Microfinancing makes sense

RESILIENCE INDEX: MORE CREDIT ACCESS FOR LOW-INCOME EARNERS WILL BOOST GDP

Average household better managing debt than before the pandemic.

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 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 query improving access to credit for low-income consumers, especially since microfinance has such a bad reputation in South Africa, microlending is highly regarded 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 to buy goods, including food, sooner and get working capital for small and micro enterprises.

How important microlenders are was evident from an econometric modelling exercise conducted by Prof Ilse Botha from the University of Johannesburg 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.

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, it is hardly reported on.

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 advisor to the Optimum Investment Group, to assist in designing the composite households resilience index (AFHRI) for the second quarter of the year.

However, Botha pointed out, although consumers are doing better with debt and the indicators continuing to recover in the second quarter, it was concerning to note that total private sector credit extension remained 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 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.

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

Since the base period for the index, spanning more than seven years, only three of the 20 indicators recorded negative outcomes, of which two are marginal, confirming a systematic improvement in median households’ ability to service debt.

Only six of the 20 indicators recorded declines between the first and second quarters, a clear indication of households’ financial position 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, credit impairments by banks, still shows a meaningful negative trend, with the overall AFHRI returning to growth mode, even if it is marginal.

The 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 this year, a gain of 3.3%.

“This index was developed with the 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, managing director of Altron Fintech, said.

“The AFHRI is based on the fact that income is required to repay debt. Without income, 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 to sustain or expand small and micro businesses.”