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«The London School of Economics and Political Science Banking on the Poor: Savings, Poverty and Access to Financial Services in Rural South Africa ...»

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The London School of Economics and Political Science

Banking on the Poor: Savings, Poverty

and Access to Financial Services in

Rural South Africa

Anthea Dallimore

A thesis submitted to the Department of Geography and Environment

of the London School of Economics and Political Science for the

degree of Doctor of Philosophy, London. March 2013.


I certify that the thesis I have presented for examination for the PhD degree of the London

School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it).

The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent.

I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party.

I declare that my thesis consists of 94 798 words.

Anthea Dallimore March 25th, 2013 Abstract Microfinance has gained prominence as a policy option for addressing poverty. Although microfinance has a long history, its growing appeal is usually associated with the attention given to the Grameen Bank of Bangladesh, which pioneered group-based lending to poor women. Following the ‘successes of Grameen and the promotion of ‘cloned’ institutions, advocacy for microfinance has focussed primarily on microcredit. Consequently, microfinance as savings, insurance, and other forms of financial intermediation received far less attention. It was believed that microcredit was a more reliable and faster means to achieve poverty reduction, especially through supporting the entrepreneurialism of the poor. Microcredit then became a mantra of the microfinance sector, increasingly identified as its ‘raison d’être’ and the justification for the investment of billions for dollars.

This thesis focuses on the relationship between microfinance and poverty. It puts savings at the centre of the research through an analysis of a savings-led financial services cooperative known as the ‘Village Banks’ in South Africa. The research considers the asserted link between microfinance and poverty from both a theoretical and empirical interrogation. It questions the limited engagement that the microfinance literature has had with the various theories on poverty and attempts to formulate a more nuanced understanding of relations between the two.

The empirical contribution is a mixed method of qualitative analysis, in the form of focus groups held in four different Village Bank communities, and quantitative analysis from an original panel of households in one community. The thesis argues that a savings-led model of microfinance has the ability to contribute to the challenges of poverty reduction more than is currently acknowledged. It will also argue that, when provided with the necessary support, member-owned financial institutions, such as the Village Banks, offer a potential solution to addressing the inherent challenges of providing low-cost banking services in rural areas.

