The South African Micro-Finance Apex Fund (SAMAF) presented its Annual Report 2010/11 to the Committee. It was noted that SAMAF was in the process of being merged with Khula and the Independent Development Trust’s small business activities, and that there were only two executives remaining, in Acting positions, until the merger was completed. For the first time in five years, SAMAF had received an unqualified audit report although there were various issues of concern raised, largely due to the impending merger, which had led to managers not being appointed at the provincial offices, lack of resources at executive level and low staff morale because of the uncertainty. However, in 2010/11, SAMAF had succeeded in disbursing R40,8 million was disbursed to financial intermediaries, in terms of its operating model, in the form of loans (R22,4 million) and grants for capacity building (R18,4 million), a substantial increase on the previous years. Support was provided to 14 micro finance institutions (MFIs), 23 financial services cooperatives (FSCs) and 24 stokvels. The total number of borrowers increased by 13,5%, from 35 884 to 40 726. Most of the finance institution funding was paid to Limpopo, and no funds were distributed in Northern Cape, Free State or North West Province, with only a small amount in KwaZulu-Natal. All provinces had, however, received grants totalling R18,4 million for capacity building. A net surplus of R34.9 million was recorded and loans of just over R1 million were written off. The matters of emphasis in the audit report related to the measurability of performance indicators not being well defined, inaccurate or incomplete recording of information, incorrect procurement and inadequate oversight over the finances and performance management. Particular challenges relating to financial institutions included lack of governance and administrative skills, and a general lack of micro-financial skills. In this regard South Africa could learn much from countries such as Kenya. In the future, SAMAF intended to try to cut red tape, increase lending levels by reducing turnaround time, actively manage the merger process, address audit findings and ensure that corporate and individual targets were aligned.
During the discussion, Members expressed concern whether SAMAF was achieving its mandate to provide funding for small and survivalist businesses among “the poorest of the poor”, especially in rural areas. They drew attention to inconsistencies in the operating model, particularly the fact that over R34 million of its funds had remained unspent, the problems that some financial intermediaries were charging end users interest rates of up to 40%, and lending criteria were resulting in beneficiaries having to wait years before becoming eligible for financial support. They also criticised the insufficient funding in rural areas. SAMAF noted that its operational model still required it to deal directly with financial intermediaries (FIs), and not directly with end users. This prompted suggestions that it might be possible to eliminate the intermediary level and provide funding to end users through Khula, as it had both the expertise and experience of operating in this market.
South African Micro Finance Apex Fund (SAMAF): Annual Report 2010/11
Mr Loni Mamatela, Acting Chief Executive Officer, South African Micro Finance Apex Fund (SAMAF), said that because of the impending merger of SAMAF with Khula and the small business activities of the Independent Development Trust (IDT), SAMAF now retained only two executives – himself and Mr Patrick Mathoma, the Acting Chief Operating Officer.
He detailed SAMAF’s mandate, vision and mission, values and objectives, and said that it provided funding to micro, small and survivalist businesses indirectly, through financial intermediaries (FIs). During 2010/11, it had disbursed R40,8 million was disbursed to FIs in the form of loans (R22,4 million) and grants for capacity building (R18,4 million). This was compared to the disbursements of R12,5 million in 2009/10, and R19,4 million in 2009-10. Support had been provided to 14 micro finance institutions (MFIs), 23 financial services cooperatives (FSCs) and 24 stokvels. The total number of borrowers increased by 13,5%, from 35 884 to 40 726. An important aspect to note was that 80% of loans by FIs to end users were in rural communities, and 95% were micro-enterprise loans, in keeping with the focus on the rural and peri-urban areas.
For the first time since its establishment five years ago, SAMAF had received an unqualified audit report. A recent market survey had shown a very positive attitude from SAMAF’s clients for its products and services. The substantial increase in approved funding, from R10 million in 2008-09 to R48,1 million in 2010-11, could be attributed to improved turnaround times, and the positive attitude and commitment of the organisation’s staff.
He noted the distribution breakdown of on-lending funds by province. Of the total of R22,4 million, the bulk went to FIs in Limpopo (R6,8 million), Western Cape (5,0 million), Gauteng (R4,8 million), Eastern Cape (R3 million) and Mpumalanga (R2,6million). No funds were distributed in the Northern Cape, Free State or North West Province. KwaZulu-Natal received R120 000. He said the Northern Cape posed particular challenges because of the vast distances involved, and suggested that its office might better be combined with Free State to improve overall capacity. All the provinces received grants totalling R18,4 million for capacity building, which were funds intended to prepare institutions to receive funding in future.
