B. Phase II - Pilot

Objectives

The pilot started in mid 1989 while an agreement was being finalised with Development Bank of Southern Africa (DBSA) to provide loan finance at the then prime interest rate to fund the GCC’s debtors book. The agreement was for R1.5m, which was the amount identified in the feasibility study as the minimum amount required to test both product and procedures. The Urban Foundation agreed to provide a loan of R600,000 worth of interest free working capital to support the pilot.

The pilot was to run for three years and then be evaluated. The mission, long and short-term objectives for the pilot phase were as follows:

Long term objectives:

· to stimulate the supply and upgrading of low income housing stock on scale, through the extending of small, short-term loans to savings associations at market related interest rates.

· to offer appropriate housing finance to low-income households

· to establish an apex organisation to interface with informal savings associations.

· to offer a finance facility to the informal savings associations who in turn would on-lend to their members.

· to raise money from the capital market either directly or indirectly for the purpose of on-lending.

Short-term objectives:

· to test under operating conditions the principles of on-lending to associations via an apex organisation.

· to test whether savings associations can maintain pressure on group members.

· to test the financial viability of these principles

· to test and develop the systems and structures required for such a financial institution.

· to test the acceptability of this form of finance to informal savings associations.

· to test under operating conditions the critical variables which influence the viability of the company.

· to evaluate under operating conditions legal constraints which hamper the operations of the GCC.

· to evaluate the acceptability and viability of the proposed staff structure to interface with savings associations and maintain group pressure.

Progress

The GCC started advancing loans in November 1989. By October of 1990 it had 57 groups (919 individuals) who were performing well. R1.78 million had been advanced.

Demand for loans continued and it was considered appropriate to raise an additional sum of money to continue lending so as not to create a negative effect in the community through a sudden stop to the system as it was becoming established. Pressures from a range of housing actors and general community demand provoked an alteration to the initial concept of the pilot.

The performance of the debtors was most encouraging at this early stage, consequently a bolder approach to the experiment was considered desirable.

Evaluation

Several positive lessons were learnt during this phase in relation to:

· methods of marketing at grassroots level

· procedures for advancing money

· games that will be played in order to access resources

· kindergarten administrative procedures

· the difficulty of operating in an environment which states “we are entitled to what we demand” which is compounded by the resonance that such a statement finds with staff

· the difficulty of teaching potential credit officers the difference between real affordability of a client and expressed affordability by a client

Potential Problems for Expansion

The GCC faced a catch 22 situation in considering expansion as:

· the product though performing well was not a year old in the field and had not entered its risky period. There were three such periods perceived in the cycle of this loan. The first was when the full money was advanced to the group i.e. after the third advance in month ten of the cycle and the incentive to keep paying in order to access more money was no longer available. The second was potentially when a sum of money equivalent to the capital had been repaid and the issue of paying interest had to be faced. The third was when the possible benefits derived from the application of the loan were no longer perceivable and therefore no longer worth paying for.

· the formal banks represented on our Board of Directors indicated that the scale of the pilot was too small to be able to derive definite results. The pilot might thus still run its full course and end up with inconclusive results as a different scale might fundamentally alter the findings of the pilot.

· the sudden halt of any resource in a resource scarce environment normally creates a negative response which makes it more difficult to reintroduce the product in the same community. Furthermore, loan recipients themselves stop paying as the only reason for repaying i.e. further loans, is withdrawn. A pilot programme therefore needed to be an ongoing programme at a certain scale to firstly create the perception of continuity and secondly to be at a scale where it is not possible to “over-manage” the portfolio i.e. manage it in a sustainable manner.