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Andrew Murray pulls together data drawn from a study that he recently undertook for the Eastern Cape Socio-Economic Consultative Council. He concludes: "Government also has the onerous task of plugging the gaps in the development finance system. Where development finance institutions are not directing credit towards basic needs development for the poor, then it is government which should be undertaking this responsibility. The question is whether it has the capacity and will to fulfil this obligation." (jbv)

vol 14 no 4

Banking on the rich: Development finance in South Africa
Andrew Murray

Printable Version
Southern Africa Report

SAR, Vol 14 No 4, August 1999
Page 21
"South Africa"



Andrew Murray is a Lecturer in the Department of Sociology, University of Fort Hare, Alice, South Africa Much of the data underlying this paper is drawn from a study that Andrew Murray recently undertook for the Eastern Cape Socio-Economic Consultative Council. All viewpoints expressed, however, are his own.

Governments have the opportunity to lend money to the poorest sectors of society that private institutions ignore. The ANC has established public development finance institutions to do just that. The private sector tends to avoid investing in socio-economic development that would benefit the poor, because they are seen as high risk and unable to afford the high interest rates of commercial loans. By contrast, loans from government institutions can be targeted to the poor and towards developmental projects. Such loans also extend the government's limited financial resources beyond relying exclusively on outright grants.

Yet development finance institutions (DFIs) have failed to direct many more resources to the poor than the private sector would have done if left to its own devices. Under apartheid, DFIs had served primarily as political instruments to finance and lend credence to policies of separate development. Today's DFIs reflect the new anti-statist political landscape which increasingly affirms the role of market forces in allocating resources. Insufficient finances are being directed to poor clients and institutions for fear that their weak management capacities and questionable abilities to generate revenue will mean that many of them will default on loan repayments. Consequently, rather than servicing new clients in order to redress apartheid's socio-economic deficits, DFIs seem locked in established patterns that serve the interests of an historic and wealthy clientele, thereby reproducing patterns of uneven development.

The new development finance system

Since 1994 the development finance system has been restructured to reflect the new policy orientations of the ANC-led government. The restructuring process has involved closing certain DFIs (such as the SA Housing Trust and the Local Authorities Loan Fund), restructuring and transforming others (such as the Land Bank, the Industrial Development Corporation and the Development Bank of Southern Africa), and creating others such as the National Housing Finance Corporation (NHFC) and Khula Finance Enterprise Corporation. At the same time the government is establishing the National Development Agency (the forerunner of which is the Transitional National Development Trust) to channel funds to non-governmental and community-based organisations.

In order to avoid duplication of spending, the development finance system has been reorganized so that each institution finances its own separate niche market. This is illustrated in the following table:


 Development Finance Institution      |          Niche Market
 -------------------------------      |          ------------
Development Bank of Southern Africa   | Infrastructure development 
Industrial Development Corporation    | Industrial development 
National Housing Finance Corporation  | Housing
Land Bank                             | Agriculture, land reform & rural development
Khula Enterprise Finance Limited      | Small, medium & micro enterprise development 


In addition to the above institutions, there also exist a number of provincial development corporations, mostly former homeland corporations. To date there has been little progress in transforming these corporations, with no national regulatory framework yet in place. Some of the provinces, such as the Eastern Cape, have taken the initiative and established transitional provincial finance institutions. But the future of these corporations and their role in the development finance system remains uncertain.

The new development finance model

The key player in designing and regulating the new development finance system has been the Department of Finance. It has been assisted by the Development Bank which has played a significant role in influencing the policies and practices of other development finance institutions. Consistent with the Growth, Employment and Redistribution Strategy (GEAR) and its demands for tight fiscal regulatory control is the notion that DFIs will only be allowed to exist if they are sufficiently oriented to cost-recovery. The Minister of Finance, Trevor Manuel, has made it clear that he doesn't want DFIs to become permanent items on any departmental budgets. In other words, after initial funding DFIs must be financially self-sustaining.

Consequently DFIs have adopted orthodox banking logic and designed risk management strategies which effectively rule out servicing the poor. This contradicts their new RDP-inspired mandates which suggest that they should be redressing apartheid's socio-economic imbalances and targeting historically-disadvantaged producers and marginalised social groups shunned by the formal banking sector. This risk-aversion logic also means that DFIs are cutting back on expenditures other than loans, such as training and capacity-building. Rather than work with institutions and producers whose weak financial management skills make it unlikely that they could manage and repay their loans, DRIs are avoiding risky borrowers altogether. Where poor borrowers are able to access loans, the high interest rates make such loans `unaffordable'. These patterns are evident in the following illustration of the role of DFIs in financing infrastructure and industrial development, and in providing financial assistance to small-scale producers.

Financing infrastructure development

The Development Bank's main funding focus is infrastructure, focusing mainly on local government institutions. It concentrates on southern Africa, although some 83% of its loans (ending March 1998) have been to South Africa. Within South Africa, an examination of the provincial distribution of current funding on bulk infrastructure (which makes up 80% of the bank's 1997/98 disbursements) reveals that more than two thirds of these funds are going to Gauteng. The Eastern Cape gets just 2% and the Northern Province less than half a percent.

