As part of our preparation for this project, we researched microfinance, both how it works in general and the existing organisations in South Africa.  We hope this information will be useful to future WPI teams, NGOs in South Africa, and other people who are interested in ways to help the poor gain financial stability through banking.

Microfinance in General

One of the difficulties for those living in poverty in developing countries is the lack of financial services available. For example, consider a poor woman in South Africa who wants to start sewing clothes in order to generate an income. However, all of her money is currently going directly into feeding her and her family, and she lacks the capital required to buy cloth and sewing needles. She is then stuck in an endless cycle of poverty, even though she has the drive and desire to work.

In order to break people out of such a cycle, some governments give subsidies to their neediest citizens. But this can create an unhealthy dependence on the government. Alternatively, if this South African woman could just get a loan to finance her self-employment, she would have the capital she needs and she would feel a sense of responsibility towards paying back her loan and earning her own income. Unfortunately, the formal banking system is not well suited to help in situations like these. A bank requires some form of collateral on a loan, so they have something to fall back on in case she defaults. It is also not in the bank’s financial interest to give out such a small loan. In the hypothetical example, the clothes-maker only needs to buy basic supplies to get her operations off the ground, so her loan will not be very large. It costs the bank money to maintain each loan, so it is much more profitable for them to lend large amounts to a few borrowers instead of lending small amounts to many borrowers (Morduch, 1999). The formal banking system is simply not designed for clients living in poverty.

Microfinance aims to address this issue by focusing specifically on providing banking services to the poor. Thus, most microfinance institutions require no collateral to take out a loan (Morduch, 1999) and provide the small loans that are appropriate for the micro businesses of poor communities.

Microfinance in South Africa

There are a number of different players that work together to bring in funds that can be lent out to

A simplified illustration of how money from overseas helps empoverished South Africans

A simplified illustration of how money from overseas helps empoverished South Africans

disadvantaged South Africans. The figure to the right illustrates the general flow of money that allows an individual in the United States to lend to a micro business or housing improvement project in South Africa.

Initially, the investor in the United States finds a microlending website like MicroPlace.com. The American selects which development financier they want to lend money to. Say for example they chose to lend $50 to the Oikocredit organisation. Oikocredit then pools all of the money they receive from the private investors and is able to lend funds to the microfinance institutions in South Africa. Two such institutions that Oikocredit is actively lending to are The Kuyasa Fund and the Small Enterprise Foundation (Small Enterprise Foundation, 2008; The Kuyasa Fund, 2007). The Kuyasa Fund can then use the money it receives to lend to families in Khayelitsha for housing upgrades. The Small Enterprise Foundation uses the money it receives to supply loans to groups of women starting their own businesses. Eventually, these microloans will be paid back, and the microfinance institutions can pay back their loan from Oikocredit. Oikocredit then pays back the original American investors via the MicroPlace.com website.

These organisations are only mentioned as examples and are by no means the only avenues for microfinance in South Africa.  The Kuyasa Fund, however, may be of interest to people working to help Monwabisi Park, as they provide housing loans for certain communities in Khayelitsha, the general region of which Monwabisi Park is a part.

For more detailed information on microfinance and specific organisations in South Africa, see section 2.3.3 of our project proposal [PDF, 1.3 MB].