SA Taxi provides loans to taxi drivers in South Africa who cannot otherwise get access to finance. While this has provided jobs and more reliable and sustainable transport for thousands who rely on taxi minibuses for work or school, the interest rates being charged have raised concerns over drivers’ capacity to repay the debt
Moses Ratsoeu spends fourteen hours a day behind the wheel of a taxi he is determined to own. Every new fare shaves a sliver off what he owes.
A 56 year-old South African father of three from Randfontein, just west of Johannesburg, Ratsoeu has driven minibus taxis for 30 years ever since the Transport Deregulation Act legalised their services. It has taken him the full length of his career to turn driving into a business. He now owns two cars: a Chinese Inyathi minibus and a much newer 16-seater diesel Toyota Quantum. To pay off this latest investment–435,000 rand or US$32,725 –Ratsoeu works 70 hours a week, though he suspects breaking even will take him at least another three years.
“There is no other option, no alternative employment through the corporate world or through the government,” he says, four hours into a shift that began at 4:30am.
Ratsoeu brings home up to 4000 rand (US$300) a month before taxes and repayments, which leaves him with around 800 rand. He picks his own hours, knowing that the more passengers he takes on, the more he earns, the closer he gets to settling his debt. Paying off the Toyota also builds his credit score, which he needs to access funding from a commercial bank. To lenders, he is too high a risk, which is why Ratsoeu turned to SA Taxi, a South African micro lender that has put thousands of entrepreneurs like him on the road.
Mitigating the risks
SA Taxi finances, sells and insures minibuses to taxi drivers whose limited credit histories hinder them from gaining the support of traditional institutions. Established in 1998, the company was sold by African Bank in 2006 to Transaction Capital Group with a portfolio of US$225,000, which has since grown to around US$600 million (8 billion rand). It currently accounts for a third of the finance market for South African taxi vehicles.
SA Taxi’s vertically integrated business model allows it to operate all three of its services in-house, reducing its risk as a lender. It independently repairs repossessed vehicles in order to sell road-worthy assets that typically make a loss at auction for banks. In a market where insurance firms routinely reject claims for financial gain, SA Taxi also makes a point of not repudiating fresh cases. The company instead maintains a fully insured portfolio by paying the client’s insurance premiums in advance each month to its insurance arm.
The impact goal of SA Taxi is to increase financial inclusion for its clients, 90 percent of whom struggle to access funding while adding huge momentum to the social and economic development of the country. More than 69 percent of households in South Africa rely on minibuses for transport, including most black South Africans, who make up more than 80 percent of the population. SA Taxi drivers, meanwhile, account for 15 million journeys taken throughout the country each day.
In 2009, the company began seeking funding from development finance institutions, having drawn on local investors for many years. This year, The Overseas Private Investment Corporation (OPIC) and other US- based impact investors came forward to support SA Taxi’s sustainable impact objective. The result was a US$227 million financing deal split between OPIC and US impact investment firms MicroVest and the Calvert Foundation, along with London-based advisory service provider Lion’s Head and one anonymous US family firm.
Maria Goravanchi, director of structured finance insurance at OPIC and chief underwriter on the deal, says OPIC’s decision to invest US$3 for every US$1 invested by the other parties was based on SA Taxi’s track-record for creating jobs while banking an underserved segment of the market. More broadly, it was about supporting a private sector firm that could interact with taxi associations such as the South African National Taxi Council (SANTACO) to transform an industry still troubled by South Africa’s apartheid history.
“South Africa I think sometimes gets forgotten because it’s seen to be a high-income country compared to its sub-Saharan African neighbours,” says Goravanchi.
Goravanchi says she had travelled to several developing countries before visiting South Africa but was struck by the lasting impact of the apartheid era while conducting due diligence on the ground. Through the experience, she confronted the reality of poor black communities still trapped in the informal economy.
By the time she underwrote the deal, the results of SA Taxi’s vertically integrated model strengthened its claim to having banked many of the country’s poorest.
“SA Taxi has really studied the market and has spoken and continued to speak on a very frequent basis to its core client base to understand what is plaguing the industry to tweak the value chain to reduce the cost to the borrower, but also to increase reliability and safety of the transport sector,” she says.
Catherine Godschaulk, Calvert Foundation’s vice president and investments team manager, says SA Taxi was the firm’s first international commitment to sustainable mobility. She adds that the financing was completed using private debt.
“The fact that [SA Taxi’s] focus is working with minibus taxi drivers we think is a really interesting intersection with the opportunity to support transportation infrastructure in South Africa that we think is more environmentally sustainable than the alternatives,” she says.
James Doree, managing director at Lion’s Head, says impact investors were drawn to SA Taxi based on similar cases in which consumer credit providers in South Africa had targeted the underserved. The investment also ticked subtle boxes related to environmental and social guidelines (ESGs).
“Most formally employed workers in South Africa rely on public transport taxis to get to work. SA Taxi is helping to remove older vehicles from circulation, improving road safety and reducing emissions,” he says.
A delicate balance
But as with some other microfinance businesses reaching out to the most underserved people at the bottom of the pyramid, SA Taxi has drawn criticism for the interest rates it charges drivers.
