A formal sector bank is considering entering the high risk, small loans market.
The microfinance industry, which predominantly operates outside the formal banking sector, is showing phenomenal growth that formal sector banks are starting to eye.
A relatively small, Cape Town-based, niche market bank, CashBank, has already been operating on the periphery of the micro loan sector making small home loans.
It's research and development section called the Group Credit Company (GCC), has been testing the micro loan market and believes that the risk can be managed.
Christine Glover, Cashbank managing director, says a range of high risk loans for people not employed in the formal sector are being tested..
Glover says these loans mostly under R1 000 are not fully secured and they have been offered for some time.
An assessment will take place in about a year's time to establish how sustainable, profitable and commercially viable they are.
She says the loans might have to be offered by a separate division of CashBank because they will have to be managed on a different basis.
Glover points out that small loans for the high risk market are generally difficult to administer, are labour intensive, costly and have higher risk profiles.
CashBank is nevertheless serious about entering this "underbanked" market.
Glover says research by an Indonesian bank involved in this kind of lending showed the only way to effectively manage these loans was to structure them entirely differently and charge flat interest rates as opposed to interest rates on a reducing balance.
"These are products that operate high arrears, but there are much lower long-term default rates.
"So you charge a huge upfront interest rate but you pay back for good performance on all loans, regardless of the terms."
In the case of GCC, 25 percent interest is returned for good performance.
But Glover says initial interest charges vary from 40 percent to 100 percent a year.
These products have been on the market for three years and need another year of testing before CashBank will consider taking them over, Glover says.
The bank focuses primarily on small housing loans that are secured by provident and pension funds.
The sizes of these loans vary according to region and are directly related to income.
The average size loan in the Johannesburg area is about R9 000 whereas in Cape Town average housing loans are about R6 500.