Africa Finance Forum Blog


Is Financial Inclusion Working in Africa? A Provocative Look into Financial Inclusion through the South African Example

07.04.2015Milford Bateman

Not so long ago the international development community felt it had found an answer to Africa's long-standing poverty problem: the microcredit model. Many microcredit programs were launched in the 1990s with the aim of reducing poverty by promoting a local microenterprise development trajectory that would transform Africa 'from below'. Sadly, this movement was getting underway in Africa just as elsewhere around the world it was becoming clear that microcredit did not work as it is supposed to do, and that almost the entire argument in favour of microcredit was actually built on 'foundations of sand'.

Most recently, a team of some of the most reputable evaluation specialists in the world reported on a number of studies they had carried out these past few years using the supposedly more accurate Randomised Control Trial (RCT) methodology, and the central finding they came to was that there is essentially no impact from microcredit. The conclusion was sobering indeed, noting "The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators" (Banerjee, Karlan and Zinman 2014: 17 - italics added).

However, support for the failed microcredit model did not evaporate away completely. The microcredit industry has been kept alive by 'shifting the goalposts'. Instead of supplying microcredit to the poor in order to address poverty and under-development, developing countries - and especially African countries - were now instructed to promote microcredit programs as part of the much wider objective of achieving 'financial inclusion'. Today, the international development community claims the key to development is to provide to stakeholders easy access to a microcredit, a bank account, a credit card, a mobile phone-enabled payment facility, and so on.

The awkward problem here, however, is that the evidence base to support the effectiveness of financial inclusion, according to me, is by all accounts even thinner than the evidence base previously mobilized to support the failed microcredit model.

First, in my view, there are virtually no reputable studies that have been able to causally link financial inclusion and 'more microcredit' to positive local impact and sustainable development. Instead, most studies simply use the availability of microcredit (and other financial services) as the acid test of whether or not financial inclusion programs have been successful. This, of course, is confusing a mere operational metric with impact. Moreover, second, it is extremely worrying that in all of those countries where it is universally agreed that financial inclusion has indeed proceeded fastest and deepest - notably Mexico, Peru, Bangladesh, Bosnia - the subsequent explosion in client over-indebtedness has proven to be a hugely damaging development, and not just for the poor but for everyone.

To look into the future of financial inclusion in Africa, it helps to examine the experience of the undoubted pioneer in this area: South Africa. After the collapse of apartheid, the feeling in the international development community was that the most glaring of the many inherited problems in post-apartheid South Africa - notably very high unemployment and low incomes in Black South African communities - could be resolved by a significant extension in the supply of microcredit and a major uptick in the level of individual entrepreneurship. After a shaky start and even a minor 'meltdown' of the microcredit sector in 2002, the microcredit promotional effort had to be re-launched under the more appealing 'financial inclusion' heading. And this time an even bigger positive development impact was envisaged. So what happened? Sadly, as I have explained at length elsewhere, the exercise was pretty much a calamity for South Africa's poor.

The first problem was historical. Under the apartheid regime most genuine high-profit business opportunities were reserved for the white South African community, with black South Africans only permitted to establish a range of trivial informal sector activities supplying the simple items and services that others in their community needed to survive. This fact centrally meant, however, that there was likely to be very limited scope for many new informal microenterprises to flourish in the immediate post-apartheid period. And this is exactly what happened. A tiny number of net jobs were created thanks to newly established microcredit programs, largely because new entrants simply took business from incumbent already struggling micro-businesses, which led these incumbents to shed jobs or else to close down as a result. Many of the new entrants also failed quite quickly. Overall, the additional competition induced by microcredit led to reduced turnover and margins across the entire microenterprise sector, and also put pressure on local market prices, all of which helped lead to a massive 11 per cent real decline in self-employment incomes between 1997 and 2003.

Second, as the majority of the poor began to realise that there was no real opportunity to survive in a micro-business, they inevitably turned, cynically one might say, to using microcredit as simply a way to provide for their immediate consumption needs, perhaps hoping to repay their microcredit sometime in the future through a financial windfall or from some other means. But the microcredit institutions were only happy to oblige - at least initially - because they could set interest rates very high (60-80% annually), and the majority of microloans could be forcibly repaid through garnishee orders, pressure on borrowers, and collateral seizure. Anyway, rapid growth, which funded high salaries and bonuses in the short term, was far more important to the managers of the main microcredit institutions than their own institution's long-run survival. By 2012 as little as six per cent of the total volume of microcredit advanced in that year was actually used for business purposes. All told, this trend plunged South Africa's poorest into unimaginable levels of debt peonage which, as reported by Statistics South Africa in 2014, involved "More than 9 million South Africans - half the national labour force - (...) battling with over-indebtedness and many are taking out more credit to pay off debt, thereby digging themselves deeper into penury."

