ECDC move from traditional to contract based finance pays dividends

The move from traditional forms of microfinance to the less risky tender or contract-based finance has paid dividends for the Eastern Cape Development Corporation (ECDC).

Speaking at the Thina Sinako learning encounters workshop on the micro finance sector in the Eastern Cape, ECDC executive manager for development finance Chris Bierman said the lucrative contract-based finance allows people to reinvest money back into their businesses and also repay ECDC loans.

“Contract-based finance is the fastest growing microfinance product in the world and it is being promoted by the World Bank and we have seen a number of players coming into this market in South Africa.”

“With contract-based finance people receive tenders for the supply of government goods and services which is less risky and lucrative. Entrepreneurs can then reinvest the money into their businesses and repay ECDC loans. As a result of the low risk nature of contract-based finance and the ability of people to repay, ECDC managed to recoup more than 98% of the R312 million it disbursed in loans in the last financial year,” says Bierman.

Bierman says ECDC supported over 800 Small Medium and Micro Enterprises (SMMEs) in the last financial year and 75% of the total loans disbursed went to tender-based finance. Of the total amount 60% went to SMMEs in rural areas. Only 1.6% of these loans were impaired far below the national average for Development Financial Institutions of about 14%.

“We have been able to recover ECDC money because we put systems in place to pre-empt potential defaulters. We assist struggling businesses by rescheduling their debt and allowing them to repay over longer periods. In some cases we provide moratoriums on repayments until the clients are in better positions to repay,” he explains.

The corporation together with Thina Sinako funded three microfinance Institutions which created more than 1 000 jobs.

Bierman says Development Finance Institutions (DFI) such as ECDC service the poor and mainly unemployed people to create jobs and enhance small businesses. Traditionally DFI’s would lend money to unemployed or poor people to start businesses such as spaza shops, the majority of whom would then struggle to repay their loans. Microfinance traditionally provides businesses with loans ranging in the brackets of R1 000 to R 20 000 and from R20 000 to R500 000 for those micro enterprises who have progressed to more formalised structures.

Reflecting on challenges in microfinance, Bierman said: “The single biggest challenge in microfinance is human resources. There is a lack of knowledge, skills and the right attitudes. A positive attitude is required for people active in the In microfinance sector to further enhance their knowledge and to impart their knowledge on others.

“Therefore research and partnerships with tertiary institutions in the form of research units are important to educate and train students who can become microfinanciers. Students leave university with knowledge but with no skills in business and they are then tasked with advising businesses when they have not yet gained any business experience themselves.”

He says there is also a lack of money to: further enhance the geographical spread of microfinance; increase investment in human capital; enhance physical infrastructure and invest in technology driven microfinance systems. “We have realized that 70% of ECDC clients don’t have internet access, which is a reflection of the client profile of ECDC . Internet access to all clients could vastly improve communication with them,” he says.

Bierman said the lack of human capital does not allow practitioners to turn money into opportunities. As such, mega projects are needed as anchors for micro enterprises to feed off.

“Local government is ideally placed because it is closest to the communities where it can provide market space, infrastructure and facilitate mega projects to create impetus for microfinance,’ he says.

Bierman explains that the consumer market made up of employed people is serviced by commercial banks, “and because these people have some form of income they are less risky for banks.” Government institutions and Non-Governmental Institutions (NGOs) are then left with providing microfinance to people with no income as banks stay away from them due to their high risk profile.”

He says surprisingly, people in rural areas tend to be less risky to lend to as they have a longer track record of residence. Borrowers of micro finance in rural areas tend to pay back their loans better than those in urban areas who simply “disappear” when they have to repay their loans. Urban poverty nodes are thus riskier than rural areas.