John de Wit (South Africa 1991) is currently launching an initiative to provide small business sector men and women with credit and training through a group-based, mutual support and savings scheme. Several million unemployed South Africans have turned to the informal sector for survival. Each year, approximately 80% of the fledgling businesses set up in this sector fail, primarily due to the lack of suitable credit.
The New Idea
John has adapted ideas associated with the Grameen Bank (founded in Bangladesh, but now well established in many parts of the developing world) to the needs of small-business men and women in rural South Africa. The Small Enterprise Foundation will use a group-based methodology adapted to the traditional rotating savings associations prevalent in South Africa called "magodisano" or "umgalelo" to provide rural micro-entrepreneurs with access to credit. The Foundation will demonstrate a new model of group-based savings and loans that is responsive to the largest problem facing micro-enterprise programs everywhere: expansion. The program is structured, from inception, towards long-term, low-cost expansion and will make affordable credit available to as many as 70,000 businesses in the first eight years of operation. Further, the Foundation will institute a savings component, or reserve fund, to increase participants' savings capital and sense of security. How does it work? A small business operator who requires a loan for his or her business initially invites four other people to form a group or "stokvel"; all of these people operate small enterprises and want loans for their businesses. The group begins to hold weekly meetings, first participating in three induction and training sessions. After successfully completing the training, all of the group members may obtain loans.
Borrowers use their loans individually, but they guarantee each other's loans, and are all held responsible if one member defaults. First time borrowers are restricted to loans of $100 and qualify for future loans of $200, $350, or more.
John's experience with micro-enterprise credit has demonstrated that the provision of credit alone is not sufficient to ensure the stability and success of businesses owned by the poor. Without additional resources, the poor are particularly vulnerable in the face of mishaps and calamities. Hence the Small Enterprise Foundation has introduced a mandatory "reserves" component. In order to receive loans, participants must actively build up a small reserve or "emergency" fund. Applicant groups open savings accounts at a local bank and maintain full control over their accounts. Members contribute towards their collective reserve fund at each meeting.
After completing the induction and training sessions, the group joins other successful groups to form a "Center" of five or six groups from the same area. The Center then becomes the focal point of group activities. Each group elects its own chairperson to serve on the Center's executive committee. This committee, in turn, runs the Center meetings and approves new loan applications. The Centers are in a unique position to tackle daily problems encountered by members, and to serve more broadly their communities.
The Centers' chairpersons also meet annually to evaluate the Foundation's policies and pass their recommendations to the Board of Directors of the Small Enterprise Foundation. In this way, the program participants have a direct say in the Foundation's policies and process.
The group-based method will enable each of the Foundation's field workers to work continually with more than 480 borrowers, and to maintain high recovery rates. John projects that, in about five years time, the Foundation will achieve self-sufficiency.
South Africa's economic crisis has exacerbated the already appalling racial and gender stratification of employment and income. The majority of South African communities are experiencing massive social disintegration and the current education and employment crisis threatens the country's development potential and prospects for a new and peaceful political settlement.
Approximately 6 million people are unemployed in South Africa. Each year, an additional 350,000 people enter the job market. Only seven out of every 100 job-seekers entering the labor market in the past five years found full-time jobs. Employment for new job-seekers alone would require a 6 percent economic growth rate per annum; in the past few years, South Africa has experienced a negative growth rate. As a result, millions have turned to the informal sector for survival; many manage to generate a small income through enterprises such as hawking, dress-making or providing services such as hairdressing or car washing.
The majority of informal sector businesses are, however, unstable, and the owners are unable to expand their activities sufficiently to ensure a minimum standard of living for their families. Due in part to South Africa's isolation and apartheid policy, only limited attempts have been made to provide credit to South Africa's informal sector, and in particular to the very smallest of businesses. This is especially true in rural areas where half of all blacks live.
At present, only two medium-sized credit and support programs operate in the country; together they provide credit to fewer than 5000 clients. Considering the rapidly increasing size of South Africa's informal sector, a clear need exists for a mechanism to deliver suitable credit on a large scale to this sector.
John has developed a rapidly expandable and cost-effective means to deliver credit to small-business men and women in rural South Africa. Group dynamics and related supports ensure the program's effectiveness and sustainability.
After conducting a survey of possible sites to locate the Small Enterprise Foundation, John selected an area 20 km outside of Tzaneen in the Northeastern Transvaal comprised of both Sotho- and Shangaan-speaking people. Fifty-two percent of the population in the area are either involved in the informal sector or are unemployed. By the year 2010, 79.8 percent of the economically active population will be unable to find formal sector employment.
John recently set up a pilot program which, in its first seven months of operation, achieved a 100 percent repayment rate and established successful Center meetings. The SEF's program will begin with three staff field workers, who will operate in two areas in Tzaneen. In the second year a third adjacent area will be opened, and the number of field workers will increase to a total of 8. In the first year, John forecasts that three field workers will be able to support 840 businesses and 1260 jobs. With eight field workers, the Foundation will support 2360 businesses and 3960 jobs, and by year three, the Foundation will support 3680 businesses and 7120 jobs. John projects that the Foundation will help more than 70,000 businesses within its first eight years of operation.
John intends to evaluate the Foundation's effectiveness through the number of loans issued each year, the recovery rate on loans, the total group savings, and member participation and attendance in group and Center meetings. The repayment rates and overhead costs, relative to the budget, will determine how well the program is maintaining its course toward self-sufficiency.
John has pulled together an impressive Board of Directors that includes the founding director of the first organization in South Africa to extend loans to informal sector businesses on a systematic basis and the managing director of a national organization that houses the only other informal sector loan program currently operating in the country (an urban program that John founded). Two other directors are from the project area and have worked extensively within local community-based organizations. These directors will ensure that the Foundation remains sensitive to important political and social issues within the local communities. They will also assist the Foundation with field staff selection, outreach, and education.
John de Wit has been involved in micro-credit projects for more than five years. Trained as an engineer, John explored a variety of ways to utilize his skills to alleviate poverty and suffering both within and outside of South Africa. Rather than channel his talents, for example, in relief aid in Mexico, or design transport systems in Ethiopia, John chose to focus his energies on economic development in South Africa. He developed, implemented, and fully managed South Africa's largest micro-loan program at the Get Ahead Foundation. In its first two years, the program disbursed 2600 loans and achieved a repayment rate of 96 percent.
At Get Ahead, he witnessed the tremendous impact of effective support to small business.His inspiration to create the Small Enterprise Foundation came in part from a client living in a Cape Town squatter settlement. When John first met Winnie Msimanga, her business consisted of five packets of sweets and three packets of cigarettes. She supported herself and her family with black tea and bread, surviving on a daily turnover of $.75-$1.25 per day. In June 1988, Mrs. Msimanga took a $100 loan, and four months later, increased her stock to achieve a turnover of $25-$30 per day. Over this short period of time, John witnessed a remarkable change in Winnie's personality and self-confidence which, in turn, generated his own enthusiasm for the project.
John's purposeful study of world experience in micro-enterprise credit and support contributed to his success in refining, adapting, and implementing the idea of group-based credit provision to the rural poor in South Africa.