Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

activities to the small and micro borrowers, leading to the

of the sector rather than taking up direct delivery of subsidised

SARB to set up a regulatory body for these loans, in

services. The regime of regulation sought to encourage

September 1999, and this time the exemption was raised to

transparency; fair competition and rationalisation of the market

R10000. Therefore as things stand today in South Africa, for

at the same time keep out fly-by-night operators, without

anyone who is lending under R10000, it is mandatory to

choking off the spirit of enterprise.

register with the MFRC, and he has no pressure to reduce his

interest rates, even if it may be as high as 360% per annum!

THE PROCESS OF REGULATION

The only guard he has to observe is that he keeps the

transaction extremely transparent, keeps the client totally

Registration

informed of all the conditionalities in the agreement, and does

Every lender who comes under the Usury Exemption has to

not over-indebt a client. The lender is also strongly

initially register with MFRC and submit its annual financial

recommended not to resort to practices such as retention of

statements. They also have to file quarterly returns in

the client's bank card or obtaining a deduction facility from

prescribed formats.

the client's pay roll.

The data presented showed that as on July 2001, the MFRC

had 1263 registered lenders. These included 9 banks and 6

In addition to setting up a separate regime for small loans,

listed companies. The total outstanding of the registered

the single most important intervention in South Africa has

lenders was R13 Billion representing over 13 million loans.

been the clubbing of all kinds of small loans under one

To get a sense of what this number means, please note that

umbrella of MFRC. So, whether the lender is a bank, a co-

the population of South Africa is only 48 million.

operative or even a moneylender, they are all same for the

MFRC, if they have a portfolio below R10000. This, as Paxton

and Gabriel contends, taken into consideration the reality of

As Paxton said, the "respectability" accorded to money

small loans, that it is high cost, and does not differentiate

lending through the process of registration led to a lot of re-

between consumption and investment finance. "Rather than

structuring in the industry. There were a number of take-

attempting to build a microfinance industry on a handful of

overs, joint ventures and other business arrangements that

donor funded NGOs, the approach adopted in South Africa is

came into play. A number of large players like the commercial

to accept the reality of consumption finance and the much

banks entered into microfinance.

discussed but little heeded reality of fungibility ...........those

entities which in many other countries would be termed as

Certificate of compliance

Along with registering themselves with MFRC, the lending

"loan sharks" and conveniently ignored when it comes to

institutions are supposed to appoint an "accredited

regulation, are explicitly included........" The de-stigmatisation

professional" as an auditor who would issue an annual

of the so-called loan sharks has legitimised lending to the

"Certificate of Compliance". The accrediting institutions are:

poor, and has given respectability to the lenders. So much so,

The SA Institute of Chartered Accountants (SAICA), Institute

that now there are a number of occurrences of big commercial

of Certified Financial Bookkeepers, Commercial and Financial

banks, expressing interest in taking over the business of

money lenders, by merging their money lending enterprises

Accountants (CFA), and SA Institute of Secretaries and

to their own.

Administrators (SAICSA). Of late MFRC has realised that the

services of these institutions are costly, and may not be

The Micro Finance Regulatory Council (MFRC) was established

accessible to the small operators. Therefore MFRC has initiated

in accordance with the Usury Act Exemption Notice of 1 June

the process of creating a cadre of "bare-foot" auditors, who

1999. The MFRC, is an association incorporated under

are trained in the specifics of auditing the books of the small

Section 21 of the Companies Act, and has been recognised

operators like Close Corporations.

as the official and single regulator of all money lending

transactions falling within the scope of the Usury Act Exemption

Re-registration

Notice, i. e., under R10000. Any moneylender, who wishes

On an annual basis the lenders are also expected to re-

to avail themselves of the benefits of the Usury Act Exemption,

register with the MFRC. This process of re-registration is a

will be required to register with the MFRC and thereafter

tool to keep the lenders on their toes as it were. The

comply with the rules of the MFRC and the Exemption Notice.

recognition by the MFRC is a temporary phenomenon and if

MFRC has a Board of Directors that has representation from

the lender does not comply according to the norms set by

the government, SARB, other development finance institutions,

the MFRC, their registration will not be renewed. This annual

consumer forums and lender networks.

re-registration is the opportunity used by the MFRC to review

the performance of the lending institutions.

This as Paxton and Havel agreed, was a step that demonstrated

a lot of vision and appreciation of ground realities on the part

But it is not the only occasion that the institutions are called

of the SARB and the government, that the Exemption was

to present themselves for scrutiny. It is only the routine one.

instituted and a special regulatory regime for microfinance

The MFRC has a very active Complaints and Enforcement

created. The policy makers realised the importance and

department that deals with all the issues of non-compliance

instrumentality of microfinance in alleviation of poverty, and

by lenders.

the need for creating a facilitating environment for the growth

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