• Private sector development and banking

Private sector development and banking

Since the apartheid-era, South Africa has operated government-supported development finance institutions (DFIs) that aim specifically to meet the financing needs of poor individuals and communities that are traditionally considered to be uncreditworthy. Among them, KwaZulu-Natal’s Ithala Development Finance Corporation and its banking subsidiary, Ithala Limited, have worked particularly well with poor people. But the future of this DFI now looks uncertain. A research report recently brought out by the School of Development Studies at the University of Kwa-Zulu Natal examines why.

Since 1994, the finance corporation and more recently, Ithala Limited, have provided savings accounts to over 500,000 previously “unbanked” individuals with a total value of deposits equalling R1.3 billion. In addition, Ithala Limited has contributed to making banking technologies – most notably its own automated teller machines (ATMs) and debit cards – more accessible to isolated rural and peri-urban populations. The organisation is also an active player in providing home loans and small business support funding to thousands of its formerly unbanked clients.

While Ithala Limited now seeks to expand its range of products and services by becoming a more formalised banking institution, the KwaZulu Natal provincial government and the South African Reserve Bank, amongst others, are attempting to persuade Ithala Limited to reconsider its plans since they are wary of their potential impact on the stability of South Africa’s wider financial system. They also argue that South African's major commercial banks are the ones that should be providing formal banking services to poor communities in future.

But according to the report, there are certain features about Ithala Limited that are likely to make it more effective in providing financial services to poor people than commercial banks will be. These include its:

• geographic and cultural accessibility
• high degree of trust with its client base
• small-scaled operations which do not pose a meaningful threat to South Africa’s banking system stability
  

For these reasons, the report argues that Ithala Limited should go ahead with its plans to expand and formalise, thereby remaining an effective development agent as well as a viable competitor to larger financial institutions. In this process, the firm should also consider:

• a full or partial privatisation of organisational ownership
• a greater emphasis on technology utilisation as a means to reduce operating costs
• improve its homegrown research capacity
  
  
  

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