The role of community banks in South Africa: can it contribute to improve access to financial services for the poor?

This paper examines the various types of community banking initiatives present in South Africa, ranging from informal self-help financial services to formalised membership based institutions; ways in which these institutions have changed in recent years; reasons for their success or failure; and risks and potential for future growth of the sector. It draws on 63 qualitative case studies spread across six provinces with large rural African populations.

Its findings include:

• informal credit and savings groups tend to start out as rotating savings associations, used mainly by women, in which members contribute specified amounts towards a lump sum payout which is awarded to each member of the group in turn
• the most common type of group is the accumulating savings and lending group, which collects monthly, pays out annually and lends out its accumulated assets during the year cycle
• there were signs of a shift in favour of accumulating groups with a focus on annual expenses, and for which interest-bearing loans were a major part of the motivation for participation
• the trend towards interest-bearing lending was less evident in the westerly interior provinces than in the easterly provinces, possibly because of a greater risk of loan non-repayment in the former due to worse poverty, high mobility, and weak social capital
• loan default and failure to repay; risk of management malpractice or embezzlement; and motivation of the group to save were seen as the factors putting savings and credit groups at risk of non-compliance and break-up
• village banks, which are less formalised (in terms of registration and legislation) than commercial banks but more formalised than savings groups, and give villagers a way of accessing loans from the commercial banking sector, are now a prominent part of the financial landscape
• mutual banks were instituted in 1993 as a banking category with less stringent capital adequacy prerequisites but similar risk management requirements compared to existing commercial banks
• however, very few institutions have opted to become mutual banks, and the capital and reporting requirements are seen as too onerous.

The paper concludes by endorsing the mutual banks’ emphasis on membership based approaches which have been successful in the informal banking sector. It suggests that policymakers need to devise a legal structure allowing mutual banks to meet the requirements of both villagers and the regulator, and have not yet succeeded in doing this.