Money made the world go round, but credit appears to have taken on this role after consumers have spent all their money. However, you can also run out of credit.
A study showed that debt levels among SA consumers are rising again, having declined slightly during the months when the government closed stores for weeks on end in 2020 in an effort to stop the spread of Covid-19.
The Genesis Analytics study, in collaboration with the Financial Sector Conduct Authority (FSCA), concludes that over-indebtedness remains a challenge in SA. It found that more than 50% of South Africa’s active credit consumers can be considered to have too much debt, which has led to bad credit records for 48% of all borrowers.
It’s hard to believe that nearly half of the 27 million adults who use credit find it difficult to keep up with debt repayments.
“Over-indebtedness is linked to national economic conditions and is exacerbated by the Covid-19 pandemic. Slow economic growth and high unemployment, coupled with rising prices for food, gasoline and other basic necessities, have had a significant impact on South Africans’ credit needs and their ability to repay debt, “say the authors of the report, concluding that 95% of low-income people used debt to pay for basic needs such as food, clothing, transportation and other bills.
Genesis Analytics found that most credit-active consumers spend borrowed money to finance their needs. About 43% of the population surveyed borrowed money to buy food and 11% used debt to buy clothes.
As expected, this trend is dominant among low-income people (earning less than R1 500 per month), grant recipients (earning around R1 500 per month) and people with informal jobs (earning more than R1 500, but less than R3 000), “says the FSCA report.
“Borrowers in the high-income group acquire credit to finance the acquisition of assets such as motor vehicles or to build, purchase or renovate a home; while only 5% of low-income people could invest in the same way.
“The fact that credit is used to cover basic consumer spending or to deal with financial shocks is indicative of the high levels of over-indebtedness of the lower income segments and the low levels of financial resilience.”
It seems uncertain and any financial crisis serves to reinforce responsible behavior among consumers, but it only lasts a while and low-income families are always stressed. Household debt to disposable income declined after the 2008 financial crisis and reached a low in 2017, but started rising again between 2017 and 2020.
In 2008, debt on disposable income was 86%. Thereafter, it steadily increased to around 77% in 2020, but decreased slightly in 2021.
It is now rising again as consumers begin spending the reserves they may have accumulated during months of enforced austerity and their need to avert new hardships.
Banks against loan sharks
While the FSCA notes that SA’s credit market is highly developed, well regulated and that the formal banking sector provides credit to nearly half of the population, and other parts of the report point out that SA has enough capital available for investment to meet the capital requirements, many people rely on “informal” credit providers.
“The consumer credit market in South Africa is highly regulated, according to the World Bank, and complies with several good practices for consumer financial protection,” notes the FSCA.
It says the credit market is large, well developed and formally provides credit to over 27 million people, or 67% of the adult population. The number of people with active credit accounts peaked in 2020, as the heightened financial distress due to the Covid-19 pandemic prompted a growing number of consumers to acquire credit.
The number of active credit consumers went from 17.12 million in 2017 to a peak of 27.4 million in 2020.
There are 7,837 credit providers registered with the National Credit Regulator (NCR), ranging from banking institutions to non-bank lenders such as microfinance institutions, vehicle lenders, and retailers offering store credit.
An analysis of the value of consumer credit shows that credit extension increased by 4% annually between 2015 and 2020. In 2020, mortgages and secured credit accounted for 41% and 31% of the total value, respectively of the loan, while the unsecured credit accounted for 15% of the loan values.
“However, when measured by number of loan agreements, credit lines and short-term loans represent 55% and 21% of the market [respectively]”, The report states, indicating that consumers representing a large segment of the population take out small, short-term loans.
Therefore, people borrow out of desperation rather than to buy long-term assets.
Banks are the largest credit providers, by value. Banks provided over 80% of R2 trillion worth of consumer debt in 2020, but only 44% of the number of loan accounts.
Resellers account for the second largest share of loans, providing 38% of credit by number of accounts.
However, the report notes that more than half of all loan applications in the formal sector are turned down, “prompting more people to seek informal credit.”
Risky, but necessary?
The informal credit market remains endemic in SA and poses a significant challenge to the sustainable and responsible use of credit, warns the FSCA.
“Based on the amendments to the National Credit Act (NCA) in 2016, all credit agreements, regardless of amount, are considered illegal if the provider is not registered with the NCR,” says Genesis Analytics.
“Historically, South Africans have used informal means to acquire credit. For many decades, black South Africans have been unable to formally access credit. As a result, informal credit and loan patterns have emerged to satisfy a deep need.
“Unregistered lenders have long been in South Africa and are seen as socially integrated into low-income communities.”
In 2019, 28% of people surveyed formally acquired credit from a banking institution and only 2% from a microfinance institution, while 28% of people borrowed from friends and family. About 16% have borrowed from stokvel (community-based savings and credit groups) and usurers (known as mashonisas).
“While popular in low-income communities, the use of informal lenders exposes consumers to various risks, including high interest rates and dubious collection methods,” the FSCA says.
“Being located within communities, informal lenders can be visited after business hours and are easily accessible. Informal lenders offer a relatively easy-to-understand repayment formula, expressed as a total repayable amount rather than an interest rate. For example, borrow R1 000 and pay back R1 300 at the end of the month.
“Because both borrowers and lenders are integrated within the community, this brings elements of trust and reputation (of both borrowers and lenders) that may not be replicable by formal financial institutions,” says the FSCA.
“However, consumers have no legal or regulatory recourse when borrowing from informal lenders. Mashonisa typically have short payback periods, high interest rates (between 30% and 50% per month) and often questionable collection methods.
“There have been reports of borrowers’ identity documents (IDs) being retained, their bank card pins taken and direct collection of grant payments, as well as the threat of violence in the face of non-payment,” according to research.
In essence, this describes a vicious cycle of debt.
The high number of people facing over-indebtedness is worrying, the FSCA says, particularly because of the social risk that arises when consumers are debt-ridden forever, resulting in disproportionate social and personal harm.
“For the FSCA, finding solutions to consumer over-indebtedness is essential and an important intervention is education on relief measures. The FSCA, in partnership with the NCR and other regulatory bodies, has been proactive in educating consumers on debt relief measures put in place to relieve consumers of chronic over-indebtedness, “the report said.
By Adrian Kruger
This article first appeared on Moneyweb and has been republished with permission. Read the original article here.