Loans need a rethink to ensure inclusion | By Kevin Rodrigues and Co-Pierre Georg | Allan Gray Orbis Foundation
Loans need a rethink to ensure inclusion | By Kevin Rodrigues and Co-Pierre Georg

Loans need a rethink to ensure inclusion | By Kevin Rodrigues and Co-Pierre Georg

Borrowing sorrow: SA has a poor savings culture, with only 33% of adults having any form of money stashed away. Statistics show that hire-purchase, credit-card and store-card debt are the biggest culprits when it comes to lower-income earners becoming debt-stressed. Picture: DAILY DISPATCH
Borrowing sorrow: SA has a poor savings culture, with only 33% of adults having any form of money stashed away. Statistics show that hire-purchase, credit-card and store-card debt are the biggest culprits when it comes to lower-income earners becoming debt-stressed. Picture: DAILY DISPATCH

High-profile development organisations around the world such as the Bill and Melinda Gates Foundation are recognising the transformative power financial inclusion can have on the lives of people at the base of the pyramid.

These organisations are investing heavily in developing insights through organisations that promote effective policy, such as the Consultative Group to Assist the Poor. Regulation that promotes financial inclusion can benefit greatly from the latest findings and other case studies globally.

According to the latest Finscope survey on financial inclusion, only 33% of South African adults have any form of savings, either at home or with formal or informal institutions. This is far below the next lowest Southern African Development Community member state, Malawi, which has a consumer savings rate of 43%. There is much work to be done to promote saving in SA, especially for those at the base of the pyramid.

For those in this band, the ideal savings product should be easily and affordably accessible, transparent, easily understood and incorporate commitment devices, such as peer pressure. It should also not require restrictive documentation.

SA’s Financial Intelligence Centre Act (Fica), especially its documentation requirements, limits the ability of formal providers to serve these people through market viable products.

Fica’s exemption 17 contains a provision for banking institutions to require only an identity document to open accounts with a balance limit of R25,000, among other limitations.

This exemption should be expanded to include investment institutions, for example unit trust managers, to open the investment market to people who cannot produce a proof of residence and for whom it would be too expensive to procure a proof of residence.

This would make this market more attractive to investment service providers who could then begin to optimise their products for the poor.

The savings culture has adverse, long-term implications for the population. National Treasury estimates that only 6% of South Africans will be able to maintain their standard of living at retirement.

This is likely to exacerbate the savings predicament as younger generations will need to support older generations as they reach retirement age.

Access to retirement funds in SA tips above 10% only in the upper-income quartile. This is largely due to the scale challenges small, medium and micro enterprise (SMME) employers face with providing access to such benefits for employees.

The government should attempt to replicate the success of the UK’s mandatory auto-enrolment retirement fund, the National Employment Savings Trust. It provides an affordable national retirement fund option to which all SMMEs must subscribe their employees if they do not already have an alternative.

This retirement plan would have an option for employees to opt out of the service. Default provisions like this have been shown by Richard H Thaler, professor of behavioural science and economics at the University of Chicago, to promote positive savings behaviour.

This system provides latitude to employees to refuse the benefit should they be unable to afford the contribution.

A compulsory state pension fund has been a priority for SA’s Treasury for several years and is under discussion with key stakeholders, having been tabled at the National Economic and Development Labour Council in November 2016.

Despite the slow improvement in the South African savings landscape, access to consumer credit has grown rapidly, driven by microfinance institutions, salary-based lenders and alternative banks.

These lenders provide credit to consumers at exorbitant premiums and are highly successful. In contrast, and despite notable successes and progress, government development finance initiatives such as the Industrial Development Corporation struggle to reach scale and have high surplus balances.

The government could consider the example set by the Thailand Village Funds initiative, which deployed R400,000 per community to settlements across the country. This was used for loan funds administered by community leaders who have flexibility to set interest rates and repayment terms. This initiative has proven effective in Thailand, with 70% of participants reporting improved quality of life and 92.6% of participants repaying in full and on time in 2010.

The Centre for Financial Regulation and Inclusion’s research has found that community-run finance initiatives prove more effective than external initiatives as there is less information asymmetry between community members and better tailoring of loan terms.

Much can be done to alter the microfinance landscape in SA to promote responsible lending.

Aside from the progress of the National Credit Act and interest regulations, South African regulators should consider the example of Bharat Financial Inclusion, an Indian microfinance corporation, when regulating the way these institutions incentivise employees.

Dedicated to responsible lending, Bharat tries to ensure the incentives of the poor and their loan officers are aligned by not basing their loan officers’ salaries on their loan portfolios.

Mashonisas — or credit providers — tend to get a lot of negative attention for their lending practices and interest charges. However, when performing a quantitative analysis using data from the National Income Dynamic Study, we find evidence that mashonisas may not be the worst source of debt for poor South Africans.

We ran a statistical model to investigate what predicts whether people with a median income below R3,897 per month and some debt become debt-stressed.

We found that having hire-purchase debt, store-card debt or credit-card debt makes people at least twice as likely to be overindebted than having a loan from a mashonisa.

Given that these more adverse sources are formal and thus easier to regulate, the regulatory focus should be on promoting more responsible lending in these areas.

Aside from these regulatory measures, the value of enhancing consumer financial education cannot be discounted. The underprivileged should be able to fully understand the implications of their financial position and decisions and how best to manage their financial lives. Despite significant progress having been made through regulation requiring financial institutions to put in place consumer education programmes, challenges remain.

The most notable challenge is the language barrier and skills concentrated with English speakers. To counter this, the government should consider making it a graduation requirement for finance students to engage in community financial education and provide these students with translation resources where required.

The regulatory landscape can benefit greatly from implementing many of the recent insights developed through extensive investment in financial inclusion research.

Much research still needs to be done on how these insights can be implemented in a South African context, especially with new data available on platforms such as Insights2Impact.

We look forward to the significant improvements in South African financial inclusion and on the lives of the poor that will come from these findings and the implementation of pro-active regulation.

• Georg is a senior lecturer at the African Institute of Financial Markets and Risk Management and Rodrigues is a management consultant and has a masters of commerce in risk management of the financial markets

Source: Business Day


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