APEX Fund: Briefing, Committee Reports: adoption

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE

Department PowerPoint presentation on APEX Micro-finance
Committee Report on Department Annual Report 2003/2004
Committee Business Plan
Committee Annual Report
[Email [email protected] for the above documents]

SUMMARY
The Department presented an overview of the Apex Micro-finance Initiative. The 'Apex Fund' was aimed at the lower end of the market. Two types of funding were envisaged: a loan scheme for those persons already in economic activity and a micro-finance scheme for those not yet economically active. The Fund would develop relationships with partner organisations. The emphasis was on innovation and suitability for the South African context. The Committee expressed concern over the envisaged partnerships with "loan sharks", and the possible request for collateral from borrowers, as this would negate the object of the Fund. The issue of interest rates was also critical. This impacted on the sustainability of the Apex Fund, as the money would have to be issued as soft loans to partner organisations and they would, in turn, have to lend the money out as a soft loan to beneficiaries.

The Committee's Report on the Department Annual Report, the Committee's Business Plan and its Annual Report, were adopted with minor amendments.

MINUTES

Department Apex Fund briefing
Ms W Damane (Department Chief Director: Enterprise Development Unit) briefed the Committee on the micro-finance Apex Fund. After seven years of operations, Government believed that the mandate given to Khula was too broad. The Department and the National Treasury were looking at an Apex organisation that would focus only on supporting micro-finance institutions servicing poor clients with financial needs not exceeding R10 000. There was international proof that this type of intervention led to an increase in incomes, particularly for persons at the lower end of the financial services market, as had happened with PKSF in Bangladesh. Over the past two years, the Department had consulted with a number of stakeholders in the micro financing sector. Most money was going through on the consumption side, and less for enterprise activities. A distinction was drawn between micro credit, which related more specifically to loans, and micro-finance, which was much broader and encompassed a variety of financial instruments, such as insurance.

The creation of an Apex Fund was seen as a facilitation mechanism. The mission of the Fund was to develop partnerships with a variety of organisations. Emphasis had been placed on services to the poor, because the Fund would go further than Khula, which dealt primarily with institutions servicing those people already in productive economic activities. The core business of the Fund included financial intermediation, development of sustainable micro-finance institutions able to reach the poor in their areas of operation, facilitation of training for micro entrepreneurs and financial co-operatives clients and capacity building for financial services co-operatives and for enhancing institutional capacity of Apex and its partner organisations. It would be a challenge to balance sustainability and the promotion of entrepreneurship. Seed funds from Government would be the first source of funds, and Apex would deliver operational support, capacity building support and on-lending products to those partner organisations that met the criteria set by the Fund.

The proposed legal structure of the Apex would be a private company with Government as sole shareholder. A steering committee had been appointed, co-chaired by the Department and National Treasury, to oversee the registration and institutionalisation of the project. On incorporation, a Board of Directors would replace the steering committee. Capacity building support would be offered at four levels: institutional; human resources development; client development and pioneer support. There was a need to assist organisations to be able to provide lending and other instruments, and loan officers would have to be trained. It had been discovered that one of the fundamental challenges of micro financing was that institutions had to be hands-on with the end user. Apex would therefore facilitate the training of clients. In addition, because the Fund would not be following a particular model, it was hoped that it would be able to promote innovation.

The Apex Fund would function as a wholesale source of funds for partner organisations and would use two instruments to on-lend to its clients: a poverty alleviation fund and a micro credit fund. The poverty alleviation fund would target people not yet in enterprising activities, but who could be in them. Only two or three institutions were servicing this market at present. This fund would have to be much more affordable. The micro lending fund would target people in existing enterprises. The target market of the Apex was micro financing institutions targeting clients whose financial needs did not exceed R10 000. The key clients of the micro financing institutions should be economically active poor households whose livelihood is dependent on the micro enterprise incomes.

The project was on track, with the steering committee fully functioning. A project manager had been appointed and the Operational Manual was being finalised. R5.7 million had been transferred to Khula, to support pre-incorporation aspects. Apex was currently incubated at Khula and this was working well. Registration was being finalised and it was anticipated that Apex would be open for business by 8 December 2004. Community based initiatives such as saving schemes had been identified, and it was envisaged to build on these. The experiences and expertise of PKSF in particular had been drawn on to come up with a strategy, and a phased approach would be followed, to incorporate ongoing learning.

