Money used to make the world go ’round, but it seems credit took over this role after consumers spent all their own money. However, one can run out of credit too.
A study has shown that debt levels among SA consumers are rising again, after declining slightly during the months government closed shops for weeks on end in 2020 in a bid to stop the spread of Covid-19.
The study by Genesis Analytics, in partnership with the Financial Sector Conduct Authority (FSCA), concludes that over-indebtedness remains a challenge in SA. It found that more than 50 percent of South Africa’s credit-active consumers can be considered to have too much debt, which resulted in bad credit records for 48 percent of all borrowers.
It is hard to believe that nearly half of the 27 million adults using credit have difficulty keeping up with debt repayments.
“Over-indebtedness is linked to national economic conditions and exacerbated by the Covid-19 pandemic. Slow economic growth and high unemployment, coupled with rising prices for food, petrol and other basic goods have had a significant impact on the credit needs of South Africans and their ability to repay debt,” say the authors of the report, concluding that 95 percent of low-income individuals used debt to pay for basic needs such as food, clothing, transport and other bills.
Genesis Analytics found that the majority of credit-active consumers spend borrowed money to finance necessities. Some 43 percent of the surveyed population borrowed money to buy food and 11 percent used debt to buy clothes.
“As expected, this trend is dominant amongst low-income individuals (earning less than R1 500 per month), grant recipients (earning around R1 500 per month) and individuals 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 house; while only 5 percent of the low-income individuals could invest in the same way.
“The fact that credit is used to cover basic consumptive expenditure or to cope with financial shocks is indicative of the high levels of over-indebtedness of lower income segments and low levels of financial resilience.”
It seems uncertainty and any financial crisis serve to bolster responsible behaviour among consumers, but it only lasts a while – and low-income households remain stressed throughout. Household debt to disposable income decreased after the financial crisis of 2008 and reached a low in 2017, but started to increase again between 2017 and 2020.
In 2008, debt to disposable income was at 86 percent. It decreased to 72 percent in 2017. Thereafter, it rose steadily to approximately 77 percent in 2020, but declined slightly during in 2021.
Now it is increasing again as consumers start to spend reserves they might have accumulated during months of forced austerity, and due to their need to ward off renewed hardship.
Banks vs 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 almost half the population, and other parts of the report point out that SA has enough capital available for investment to satisfy capital requirements, many people are reliant on ‘informal’ credit providers.
“South Africa’s consumer credit market is highly regulated, according to the World Bank, and conforms with several good practices for financial consumer protection,” notes the FSCA.
It says the credit market is large, well-developed and formally provides credit to more than 27 million people, equivalent to 67 percent of the adult population. The number of individuals with an active credit account reached a peak in 2020, as heightened financial distress due to the Covid-19 pandemic drove an increasing number of consumers to acquire credit.
The number of credit active consumers rose 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-banking lenders such as micro finance institutions, vehicle financiers and retailers offering store credit.
An analysis of the value of consumer credit shows that credit extension increased by 4 percent per annum between 2015 and 2020. In 2020, mortgages and secured credit comprised 41 percent and 31 percent of the total loan value respectively, while unsecured credit represented 15 percent of loan values.
“However, when measuring by number of loan agreements, credit facilities and short-term loans represent 55 percent and 21 percent of the market [respectively],” says the report, indicating that consumers representing a large section of the population take out small, short-term loans.
Thus, people are borrowing out of desperation rather than to buy long-term assets.
Banks are the largest providers of credit, by value. Banks provided more than percent of the R2 trillion worth of consumer debt in 2020, but only 44 percent of the number of loan accounts.
Retailers account for the second largest share of lending, supplying 38 percent of credit by number of accounts.
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 amendments to the National Credit Act (NCA) in 2016, all credit agreements, regardless of the amount, are considered illegal if the supplier is not registered with the NCR,” says Genesis Analytics.
In 2019, 28 percent of the surveyed individuals acquired credit formally from a banking institution and only 2 percent from a micro finance institution, while 28 percent of individuals borrowed from friends and family. Around 16 percent borrowed from a stokvel (community-based savings and credit groups) and loan sharks (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,” says the FSCA.
The large number of people facing over-indebtedness is of concern, says the FSCA, particularly because of the societal risk that arises when consumers are overburdened by debt in perpetuity, leading to disproportionate social and personal harm.
“For the FSCA, finding solutions to consumer over-indebtedness is vital, and an important intervention is education around relief measures. The FSCA, in collaboration with the NCR and other regulatory bodies, has been proactive in educating consumers on the debt relief measures put in place to alleviate consumers from chronic over-indebtedness,” says the report.