Envy of lending industry
PEER PRESSURE: GROUP LENDING STRUCTURE IMPROVES PAYBACK
Since inception, SEF’s disbursed R5.5 billion in loans to nearly 158 000 people, 99% of them women.
The unsecured lending bubble’s already claimed the scalps of African Bank (now rescued) and a clutch of retailers such as Stuttafords and Edcon (in reconstructive surgery).
Part of the blame lies with Usury Act amendments over 20 years ago, that lifted the ceiling on interest rates that microlenders can charge. Many lending horrors arose: garnishee orders, 30%-a-month interest rates, even the 2012 Marikana massacre (miners complained of being drowned in debt, dependent on micro-loans).
National Credit Regulator figures show unsecured lending has ballooned to R167 billion (2009: R54 billion). Lenders have no collateral to call on if loans default.
In the banking sector, bad debt provisions as a ratio of total advances vary from 0.01 for Absa to 0.13 for Capitec. How then does one explain the extraordinary bad debt record of the Small Enterprise Foundation (SEF), which lends to the poorest of the poor and has written off just 0.24% of the cumulative loans disbursed since it opened in 1992?
Since inception, it’s disbursed R5.5 billion in loans to nearly 158 000 people, 99% of them women. These loans don’t require collateral from the borrower, yet SEF has a bad debt ratio that’s the envy of the banking world.
“Our lending works on peer pressure,” explains John de Wit, SEF founder and CEO. “We follow a group lending approach very similar to that pioneered by the Grameen Bank of Bangladesh which, together with its founder Professor Muhammad Yunus, received the Nobel Peace Prize in 2006. All our borrowers must be introduced by an existing client, and they form part of a group or cell where all members of the cell take responsibility for the loan repayments of everyone else.”
There’s an extensive team of consultants on the ground to survey and monitor loan activity. Miss a payment by a day and you’ll likely be visited by a loan consultant, not to harass, but to offer assistance. Other group members will then be required to cover the defaulter’s loan, creating considerable peer pressure. As such, no one wants to miss a payment and people will move heaven and earth to ensure loan repayments are met on time.
Nonprofit organisation SEF has operations in five provinces, and will soon cover SA.
De Wit says it works to reach those living below roughly half the poverty line.
The typical enterprises started by SEF clients include peddling of fruit and vegetables and new or used clothing, small convenience shops, and dressmaking. On average, each business employs 1.1 individuals, including the owner, full- or part-time. Very poor families are able to afford three meals a day; others pay school fees and buy uniforms.
After several loans, many families electrify their houses or expand their business to hire employees. In addition an increase in income, sense of independence and self-reliance result in significant empowerment for clients.