Microfinance and Poverty Alleviation in South Africa

This paper argues for the need for an alternative form of microfinance in South Africa. It states that:

• The unequal income distribution and economic structure of South Africa has produced a large number of unbankable households that are not served by the commercial retail-banking sector;
• State-sponsored small, medium and micro-enterprises (SMME) microfinance programs are not oriented to poverty relief or social development;
• Attempts to provide traditional microfinance services to economically marginalized households in South Africa will fail without subsidization;
• Therefore, microfinance policies must carefully define the developmental challenge in order to be effective. They should:
  • Provide sustainable microfinance facilities to the poor to facilitate income generation or reduce the cost of poverty;
  • Use microfinance to develop, mobilize and leverage hidden social assets in resource-poor communities.

The paper criticizes the South African SMME microcredit program because:

• It emphasizes quantitative and financial measures, and is not able to identify and capture the qualitative impacts of social mobilization microfinance;
• It adopts the income approach to poverty as opposed to the more holistic sustainable livelihoods/ asset vulnerability approach implicit in alternative microfinance;
• It blocks experimentation and innovation by insisting on inappropriate evaluative criteria.

The paper concludes by arguing that the developmental challenge for the Department of Social Development is to explore ways in which it can explore and incorporate alternative forms of "social microfinance" into its programs.