MFRC Instrumental in Expanding Financial Access to the Underbanked in South Africa

The Micro Finance Regulatory Council (MFRC) has played an important custodial role in the emergence of a R17bn ($2.5 billion) microfinance market ? from less than R1bn in 1992 and around R10bn in 1999 when the Council was formed.

A new report, The Evolution of the South African Microfinance Sector from 1992 to 2004: The Role of the Microfinance Regulatory Council finds that the Council has contributed to an increase in access to finance to some 3 million poor and low income people, “the majority of whom did not have access to formal finance before.”

The report by ECI Africa and the Iris Centre of the University of Maryland cautions, however, that while consumer credit has increased significantly since the 1992 exemption notice, “it is equally clear that the original intention of expanding access to SMME finance has not been directly achieved”.

This is an area where the department of trade and industry, national treasury and the microfinance industry at large need to place more focus going forward, advises the report, while at the same time addressing the other regulatory constrains on small business establishment, growth and development.

In commending the MFRC for its work in reforming and upgrading financial service delivery for poor and low-income individuals, the report says the MFRC “supported and in some cases led, a wide-ranging review and development of new legislation and other market infrastructure towards a better functioning and more rational financial services sector.”

It notes that the MFRC’s activities have gone from formalising the industry in setting new behavioural standards to conducting research and advocacy concerning the new National Credit Bill that will unify the patchwork of norms and implement agencies in this field ? including a regulator that would replace the MFRC.

“This is an indication that strategic thinking weighs more heavily than bureaucratic self-interest,” the report says.

The report further points out that the MFRC addressed “glaring deficiencies” in financial sector development by formalising the microlending sector, providing consumer protection, and improving sector information and understanding.

The report applauds the MFRC for the major role it played in “cleaning up the microlending industry and providing an avenue for consumers to seek recourse”. The Council is also seen as having fomented major changes in both borrower behaviour and more responsible lending practices. Greater transparency in pricing resulted from the MFRC introducing a prescribed loan summary in 2000, in line with the “truth in lending” disclosure requirements in the US. The interventions also served to enhance the profile of the microlending industry in South Africa.

Due largely to the MFRC’s efforts in the dissemination of information, much more is known today about the microfinance sector. This resulted in “a quantum leap” in the general understanding of the sector.

The report highlights pricing and inadequate competition, along with insufficient levels of development finance and financial illiteracy, as the most important market development gaps for South Africa?s financial sector.

The report further highlights a number of critical challenges that have to be addressed in expanding access to finance in South Africa:

• Incentives to expand development finance, both to banks and to commercial and development orientated microfinance institutions
• Improving the efficiency of commercial credit transactions
• Improving access to savings, insurance and other financial services
• Reducing the burden of “red tape” on SMMEs
• Addressing the development needs of the embryonic township and moderate income housing markets, and
• Further improvements in information infrastructures, such as title and collateral registries.

On the role of the MFRC, the report notes that: “The MFRC is indeed unique in the international sphere.”