Illana Melzer

Rising Star or Red Flag?: South Africa’s financial inclusion growth raises questions for the entire industry

South Africa placed second in a recent Brookings Institute study comparing financial inclusion in 21 developing countries – surpassed only by Kenya. But though this has occasioned a number of glowing headlines, there’s a troubling aspect to these findings.

According to the report, financial inclusion refers to “both access to and usage of appropriate, affordable and accessible financial services.” The report suggests that “having greater access to financial services promotes entrepreneurship, lifts people out of poverty and gives them greater hope for a brighter economic future.” Its first key takeaway is that “access to and use of formal financial services provide opportunities for facilitating individual prosperity and economic development.”

This may sound like unalloyed good news, but the report fails to support these assertions. It simply presents them as fact, or articles of faith: It’s a given that financial inclusion delivers demonstrable developmental dividends. Indeed, the framework used to assess financial inclusion makes absolutely no mention of the impact of increased access to and usage of financial services on the lives of the newly included. Surely we need to ask whether this focus on financial inclusion is a helpful approach, and whether it furthers the important agendas of the developmental organisations and donors involved.


Do More Accounts Equal Greater Social Impact?

Let’s explore the South Africa data in a little more detail. According to the report, “Financial inclusion in the country increased from 61 percent in 2004 to 86 percent in 2014.” That is no small change. Admittedly, we have no counterfactual, but given the expectations for financial inclusion set out in the report, we would expect to see some visible impact on entrepreneurship or poverty levels in light of this very significant improvement. In that regard the data is somewhat disappointing. According to the Labour Force Survey of 2004, there were 1.4 million black African business owners in South Africa. In 2014 there were 1.5 million [1]. This is hardly an achievement given South Africa’s staggering levels of unemployment – there are 7.4 million unemployed black South Africans, including so-called discouraged work seekers, who by definition have lost hope of a brighter economic future. The connection between financial inclusion and entrepreneurship is clearly less direct than anticipated.

With regard to poverty, South Africa has seen significant improvements in living standards and a reduction in hunger and deprivation over the past 10 years. But this is a result of direct assistance provided by the state. By way of example, in 2004 there were 7.9 million recipients of government grants, receiving a total of around R45 billion a year. By the end of 2014 there were over 16 million beneficiaries receiving R120 billion. These grants are paid electronically into bank accounts established precisely to facilitate a more efficient grant payment system. Grant recipients have become financially included because they are poor enough to receive government grants. Likewise, their levels of poverty have been reduced because they receive grants, not because they have bank accounts. Overwhelmingly, it appears that grant beneficiaries cash out their benefits in full – jettisoning financial services in favour of hard currency, as do many wage earners who are paid their salaries directly into a bank account. While this calls into question the impact of increased banking penetration for the poor, there is one clear beneficiary: The financial inclusion agenda, for which more accounts apparently mean greater success, no matter how they are used.


More Opportunity – or Just More Debt?

Of all the statistics celebrated in the report, however, it is the one related to increased credit usage that is most perturbing. Yes, there has been a significant increase in the number of South Africans using formal credit products. According to the latest Credit Bureau Monitor (Q1 2015) published by the National Credit Regulator (NCR), there are 23.1 million credit-active South Africans, up from 17.1 million as recorded in Q4 2007, when the first Credit Bureau Monitor was published by the regulator. Using data from the Labour Force Survey for the corresponding time periods, the proportion of credit-active South Africans has increased from roughly 57 percent of the adult population to 70 percent.

However, there is clearly a significant problem with respect to the borrowers’ ability to repay – a basic indicator of impact. According to the Credit Bureau Monitor, just 43 percent of borrowers who are credit active are current on all of their accounts. Thirteen percent are one or two months in arrears, while almost a quarter are behind by 90 days or more. A further 10 percent have adverse listings (that is, their debts have been written off or handed over for collection). And in retail credit, according to credit bureau data provided by XDS, over 40 percent of borrowers with open accounts are 90 days or more in arrears on their worst performing account in that category. What’s more, a staggering 11 percent – or 2.5 million borrowers – have a judgment against them, typically an emolument attachment order compelling an employer to deduct outstanding repayments directly from payroll. This mechanism is blatantly abused by debt collectors, and brings into question the integrity not only of the financial sector, but of the judiciary, too. When you look at the data, the question that comes to mind is not why so many borrowers don’t pay, but why so many still do. Lenders expect high default rates and have priced for it – it is a wonder that any good payers remain.

Aside from the high levels of arrears, the application of borrowed funds is also worthy of scrutiny. According to the NCR, just 2 percent of South Africa’s gross debtors book comprises so-called developmental credit. This category includes loans granted for housing, education and small business development. Measured in terms of rand value, consumer credit in South Africa is naturally dominated by mortgages, which are presumably developmental. And some borrowers may use unsecured credit for developmental objectives (however those are defined). But by far the most significant category of credit measured in terms of number of borrowers is retail credit. Over 10 million borrowers have one or more credit accounts at clothing retailers. And in 2014, borrowers earning between R10,000 and R15,000 (approximately $720 to $1,080) per month opened over 1.2 million credit facilities, took out almost 900,000 unsecured loans and obtained almost 150,000 secured lines of credit – predominantly to finance the purchase of vehicles. In contrast, though this segment broadly corresponds to the emerging middle class borrowers targeted for affordable housing, they were granted just 11,400 mortgages. The estimated installments on all the non-mortgage credit granted in that year could have financed 500,000 mortgages at the prevailing average mortgage size, admittedly a highly stylised imputation.


Important Truths – and Dangerous Risks

Of course, the problem is not only on the supply side. Borrowing patterns reflect consumer priorities. They also reflect the availability of underlying goods and services in the market more generally. Nevertheless, the data clearly show that the problem is not one of access to credit. There is plenty of credit – possibly too much. The challenge is to somehow direct available credit toward promoting entrepreneurship, lifting people out of poverty and giving them greater hope for a brighter economic future rather than funding, at great expense, the purchase of new clothes and cars.

Indeed, given the high default rates, high cost of borrowing, high levels of indebtedness and limited mortgage lending in South Africa, it may be fair to say that access to and usage of credit entrenches patterns of inequality and exacerbates poverty. It would appear that financial inclusion has delivered far greater benefits to providers and officials than it has to the intended beneficiaries.

Clearly these issues are not only of concern to South Africans, but demand engagement by all those who strive to bring affordable, appropriate and accessible financial services to the poor. The South African experience raises the possibility that our unshakable faith in the developmental impact of financial inclusion may be blinding us to important truths and dangerous risks. The building blocks and infrastructure required to bring developmentally focused financial services to the poor also bring products and services that might increase the risk exposure of households, while doing little to brighten their economic futures. It is worth remembering that supply chains in the clothing and furniture retailing sectors are easier to build than in the housing sector, that credit follows product, and that opportunity is hampered not only by limited access to finance.

Of course, the goals of lifting the poor out of poverty and giving people greater hope for a brighter economic future are noble, and indeed should be pursued. But if we don’t approach these goals with clear, open eyes and engage with the complex reality of the poor’s experience, our reports and research will become nothing more than self-congratulatory spin. It helps no one when we use limited data and incomplete frameworks. Surely we should know better.


Illana Melzer is a co-founder of Eighty20 Consulting, an independent consulting company that focuses on customer value analysis and database analysis.



[1] Two categories were used to identify business owners in the Labour Force Survey: working on his/her own on a small plot, or working on his/her own or with a partner in any business. Data for 2014 is sourced for quarter three from Eighty20’s Xtract system.



Education, Impact Assessment
financial inclusion, impact measurement, lending, poverty alleviation, research