Thursday, 4 May 2017

Letter to Business Day on the pitfalls of micro loans

Today's Business Day carries my letter about the pitfalls of micro loans for small businesses. You can read the letter here or the full version I sent them below.

Sir

Mark Barnes must realise he is taking Postbank into treacherous waters (Postbank's fresh loan plan aims to boost access, BDay 28 April). While access to credit for informal sector businesses, in the form of micro loans, is touted as promoting financial inclusion, it has more often than not led to over-indebtedness and financial distress among borrowers and boom-bust times for credit providers. 

By citing the need to "find the right price" for these loans, Barnes is calling for a more borrower-friendly yet sustainable - from the lender's perspective - risk-return ratio, which is admirable. 

The state is already deeply invested in this space, notoriously via the Small Enterprise Finance Agency, Sefa. For the 2016/17 financial year to December 2016 Sefa reported that 48%, or R678 million, of its loan book was at risk, in other words might not be paid back. Without state backing it would have gone the way of Unifer, Saambou and African bank long ago. 

Poor pre-loan screening and inadequate post-loan support are the main causes of this dismal performance. Too much money was borrowed for consumption spending not investment.

If Barnes is serious about entering this market, he would be well-advised to take a close look at these critical factors first.  

He is presumably trying to find the sweet spot of providing affordable credit profitably and by doing so contribute to the growth of township and rural economies.

Economic development of our poorest regions requires a holistic approach and access to credit is but one pillar of a multifaceted solution that benefits lender, borrower and the broader economy. Proliferating micro loans on their own will not achieve this, even at "affordable" interest rates. 

Barnes would do well to have a conversation with the National Mentorship Movement which aims to source 100 000 mentors and 1 million mentee businesses. That could lead to real inclusive, socially responsible and profitable business that moves the dial on job creation and growth.

Yours

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