in increasing access to credit for the working poor and it has been helpful to many people – their use of the service despite its costs has proven so. Given the financial vulnerability of many clients, however, regulation and enforcement of consumer protections under the National Credit Act is especially important.
Creating a Path for Development Microfinance in SA
Many of the goals and needs of the salary-based lending sector are different than for development microfinance. This is why DMA exists today.