Earning a healthy and sustainable income is not enough
COMMENT
Mohale Ralebitso
As if we needed a reminder of money's role in social development, even a glance at recent headlines is a jolting reminder of how money shapes destiny. In the Western Cape and Mpumalanga, for example, loan sharks lurk around pension pay points, ready to lay claim to the grant recipients' cash.
It is hard to imagine a more cold-hearted practice than preying on the elderly, the destitute and women receiving child grants of a few rand, while knowing that these people will go hungry for most of the month. In addition, the role of mashonisas in the tensions that led to the events at Marikana has been well-documented too.
Comprehensive legislation has tried to outlaw such practices, but unscrupulous predators will continue to fleece others until sound financial habits are entrenched and passed on from generation to generation, and poverty is eradicated.
Real economic growth would ease the desperation of our people, but earning a healthy and sustainable income alone is not enough.
Even high income earners fall into debt traps. Interventions that help all South Africans overcome financial vulnerability are needed.
Financial education is crucial. It is the key to all having access to financial services and being able to enter an upward spiral of wealth creation and financial security. Here are a few points to consider:
We should treat financial education as a national priority as we tackle the wider systemic education challenges. Without financial education, families will not have the capacity to engage the much sought financial inclusion that enables them to save for their children's education or their own retirement, to borrow start-up capital for small, medium and micro enterprises (SMMEs) and all that we need to fire up the economy. The knock-on effects of that on economic growth are clear, as more than 75% of new jobs worldwide are in the SMME sector.
No barriers or loopholes
Financial inclusion must be accompanied by responsible borrowing and lending. Codes of conduct must surely be considered, rigorously applied and energetically enforced. Sadly, an unintended consequence of such frameworks has been to deter some borrowers from approaching the formal financial services sector and to instead use micro-lenders whose combined charges (interest rates and other often hidden charges) that are — let's be honest — indefensible.
The latest Finscope survey for instance found that many people prefer borrowing from mashonisas because they are spared the nuisance of filling in the reams of paperwork that formal financial service providers require.
There is tragic irony here: the formal sector's efforts to be ethical inadvertently drive consumers into the clutches of loan-sharks whose seeming convenience shows its ugly truth all too soon.
Finscope also found that nearly 80% of people prefer to not borrow money. That is natural: nobody wants to have to beg. Yet loan-sharks flourish, in part because many consumers face the most desperate of circumstances, having to borrow to pay for basic supplies with much of their income consumed by the growing costs of servicing debt.
The consequences are longlasting, can be felt for years and can affect successive generations, putting families that could have escaped poverty back into a cycle of generational debt.
Teach the "rich" too
Financial education is not just about the poor. We must not think that once consumers earn reasonable incomes and have bank accounts, they no longer need education.
The amount of people who make a decent living but are shackled by bad debt, blacklistings, garnishee orders and repossessions should disabuse us of that notion.
It is tragic that we have citizens who have overcome massive obstacles (grinding poverty and lack of access to decent education, for instance), have built a career and have then been snared by debt with further financial insecurity in retirement a virtual certainty.
A number of consumer studies, among them the Old Mutual Savings and Investment Monitor and Retirement Monitor, have revealed that some people resign from well-paid jobs so they can cash in their pensions to pay the short-term debt (credit cards, multiple loans or in some cases even loan sharks) that they can no longer afford to service with their incomes.
The immediate consequences are a disruption of their careers and a hobbling of economic growth as financial stress negatively impacts employee productivity and wellness.
The long-term effect is that people outlive their money, retire destitute, or cannot afford to retire at all and ultimately become a strain on the next generation and or the state.
Feasibility, a research company, found that most debt — about R600-billion — is owed by middle-income South Africans earning between R8 233 and R22 779 a month.
Only about 40% (if that) is made up of housing loans. That means the debt is not necessarily associated with a growing or income-generating asset.
It is important to also focus on including the rural poor in financial systems. Economists who commented on Census 2011 suggested that urbanisation and income gaps found in the study could lead to the government's spending being focused on provinces with the most population growth and economic activity.
While this is justified to some extent, it could result in a widening gap between the rural poor and their urban counterparts.
Financial inclusion should by definition include the rural poor, hard as it may be to reach them. This is one reason why the Masisizane enterprise development fund, an Old Mutual initiative, focuses on women, young people and the disabled in rural and peri-urban areas.
They have the greatest need, but also the potential to deliver economic inclusion if properly resourced and once viable, integrated into the economic mainstream and supply chain networks to foster further growth and with that, employment growth in rural and peri-urban communities.
A final point is the need for collective and comprehensive action on financial inclusion.
A cautionary tale can be drawn from India, whose Reserve Bank set up the Khan Commission to investigate financial inclusions in 2004. An aggressive campaign enabled a number of provinces to declare 100% financial inclusion, and with that, more than 600-million people did open bank accounts for the first time.
But it also led to a proliferation of microcredit agencies and — allegedly — extortion that drove hundreds to suicide. According to Danielle Sabai of International Viewpoint, more than 200 people in the province of Andhra Pradesh alone are said to have killed themselves because they could no longer meet microcredit repayments.
Such tragedy can be averted here: the government clearly sees its obligations and the opportunities of working with a well-regulated and resourced financial services sector and can help ordinary people, even those with what they might consider to be modest resources to do great things.
We are fortunate to daily meet some of these extraordinary people who, no matter their income status, choose to make the most of what they have and use the education available to make effective use of financial services.
Mohale Ralebitso is the director for marketing, communication and corporate affairs at Old Mutual.