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Making Financial Services Work for South Africans

By Faith Kiarie

It is often argued that for economic growth in Africa to be politically and socially sustainable, it must be inclusive. Considering the unpredictability of the future, it is crucial that individuals and businesses have access to affordable financial services so that they can weather income shocks and spend easily.

The number of people with bank accounts in South Africa exceeds that in any other African nation. The World Bank reports that 54 percent of South African adults can conduct financial transactions with banks or similar formal institutions, and the statements of South African banks such as Capitec suggest that this figure is even higher. However, borrowing from these banks is seldom possible. Only 9 percent of South Africans and 25 percent of small- and middle-sized enterprises (SMEs) in South Africa use formal credit. A larger part of the population, approximately 36 percent of adults, makes use of informal credit— borrowing from unregulated loan providers such as private money-lenders, savings clubs, friends, and family. Moreover, even though many South African adults hold bank accounts, there is evidence that many of those accounts are dormant.

This culture of under-banking (the underutilization of mainstream financial services) and reliance on informal credit is curious for a country that has a financial system that rivals those of the developed world.

One line of reasoning is that financial illiteracy is widespread in the country, and there is a mistrust of banks and similar institutions. The Financial Services Board (FSB) has implemented educational programs in the past in an attempt to remedy the situation, but its efforts have not borne much fruit. It’s unfathomable that people are simply unwilling or unable to learn how to manage their finances. A more satisfactory answer to the FSB programs’ failure may come from the World Bank’s 2013 South Africa Economic Update, which says that these programs “...are not adequately coordinated or monitored for effectiveness...”

Another possible reason for the culture of under-banking is that South African banks have been unable to reach most South Africans not only because they fail to grasp their needs, but because they have little interest in catering to them. The biggest four banks in the country control approximately 80 percent of the banking sector’s assets and have structured their services to serve the mid-to-high-income groups. They maintain their highly complex operations and technical systems by charging high banking fees. The riskier lower-income segments of the population struggle to keep up with transactional fees and the high costs of borrowing, in addition to banks’ stringent requirements.

With this in mind, it seems unjust to claim that South Africans are merely addicted to unsecured credit and/or unconcerned about saving. In addition to the points discussed above, the excessive red tape involved in accessing financial services often drives people into the informal market. This is why Capitec, now one of South Africa’s five biggest banks, has managed to disrupt the industry with its radically different business model that leverages profits from salary-based micro-lending. It covers the growth of its loan book with greater growth in its traditional retail banking operations. With its paperless, low-cost strategy,  Capitec penetrated the retail market and recorded astonishing new account openings of up to 100,000 new accounts monthly, as reported in 2014. Capitec understands its customers' needs, particularly in the lower end of the market, and serves them accordingly.

Another force of good, stokvels, have also gained attention, with new evidence that South Africans may actually be saving more than we think. Traditionally, a stokvel is a sort of credit union in which twelve or more people pool funds together on a fortnightly, weekly, or monthly basis. They date back to the gold reef discovery era when they sprung and flourished in response to an economy that was dominated by powerful conglomerates reflecting the race and class discrimination of society. Africans who were struggling to make ends meet started stokvels in order to fulfill various financial obligations, and found that they were an effective way to raise interest-free capital quickly.

A 2014 report states that 11.4 million South Africans are part of the stokvel industry, with collective savings worth 25 billion rand (about $2 billion). And it is not just the poor who make up the membership. Thirty percent of stokvel members belong in the 9th and 10th LSM, or Living Standards Measure, which divides the South African population into groups from one (lowest) to 10 (highest). The majority of the stokvels are for burials, savings, and investment—which has implications not just for the banking industry, but also for the insurance industry, which has invested heavily in the middle class. Furthermore, the National Stokvel Association of South Africa is looking to rebrand in a bid to entice more youth to choose stokvels as their preferred method of saving.

After realizing that stokvels represented a significant, untapped market, the banking sector climbed on the bandwagon and began offering group savings accounts for stokvels. Not too long ago, this industry attempted to imitate the success of low-cost initiatives such as the Kenyan M-Pesa. Unfortunately, as with the Financial Services Board’s efforts, the results did not live up to expectations.

It remains to be seen whether the banking industry is breaking enough ground in its endeavor to pull South Africa's economically challenged groups into the formal market. To be fair, group savings accounts may encourage a culture of saving since they incur lower transaction costs and earn higher interest rates than smaller accounts. Banks have also been trying to reach more people with a rollout of new, fancy branches fitted with the latest technology. However, there is little incentive for stokvel members to keep their funds in savings accounts when they can earn higher interest rates by lending to small businesses and individuals who struggle to access funds formally. And for those who do not trust banks, keeping money under the mattress may not sound absurd, even in the 21st century.

The big banks in South Africa may be too removed from certain segments of the population to cater to their financial needs adequately, and quite frankly, more profitable markets in other African states are beckoning. Stokvels, Capitec bank, and other payday loan providers are doing much to relieve consumer stresses.  The Treasury has also introduced tax-free savings accounts with a 30,000 rand ($2,418) annual threshold. However, as it stands, SMEs have little access to financing and the government has yet to implement innovative and far-reaching initiatives to address the dearth of microfinance institutions in South Africa. This is against the backdrop of a regulatory system that makes an already risky market unattractive.

The time has come for the country to set aside conventional wisdom and make way for new, out-of-the-box thinking, which will hopefully help eliminate South Africa from the list of most unequal societies in the world. If private businesses can better reach the less-endowed segment of South Africa— particularly small and expanding firms— then the government should use its power to mobilize financial resources, not frustrate efforts with unfriendly business conditions. After all, it would be politically and socially beneficial to everyone if the whole population had access to the seemingly ever-growing African pie.

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Faith Kiarie recently completed an honours degree in finance at the University of the Western Cape. She is interested in economic development in Africa, especially that of women. 

[Photo courtesy of Heather Dowd]

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