It is tragically ironic that the Development Bank is spending less money today in the underdeveloped former homelands than it did under apartheid. This has to do with its risk aversion logic (as outlined in its mandate document) which holds that `the broader financial base' and affordability of an area should be evaluated before funds are disbursed to borrowing institutions. At the heart of this approach is the notion of `affordability' - the ability of beneficiaries to pay for services, and for local authorities to collect and manage funds. As such the Development Bank, like private sector investors, will not venture where local authorities are perceived to be weak, and where residents are perceived to be too poor to pay for services. This has the net effect of increasing the pressure on government to cater to the basic needs of the poor, resulting in scaling down service (to so-called minimalist levels, consisting of communal taps, pit latrines etc). This in turn may lead to even less repayment and further bankrupting of local authorities, as poor communities refuse to pay for service levels which fall below their needs and expectations.

Financing industrial development

The Industrial Development Corporation (IDC) has the mandate to encourage and finance industrial development. Recently the IDC has included emergent and historically disadvantaged entrepreneurs to its list of mandate clients, and has designed a number of schemes and new products which offer risk sharing and low interest loans for these clients. But despite these seemingly good intentions, a look at IDC financing over the 5 years up to June 1998 reveals that the IDC is still weighted heavily in favour of its traditional client base - large corporations in the minerals-energy-complex (MEC), particularly basic iron and steel, and non-ferrous metals. This is in spite of the poor performance of MEC industries in creating jobs and generating export earnings.

For example, over the past 5 years, the minerals-energy-complex industries have received more than two thirds of IDC investments, but account for a lowly 14% of jobs created over this period. Sectors such as agriculture, forestry and fishing are far more effective in creating jobs, and small and medium enterprises are far more successful than their corporate counterparts in both creating jobs and generating export earnings. Over the past 5 years, small and medium enterprises have received only 15% of IDC finances but have created 66% of the IDC's accredited new direct employment and 26% of its projected annual export earnings. IDC finances are also very unevenly distributed across the country. The greatest proportion (40%) is going to the Western Cape, while a clutch of poorer provinces (the Northern Province, the North West,

the Northern Cape and the Free State) are getting less than 7% between them. There are also great disparities within provinces, with the former homelands faring worst. Of the total IDC loan portfolio of R2,741 billion dispensed to the Eastern Cape over the past 5-year period to June 1998, less than 1% (R23 million) went to the former Transkei.

Financing small-scale producers

Part of the Land Bank's new mandate is to provide financial services to small-scale farmers, land reform beneficiaries and the rural poor more generally , for which it has designed a number of new products. But over the past few years the Land Bank has primarily been servicing its historic client-base - white commercial farmers. Emerging farmers and land reform beneficiaries have been paying considerably higher interests than their established commercial counterparts. Recently, after pressure from the National African Farmers Union, the Land Bank has devised a scheme to provide low interest rates to emerging farmers for long-term mortgage loans. However poor clients are still receiving short and medium term loans (for fertilisers, seed, machinery, stock etc.) at interest rates well above the prime bank lending rate.

The situation for emerging entrepreneurs and small, medium and micro enterprises is no better. Khula Enterprise Finance Limited, established by the Department of Trade and Industry in 1996 to provide credit to small businesses, is still trying to sort out its own teething problems. Because Khula works by lending to small businesses through intermediary institutions like NGOs, the recipients get their credit at well above the prime lending rate. This is because the intermediary institutions still have to add interest in order to sustain themselves. So while small producers are at least now beginning to get access to credit, it is on unfavourable terms which may serve to threaten the sustainability of their enterprises and undermine plans for business expansion.


As was recently revealed in a number of socio-economic profiles of Eastern Cape towns and districts, access to credit and financial assistance remains the principal constraint that small-scale producers face. Meanwhile, the new development finance system is so far having little impact on the poor. In order to effect their own cost-recovery strategies, development finance institutions are still primarily servicing historic and wealthy clientele. Where credit is being made available to the poor, it is at extremely high levels of interest. But while the development finance institutions must themselves be subject to critical scrutiny and made to account for their practices, to lay all the blame at their feet would be to miss the point. The problem lies in South Africa's macro-economic and financial policies which ultimately set the conditions of cost-recovery that control DFIs, consequently affecting who they lend to and at what rates. We also need to critically examine the impact of globalization, and how the `internationalisation of finance' has forced the state to battle inflation above all else.

Long term solutions lie in restructuring the country's macro-economic policy to allow for increased social spending on the poor and to reduce the exorbitant interest rates which make it impossible for the poor to access credit (even if this may mean slightly higher levels of inflation). In the meantime, the onus is on government to bring pressure to bear on the development finance institutions, if it is able, to ensure more of their finances are directed towards the poor and incurred on non-loan expenditures such as training and capacity-building. Because these activities will incur extra costs for the development finance institutions, government will have to seriously consider providing targeted grants and subsidies to institutions for lending to the poor through intermediary agencies at below market rates.

Government also has the onerous task of plugging the gaps in the development finance system. Where development finance institutions are not directing credit towards basic needs development for the poor, then it is government which should be undertaking this responsibility. The question is whether it has the capacity and will to fulfil this obligation.

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Printable Version

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