The Townships Project A Canadian non-profit jumpstarting business in South
African townships through microlending, microfranchising
and asset based community development.
Canadian Charitable Registration Number (86418 8420 RR0001).
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South Africa - Microcredit
Overview

Microcredit

Asset Based Community Development

Micro Franchising

Microcredit, as that term is used by The Townships Project, is the provision of loans to the unemployed or self-employed for the purpose of starting or expanding a business.

Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services.1  Many are familiar with the Grameen Bank and Muhammad Yunus, winners of the 2006 Nobel Peace Prize, with which the movement of microfinance is closely associated.  The movement seeks a world “in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance and fund transfers.2  The Townships Project is built on the premise that such access can help those in poverty to escape it.

Traditionally, banks have not provided financial services to clients with little or no cash income.  Banks incur substantial costs to manage a client account.  For instance, the revenue from delivering one hundred loans worth $1,000 each will not differ greatly from that of delivery a single loan of $100,000.  However, the cost of making one hundred loans is much greater than that of making a single loan, and hence banks have traditionally shied away from banking for the poor.

Microfinance has developed techniques which bring the cost of lending much closer to the point where small loans can generate sufficient capital to be self-sustaining.  While the success of Grameen Bank (which now serves over seven million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success.  Although much progress has been made, the overwhelming majority of people who earn less than $1 a day, especially in rural areas, continue to have no practical access to formal sector finance.  Microfinance has been growing rapidly with $25 billion currently at work in microfinance loans,3 but it is estimated that the industry needs $250 billion to get capital to all the poor who need it.  And, of course, to be effective, it must be managed well.

In South Africa, those providing microloans have not yet transformed themselves into banks, so they do not have access to a savings base to leverage their capital.  The traditional bank most identified with providing banking services to the working poor is Capitec Bank, which provides payroll-based loans and savings accounts.  The Post Office also provides low-cost banking services, not including loans.

South Africa has more than twenty years of history in microcredit, but only a handful of institutions which have succeeded in achieving nearly self-sustaining status, including Small Enterprise Foundation, Women’s Development Business and Marang.  The Townships Project supports a fourth institution, started by the founding CEO of Marang, Yvonne Radinku, in 2007.  It anticipates reaching self-sustaining status by the end of 2010, but will continue to require financial support for expansion.

The Townships Project has come to realize over its 11 years of work in microcredit that a number of services and strategies must work together to bring lasting relief from poverty.  As a result it is broadening its partnerships to include organizations working in asset-based community development and micro-franchising.  Asset-based community development helps communities come together to plan how to use what they have to get what they need.  Their community development plans often include the sorts of local businesses that microloans can start or expand.  Many of those local businesses can also use the business systems and branding that franchising, the most powerful business system ever created, can bring.  The Townships Project expects that this approach will help it deepen the effectiveness of its support for microl-ending in poverty alleviation in South Africa.

It is interesting to consider the principles set out by the Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004, as they summarize 150 years of development practice:4

  1. Poor people need not just loans, but also savings, insurance and money transfer services.

  2. Microfinance must be useful to poor households:  helping them raise income, build up assets and/or cushion themselves again external shocks.

  3. “Microfinance can pay for itself.”  Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.

  4. Microfinance means building permanent local institutions.

  5. Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system.

  6. “The job of government is to enable financial services, not to provide them.”

  7. “Donor funds should complement private capital, not compete with it.”

  8. “The key bottleneck is the shortage of strong institutions and managers.”  Donors should focus on capacity building.

  9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.

  10. Microfinance institutions should measure and disclose their performance – both financially and socially.

1 Much of this section is sourced from Wikipedia

2 Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line: implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-3.

3 Microfinance: An emerging investment opportunity. Deutsche Bank Dec 2007

4 Helms, Brigit (2006). Access for All: Building Inclusive Financial Systems. Washington, D.C.: The World Bank. ISBN 0821363603.


News & Events News

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March 28, 2017
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2015 Annual Giving Letter
January 5, 2016
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