Access to credit for business start-up and working capital is essential for any market and community development. Serving poor and/or unbanked entrepreneurs who do not have assets to guarantee their loans presents a special challenge. Often, they also lack basic accounts training or experience with financial organisations. Through many years of local and global effort, several good lending models have been developed to work well for clients.
Group Lending for Microenterprises
The group lending model for microenterprise development is the most common approach in South Africa. It is not as widespread as in other countries but this model has a firm toehold here, with much experience.
In this model, poor entrepreneurs form groups of about five people. They are trained together, they guarantee each other’s loans and a group support system is developed. Traditional loan guarantees are not required: payback can be achieved at very high rates thanks to careful screening, peer pressure and on-going monitoring and support to the microenterprises. Loans range from about R500 to R15 000, over at least 4 months, depending on a person’s history and experience, and the lending organisation’s programme.
Lower Costs for Tracking Many Small Loans
Group microenterprise lending helps reduce risk and keeps administrative costs down for the lender. This is very important in microfinance, where lenders must disburse and collect many small loans instead of a few larger ones, like in a traditional bank. Group lending, however, is only appropriate for the tiniest microenterprises whose needs can be met with very small loans.
Individual microloans are usually more appropriate for larger loans (R10 000 to R50 000), such as for housing or for entrepreneurs with bigger plans and more experience. Providing microloans to unbanked individuals can be more costly, however, in terms of risk assessment and collection. In the case of microenterprise development, it can also require higher/different levels of training and support to the entrepreneurs.
For these reasons, individual microlending for development purposes is even less common in South Africa than group lending. This is a critical gap in our economy. Several DMA members are trying to address this and it deserves significant attention.