For the period under review, SAMAF recorded a net surplus of R34,9 million. Loans to the value of just over R1 million were written off.
Although an unqualified audit opinion was expressed, several issues were raised. These included that fact that the measurability of performance indicators was not well defined, information was not being recorded accurately or completely. There was one incidence where procurement did not follow National Treasury regulations (which was subsequently found to have been condoned by the Director General), and there were reports of inadequate financial oversight and performance management. Mr Mamatela pointed out that the organisation was operating without a Chief Financial Officer, and a new incumbent would be appointed only after the merger process had been completed.
A number of challenges needed to be addressed before the end of the current financial year. The first of these was the lack of governance and administration skills within the FIs, which impeded SAMAF’s activities and required the intervention of the organisation’s capacity-building unit. There was a general lack of micro-financial skills, both internally and externally. South Africa could learn much from other African countries, such as Kenya, where micro-finance played a much larger role in economic activity. The impending merger was a major factor, as managers could not be appointed at the provincial offices, there were insufficient skilled resources at executive level, and uncertainty was contributing to low staff morale. The sooner the merger was completed, the better.
Looking ahead, SAMAF would try to cut red tape and increase lending levels by reducing turnaround times, would actively manage the merger process, address the audit findings, and ensure that corporate and individual targets were aligned, clearly defined and agreed up front with all members of staff.
The Chairperson said that had been the first time that the Committee had received such a detailed and organised report from SAMAF, and congratulated it on receiving an unqualified audit certificate.
Dr P Rabie (DA) said the presentation had referred to some policies not being in existence. He asked for clarification.
Mr Mamatela said some examples were the lack of a coherent training policy which could be applied consistently throughout the organisation, a policy to address the changes involved in moving to an open-plan office facility, and a dress policy. Other existing policies needed refinement, and would be worked on.
Dr Rabie suggested that as Kenya and other African countries were proving successful in implementing micro-financing policies, a visit to these countries should be undertaken to study and learn from them.
Mr Mamatela agreed, adding that there were other success stories in South American countries, such as Peru, and that research would be beneficial.
Mr N Gcwabaza (ANC) noted that there had been a rapid rise in approved funding in the past two years, and asked what had caused the upturn.
Mr Matamela attributed the improvement to shortening the turnaround times, so that more applications could be handled, as well as a more positive attitude among staff at regional offices.
Mr Gcwabaza asked why the Director General had condoned two instances of irregular expenditure.
The Chairperson asked whether any follow-up action was taken on this.
Mr Patrick Mathoma, Acting Chief Operations Officer, SAMAF, said that SAMAF had engaged the services of a sole provider, who was a specialist in the field of loan finance systems, and that delays in collating data had resulted in an overrun, which the Director General then had to condone. He conceded that this might have been partly due to inefficiencies on the part of SAMAF.
Ms D Tsotetsi (ANC) said she was not in favour of the proposal to combine the offices of the Northern Cape and Free State, taking into account the high levels of unemployment and poverty existing in these areas.
Mr Mamatela clarified that what he in fact proposed was not that the Northern Cape office should be closed, but that the two regions should be combined at management level. This would allow for the deployment of another outreach coordinator in the Northern Cape.
Ms Tsotetsi said she had asked, on a previous occasion, how the merger and restructuring would affect appointments and the future of staff, and had been assured that “everyone would be taken on board.” She therefore could not understand why there should be uncertainty and low morale.
Mr Mamatela confirmed that the Industrial Development Corporation (IDC) had given such an assurance, and Samaf had itself told staff no jobs would be lost. The uncertainty related to personnel speculating about what sort of jobs they would be offered after the merger, such as current managers finding themselves having to work under another manager, owing to a rationalisation of positions.
Mr Z Ntuli (ANC) asked whether Samaf was, in fact, following its mandate, which was to focus its efforts on poor communities in rural areas. The figures seemed to indicate that this was not being done.
The Chairperson agreed, and stressed that the real target market should be the remote rural areas.
Mr Mamatela said SAMAF was doing its best to follow the mandate. Its products were designed to serve the rural and peri-urban areas, but it was necessary also to be mindful of the fact that squatter camps existed even in urban areas. The fact that 80% of loans by FIs were made in rural areas, and 95% were to micro-enterprises, was a positive indication.
The Chairperson said that provinces such as Gauteng and Western Cape featured prominently in the figures, and this cast doubts on SAMAF’s definition of rural areas, and again raised the question of whether SAMAF should not be refocusing its efforts in other markets.
Mr Mamatela confirmed that SAMAF’s current focus was on facilitating the establishment of cooperatives in the rural areas.