On 15 June 2017, major roads leading out of Midrand, an area in which SA Taxi bases its headquarters, were strategically blocked by rows of white minibuses. SANTACO had posted an online message warning residents of industrial action and recommending alternative modes of transport. Would-be passengers included nurses, teachers and cleaners. The engine of the nation had ground to a halt.
Thousands took to Twitter in the heat of the moment. Some condemned the drivers for holding the country to ransom. Others made attempts to initiate constructive debate. More still satirised the predictability of the chaos. Yet to all, the cause was clear. The loans for the Toyota Quantum minibuses sold to SA Taxi clients had an interest rate of 28 percent, making repayment virtually impossible according to drivers. They were striking to have rates slashed, and in the hours that followed, stakeholders including SA Taxi, motor dealers, spare part dealers, tracker systems, tyre outlets, and even the state treasury, sat down to negotiate a deal. When drivers learned of an offer that would cut the rate to 25 percent, the action was called off without resolution.
Ralph Jones, chairman of SANTACO, said the three percent deduction did not make sense for drivers who had been forced to take out unaffordable loans in the absence of an alternative.
“If there is a reduction, it should be along the lines of 17 percent. Then, if maybe you perceive there being high risk, what is wrong with them saying ‘OK, let’s look at 20 percent’? This would make a lot of sense and take a lot of pressure from people,” he said.
“The banks have always perceived us to be high risk. Whoever came with the concept of SA Taxi Finance looked at how can they assist people, but now, instead of helping people they made people more and more poor.”
Mark Herskovits, executive director at Transaction Capital and Capital Markets, SA Taxi’s finance arm, says the company only prices according to its risk. SA Taxi holds to the standards of the National Credit Act, he adds, which restricts it from charging more than 34 percent on loans.
“We certainly don’t make any kind of super-normal profits in our business. We make a very moderate return, given the risks that we take on,” Herskovits says.
“To run a successful financing business, we need to charge a risk based rate that makes sense commercially, otherwise we wouldn’t be able to service the needs of a high risk segment of the market that is underserved and does not typically have access to finance.”
Ratsoeu says he left the strike that day tired and disappointed.
“Presently, I don’t know whether our leaders are still negotiating, but I’m not yet confident about the negotiations,” he says.
“The bottom line is their interest rates. Standard banks charge 11 to 12.2, 12.5 percent, but they will not lend to us.”
OPIC claims 226 drivers were at the strike on 15 June, a proportion less than 1 percent of SA Taxi’s 27,000-strong client base. Jones says the total number came closer to 5,000.
Taxi strikes occur frequently in South Africa, though further industrial action was suspended on 6 July, pending talks involving SANTACO and the country’s transport minister. While these events give the public cause to dismiss state bureaucracy, they also lend perspective to what Goravanchi calls “the transformational nature of the industry”. “Given the history of the industry, [strikes] are not something that are new but happen periodically. This is a sector which is still transforming,” Goravanchi adds.
A tour round history
A brief look at the history of South Africa’s taxi industry challenges basic concepts associated with urban mobility. According to Goravanchi, the word ‘taxi’ could be considered a misnomer in relation to the country’s transport system. Minibuses are box-shaped people carriers unlike the high-end cars driven for Uber, a rival many drivers in South Africa accuse of bringing unfair competition to the industry.
The minibus taxi first emerged during the apartheid era when dislocation laws pushed black communities to the outskirts of every commercial hub in the country. They have fuelled violence between gangs, workers’ unions and political parties, leading to the deaths of nearly 2000 people between 1991 and 1999, according to an IRR think-tank study. Their reason for existing, however, remains their necessity among South Africa’s black working poor. Without them, Ratsoeu’s children would have had to walk 11 miles to school each day from an early age.
SA Taxi has agreed to cap its interest rates at 26 percent, though Herskovits says this means its portfolio will not be able to accommodate certain clients. He says turning clients away undermines SA Taxi’s mandate to be “as inclusive as possible in bringing people into the financial net”.
Jones says he hopes future industrial action will lead to conditions in which drivers are financially included without becoming mired in long-term debt.
“Everything when it starts as a concept is good but as soon as people get into a comfort zone, they forget why it was established. For us, SA Taxi was established to assist, but it has since made people rich, and has since made more people poorer, so it has lost its meaning as far as I’m concerned.”
To many of its clients, SA Taxi presents a case of Hobson’s choice where the individual is free to choose between one option and no option. As Ratsoeu explains: “SA Taxi for me wasn’t a choice. It was due to the credit ratings that were applicable.”
Yet, if one option really is better than no option, SA Taxi is an impact investment almost by definition.
The company’s high-performing loan ratio, together with its aim of turning more than one hundred thousand faulty vehicles into clean, safe passenger carriers, adds kudos to its premise.
In 2017, the company was entered as a finalist for the Union Internationale des Transports Publics’ (UITP) smart financing and business award. Its nomination stemmed from having created 42,000 black-owned enterprises, while saving South Africa’s department of transport crucial funding for infrastructure.
Ratsoeu says he and his wife Eva, a pre-school teacher, will one day have saved enough money to put down a deposit with a bank that recognises his credit score. He plans to continue driving, only this time as a completely self-sustained businessman. If the plan succeeds, SA Taxi might just be the best business decision Ratsoeu ever made.