Decline in short term credit sheds 1400 jobs, nearly R100 million in taxes

The decline in short term credit impacted jobs and taxes during the first year of the pandemic, and this decline had a direct impact of R790 million on sales and R96 million in tax, while 1 400 jobs were lost as a result of low-income consumers borrowing less, according to a new survey.

Short-term credit is usually used for unexpected expenses and enables consumers to borrow money and repay it within a few months. It is a key financial instrument for low-income households and micro businesses.

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Short term credit index

According to the results of the first Altron Fintech Short-term Credit Impact Index AFSCI, released on Thursday, short term credit contracted by 12,3% between the first quarter of 2020 and the first quarter of 2021, resulting in the estimated economy-wide decline in sales, taxes and jobs.

The index was developed in partnership with Keith Lockwood, an independent economic consultant and adjunct faculty member of the Gordon Institute of Business Science. Altron Fintech commissioned the index to assist credit providers in the short term credit market in to assess risk and credit extension.

It is also aimed at building a deeper understanding of the role that this form of credit plays in the South African economy and society. Short-term credit is a relatively poorly understood form of credit, despite the critical role that it plays within the economy.

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Importance of short term credit market

Although short term credit makes up a very small share of total consumer credit, it is an important market as it provides:

• first-time access to credit for many people who have never had access before
• a proportionately greater share of credit for lower-income households than they can get from other forms of credit
• a source of funding to households with low incomes and limited savings in unforeseen developments and emergencies
• finance to micro-business for working capital and stock and asset purchases
• a barometer of the financial health of a vulnerable and often neglected portion of South Africa’s population.”

Who uses short term credit?

Lockwood says when it is compared to other types of consumer credit, a much larger proportion is advanced to people earning less than R15 000 per month. As this group only accessed 11% of total consumer credit in the first quarter of 2021, they obtained 57% of the short-term credit advanced.

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Short term credit value down

Although the economy has partially normalised, the value of short term credit extended was down 20%, while the number of loans advanced was 25% below the pre-Covid levels of the fourth quarter of 2019. During the first quarter of 2021, R1.97 billion of short-term credit was advanced through 715 000 loans with an average value of R2,758.

Why the sharp decline? Lockwood attributes the decline in the number of credit-worthy credit applicants to the 1.4 million drop in total employment during the pandemic which resulted in average real incomes declining over the same period.

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Negative impact

“Just as net additions to credit extension can generate positive economy-wide economic impacts that are a multiple of the value of the credit extended, contraction of net credit extension generates negative multiplier effects throughout the economy.

“Businesses that were receiving additional sales as a consequence of the credit made available to their customers will experience a decline in sales and then employ fewer factors of production and place orders of less value with their suppliers.”

Lockwood says this process will continue with indirect and induced impacts magnifying the negative impacts. There has been a significant extension of the average repayment period of short term loans to enhance the affordability of lending.

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Short term credit plummets

While loans with a repayment period of up to 1 month accounted for 64% of the value of short-term credit advanced in the fourth quarter of 2019, this had dropped to 54% in the first quarter of 2021. Over the same period, loans with repayment periods of 4 to 6 months increased from 26% to 34%.

Johan Gellatly, MD of Altron Fintech, explains that credit is an important cog in the engine that fuels economic growth. “An increase in credit extension injects money that was previously out of circulation back into the economy and generates a stream of economic activity and incomes.”

This index is the second developed by Altron Fintech that is focused on credit provision in the economy. The company launched the AFHRI on 25 August this year, to provide critical insight into the financial state of households by assessing the state of credit extension from the perspective of the ability of borrowers to repay loans.