The recent implosion of African Bank Investments Limited (Abil) has cast short-term and unsecured lending to the poor back into the news.
Abil has long been viewed as a key player in the “financial inclusion” of South Africa’s poor and described as “…an important symbol of the country’s ability to lend to poorer people” by Azar Jammine of Econometrix.
The mantra of financial inclusion is an article of faith in a society with 9 million unbanked adults, yet ignores how South Africa’s poor have long been incorporated into markets, including financial markets, and typically on disadvantageous terms.
Unsustainable credit practices and widespread consumer indebtedness among the poor are manifestations of this “adverse financial inclusion”, and painfully evident in the collapse of Abil.
It is not difficult to see the twin reasons for South Africans’ burgeoning indebtedness in widespread structural unemployment, and a convergence between consumer demand and big corporate capital.
Growing indebtedness reflects depressed real and social wages alongside sharply rising costs of living.
On the other side of the equation, conspicuous consumption is a valorised habit of our elites (both established and new), and channels popular aspiration.
Furthermore, in a divided and highly unequal society consumption is not just about consumer aspiration.
Accumulating the accoutrements of the good life is often experienced as a precondition for social respectability, human dignity and even full adult personhood.
Particularly for those historically denied it.
Public cultures of consumption are therefore seldom simply about the material stuff. Along the spectrum from entry-level cellphones to Porsches at the world’s largest dealership in Johannesburg consumption is intertwined with post-apartheid social citizenship.
Mass indebtedness and the consumption that drives it therefore have socio-political dimensions.
Several commentators have linked industrial unrest and wage demands to South African workers’ over-indebtedness and widespread abuse of emolument attachment (“garnishee”) orders.
Recent history, from the Arab Spring to the UK youth riots, shows that simmering popular discontent at crushing unemployment and personal indebtedness is seldom a political issue – until it suddenly is.
South African-style adverse “financial inclusion” of the poor is vividly evident in short-term and unsecured lending, where the excesses are both egregious and relatively well known.
For instance commentator and biscuit factory owner Simon Mantell described the 90 percent effective interest paid on short-term loans by his blue-collar employees.
Abil is widely reported to have charged 60 percent.
This gouging occurs despite unsecured lending interest rates statutorily set at 5 percent monthly (under six months), or long term (approximately) 32 percent annually.
But to these nominal rates are added steep initiation fees (R150 plus 10 percent of the loan amount, between various thresholds), R57 monthly admin fees, hazy credit life insurance, and a miscellany of financial trinkets and trickery.
The latter include default subscriptions to “clubs”, magazines and SMS services; (interest bearing) “cash backs”; “free” gifts and sharp practices such as the widespread upselling of loans.
All included, the effective interest rates malignantly swell to between 40 percent to 200 percent pa.
Premiums
Consider for a moment credit life insurance, recently subject to a spasm of regulatory concern.
In many cases the monthly premiums exceed the combined principal and interest repayments on loans.
This is the apogee of fiscal venality: selling poor people insurance they do not understand (or, statistically, much use), over debt they cannot afford, for consumer products that rapidly depreciate in value.
If the average consumer credit granting firm were an actual rather than a legal person, it would be a sociopath.
These effective interest rates are not only detrimental to debtors; they are unsustainable.
Compound interest extends outstanding balances into perpetuity, hypothetically consuming substantial proportions of lifetime earnings.
The middle classes, those with their names on their office door or desks, can at least access secured debt, or leverage it over appreciating assets to their advantage. While usurious credit is the poverty premium paid by those with their names on their overalls.
How did we reach this point, especially after a decade of regulatory reform including the National Credit Act (NCA), and its regulator?
This is a story of convergence between the local and global.
South African firms have long honed their competitive advantage in profiting from poor consumers.
While globally the unrelenting “financialisation” of capitalism increasingly sees profit accumulated through speculative returns, and less from physical trade or primary production.
The commensurate “financialisation” of the poor positions them not simply as markets for goods and services, but increasingly as objects of financial speculation.
Financial sector actors, lenders and retail banks are all part of this process.
As are many of South Africa’s largest mass-market retailers that predominantly sell on credit.
Several derive their largest profits from their loan books: they are essentially consumer credit companies that peddle clothes, homewear, furniture, appliance, jewellery etc on the side.
Moreover business models for credit provision in South Africa’s low-income market have long been built on the creditor’s ability to collect, rather than the borrower’s ability to repay.
And it is debatable to what extent the NCA has altered these deeply embedded profit pathways.
South Africa’s financial services sector seems able to provide its regulators with a cloud for every silver lining.
In the hyper-debt economy, where nearly half of all credit-active consumers are credit-impaired, indebted individuals are not simply consumers.
They are simultaneously the product.
Their regular defaults are commodified in corporate loan books to be collateralised, leveraged and transacted.
The hyper-debt economy appropriates the “fortune at the base of the pyramid” and feeds a vast economic ecosystem: lenders, retailers, marketers, financiers, analysts, credit bureaus, collection agencies, buyers and sellers of corporate loan books, and lawyers and paralegals to process garnishee orders.
Finally, to rehabilitate and resurrect errant debtors, debt consolidators and counsellors exist.
While credit can be benign and socially useful this quality is directly related to the cost of credit.
Interest rates are developmentally regressive in proportion to the magnitude of their premium over inflation.
Interest is therefore akin to medicinal compound: at elevated levels, panacea quickly becomes poison.
Actuary Pieter Wasserfall of ZAQ Finance draws attention to the corollary of credit, namely savings, and suggests this ought to be the security for affordable credit for low-income borrowers. He explains that if a R2 500 monthly earner could save 10 percent of their income, with modest interest they would accumulate approximately R10 000 in three years.
Wasserfall estimates this ought to be enough to secure their consumer credit demand in the vast majority of cases.
Therefore, somewhat counter-intuitively, efficient instruments for moderate savings become part of a credit solution for low-income consumers.
This is a proposition that ZAQ Finance seeks to commercialise with their “passive investment clubs” for low-income savers. The business challenge remains achieving the requisite scale; the social challenge is tempering future impulses towards extortionate interest and predatory practices that are the industry norm.
The developmental impact of credit has been part of the international development orthodoxy since the 1990s and earned Bangladesh’s Grameen Bank founder, Yunus Mohammed, a Nobel Peace Prize.
However, the basic assumption of the “micro finance revolution” is that credit will be used for productive purposes.
In the South African context the historical dispossession of the African poor in conjunction with the existence of a powerful formal sector that effectively “crowds out” the informal sector, together mitigate against using credit for micro enterprises. Instead, credit is primarily used for consumption.
The present challenge remains how to provide credit on terms that do not inexorably impoverish low-income borrowers over time.
David Neves is a senior researcher at Plaas (Institute for Poverty, Land and Agrarian Studies) at the University of the Western Cape. He writes in his personal capacity. He has no interest in nor derives any benefit from ZAQ Finance.