Microfinance & driving financial inclusion

In the tapestry of economic development, financial inclusion is a foundational thread, weaving together individuals, communities, businesses, and economies. In South Africa, microfinance is the golden thread. When offered responsibly, microfinance has the power to unlock opportunities, transform lives, and break the cycle of poverty in underserved communities. By circumventing the historical barriers to financial inclusion, microfinance opens doors to prosperity.

Thembi is a young entrepreneur whose journey to financial freedom embodies the transformative power of microfinance. Equipped with nothing but determination and a modest microloan, Thembi established a home-based spaza shop and, what began as a humble endeavour to provide for her household has blossomed into a thriving business, creating income opportunities for a number of people in her community. Her story is but one of many that illustrates how access to microfinance can serve as a catalyst for economic empowerment and social upliftment.

Behind the scenes, innovations by credit bureaus have paved the way for millions of South Africans to access credit in the form of microloans. According to TransUnion data, in 2023 alone, 2.3 million new credit facilities were opened by consumers whose applications would otherwise have been declined due to a lack of traditional credit history.

However, over 14 million South Africans still lack access to formal financial services, presenting both challenges and opportunities for the microfinance sector. Serving this population will require a concerted, collaborative effort to overcome obstacles such as credit risk, operational costs, and limited financial literacy. But the potential rewards are immense. Empowering underserved communities through microfinance not only reduces poverty on an individual level, it also has the potential to alleviate the burden on our national social welfare systems.

Collaborating for impact

Realising the full potential of microfinance requires effort across stakeholders in the financial services industry. In South Africa, National Treasury and the National Credit Regulator work to build trust in the microfinance industry and encourage greater access to credit for underserved populations. Non-governmental organisations and development agencies play a crucial role by providing funding, technical assistance, and capacity-building support to microfinance institutions, as well as financial education and training programmes for underserved communities. In the private sector, partnerships between banks, micro lenders and FinTechs are enabling greater access to credit, while mobile money platforms and digital wallets enable individuals to access financial services conveniently and affordably, especially in rural and remote areas where traditional banking infrastructure is lacking.

Furthermore, by partnering with credit bureaus that have invested in the world of microfinance, lenders protect both themselves and the people who borrow from them. With access to comprehensive credit information, lenders are able to assess borrowers’ creditworthiness more accurately and reduce their default risk. Access to this data also aids lenders to identify high-risk borrowers and potential over-indebtedness. Both borrowers and lenders are protected when parties in the microfinance value chain are able to verify borrowers’ identities and flag suspicious activities, as well as to facilitate compliance with regulatory requirements, and legal and ethical standards.

Financial inclusion and economic growth

For some consumers a microloan will be their first formal credit product, and as such they will not have been able to build a traditional credit history prior. In many cases, the alternative data provided by bureaus like TransUnion enables lenders to better understand and score these consumers before advancing them credit, thus furthering financial inclusion and facilitating the start of their formal credit journey.

Alternative data sources include demographical, geographical and telecommunications data sources, when combined with traditional credit data it allows lenders to engage with their customers, allocating the right product at the right price based on accurate risk and affordability assessments.

At its core, financial inclusion serves as a linchpin for sustainable economic development. By providing individuals and businesses with access to essential financial services, such as credit, savings, and insurance, along with financial literacy and education, we lay the foundation for entrepreneurship, investment, and innovation. By ensuring that all members of society have equal access to financial services and opportunities, financial inclusion promotes social equity and fosters social cohesion. Moreover, financial inclusion drives growth by integrating previously excluded segments of the population, like informal sector workers and micro-entrepreneurs, into the formal financial system.

Fatgie Adams

Fatgie Adams

Head of Credit Risk Solutions, TransUnion Africa

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