We have argued earlier that the risk of microfinance institutions can be divided into two sources, viz., systemic risk (the risk that the system transfers to the institution) and organisation specific risk (the risk originating from the clients or from inside the organisation). These risks are presented and assessed in the next tables. At this moment we are not quantifying the risks in detail. We have argued in section 4.7 how these risks can be quantified. In this table we wilt attach a value to each risk (in generic form).

Table 21: Risk estimate based on systemic risk

The estimated cost is provided as a range covering the different types of microfinance institutions, ranging from cash lenders, micro enterprise lenders to term lenders. We have estimated that newly 7 per cent of government employees on the PERSAL system are vulnerable in terms of over-indebtedness. We have provided several salary slips (see Annex 7) which indicate the severity of this debt trap of certain employees. This translates into nearly a one billion Rand potential loss (if we assume that provident funds or other collateral does not cover these diet) that wilt impact on the term-lenders specifically.

Table 22: Risk estimate based on organisational risk originating from outside the firm

Most clients in the microfinance market have scarce collateral. Until recently this was a severe problem as most financiers based their collateral estimates on conventional concepts of collateral, for example, fixed property. Innovative thinking in the microfinance sector led to the use of repayment ability, with assets like provident and pension funds serving as collateral. There are however still risks pertaining to collateral. Losing your job implies a severe impact on your repayment ability. Also, you put future consumption at risk when you use your provident fund to guarantee consumption loans (as example as this should not happen in the sector).

Policy and legislation risk refers to the changes to the sector that changes in legislation can initiate. A very good example is the growth of this industry based on the lifting of the Usury Act floor from zero to R6,000.

Table 23: Risk estimate based on organisational risk originating from inside the firm

What about the risks the clients engage in when signing a loan contract?

Table 24: Risk estimate of clients entering into loans

It will be incomplete if we do not provide an indication of the risk of the microfinance sector for the broader financial sector. In the next table this is presented.

Table 25: Risk estimate of the possible risks of the microfinance sector impacting on the broad financial sector