More than half of South Africa’s credit-active consumers are over-indebted, a new report by Genesis Analytics and the Financial Sector Conduct Authority (FSCA) shows.
Between 2015 and 2020 the percentage of credit-active consumers with an impairment record fluctuated between 38 and 48%, the report shows.
“Over-indebtedness is linked to national economic conditions and exacerbated by the Covid-19 pandemic,” Genesis Analytics said.
“Slow economic growth and high unemployment, coupled with rising prices for food, petrol and other basic goods have had a significant impact on the credit needs of South Africans and their ability to repay debt. Financial distress is associated with missed credit repayments.”
The report found that the majority of the credit-active consumers spend borrowings on financing necessities: 43% of the surveyed population spent the borrowed funds on food, 11% on clothing, and on bills and monthly fees, respectively.
In essence, 95% of the surveyed low-income individuals engaged in debt financing to afford basic needs such as food, clothing, transport, and bills.
“The fact that credit is used to cover basic consumptive expenditure or to cope with financial shocks, is indicative of the high levels of over-indebtedness of lower income segments in particular, and low levels of financial resilience,” Genesis Analytics said.
As expected, this trend is dominant among low-income individuals (earning less than R1,500 per month), grant recipients (+/- R1,500 per month), and individuals with informal jobs (more than R1,500, but less than R3,000).
By comparison, borrowers in the high-income group acquire credit to finance the acquisition of assets such as motor vehicle(s) or to build, purchase or renovate a house; while only 5% of the low-income individuals could invest in the same way.
The large number of people facing over-indebtedness is of concern for the FSCA, particularly because of the societal risk that arises when consumers are overburdened by debt in perpetuity, leading to disproportionate social and personal harm.
The regulator noted that there are currently two mechanisms in place that deal with over-indebtedness: the insolvency law, and debt review.
The data mirrors finding from financial services firm Sanlam in 2021 which showed that consumers are struggling to shake off the impact of the Covid-19 pandemic on their finances.
Sanlam found that 56% of polled South Africans saw their savings decrease since the advent of Covid-19. The survey found that 59% of 1,200 respondents said they have been forced to change their spending habits.
More than half (54%) of respondents said they are not able to make their money stretch to month-end, while poor financial health is seen as a serious stressor for relationships and mental health.
Data from FNB prior to the start of the global Covid-19 pandemic showed that middle-income South Africans relied heavily on debt with some using as much as a quarter of their monthly income to pay interest on debt.
FNB said that its data showed that more than half of middle-income consumers spend their income in less than five days after receiving it. The lender categorises middle-income consumers as those who earn a gross monthly income of between R7,000 up to R60,000.
Data from Old Mutual, also published in 2021, showed how South Africans are struggling to cope financially.
The group’s savings and investment monitor was conducted through an online survey, with a minimum income threshold of R8,000 and above considered.