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8 December 2008
An innovative Standard Bank project to extend loans to informal businesses has reached an important milestone in Umlazi, KwaZulu Natal.
Standard Bank launched the Community Investment Fund (CIF) initiative in September 2007 with the aim of extending loans to informal businesses that would not qualify for credit under the bank's lending criteria.
The Umlazi Community Investment Fund has disbursed R1.7m to 100 informal businesses, ranging from spaza shops to tailoring businesses and small farmers. This is an important milestone because of a KwaZulu Natal government pledge that it would match Standard Bank's funds once loans worth more than R1m had been made to small businesses in Umlazi. Dr Zweli Mkhize, MEC for Finance and Economic Development in KZN, who made the pledge at the launch of the fund in April, has confirmed that the province will contribute R1m to the community fund.
Speaking at the launch of the Fund in Umlazi today (Monday December 8), Sim Tshabalala, Chief Executive Standard Bank South Africa said: "This is an example of a partnership between government, the community and Standard Bank of South Africa, and we are proud of it. If this partnership works, then it will benefit many people in communities where banks have found it hard to deliver financial services. We believe it will work."
Dr Mkhize said government and the private sector have the responsibility to create an enabling environment for communities in previously disadvantaged areas such as Umlazi. "Just few years ago, we witnessed the systematic strategy under the apartheid government, the strategy that was aimed at excluding the majority of South Africans from participating in the mainstream economy."
He said that government was examining new areas of growth, checking where the new economic opportunities for job creation and investments are. "This morning's gathering, without doubt, signals the pursuit of newly found economic opportunities. We are confident that this fund will meet the diverse needs of the community of Umlazi."
The Umlazi fund has exceeded expectations, testimony to the effectiveness of Standard Bank's partnership with the local Umlazi Economic Development Foundation.
The Community Investment Fund model is novel in two respects: Firstly, funds are only launched in communities which have strong community-based organisations that are capable of partnering with Standard Bank in managing and disbursing the funds. Secondly, the model does not require collateral to support loans but relies on community peer pressure and moral persuasion to ensure repayment.
The Umlazi Community Investment Fund is one of six funds launched in three provinces. The other five are:
- Bethelsdorp Community Investment Fund (Eastern Cape) established in September 2007;
- Mutale Community Investment Fund (Limpopo) established in October 2007;
- Mhlontlo-Tsolo Community Investment Fund (Eastern Cape) established in October 2007;
- Inanda Community Investment Fund (Kwa Zulu Natal) established in November 2007;and
- Mhlontlo-Qumbu Community Investment Fund (Eastern Cape) established in October 2008;
In total over R7m has been distributed to more than 630 businesses with average loans sizes of R11 000. The average default rate across all six funds is 7%.
The CIF works on the principle of using donor funding for the purpose of on-lending to informal businesses with a view to creating the necessary banking track record that will qualify them for migration to formal banking. The project has been funded by Standard Bank's Corporate Social Investment division.
The strategy is to extend the source of funding to other institutions once the existing community funds are working efficiently and have sufficient capacity to manage on their own. The basis on which the money is made available is that the bank (or other donor) will not accrue any profit but that returns will be reinvested into the fund.
Loans are made to existing businesses as well as start ups for the purposes of working capital, acquisition of assets and business expansion. The terms of the loans are:
- They range from R1 000 up to R50 000 depending on the needs of the business and its repayment capability
- Repayments are made over a maximum period of up to 24 months. The repayment schedule is linked to the nature and requirements of the business. Interest is charged at 3% per month on outstanding balances. Sustainability of the fund is the core determinant factor in setting the interest rate.
There is an initiation fee of R100 and a monthly charge of R15. (Both the interest and the fee charges are well within the limits for Developmental Credit based on the National Credit Act).
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