Table of Contents Declaration


Table of Contents

List of Figures

List of Tables

Acronyms and Abbreviations



Chapter 1 The Evolution and Development of Microfinance

1.1 Review of the Literature

1.1.1 In the Beginning: the 1950s to 1970s

1.1.2 Gaining Traction: Microfinance Research in the 80s and 90s

1.1.3 Point of Departure: Microfinance in the 21st Century

1.2 Dominant Discourses: Credit First and Integration Next

1.2.1 The Credit First Approach

1.2.2 Integration: The Financial Services Approach

1.3 Member-owned Institutions: A Savings Led Model

1.3.1 MOI Types

1.3.2 Drivers of Outreach

1.4 Conclusion

Chapter 2 Poverty and Microfinance

2.1 History of Ideas about Poverty

2.2 Definitions and Concepts

2.3 Theories of Poverty

2.3.1 Income

2.3.2 Basic Needs

2.3.3 Human Capability

2.3.4 Chronic Poverty

2.3.5 Subjective Poverty

2.3.6 Assets and Sustainable Livelihoods

2.3.7 Poverty and Vulnerability

2.4 Revisiting References to Poverty in the Microfinance Discourse

2.4.1 Cursory Acknowledgement

4 of 314 2.4.2 Explicit Affiliations

2.4.3 Implicit Affiliations

2.4.4 Direct Engagement

2.5 Formulating a Theory of Microfinance and Poverty

2.5.1 The Credit First Approach

2.5.2 Financial Services Approach

2.6 Conclusion

Chapter 3 South Africa in Context

3.1 Defining Characteristics of Poverty in South Africa

3.2 The Landscape of Financial Services in South Africa

3.2.1 The Microfinance Sector in South Africa

3.2.2 Village Banks in Practice: The South African Experience

3.2.3 Secondary Research and Empirical Findings

3.2.4 Findings specifically related to savings

3.3 Conclusion

Chapter 4 Research Design and Methodology

4.1 Ontology and Epistemology

4.2 Research Purpose and Questions

4.3 Research Design and Methodology

4.3.1 Qualitative Strand: Research Question One

4.3.2 Quantitative Strand: Research Question Two

4.3.3 Ethical Considerations

4.4 Pre-Field Preparations

4.4.1 Access and Funding

4.4.2 Selected Communities

4.5 Quantitative Data Collection: Challenges in Field

4.5.1 Sample Size and Sampling

4.5.2 Attrition

4.5.3 Splits and Changes in Household Status

4.5.4 Data Management

4.6 Conclusion

Chapter 5 How Village Banks Work: Qualitative Findings

5.1 Democracy, Ownership and Governance

5.2 Social and Economic Benefits

5 of 3145.3 Discussion

Chapter 6 Cause and Effect?: Quantitative Findings

6.1 Bhambanana in Detail

6.2 Household Characteristics and Livelihood Strategies

6.2.1 Household Composition and Demographic Characteristics

6.2.2 Living Standards

6.2.3 Food Security

6.2.4 Asset Ownership and Acquisition

6.2.5 Livelihood Strategies

6.3 Household Strategies for Coping with Shocks

6.4 Individual Banking, Savings and Credit Activities

6.4.1 Banking Practices

6.4.2 Borrowing

6.4.3 Lending

6.4.4 Savings

6.5 Poverty Score and Multivariate Analysis

6.5.1 Constructing the Indicator Score

6.5.2 Findings: Wave 1 Only

6.5.3 Findings: Combined Data Set (Wave 1 and 2)

6.5.4 Household Vulnerability

6.6 Conclusion

Chapter 7 Conclusion

7.1 Research Questions and Review

7.1.1 Key Literature Findings

7.1.2 Interpretation of Key Empirical Findings

7.2 Limitations of the Data and Study Design

7.3 Contributions and Policy Implications

Appendix One: Focus Group Interview Schedules

Appendix Two: Example of Fieldworker EA Map

Appendix Three: Household Scan Questionnaire

Appendix Four: Wave 1 Questionnaire

Appendix Five: Additional Tables

Appendix Six: Indicators in CGAP PAT


6 of 314 List of Figures Figure 1: Institution-Centred Microfinance

Figure 2: Client-Centred Microfinance

Figure 3: Map of the Republic of South Africa and its Provinces

Human Development Index Trends – 1980 - 2005

Figure 4:

Figure 5: Percentage of households with savings, insurance and debt

Figure 6: Percentage of households with savings, insurance and debt by Race

What ‘poor’ people are saving for

Figure 7:

Figure 8: Instruments Used to Save

Figure 9: Reasons for having, or would like to have, a bank account

Figure 10: Entrance to Bhambanana Village Bank

Figure 11: Mathabatha Village Bank

Figure 12: Motswedi Village Bank

Figure 13: Sakaletfu Village Bank

Figure 14: Enumeration areas surrounding Bhambanana

Figure 15: Location of Bhambanana in KwaZulu-Natal Province

Figure 16: Example of the Low-density Landscape

Figure 17: Distribution of Age by Sex and Wave

Figure 18: Distribution of Age by Sex in KwaZulu-Natal

Figure 19: Source of Drinking Water (W1)

Figure 20: Type of Toilet (W1)

Figure 21: Access to Telephony

Figure 22: Income Source from at Least one Household Member

Figure 23: Bank where account was held

Figure 24: Purpose of the loan

Figure 25: Type of savings

Figure 26: Cumulative Frequency Distribution by Banking Type (W1 only)

Figure 27: Cumulative Frequency of Poverty Scores by Wave

Figure 28: Cumulative Frequency of Poverty Scores by Wave & Banking Type

7 of 314 List of Tables Table 1: Gini coefficient by population group

Table 2: Poverty Rate and Poverty Gap (2002)

