Filling the Gap in South Africa's Small and Micro Credit Market: An Analysis of Major Policy, Legal, and Regulatory Issues

This paper studies how South Africa's financial services market has shaped an unorthodox evolution of microfinance. It analyzes the current state of low-end credit services in South Africa, focusing on the micro-lender market.

The paper:

• Discusses small and micro credit provision in South Africa's unique micro-loan market;
• Addresses major issues that have emerged as potential stumbling blocks in the country's efforts to ensure financial services to those who need them most;
• Outlines some possible policy responses based on international 'best practices', including the core elements of an institutional framework for market governance and deepening.

The paper concludes that the most effective way to increase availability of low-end financial services is to address a few key incentive structures embedded in the laws and regulations governing the market. The needed changes include:

• Removal of interest rate controls;
• Establishment of one or more new tiers of financial institutions;
• Increase in the flow of wholesale funds;
• Improvement of the legal and enforcement mechanisms for secured finance;
• Provision of appropriate consumer protections.