Don’t let debt be the death of you

2013-07-17 00:00

IN January, First National Bank economist John Loos identified household debt as a major theme for 2013.

“Underlying household financial frailties”, he suggested, were evident in the fact that total household sector credit growth had moved to above 10% as at November 2012, the first month of double-digit year-on-year growth since late 2008. Studies in the UK, he warned, had started to draw links between levels of indebtedness and mental illnesses, such as stress and depression.

Just how sick is South Africa’s household sector? According to financial education consultant Rags Poppleton of Ikhumiseng Consulting, it’s critical.

After over 10 years of facilitating financial literacy workshops for a range of industrial sectors, Poppleton feels confident enough to describe debt as a “fundamental undermining influence” in our society. The issue of suicide — both actual and ideated — comes up repeatedly among participants, she said.

“Of course, it’s impossible to say that debt is the direct cause of suicide, because debt has such a corrosive effect on households, causing a litany of ills, such as family breakdowns, violence, absenteeism and low productivity,” she said. “But in any workshop, whether it involves mineworkers, police personnel or office workers, those who aren’t coping with their finances usually constitute 70% to 80% of participants.”

Many of these participants tell her that her workshop represented their last hope. “I’ve had people come to workshops and admit afterwards that they were considering suicide,” she said. “But after training, they are able to see an alternative.”

That alternative — the empowerment born of financial literacy — is being increasingly perceived by banks as a business imperative rather than as opportunities for marketing, or for earning social responsibility brownie points, according to manager of consumer education at Standard Bank Dhashni Naidoo.

Naidoo was one of the panellists at a forum held by Finmark Trust in Sandton in early June, during which the findings of research into the financial education programme of a non-governmental organisation called SaveAct were shared with a range of financial sector role players looking for effective financial education programmes.

SaveAct, a non-governmental organisation operating in rural and peri-urban areas of KwaZulu-Natal and the Eastern Cape, has brought over 20 000 people — mainly unemployed women — into formalised and self-regulated savings and credit groups. Poppleton describes it as “one of the most exciting models she’s seen”.

Not only do these groups tap into a strong desire to save, but also give members the opportunity to borrow money from their group at relatively low interest rates, thereby growing the pool of money available to the group at the end of the savings cycle by up to 30%. Significantly, the model, which fine tunes the traditional stokvel system, incorporates both financial education programmes and business enterprise training in its operations. Thus, its broader goal is to provide a platform for local economic development. Demand for SaveAct-led savings and lending groups continues to outstrip the organisation’s capacity.

Of specific interest to the Sandton gathering was the organisation’s financial education programme, which was chosen as a case study by FinMark Trust, an independent body that identifies ways to develop inclusive financial systems for the poor in Africa. Finmark engaged Genesis Analytics to undertake the research with a view to using the findings as a way to improve the efficacy of all financial education programmes.

Although recommendations for improvements were made, particularly around embedding the educational programme more thoroughly into the SaveAct model, the organisation was found to be well-placed to leverage its existing infrastructure, to develop the financial capability of its members — the vast majority of whom were already demonstrating sound financial behaviour.

SaveAct’s commitment to financial education was recognised earlier this year when it won the PlaNet Finance award for Embedded Financial Education, which will see SaveAct’s educational activities benefit from expert technical support from PlaNet Finance, a Paris-based international NGO, and the Washington DC-based NGO Microfinance Opportunities.

The current national preoccupation with financial education stems, in part, from a 2000 amendment to the Financial Services Board Act that mandates the FSB to promote consumer financial education programmes. For the financial services sector, financially educated consumers mean better-serviced loans. But government is also taking seriously the need to encourage savings and greater access to the country’s sophisticated and well-regulated financial services sector. The aim is financial inclusion, so people have a chance to participate in the formal economy.

Higher household savings levels also mean greater national financial security. Currently, South Africa’s gross savings only amount to around 16% of GDP. According to World Bank’s figures, emerging economy China reported gross savings as a percentage of GDP at 53% in 2011 and India 35% in 2010. Zambia’s percentage in 2011 was 28%.

Up until the recent publication of the FSB’s baseline survey, “Financial Literacy in South Africa”, an overall understanding of national financial literacy levels was lacking. It is now known, thanks to the survey, that 51% of the population do not have a household budget, only 45% can answer a simple question about interest, only 26% can correctly answer a question about inflation and almost half (44%) are not able to meet living costs. Most people do not save for emergencies and a third of all consumers hold no banking products.

But, as SaveAct has shown, that doesn’t mean poor people are not saving — and doing so in a formal way. According to Kim Dancey of FinMark Trust, while SaveAct officially falls outside of the formal financial sector, there is a great deal of structure to the saving and credit system that it offers.

“SaveAct has shown that, contrary to what people think, poor people can and do save the limited resources they have. They are both innovative and resourceful with their cash, and employ a range of informal and formal financial services.”

SaveAct CEO Anton Krone says one of the primary reasons for the model’s success is that it does not start by asking people to take loans. Instead, it starts by asking people to save.

“Microfinance is useful for poor people. However, it expects borrowers to carry the risk of the loan, which for poor people is often about life and death. If their investment doesn’t work out, for example, in a high-risk agricultural project, they stand to lose everything.”

While financial education has been taking place on a cluster basis for many years, the value of a more coordinated approach is gaining recognition. Last year, the multi-stakeholder National Consumer Financial Education Committee was formed and has developed a national consumer financial education strategy, due to be approved in July to provide a framework for consumer education initiatives.

It is hoped that education will produce a change in mind-sets and attitudes. But the true test will be a change in consumer behaviour. Krone, like other role players, draws links between the debt crisis and HIV/Aids.

“Like HIV/Aids, it’s not easy to pinpoint a single cause or solution for the debt crisis. Debt is a complex issue that relates to people’s basic behavioural patterns, and instinct for consumerism and status.”

Through its activities, SaveAct is meeting a palpable grassroots need for coordinated savings initiatives that have the trust of their members.

How to bring organisations like SaveAct and the formal financial services sector into each other’s orbit, without major casualties, remains an ongoing challenge. However, learning is a two-way street.

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