Discussion
The Chairperson asked for more information on the PKSF.

Ms Damane replied that it was an organisation based in Bangladesh that focused particularly on rural people, and provided micro financing products. The provision of these products had been extended to urban areas, and it was regarded as a highly successful venture.

Ms F Mahomed (ANC) remarked that the target date seemed very ambitious, and asked what was happening about provincial structures.

Ms Damane explained that, when she had said Apex would be open for business, it had meant that people would know the location of the Fund and that it was not in Khula. All issues of the legal framework had been finalised. A phased approach had been chosen because there would otherwise be a challenge to deal with an influx of people. The Department envisaged the first six months as a time to identify organisations with whom to work. Potential partner organisations were also being targeted.

Ms Mahomed asked how advocacy would be addressed. A lot of women would access the Fund if it was well advertised.

Ms Damane replied that support was needed from advocacy groups to say that "the Department was working towards a micro-financing goal".

Dr E Nkem-Abonta (DA) asked if it would be possible in future to involve the Committee at the level of conception and planning, as it would welcome the opportunity to have input. He gathered the approach would be experimental and asked what would happen if it failed. Would it not be safer to look at systems that had worked?

Ms Damane replied that lessons from other initiatives, such as the Step-Up Fund and Khula, had enabled the set-up of Apex as a different structure.

Dr Nkem-Abonta asked whether the need to rely on existing institutions would limit the scope of the Fund. Would the end-borrower need to provide collateral? If not, how would the Fund ensure that they were repaid? There was a huge risk of major failure.

Ms D Ramodibe (ANC) asked for clarity on the major role players, and asked why reference had been made to stokvels, as she had thought the Apex Fund money was intended for those wanting to generate an income.

Ms Damane replied that the Department believed the group-lending approach was currently working, but there was also a need to understand the working of stokvels.

Ms Ramodibe asked why the Department believed that Khula would cope this time.

Ms Damane replied that Khula had started micro financing for South Africans. Marang (previously Get Ahead) was now a very strong micro financing institution as a result.

Ms Ramodibe said that some lenders were not registered and asked whether they would also be covered.

Ms Damane replied that an essential part of capacity building was helping people to register. It was important to work with local structures, but initially the Apex Fund needed to be operational at the apex level.

Dr Nkem-Abonta referred to the problem of sustainability of partner organisations and asked how they would make profits from soft loans, because, somewhere in the chain, someone would have to pay. Would the Government subsidise the Fund and bail it out in the event of huge losses?

Ms N Khunou (ANC) expressed the hope that, as the project got under way with Khula, the Department was mindful of the challenges, as there were a lot of problems with delivery. She asked what interest percentage would be charged or how the Department would influence the interest charged.

Ms Damane replied that the interest rate was a critical issue and was one of the areas under constant discussion. The intent was not to distort the financial markets, but intervention would be about affordability. It was a challenge to ensure that partner organisations would transfer benefits to beneficiaries. Part of the approach when identifying a partner organisation was a physical visit and oversight of the business. It was a very hands-on approach.

Ms Khunou said that when someone started a business and borrowed money, there was a very small likelihood that they would be able to repay the money, particularly in the first year of business. What repayment timeframes were anticipated?

Dr M Sefularo (ANC) asked how village banks would relate to the Fund.

Mr S Njikelane (ANC) asked whether the Apex Fund had a risk management strategy and whether there was any partnership building strategy. He felt the first place for such a strategy would be other Departments such as Agriculture, with the Land Bank. There should also be strong emphasis on co-operative banks.

Ms Damane replied that there was a detailed approach in terms of risk management elements. The Department recognised the need to work very closely with structures, and village banks provided a good opportunity for this. A lot of capacity was still required, the Department recognised the need to work with other Government Departments. Interaction with the Department of Social Development could result in the Fund being used as a way to assist in terms of grants so these were used for more productive activities.

Ms Khunou asked whether hawkers were included as she felt that hawkers should be elevated somewhere as they were trying to earn a living. If they were included, what difference would it make in their lives?

Mr S Rasmeni (ANC) asked whether the Department had conducted research before coming up with a programme, in order to determine how to target the end users at the levels of rural and urban areas. It was important to know that the Fund would target people in need of the specific products.