Table 3: International comparison of unemployment rates (%) 2000 - 2002

Table 4: Households with access to basic needs (%) by population group

Table 5: Retail outreach in the micro-lending market in South Africa

Table 6: Retail outreach in the micro-saving market in South Africa

Table 7: Basic information of pilot banks

Table 8: Marginal Propensity to Consume

Table 9: Median percent changes in Net Worth

Table 10: Probit Model of Savings

Table 11: Probit analysis of the probability of going hungry

Table 12: Basic Beliefs of Alternative Inquiry Paradigms

Table 13: Household attrition

Table 14: Split Households

Table 15: Transition Matrix

Table 16: Age and Sex of Deceased Household Members

Table 17: Vocational Status of Household Members

Table 18: Average number of days certain foods consumed

Table 19: Total mean value of assets and those purchased in last 12 months

Table 20: Most Common means for Purchasing Assets

Table 21: Total mean value of income by source

Table 22: Who to turn to in a Financial Crisis

Table 23: Shocks experienced by households in past 24 months

Table 24: Coping strategies for dealing with a negative shock

Table 25: Frequency of coping strategy for all shock types

Table 26: Source of assistance for coping with negative shocks

Table 27: Source of Loan

Table 28: Value of loan in Rands

Table 29: Monthly interest rate charged (%)

Table 30: Who the money/item was lent to

Table 31: Reasons for saving money

Table 32: Savings in Rands as a percentage of income

Table 33: Variables included in final Principle Components Analysis

Table 34: Selected Poverty Indicators by Banking Type (W1 only)

Table 35: Mean poverty score by Banking Type (W1 only)

Table 36: Poverty Line according to banking type

8 of 314 Table 37: Savings and Debt by Banking Type (W1 only)

Table 38: Linear regression of Poverty Score

Table 39: Mean Scores & Paired Samples T-Test of Poverty Score by Waves

Table 40: Mean Scores of Poverty Score by Banking Type

Table 41: Change in Poverty between Waves by Household Type

Table 42: Number and Nature of Shock by Banking Type (W1 Only)

Table 43: Use of Selected Coping Strategies by Banking Type (W1 Only)

Table 44: Strategies Adopted by Change in Poverty Status

–  –  –

Currency Values are first presented in South African Rands (ZAR) followed by their conversion to US Dollars. As the ZAR/USD exchange rate has been subject to significant fluctuation, calculations have been made based on the average for the relevant year.

Below is a list of the exchange rates used in the thesis.

One Dollar equivalent in South African Rand 1996 4.30 1999 6.11 2000 6.93 2001 8.60 2002 10.50 2003 7.54 2004 6.42

11 of 314 Acknowledgements Whilst the writing of a PhD thesis is a somewhat lonely experience, it is certainly not one that is done alone. Many people, mostly voluntarily, but some forced (!) have made significant contributions in assisting me in this long and arduous undertaking. For each and everyone I am most grateful. It would seem that undertaking a thesis on a part-time basis possibly requires double the amount of assistance.

Firstly, the respondents who willingly gave me their time, and their stories – the Village Bank members of Mathabatha, Sakaletfu, Motswedi and Bhambanana, and to the wider community of Bhambanana who agreed to be interviewed, not once, but twice! I hope this work does some justice to exposing how poverty is lived for them on a daily basis, and how the Village Bank has helped them, even if just a little.

I am extremely indebted to the institutions that put their faith in me enough to fund this research. The Centre for Civil Society at the University of KZN, who funded the qualitative research; FinMark Trust who funded the first wave of quantitative data collection; the Poverty Node Research Grant of the University of Cape Town, who funded the second wave; and lastly, the Ernest Oppenheimer Memorial Trust, who part funded a year of university fees.

For his very gracious and patient supervision, and for never once complaining about our ‘long term’ relationship, I am most thankful to Gareth Jones. His feedback, whilst not always received willingly, always proved to be insightful. Thank you for beating this thesis into a respectable state and making it possible for me to accomplish what otherwise seemed mostly unachievable.

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