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Big opportunities in micro-lending

05 June 2007 Gareth Stokes

We read with interest a recent Fin Week article which revealed that SA Eagle was considering introducing a new micro-loan product to the local market.

This announcement was made amidst plenty of negative sentiment on the credit market in general, and the micro-loan sector in particular.

According to the SA Eagle website the company operates in both the domestic and commercial markets, transacting all classes of short term insurance. It markets its products almost exclusively through brokers and agents. As such, SA Eagle is well positioned to enter the market for related financial services products.

We should point out that although the National Credit Act (NCA) introduces a number of administrative requirements relating to lending, it does not rule out the possibility of making substantial profit from the activity. Two of the provisions of the Act are that a lender may charge initiation fees and a monthly administration fees on any credit agreement. These charges exist over and above the very lucrative maximum interest charge.

In fact, these fees are so favourable to the lender that JD Group, recently in the news for all the wrong reason, will shy away from charging the full amount allowed by the legislation. There is no doubt that providing short-term and micro loans remains a lucrative service for those companies prepared to implement such businesses properly.

Lessons from India

Steven R. Covey, author of The 8th Habit (and of course, The 7 Habits of Highly Effective People) includes an interesting interview with Muhammad Yunus, the founder of India's Grameen Bank. Yunus identified the need for a facility to assist India's poorest with micro-loan finance to start businesses.

Yunus started the bank after witnessing how small businesses were exploited due to the lack of capital to purchase their own input materials. These businesses were essentially bonded in slavery to the merchants to whom they supplied goods. In many cases, a micro-loan of less than one USD would enable these businesses to free themselves from this burden.

Providing micro-loans to a sector of the population that was totally un-banked was not an easy task. However, Yunus persisted, and today Grameen Bank employs in excess of 12, 000 people and operates from 1, 267 branches across India. The Grameen Bank story illustrates how much potential exists in the micro-finance industry when the motive for lending is not one of profit but instead combined with a desire to uplift the poorest individuals in society.

New revenue streams would be welcome

Entering the micro-loan market will enable SA Eagle to diversify its revenue streams out of traditional insurance lines. Raymond Risler, co-head of micro-insurance at Zurich Financial Services believes that the move "isn't a change of strategy but rather extension of [the company's] strengths to a new target market."

This move would tie in with the company's entrance to the micro-insurance market. Risler says the group is already rolling out a pilot project for a combined home, home content and funeral product to the Bafokeng community. This project is being assisted by the group's empowerment partner, Royal Bafokeng Holdings.

Micro-finance products will be boosted in coming years by improvements in various micro-payment systems. There are already moves to implement cell phone payment systems for various small instalment or premium sales.

Big brand changes afoot at SA Eagle

New financial products are not the only changes at SA Eagle. From 27 June 2007, the SA Eagle brand will be retired - and the name replaced with that of its major shareholder, Zurich Financial Services. The name change was agreed at the company general meeting, held early in May this year.

In terms of the agreement, the company's name will change to Zurich Insurance Company South Africa Ltd (Zurich SA).

Editor's thoughts:
Too often, micro-loans are used to fund essentials such as food and clothing. The poor end up paying a high price for not having enough cash to meet their basic needs. South Africa needs private lenders to step in and provide more access to micro-finance that can uplift communities. What role can micro-lenders play in uplifting society? Send your comments to
gareth@fanews.co.za

 

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