/ 28 September 2012

Caught in the unsecured credit trap

Treasury deputy Ismail Momoniat at the Global Policy Forum.
Treasury deputy Ismail Momoniat at the Global Policy Forum.

The pressure that unsecured lending puts on already indebted South Africans needs to be better understood, particularly in the wake of events such as the Marikana tragedy, according to experts.

Levels of unsecured credit have to be examined in the context of the broader socioeconomic pressures on individuals, Kim Dancey, the head of policy, regulation and consumer empowerment at FinMark Trust, said this week.

It is important to understand the impact that rising levels of unsecured credit – and subsequent indebtedness – have in areas such as Marikana, where people are also dealing with the rising costs of transport, electricity and food, she said.

"The broader socioeconomic impacts that go with unsecured credit place pressure on employees to get more money to make repayments."  

Although she said the health of the banking sector is not at risk, with 9% of the total loan book attributable to unsecured credit, "there is a broader picture that needs to be examined".

Dancey was speaking ahead of the 2012 Global Policy Forum, held by the national treasury and the Alliance for Financial Inclusion in Cape Town this week.

Ismail Momoniat, the treasury's deputy director general, echoed Dancey's sentiments, saying that the country was working towards "a twin peaks model" of financial regulation.

Macro-prudential governance
Under this model, the state regulates the financial services sector through two "peaks" – the first of which relates to macro-prudential governance, or the safety of the banking system, and the second to market conduct.

From a bank safety point of view, levels of unsecured credit are not a problem, although they have to be monitored, said Momoniat. "But from a market conduct perspective … when people are becoming so overleveraged and they are spending on conspicuous consumption or current needs rather than investment, it clearly would become a problem."

However, the problem is complex and needs to be better understood, he said. In particular, it is unclear why many working South Africans, including public servants and miners, are accumulating such high levels of debt. "But whatever the complexity, what is clear is that those levels are not sustainable," said Momoniat.

Banks are not the only operators in this sector, which includes retailers, microlenders and other small players, Momoniat pointed out.

The National Credit Act was created to curb reckless lending, and he questioned whether a review of current standards should not be conducted.

South Africa also faces the problem of a low savings rate, with many people unable to accumulate either short- or long-term savings, given their irregular or volatile income streams. Dancey pointed out that in South Africa it is not attractive to save, particularly with banks, where "returns are fairly dismal".

Around 66% of South Africans do not save any money, according to the FinScope 2011 South Africa survey, which measures access to, and the use of, financial services. It found that a mere 11% of South Africans save with banks, 13% save through the formal non-banking sector, 4% save informally through entities such as stokvels and 6% save at home.

FinScope defines financial access under four areas – namely banked, formal non-banked, informal and excluded. "Banked" refers to people who use account-based services, "formal non-banked" includes any regulated insurance or savings product, and "informal" includes a range of unregulated products from neighbourhood stokvels, funeral schemes and more sophisticated credit and savings groups. The "excluded" category refers to those who rely on friends and family to access finances and borrow money.  

The study attributed the low savings rates to a lack of funds, but also to low levels of financial literacy.

Despite this, many poor and rural South Africans are making efforts to save through microsavings facilities, according to Dancey.

She pointed to sophisticated savings and credit groups such as SaveAct, which operates in KwaZulu-Natal. It has grown to include 15 000 members in 650 groups, according to a report released in May.

The group also has a savings book of R15million and a loan book of R10million. It allows members to borrow up to three times the amount they have saved with it, and gives members a 30% average return on savings a year.

This trend is augmented by other elements of financial inclusion such as insurance. Many low-income earners save through micro-insurance products such as burial schemes, Dancey said.

Momoniat said that when it comes to long-term savings, the local industry is characterised "by opaqueness and very high costs, and frankly destroys any incentive to save".

Innovative products
There are additional complexities, he said, such as the problem of preservation when it came to saving for retirement. Many people, for instance, spend these savings when they lose or change their jobs rather than preserving the funds.

There are still too few innovative products that are appropriate and affordable, particularly for low-income earners, Momoniat said.

The FinScope survey revealed that in 2011 only 29% of South Africans saved for their retirement, with 11% saving through a pension fund, 9% through a provident fund and 9% through a retirement annuity.

The Association for Savings and Investment South Africa (Asisa) has been examining a Kenyan savings model called the Mbao Pension Fund, which allows people with low or erratic earnings to save money using their mobile phones.

Working alongside local trade union federations, Asisa is looking at this modal as a potential savings solution for low-income workers and people in the informal sector.

Around 14.5million people have no long-term savings coverage in South Africa, according to Stephen Smith, senior policy adviser at Asisa.

Huge development
The potential for mobile money – essentially, financial services by  cellphone – is a "huge development" towards financial inclusion, said Smith. Although this model had initially been a mechanism to send money across long distances, it was morphing into a product for transforming the value of money over time, he said. In Kenya, mobile money now contributes 30% of the country's gross domestic product.

Asisa has set up a multiconstituency steering committee and formal work on the project began in April. Workshops with potential members have also started.

Despite the hurdles there are indications that financial inclusion, particularly in accessing services, has improved in recent years. Around 68% of South Africans now have access to formal financial services, according to Lungisa Fuzile, director general in the treasury. This is up from the 2011 figure of 63% recorded in the FinScope survey.

Initiatives such as the low-cost Mzansi accounts have contributed to improved access in recent years, with between six and eight million accounts in existence, said Dancey.

The use of these accounts, however, remains a challenge, she said, with many account-holders still withdrawing all their cash at once and "putting it under the mattress".

Again, this comes down to financial literacy, said Dancey. Cash is still king for many, and there is a great deal of pride associated with it.