Endowing South Africa’s populations with banking services
Focus Area: Financial Markets
Implementation: Capitec Bank
Country: South Africa
Background
With total assets of U$361 billions at the end of 2007, representing 130% of GDP, the banking sector of South Africa is by far the most developed and most sophisticated of the continent. Yet, the legacy of the political system of apartheid, where the activity was concentrated on the upper layers of the white population, inserted financial exclusion in the actual society: a problem that affected 24% of the population of South Africa in 2008. Nearly 40% of South Africans don’t have access to bank services and only 30% of the black population - which represents nearly 80% of the nation - has a bank account.
However, advances in the recent years are significant and contrary to the practices of the early 1990s, when the manifold outsiders marginalized of the banking system were provided by small informal actors. The current figures reflect the recent development of banking products and services oriented to the most modest stratum of the South African population: the banking rate has grown by 13 percentage points between 2006 and 2008, from 50 to 63%. The rise of this type of bank was boosted by the launch in October 2004 of the entry-level "Mzansi" (“South” in Zulu), offering limited services to deposits, withdrawals and debit card payments (in 2007, nearly 5 million people had a "Mzansi"). But the crucial factor is the development of institutions offering financial products and services more suited to needy customers, unlike banks (the Mzansi account does not allow debit and does not provide credit to their owners). Recent years have witnessed significant development of micro-lenders, whose business model is the application of high interest rates, according to the risk represented by these financially vulnerable customers.
Project description
Founded by two bankers, Capitec, a retail specialist in the provision of micro-credit and banking services to low-income populations, began operating in 2001 and has been listed on the Johannesburg Stock Exchange since 2002. Rooted with a network of 360 branches countrywide, Capitec is now the second player in the market for small loans in terms of assets (€260 million) and number of clients (€1.8 million) behind African Bank. It is the only financial institution in the low income segment to offer full banking services (micro-loans, savings, bank accounts, credit cards etc.). to its target clients who consist of people with a monthly income of between €180 and €666 per month, that is to say about 19 million people. These clients are low-income employees using debt to buy goods and pay for services, pay school fees, improve their habitat, restructure their existing debt, etc... The maturity of loans varies between one month and 3 years. During the year 2008-2009, Capitec granted nearly 3.5 million loans to 3414 employees and thus keeping low costs.
Capitec’s resources are derived primarily from customer deposits. This cheap resource has the characteristic to be due and must be supplemented long term guaranteed means. 31/01/2008: Proparco provided Capitec with funding in the form of a senior loan of ZAR150 million for 5 years. This loan, ascribed in rands, increases the resources of the bank's local currency in the long-term.
Objectives
Proparco's intervention in financing Capitec is part of the mission aiming to improve access to financial services and products of historically disadvantaged populations. Micro-credit is a tool for financial inclusion of people without access to traditional banking systems due to their low income and their risk profile. With its wide range of financial products and services, Capitec meets the needs of these populations, i.e. savings, access to credit and so on. Thus, Proparco helps to improve the quality of services in terms of diversity, durability and cost, along with a credible and financially strong organization.
Critics of micro-credit often reproach high rates. The situation is somewhat different in South Africa where strict regulation controls the practice of microfinance institutions. Although the ceilings imposed by the regulation remain high, unavoidable costs of micro-loans must be considered, as well as the risk profile of clients and the important cost of refinancing institutions. In addition, microfinance institutions provide credit access to persons who otherwise would be excluded from the financial system or constrained to turn to loan sharks that are non-compliant with any regulation.
Impacts
Through this funding, Proparco will assist in providing longer maturities for Capitec loans. Historically focused on providing assistance to the very short term, Capitec has grown and developed long term products, hence requiring longer term resources. The average size of loan, which is constantly increasing, was €150 in February 2009 (compared to €100 for February 2007). The bank has been significantly increasing it’s loan book particularly with the success of 18, 24 and 36 month loans launched in October 2006 and 2007.
Moreover, the presence among its investors of a financial institution for international development, such as Proparco gives Capitec a guaranteed level of credibility in financial markets, enabling the company to raise resources more easily. This can be seen by the success of the bond program in which ZAR 360 million was raised in May 2008. In addition, other international financial institutions, like the FMO and Norfund, are also investing in Capitec alongside Proparco.
Date and amounts
Startup: 2008
Funding: credit line of ZAR150 million