Ms Damane replied that the Fund was building from and working with a range of practitioners, academics and existing organisations. A great deal of thinking had gone into it.

Mr Rasmeni wondered if the size of the funding, that is, loans up to R10 000, would help someone to start a business, and what kind of business it would be. Would it just help for purposes of consumption?

Ms Damane replied that it remained a challenge to give individual loans for small amounts, and it was necessary to ask what people were doing with the money. Small Enterprise Finance, for example, which operated mostly in Limpopo, was starting to mobilise people to become economically active.

Mr Rasmeni said that the Department had said that potential partner organisations would include micro lenders, and asked what other organisations were already in the business.

Dr Sefularo asked whether the Government was doing what had started in other countries as a voluntary effort. The experience of Bangladesh and other similar initiatives had started as voluntary organisations or mutual support systems.

Ms Damane replied that the Bangladeshi model had initially been capitalised by Government, but had been set up as a Section 21 company.

Dr Sefularo said he would like to see a battery and system of measures and institutional arrangements to address the challenges of the second economy.

Mr L Zita (ANC) asked what the initial capitalisation of the Fund was. There was a similar fund in Agriculture and he asked if discussions had been held with the Department of Agriculture. The initial capitalisation of that Fund had been R1 billion. It would be wrong for rural people to have a better service than the urban poor.

Ms Damane replied that the Department believed that, in the first three years, the Fund would require approximately R450 million. This period would be used to consolidate the South African model.

Mr Zita asked whether the Fund's approach would be passive like its predecessors, or active and mobilising.

Mr Njikelane asked why the Fund was to be a private company rather than a Section 21 company or a Trust, and to what extent the Department envisaged links with the Local Economic Development (LED) units of municipalities.

Ms Damane said that the regulatory issue was still a challenge. When micro financing institutions were considered in South Africa, reference was made to both "loan sharks" and organisations like Marang that were much closer to the end users, including hawkers. The Department believed there was an opportunity with co-operative banks, but believed Apex should continue to engage with Government. This was why its role was different from that of Khula, and was more active and proactive. The success of similar initiatives internationally depended on closeness to partner organisations and the closeness of these organisations to their clients. The challenge was to ensure that the structures existed in local areas, and the Department had been engaging with co-operatives and looking at the challenges.

Ms Ramodibe expressed the hope that the gender balance would also be addressed when results were obtained. She also asked what kinds of skills were to be capacitated.

Ms Damane replied that the products were reaching 95% women.

Dr Nkem-Abonta said he was not convinced that Apex could ever become self-sufficient. However, it would be an inefficiency in the system if it was not eventually self-sufficient. One would accept losses in the first five years perhaps. If the Government put R450 million into the Fund, it would lose bank interest on the money. The money would be loaned to partner organisations at a lower interest rate than the Government would have got. Apex would then tie the hands of the partner organisations to lend it out at a lower rate. This might leave too low a margin to be worthwhile. There had also been no clear answer on the question of collateral. He asked for satisfaction that the assured probability of self-sustainability was high. He still felt it was better to take what had worked and to adapt it.

Ms Mahomed expressed concern at the emphasis on collateral. Apex was aimed at the poorest of the poor, and these could not afford collateral.

Adv M Stephens (UDM) said that he hoped there was no question of collateral, as this would defeat the object. If collateral was demanded, the Fund would become a pawnshop. The Fund should be a financier able to look closely at the viability and moral risk of a proposal. Very high interest rates would reduce the possibility of success, so there was a need for properly viable projects with "low moral risk" (people who felt duty-bound to repay the loan) and reasonable interest rates.

Dr Nkem-Abonta stressed that he had not been insisting on collateral, but had been asking how partner organisations would ensure repayment of loans if collateral was not demanded. Sustainability was essential. The question was how partner organisations would be able to lend money cheaply, and whether Apex would be able to control them.

Mr Njikelane asked what would happen in respect of tax if it was a private company, and how this would impact on sustainability. He asked for clarity on the risk management strategies and urged caution. To what extent did the Department see the micro-finance initiative as part of a continuous strategy? He saw a continuum strategy as starting with poverty alleviation in the form of grants, then Apex assisting at the next level, moving up to Khula type financing and then to conventional banks. Was this what was envisaged? This had been the Bolivian experience. He endorsed the suggestion of expertise from other countries and said that he was very keen to see implementation. What would be expected of Members of Palriament down the line in spreading the information about the Fund?