The Chairperson said site visits indicated there were inconsistencies in the organisation’s activities, with some regional services councils (RSCs) not being favoured by FIs for one reason or another, and the blame was put on SAMAF. People were not being as readily assisted as they should be. They were waiting a long time for services, and there were perceptions that they would be assisted or not at the whim of the official. These difficulties needed to be addressed. The funds were not for the benefit of SAMAF or FIs, but for the poorest of the poor.
Mr Mamatela said he took these comments very seriously, and undertook to investigate, take action and report back to the Committee.
Mr Mathoma said that one unfortunate aspect of the SAMAF operating model was that it had to reach its target market through intermediaries. It was trying to develop a tool to measure the actual impact of its efforts to reach the end user.
The Chairperson asked whether it might be possible to eliminate the intermediary FI level and provide funding to end users through Khula, as it had both the expertise and experience of operating in this market.
Mr Ntuli also supported the use of Khula to disburse funds directly to end users.
Mr Mamatela said one of the roles of SAMAF was to be a catalyst in the development of the micro-finance industry. It therefore had to help in empowering these institutions, enabling them to provide a service to those who could not be funded through commercial banks. It also allocated funds to Financial Services Cooperatives (FSCs), which in turn made loans to their members.
The Chairperson said one of SAMAF’s criteria for lending to FSCs was that they initially had to accrue savings of at least R100 000, otherwise they would not be funded. This funding model was very restrictive, based on the Cooperative Act, and led to inconsistencies in applying SAMAF’s mandate. It was easier for FSCs to make use of commercial banks.
Mr Mathoma said the entry level was no longer R100 000, but R10 000, and this was stipulated in the organisation’s product sheet.
The Chairperson said she had heard that the R10 000 level was being applied in Gauteng, but this was not the case in the rural areas, which was another worrying example of inconsistency. The message to the consumer needed to be the same throughout the country.
Mr Mamatela said the disclosure of this inconsistency was very embarrassing. The operating model was not perfect, and therefore it was imperative to look at best practices elsewhere, and improve on the model.
Mr Ntuli said some entities were proud to announce that they had ended the financial year with a surplus. This, however, should not be the case at SAMAF, especially when end users were in some instances having to wait for years for financial support.
The Chairperson said that she regarded the fact of a surplus as indicative of under-expenditure, because it surely represented money that should have been spent on the end beneficiaries. This was not acceptable at a time when so many people were in need of assistance.
Mr Mamatela agreed that SAMAF was painfully aware that it should not have a surplus, and that it had tried very hard to use the money for those who really needed it. It might be necessary to reconsider and reduce some of its funding criteria in order to resolve this challenge.
Mr Ntuli noted that SAMAF was trying to motivate stokvels, and asked what incentives were being offered to assist this process.
Mr Mathoma said a product had been developed in terms of which 30 people who formed a stokvel would qualify for funding of R250 000. This funding was for capacity building, such as paying employees and buying computers, stationery and furniture. A further amount of R50 000 would be put aside as an incentive to help them grow to the status of an FSC. It was not repayable, provided that they were first capacitated on lending methodologies.
The Chairperson said oversight visits around the country last year had revealed that many SAMAF end users were not surviving, and instances were reported where FSCs were charging up to 40% interest. There seemed to be no consistency in the way intermediaries were operating with SAMAF’s money – which was essentially money provided by the Government to try to help the poor – as some institutions were not assisting the people. She hoped this issue could be addressed within the merged entity.
Mr Mamatela said the charging of high interest rates was of huge concern, and unfortunately not enough studies had been done to ensure that the charges to the end user were affordable. SAMAF was looking at this area very seriously and hoped to come up with a solution in the medium term.
The Chairperson said the material losses of over R1 million reported during the review period were quite high, and asked if these arose through the correct procedures not being followed.
Mr Mamatela said the losses were loan write-offs, and were not irregular. The harsh reality was that SAMAF operated in a high-risk environment, and its loan finance was not secured. It must therefore be accepted that there would have to be some write-offs, although SAMAF was doing its best to ensure that these were minimal. Legal action to recover outstanding funds was not really an option when dealing with organisations that had no assets or no longer existed.
Mr Gcwabaza asked why SAMAF was recording payments made to both internal and external auditors, as he would have expected the internal auditors to be remunerated as employees.
Mr Mamatela said the organisation should ideally have its own internal auditors, but this was not the case at SAMAF, and this function had been outsourced. He clarified the different roles of the internal and external auditors, and the function of the audit committee.
Mr Matamela said he would investigate other queries from Members regarding consulting fees, travel and subsistence expenses and performance bonuses, and report back to the Committee on these points.
The meeting was adjourned.
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