SA's high level of financial exclusion

South Africa has a high level of exclusion and only a quarter of low-income households use their bank accounts for transactions.

This is according to a new report from the Boston Consulting Group – a US-based management consulting firm – which shows that South Africa’s financial services sector has mostly excluded low-income consumers.

Almost everyone has insurance, but for low-income households, this largely consists of funeral policies.

Access to credit is growing, but this often entails unsecured lending that leads to consumers becoming overextended and defaulting on their debts.

According to Boston Consulting, South Africa needs to improve its financial inclusion along all these dimensions through regulatory change and product innovation from the private sector.

Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society.

The case for ‘inclusion’

Boston Consulting has been a major promoter of “financial inclusion” as a developmental target and was also a major cheerleader for recent attempts by India to “de-cash” its economy and drive people into digital payment systems.

As proof that financial inclusion is good for countries, Boston Consulting cites a study it did last year using a new measure of “wellbeing” – that it argues is better than GDP – called the Sustainable Economic Development Assessment.

“We find that financial inclusion is one of the main predictors of turning wealth into wellbeing in the 150 countries we studied,” said Adam Ikdal, local head of Boston Consulting, at a launch event this week at the Gordon Institute of Business Science.

GDP per capita still accounts for 74% of the difference in “wellbeing”, according to Boston Consulting’s measure.

Financial inclusion can, by itself, explain another 11%, claims the group.

However, that study defined inclusion simply as having a bank account.

The whole premise of this week’s report was that this was not a proper measure of inclusion.

Instead, Boston Consulting has developed a new methodology that combined the prevalence of services with how intensively they are used – and how sustainable they are in terms of affordability and profitability.

“On face value, if your only metric was people with bank accounts, you would say South Africa is a fairly inclusive economy; the problem is that many people were given that account by an employer or government. But many people are uncomfortable using their bank accounts for transactions. One third of the population draws it all out at once,” said Ikdal.

A distrust of banks and high fees are the most frequent reasons given for this.

Not that simple

“The report is not telling us much that is new,” said Khulekani Mathe, head of financial inclusion at the Banking Association of SA.

“I think the report is limited in its approach to financial inclusion in the sense that it looks at it in the absence of the greater economic inclusion,” he said.

“In South Africa, that is the biggest problem.”

“There are limits to what you can do purely from a financial inclusion standpoint.” Unemployment and a lack of education underpin this, he said.

“Another important point is that the cost structure of this economy is extremely high,” said Mathe.

“A lot of that derives from our history in terms of settlement patterns. I think the report is ignoring the economic geography perspective,” said Mathe, who was previously part of the National Planning Commission.

“We really need to look at this economy in totality to understand the limits of what can be done by the financial services sector,” he said.

Mathe said that the tendency to hold cash despite having a bank account also has to do with the simple fact that South Africans find themselves in a cash economy where debit cards would be relatively useless for everyday transacting.

Those funeral policies

“If you look at South Africa, most people actually have some form of insurance. Most have funeral insurance, a basic life cover that is expensive,” said Ikdal.

He cited respondents to the survey where households have so many funeral policies that “someone in that family has to die every two and a half years for it to make sense; they should rather be putting the money in a savings account”.

“Yes, [people buy funeral insurance] to a point where it does not make economic sense,” said Mandla Shezi, managing director at insurance company Hollard Direct, whose company sells these policies.

He attributed it to a distrust in funeral insurance companies, making people buy multiple policies in case some do not pay out.

“I want bigger life cover, but the only ones available require medical underwriting, blood tests and all these things I am not prepared to do. So, instead, I buy four products of R50 000 each and put together life cover of R200 000.

He said Hollard had not been able to create a product for people earning below R1 600 per month and that a “systemic” solution involving donor funding might help.

Savings ‘culture’

“South Africa is extremely poor at saving,” said Ikdal, attributing it to a lack of savings culture.

“We have a different view about savings in South Africa,” said Shezi.

“It is not about a low-savings culture. There are no products. If you really dig deep, the savings culture exists ... an informal savings culture. The stokvels provides a mechanism that meets their needs.

“It is not a lack of culture ... it is expensive bank fees and lack of everyday banking.”

According to Shezi, Hollard tested 26 available savings accounts in South Africa with small deposits of R500 and found that, after fees, only three actually had a real return. The best rate of return was 1.8%, he said.


Do you have a bank account that you don’t use? Why not – don’t you trust banks or is it too costly?

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