Risk management for microfinance institutions in South Africa

Abstract

Microfinance is part of the financial services industry in South Africa. Microfinance Institutions (MFIs) in South Africa provide financial services to a wide spectrum of clients between LSM 1 and 6. The perception exists that the micro-lending industry in South Africa is a high risk industry. Since 2007 the industry has been regulated by the National Credit Act. Due to the entrepreneurial nature of the micro-lending industry in South Africa, risk management should be an integral part of every MFI in South Africa in order to maintain control and ensure sustainability. The study focuses on the following factors related to the micro lending industry in South Africa: the comparison between perceptions of anticipated risk from management with the risks identified in the analysis of client data the optimal risk balance; the pro-active management of risk in the microfinance environment; the prediction of the outcome of microfinance credit transactions and the average profile of a microfinance client in South Africa. The study compares the perception of management in terms of risk related issues with the outcome of a client analysis in terms of risk aspects. The study also determines the profile of an average ideal micro finance client and the profile of an average non-paying micro finance client. If management in the micro finance industry understands the risks in the industry and has the tools to manage these risks, together with the understanding of the profile of the ideal client, it will enable them to ensure sustainability of their businesses as well as address the financial needs of the lower income end of the market in South Africa in the best possible way.