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Microfinance

Microcredit has been a disaster for the poorest in South Africa ... The finance model was supposed to help the country's disenfranchised, but has just pushed them further into debt

Burgess COMMENTARY

Peter Burgess

Microcredit has been a disaster for the poorest in South Africa The finance model was supposed to help the country's disenfranchised, but has just pushed them further into debt

IMAGE Microcredit has funded many new spaza shops – but are they drivers of sustainable development? Photograph: Kim Ludbrook/EPA

After apartheid ended in South Africa in 1994, the international development community quickly arrived with plans to promote the microcredit model. Proclaiming that it would rapidly bring new jobs, incomes, empowerment and dignity to the poorest black communities and townships, expectations of rapid progress ran high.

However, the microcredit medicine applied to post-apartheid South Africa has turned out to be a deadly one. It is now increasingly clear that the much-lauded market-driven microcredit model has inflicted untold damage on the South African economy and society. Concerned investors are rapidly leaving the bloated microcredit sector, with many users arguing that it is on the verge of a self-orchestrated collapse.

The microcredit-induced problems that emerged in South Africa are two-fold. First, microcredit per se is actually an 'anti-developmental' intervention. For one thing, it exists on paper to support the smallest income-generating activities, but in practice is increasingly all about supporting consumption spending. In South Africa, the microcredit movement has created an incredibly risky and expensive way to support the immediate consumption needs of the very poorest.

With few poor individuals possessing a secure income stream that might ensure full repayment of a microloan unemployment is now higher than it was under apartheid, many of the poorest individuals have been forced to repay their microloan by selling off their household assets, borrowing from friends and family, as well as simply taking out new microloans to repay old ones. For far too many now 'financially included' individuals in South Africa, using microcredit to support current spending has been a disastrous and irreversible pathway into chronic poverty.

Going further, of the very small percentage of microcredit that actually does go into supporting income-generating microenterprises (as per the original model), the fact remains that the business activities that emerge are simply not the drivers of sustainable development and poverty reduction. The rafts of new street traders, barrow boys, spaza shops and the like have generated very little, if any, positive impact in South Africa's poorest local communities. Centrally, late-apartheid South Africa already possessed a very large informal economy in the black townships, one that was composed of exactly such simple low-capitalised no-growth activities.

Among other things, this existing capacity helps to account for the high rate of job and income displacement that emerged after 1994, when new microcredit-supported informal microenterprises took demand, and subsequently income, away from the rafts of already struggling businesses in the black communities. The inevitable hyper-competition that arose was one of the central causes in self-employment falling dramatically between 1997-2003, dropping by more than 11% per annum.

This was not microcredit's intended poverty reduction so much as the intensification of poverty, suffering and deprivation among the very poorest communities forced into informal sector work. Even worse, social tensions were greatly exacerbated thanks to hyper-competition and the aggressive taking of clients away from existing businesses, while ethnically-motivated business turf wars inevitably began to rear their ugly head too.

Perhaps most importantly, the growing dominance of the microcredit model has meant that South Africa's scarce financial resources have essentially been diverted away from more productive and sustainable business activities; notably away from formal manufacturing-led SME development, which the country desperately needs. Microcredit institutions that successfully mobilise savings, remittances and public and private investment funding, and then profitably channel this largesse into microcredit applications, effectively de-fund the very enterprise sectors most closely associated with sustainable local economic development and poverty reduction.

Just as in microcredit-saturated Latin America, the programmed diversion of South Africa's scarce funds into microcredit applications has been a first-order development disaster in the post-apartheid era. The market-driven microcredit model in South Africa has progressively helped to destroy the important economic, social and institutional foundations that underpin a healthy local economy.

A further intractable problem with microcredit in South Africa is related to the extensive commercialisation that was introduced into the global microcredit industry in order to make it financially self-sustaining. Like Alan Greenspan and Ben Bernanke, far too many high-profile microcredit supporters and policymakers also naively bought into the myth of the free market, including its particular aversion towards robust regulation. There was hope that for-profit microcredit institutions would dutifully stick to their allotted mission and responsibly lend to the poor. However, just as in the wider economy, where the actions of the financial institutions on Wall Street brought on a global recession, the widely-held assumption that private banks and microcredit institutions would be responsible also proved to be spectacularly wrong.

Bombarded with microloans in such a way that today they simply cannot repay even a fraction of what they owe (estimates are that 40% of the South African workforce's income is spent on repaying debt), South Africa's poor are now caught in a microdebt-trap of unimaginable proportions. Only now are people realising that the real aim of the private banks and microcredit institutions in South Africa – exactly as in the case of Wall Street's infamous sub-prime lenders – was not to help their poor clients, but to extract as much value from them in the shortest time possible before leaving the sector and moving on to other fields of business.

Unfortunately, the very worst impacts of microcredit in South Africa have taken place in the poorest and most vulnerable regions, especially around the mining district of Rustenburg. Here, many of South Africa's largest and most prestigious banks opted to pour in vast amounts of microcredit in order to quickly generate profits at the expense of the hardest-working yet most vulnerable individuals imaginable. The result of pursuing this goal was massive profits for the private banks and microcredit institutions and, of course, huge financial rewards for their high-profile CEOs, but personal devastation for the vast majority of already heavily indebted mineworkers and their families. Sadly, largely in order to make additional money for its managers, even the ANC-linked and once radical National Union of Mineworkers got involved in pushing microcredit onto its poor members through its part-ownership of UBank.

South Africa's microcredit model and its supporters – much like their counterparts around the world – have been widely discredited. Extracting the poor from the grip of the microcredit movement will not be easy, however, in a country where officially sanctioned exploitation of the poorest black communities seems to remain, even under the post-apartheid government.

But the alternative is to leave things as they are and deal with an inevitable Arab Spring-style uprising, the end result of which one simply cannot predict.

Milford Bateman is a freelance consultant on local economic development in Opatija, Croatia.

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