Finally, the rapid expansion of the financial inclusion project in South Africa has undoubtedly resulted in scarce financial resources being channelled out of the most important high(er) productivity uses, and into the very least productive trivial ones, such as petty retail trade. Many of the private banks 'downscaling' into microcredit openly admitted to having mobilized additional financial resources by curtailing their existing lending programs to the formal SME sector. As a result, the informal microenterprise sector has boomed of late thanks, among other things, to the (over) supply of microcredit, while the formal SME sector - the most important sector in terms of growth and the technological upgrading of the local economy - has languished because of a lack of affordable capital. Even worse, what little growth that has been registered in the formal SME sector has largely been in the no-growth quick-turnover services sector, such as security guards and cleaners.

Summing up the anti-developmental paradox that has emerged in South Africa is the current Minister of Trade and Industry, Rob Davies, who has pointed out that, "[t]he (South African) economy is characterised by extensive financialisation, but only a small percentage of investment is channelled towards the productive sectors." South Africa's experience with the financial inclusion concept has been a catastrophe. One can only hope that important lessons are learned by the many other countries in Africa heading, or being led, down the very same path, and that alternative community-based financial institutions with a very good historical record of local development success across many countries, such as credit unions, financial cooperatives, cooperative banks and local/regional state-led development banks, are much more strongly encouraged in the future.


Milford Bateman is a freelance consultant on local economic development, since 2005 a Visiting Professor of Economics at Juraj Dobrila at Pula University, Croatia, and since 2013 Adjunct Professor of Development Studies at St Marys University, Halifax, Canada. He is currently based at UNCTAD working mainly on issues of local finance and local agro-industrial policy in Ethiopia.

The views expressed in this article are those of the author and do not necessarily represent the views of Making Finance Work for Africa. 

  • 1 Comment(s)
14.04.2015 14:53 - Robert Stone

This blog represents a familiar kind of attack on microfinance. Like many such attacks, it confuses the issue by mixing up the categories that it is dealing with.  Milford Bateman claims that his target now is “financial inclusion” rather than microcredit, but everything that appears in this blog is still about credit – he writes as if financial inclusion only relates to microcredit and not to remittances or savings or insurance or all the other components of true financial inclusion. What is more worrying is that blog makes highly selective, indeed misleading, use of the evidence. For example, it is claimed in relation to South Africa that, "Overall, the additional competition induced by microcredit led to reduced turnover and margins across the entire microenterprise sector, and also put pressure on local market prices, all of which helped lead to a massive 11 per cent real decline in self-employment incomes between 1997 and 2003." The reference to the 11% real decline in self-employment has a hyperlink to a January 2005 article by Geeta Kingdon and John Knight published by the Global Poverty Research Group. Kingdon and Knight do not attribute the decline in self-employment "to the additional complications induced by microcredit". They attribute it to a range of economic and policy issues, but not to finance. Indeed, they make no reference at all to microcredit, and the only reference to credit is to a 1999 survey in which informal sector operators in Jo'burg report lack of access to credit as one of the four top constraints on their business. So Kingdon and Knight's conclusion is diametrically opposite to what Milford Bateman suggests it is in the MFW4A blog. Similarly, there is an assertion that "Many of the private banks 'downscaling' into microcredit openly admitted to having mobilized additional financial resources by curtailing their existing lending programs to the formal SME sector." No specific sources are cited so we don’t know who these banks are. And, despite the assertion, there doesn't seem to be much real evidence of that happening to any significant extent. Lending to SMEs as a proportion of the loan portfolio of banks in South Africa has historically been higher than in Nigeria but lower than in many other significant African countries - 8% in South Africa 2013 compared to 5% in Nigeria, 17.4% in Kenya, 17.0% in Tanzania and 14.0% in Rwanda (Gunhild Berg and  Michael Fuchs, "Bank Financing of SMEs in Five Sub-Saharan African Countries: The Role of Competition, Innovation, and the Government", World Bank Working Paper WP 6563, August 2013). But there does not seem have been any decline in lending to SMEs by banks a result of the expansion of microcredit: a World Bank survey of banks in South Africa in 2011 indicates that bank exposure to SMEs (corporate rather than retail exposure) remained steady from 2008 to 2010 during the period when payday lending was scaling up. Insofar as there were problems in SME access to credit, according to the survey, it was attributable to the economic downturn and not to a diversion of funds to payroll lending (much of which was not done by banks in any case). This is a similar dynamic to that noted by Kingdon and Knight in 2005, and similarly unrelated to the microcredit “catastrophe”. No one doubts the serious problems caused by over-indebtedness in South Africa, and elsewhere, but the solution does not lie in lumping together all the providers of financial services for the poor, good and bad, and blaming them all for seeking to expand financial inclusion.

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