Low-income consumers need more access to credit, if we want to fix economy

Low-income consumers need more and easier access to credit because it adds a significant amount of money to South Africa’s gross domestic product (GDP).

A recent composite households resilience index (AFHRI) for the second quarter of the year also confirms that the average household tended to find it easier to incur and manage debt than before the pandemic.

Although most people would wonder about improving access to credit for low-income consumers, especially since microfinance has such a bad reputation in South Africa, microlending is held in high esteem in most parts of the developing world.

Short-term loans and unsecured credit offered by microfinance institutions played a significant role in combating a key element of global inequality, the ability of individuals buy consumption goods, including food, sooner and get working capital for small and micro enterprises.

How important microlenders are, was evident from an econometric modelling exercise Prof Ilse Botha from the University of Johannesburg conducted in 2019. This study indicated that South Africa’s GDP would have been R191 billion lower between the first quarter of 2015 and the third quarter of 2018 without the credit provided by microlenders.

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Data shows why low-income consumers need access to credit

However, South African reports about household debt are often characterised by a lack of objectivity, particularly regarding the short-term lending industry, with increases in default values or default ratios regularly featuring prominently in the media. When they decline, hardly anybody reports on it.

As a result of the need for data that provides more clarity on the financial disposition of households in general and their ability to cope with debt in particular, Altron Fintech commissioned economist Dr Roelof Botha, economic adviser to the Optimum Investment Group, to assist in designing the AFHRI.

However, Botha pointed out, although consumers are doing better with debt and the indicators continuing to recover in the second quarter, it is concerning to note that total private sector credit extension remains on a downward trajectory.

“This raises question marks over the recent decision by the SA Reserve Bank to raise short-term interest rates at a time when insufficient progress has been made with a recovery of job losses.”

He added that, due to the strong positive correlation between private sector credit extension and GDP growth, it has become urgent for government to reconsider the undue regulatory burden on the formal microfinance sector.

“Unless lower income groups are allowed easier access to credit, the pace of employment creation in South Africa will remain muted,” Botha warned.

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Key results

These were the main conclusions from the results of the AFHRI:

• Since the base period for the index, which spans more than seven years, only three of the 20 indicators recorded negative outcomes, of which two are marginal, confirming a systematic improvement in median household’s ability to incur and service debt.
• Only six of the 20 indicators recorded declines between the first and second quarters, a clear indication of further progress with households’ financial disposition recovering.
• Seven of the indicators recorded double-digit rates of improvement between the first and second quarters. Although half of the indicators are still in negative territory, only one of them, credit impairments by banks, still shows a meaningful negative trend, with the overall AFHRI returning to growth mode, even if it is marginal.
• The four indicators with the largest weighting in the index, employment and salaries, have not yet recovered from the effects of the Covid pandemic.
• Encouraging features of the latest AFHRI include consistent improvement in the ratio of household income to debt costs (an improvement of 20% over the past two years) and the recovery of household disposable income since the first quarter of 2021, a gain of 3.3%.

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Low-income consumers are resilient enough

“This index was developed with a key purpose of providing critical insights for the market on the level of resilience of consumers who apply for credit. It is important for providing micro credit which is an important segment of the overall credit market and often the only option for individuals and small businesses,” Johan Gellatly, MD of Altron Fintech, says.

“The AFHRI is based on the fact that income is ultimately required to repay debt. Without income of some kind, individuals cannot qualify for loans that allow for expanded access to the full range of goods and services that make up private consumption expenditure, as well as the funding of working capital required to sustain or expand small and micro businesses.”