SOUTH Africa’s high levels of indebtedness and low savings rate elicit frequent hand wringing by economic commentators and public officials alike. Both parties implore the feckless South African consumer to save more of his or her income, a gospel echoed by institutions such as the SA Savings Institute.


Yet this anxiety over the absence of a “savings culture” plays out in a market and policy context marked by glaring contradictions. Injunctions to save are made in an economy in which unsecured lending has ballooned, the poor are a market segment, and low-income saving is frequently unfeasible.

A recent seminar at the University of the Western Cape by Pieter Wasserfall of ZAQ Finance once again cast many of these elements into stark focus. Consider for a moment material from one of his case studies.

Petrus (not his real name) is a 31-year-old farmworker with two dependants, resident on an Overberg (Western Cape) farm.

In 2012, Petrus – earning R2 557 a month – decided to begin investing with one of South Africa’s established, big four life-based financial services companies. His initial monthly R110 is contractually bound to escalate every year and offers a “projected” (not guaranteed) return of 10 percent in a decade. But, crucially, this return reduces to 5.9 percent after costs, fees and commissions.

What is guaranteed is that these expenses amount to roughly a quarter of his monthly payment and will in all likelihood doom him to negative real returns after inflation. If Petrus continues his ruinous “investment” to retirement, the effect would be compounded.

At 65 years of age he would eventually have forgone approximately 62 percent of his return (receiving R242 000 rather than R644 000 without the accumulated costs). If, in the next decade, Petrus’s precarious livelihood results in his contractual savings being interrupted because of factors such as a seasonal shock, workplace injury or a sick child, even this “new generation product” will levy a confiscatory penalty on his total investment.

Moreover Petrus’s case is utterly unexceptional. His story is replicated a thousand-fold over: the names and companies alter, and percentages vary slightly, but the outcomes remain fundamentally unchanged.

Low-income earners’ assiduous efforts to save and invest will often inexorably serve to impoverish them further.

The fact is that in South Africa there are few widely available financial products for savers with small sums (in the region of R100) to invest that provide real returns (net of costs). Retail banking’s costs lead to the familiar township refrain, “banks [fees] eat your money”.

The poor are, through necessity, among the most astute of money managers and are justifiably apprehensive of banks’ erosive charges. They plausibly reason it is better to participate informally in a stokvel, or spend their money on a consumer durable or housing before inflation whittles away its value. For impoverished South Africans, formal saving is frequently an economically irrational act.

The causes of this state of affairs are structural and are intertwined with the routine workings of the South African economy. South Africa presents a perfect storm of entrenched income inequality, historically low returns on assets or opportunities for accumulation by the poor, and a powerful and concentrated formal sector. The latter has over a century honed its ability to profit from poor consumers.

Witness the competitive advantage of South African multinationals (SABMiller, Shoprite, MTN and so on) in their expansion across the continent. In this context the call to bank the unbanked or characterise the poor as in need of financial “inclusion” strikes a false note.

The relationship between the poor and the financial services sector simply recapitulates their broader relationship to other sectors of the economy, such as the food system or retail.

Low-income consumers are not excluded from the formal economy; on the contrary they are incorporated and included on highly disadvantageous and adverse terms. They are not at the “base of the pyramid” awaiting rapturous ascension into market relations: they have long been customers and clients. Their difficulty is not their estrangement from the market; it is quite simply the quality of their connection to it.

Financial markets are at present often inimical to the needs of the poor, and regulatory efforts have so far failed to remedy this. Recent history demonstrates financial sector regulation is often highly uneven. Reform in retirement savings, consumer credit and unsecured lending markets remains an ongoing challenge, particularly in the face of deeply entrenched interests.

If a financial regulator such as the Financial Services Board has proved unequal to the task of curbing even the most egregious of excesses committed against the better-educated middle classes (Sharemax, Fidentia, Relative Value Arbitrage Fund and so on), what of the average low-income consumer?

The poor consequently save in stokvels (but typically only for shorter timeframes), silently fall victim to the scams and trickery of the unscrupulous, and stomach pitiable returns (as in the case of Petrus) from the panoply of offerings from the formal sector.

There are many cautionary parables of the travails of financial regulation in South Africa. Witness the reductions in banks’ transactions fees (brokered by the financial services charter), which promptly saw the profit centres metastasise in unsecured lending; the extended toil of the Competition Commission; and even the enforcement chore of vanquishing the latest Ponzi scheme. The most recent of these (bearing the sobriquet of “R699 cars”) appears extraordinarily entangled with those bastions of formal capital, the banks themselves.

Quite apart from the structural and regulatory context, perhaps the problematic relationship between the financial sector and the poor has even deeper roots.

Maybe it inheres in our collective view of development. In the popular and official imagination, national development is often conflated with physical asset accumulation and consumption expenditure. An example is the political trumpeting about South Africa’s poor ascending on the asset-based living standards measures (or LSMs).

The implicit policy metaphor is one of the household income sheet, with solid wage increases (for labour market insiders) and the social wage (health care, education, subsidised utilities and housing) as part of the post-apartheid dividend.

Yet this overlooks the totality of households’ balance sheets, including rising indebtedness and the dearth of savings.

It is in this context Wasserfall explained how his company has discerned a gap and seeks to scale up its nascent “passive investment club” to profit from it. It offers the prospect of real returns for low-income consumers, and aspires to tackle the Janus face of savings – namely, affordable credit.

It is too early to discern the developmental impact of ZAQ Finance’s offerings, although the costs are moderate and the offerings appear superior to the venal and exploitative products conventionally peddled to the poor.

But thinking about the endeavours of ZAQ Finance recalls the acerbic Samuel Johnson’s assessment of a dog dancing on its hind legs: “It is not done well; but you are surprised to find it done at all.”

So what is perhaps most noteworthy of ZAQ Finance is that there should even be scope for its products at all.

That the conditions for their viability exist attests to the enduring failure of the market to provide appropriate products for low-income savers, even after a decade of regulatory intervention. It is a failure that underscores just how hollow the promise of “financial inclusion” really is.


David Neves is a senior researcher at the Institute for Poverty, Land and Agrarian Studies (Plaas) 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.