Mr O Bapela (ANC) remarked that the Department had placed Apex at the lower end of the client base. In respect of its private company status, he said that some self-owned enterprises were private, and he had thought that this was a trend, and was also happening at local government level. What was the situation in other countries?

Mr Zita expressed concern at the narrow concept of the role of the DBSA. Had the issue of partnerships with German bankers, for example, been considered. What was the overall strategy? There was a need to link the Fund to a local consciousness strategy. Would it be possible to have partnerships with social movements?

Advocate Stephens asked to what extent Apex would have control over its partner organisations, as this was the essence of its effectiveness.

Ms Damane replied that when the Department had started the process, micro-finance had been defined as being much broader than micro credit. One of the innovations was that, unlike simply loans, it was looking at links between savings, loans and other financial services. In Bolivia, for example, 80% of clients that got financing had said that savings had increased, and 78% of these had not previous had savings, so savings were mobilised. Some partner organisations included young people in church groups, and the Department was looking at innovations. She agreed with the need to learn from others, and mentioned the PKSF intervention. Organisations had to be very close to their clients and the Department would welcome assistance in identifying those organisations. Collateral referred to the issue of a broader kind of intervention.

Mr Rasmeni expressed concern about the partnerships that Apex was building with loan sharks. Were there some strategies to turn them around from high interest rates?

Ms Khunou referred to an earlier Department presentation, which had said that micro lenders were more accessible and more helpful than banks. But how much interest would be charged by these micro lenders? This would create a problem if the poorest of the poor were referred to them. How were borrowers expected to repay their loans?

Ms Damane replied that Apex was looking at two products, and both would be linked to prime. The Khula instrument was locked at lending at prime plus two. Some micro financing institutions lending to existing entrepreneurs found this affordable. The other option would be a soft loan, perhaps at prime less three or four. The Department was in discussions with the National Treasury and others. The challenge was to ensure people who accessed the soft loan passed it on and ensured sustainability. The Department was looking at the medium to long term, and the percentage of the portfolio to go here, and how to target this market. She suggested that the Department give the Committee a more detailed presentation on the overall strategy of the Apex Fund.

The Chairperson pledged the support of the Committee and said that, when the Fund was up and working, the Department would be invited back to interact critically and objectively about its successes and challenges.

Committee Report on the Annual Report of the Department
Mr Zita requested that some issues be flagged. The IDC sought to be self-financing, and needed to be 60% self financing to be more proactive. The current model might restrict capacity. There was also an absence of a proactive sectoral strategy in the Department. The points were noted.

The report was adopted.

Committee Annual Report
Dr Nkem-Abonta suggested that the vision should be better oversight and it was written as though oversight was simply a means to doing other things. This was noted.

Dr Sefularo suggested that the second part of the preamble be omitted. The Committee concurred.

Dr Sefularo suggested that the definition of oversight work be broader. The Committee concurred.

Mr Njikelane said that the activities in June had not been included, such as the adoption of the budget. The Chairperson said that the Committee had been an ad hoc Committee at that stage. A report would be written for the ad hoc Committee.

A number of typographical and numerical errors were corrected. It was noted that the Committee did not have a researcher, and it was agreed that this should be addressed.

The report was adopted with amendments.

Committee Business Plan
The second sentence of the preamble was deleted as per the Annual Report.

Mr Zita suggested that intervention on the character of broad-based black economic empowerment should be embedded and requested it be flagged. The Chairperson suggested that it was an issue that would have to be revisited in the broad scheme of plans.

Dr Nkem-Abonta suggested that internal debate was held on current issues. The Chairperson concurred, saying it was the Committee's responsibility to be knowledgeable on current affairs. This should be included in the programme.

Ms Ramodibe requested the issue of gender be included in the core objectives. Mr Njikelane suggested a more generic term be used, such as equity in terms of gender, youth and disabled. This was captured.

Dr Sefularo referred to the list of places to be visited, and suggested this needed expression. He proposed a plan for some baseline visits at the beginning of the next year. Advocate Stephens suggested there should be a contingency reserve. The Chairperson concurred and this would be incorporated.

The Chairperson said that he would look more closely at the narrative and costing.

The report was adopted with amendments.

The meeting was adjourned.