A case for opening up unsecured lending in South Africa

Economist and economic consultant, Dr Roelof Botha from the Gordon Institute of Business Science (GIBS) at the University of Pretoria, is making a case for expanding access to unsecured lending in South Africa, saying the move could benefit the country’s struggling economy in the long run.

According to Botha, justification for expanding access to credit among South African households can be found in several key indicators, and would provide many with the working capital needed to improve their homes or even start a business.

“South African households deserve a bout of more accommodating monetary policy, as they have behaved exceptionally well with regard to debt as a percentage of total income,” he said.

“For the country as a whole, this ratio has declined consistently from a high of 87.8% in the first quarter of 2008 to only 73.2% in the first quarter of 2017.”

This ratio is considerably higher in most of South Africa’s key trading partners, Botha said, noting that in Australia, for example, it was in excess of 200% at the beginning of 2017.

“Fortunately for South African households, the Reserve Bank started lowering its official bank rate (the repo rate) in July and several more rate cuts are on the cards for the remainder of the year and into 2018,” he said,

Further good news for households is the fact that inflation is “dropping like a stone”, according to Botha, which means that unsecured credit will become more affordable in coming months and into 2018.

“It is clear that South African households are consistently expanding their levels of expenditure and ownership of assets, which to some extent mitigates lending risk.”

Lending in South Africa

Lending money in South Africa has become a tricky affair, as rising debt levels crash with an economy in decline, making most financial institutions risk averse.

Following the announcement of its latest financial results, FirstRand CEO Johan Burger recently revealed that its main retail bank, FNB, was cutting back on credit extensions, following a wider industry trend of banking groups shying away from lending.

Political uncertainty, high levels of unemployment, and a state failure to reignite the economy, leading to consumer affordability issues, are all putting pressure on the, while the country has a history of handling unsecured lending poorly.

Despite this, Botha argues that there is definitely room in the country to be more open with lending, citing research conducted in conjunction with the University of Johannesburg, that highlighted misconceptions around the role of unsecured lending in the country.

The study analysed the relationship between loans other than mortgage bonds, and GDP.

Botha’s research showed that the number of households in the buying power category of R120,000 or more per annum has increased quite phenomenally from less than 200,000 in 2002 to almost 2.7 million in 2016. This represents annual average real growth of almost 15%, way above the average economic growth rate.

“South Africa enjoys a relatively high level of home ownership amongst its citizens (more than 54%), but the values of many of these homes do not qualify as collateral for secured lending. This acts as an unnecessary obstacle in obtaining credit that can be used, amongst other things, for home improvements and asset ownership,” Botha said.

“Unsecured lending is also, as a rule, the only source of financing of working capital for small, medium & micro enterprises (SMMEs).”

“The study confirmed the positive relationship between private sector credit growth and economic output. In the absence of fairly strong growth in unsecured lending since the end of the 2008/09 recession, the economy would still have been in recession today,” he said.

“An expansion of access to unsecured credit by financial institutions holds the obvious potential advantage of assisting the quest for higher economic growth, employment creation and, as an inference, a broadening of the tax base.”

Dr Roelof Botha is currently Joint Managing Director of GOPA Group SA, a multi-disciplinary research company that specialises in development facilitation. He has been an economic advisor to PricewaterhouseCoopers for the past 17 years.

Read: Taking out a loan in South Africa is getting harder as banks curb lending