Fostering financial inclusion in South Africa

Meet Lydia. Aged 31, she lives in the back room of her mother’s house in a township in Gauteng, South Africa. She supports herself by selling food to schoolchildren and makes less than $40 a month. Although she has a savings account, she’d need to take a taxi to the bank and pay fees, so instead she keeps her money at home.

Zanele is five years older and also lives in a Gauteng township. She sells fresh vegetables at a stand and makes daily cash deposits of her earnings. When her roof collapsed, she took out a loan from a non-bank financial institution at an interest rate of 11% per month.

I met Lydia and Zanele – and many like them – while researching the issue of financial inclusion in South Africa. Gauteng was an obvious place to start. It may be the smallest province in the country, but it also generates the most wealth. Home to the economic hub of Johannesburg and richly endowed with mining, technology and finance industries, it is also the location of Soweto, a city developed as a township for black people under apartheid. Inhabited by more than two million people, with homes ranging from extravagant mansions to makeshift shacks, it is a bustling mix of energy and commerce that nonetheless does not lack for low-income individuals. How to help them gain better access to secure and sustainable finance was our task at hand.

The ups and downs of financial inclusion

There is no shortage of reasons why sustainable financial inclusion is important. By allowing people to transact more efficiently, save for a rainy day, get insurance, or invest to increase their earning power, it raises people’s standard of living and wellbeing. In a country like South Africa – which has its share of economic challenges – it can reduce poverty and boost GDP growth.

That said, and as Lydia and Zanele’s stories attest, financial inclusion is not always a force for good. Inadequate products can harm consumers and, when credit is too freely available, incidents of personal bankruptcy can spiral. This can in turn impact banks’ balance sheets and, ultimately, their ability to support productive investments in the broader economy. And at the same time, consumers have little motivation to save when interest rates are often lower than inflation.

We met numerous people across the Gauteng townships who were financially included, not out of choice but rather because they had to be – in order to be paid a salary or receive their pension. Being financially included sounded good, but in reality it meant travelling to faraway branches, enduring long queues and paying fees in order to withdraw their hard-earned cash. Several interviewees also felt that the informal sector provided loans that were more relevant to their needs, as typically they had very small amounts available for emergencies and preferred to keep their savings at home – like Lydia.

No wonder, then, that although account penetration is high – 70% of adults in South Africa have an account, which is more than Brazil, Chile, India and Russia – their actual use is not nearly as high as in more mature economies. Most South Africans use their accounts to park money temporarily. Many withdraw their entire salary or welfare payment as soon as they receive it, meaning that – in South Africa at least – cash is still king.

From problem to solution

There’s no doubt that financial inclusion is a complex topic – especially for a country as diverse and ever-changing as South Africa. Unfortunately, the available measurement tools are either too simple (such as transaction account penetration) or too complex (such as academic frameworks that are difficult to use) – as was confirmed during our conversations in Gauteng. All too often, such tools fail to take into account whether products and services are mutually beneficial for consumers and providers, and thus sustainable.

To help address these shortcomings, we have created a dashboard that showcases a country’s sustainable financial inclusion in a way that is more sophisticated than the common benchmarks, and is ready for use by policymakers and financial institutions alike. We believe that financial inclusion is not binary, but rather that it must be assessed using a variety of performance indicators that cover the four basic financial products required through one’s lifetime (transaction accounts, credit, savings and insurance), and reflect not only adoption but also usage and sustainability. Adoption without use has no impact, whereas use without sustainability has a negative impact.

Having developed this dashboard, we looked at various countries and realised that no country is fully financially inclusive, not even mature countries in Europe and North America. In South Africa’s case, the journey to sustainable financial inclusion may be ongoing, but it’s important to remember that high account penetration and better consumer protection laws tell a story of tremendous progress over the past five years. South Africans now need to build on this existing base to extend the benefits of financial inclusion more widely.

For example, our in-depth consumer research in the country’s townships and countryside has helped identify three root causes for the gaps in sustainable financial inclusion. Firstly, financial service providers’ business models are not tailored to the needs of lower-income citizens. Secondly, regulation is sometimes insufficiently conducive to financial inclusion and, thirdly, the financial infrastructure often does not support low cost service provision.

The first requires banks and insurance firms, together with the growing ecosystem of financial services providers, to take action – such as offering greater flexibility in loan payments for low-income consumers. The second and third causes, however, require government to provide adequate regulation and infrastructure to support and nurture the innovative business models that will deliver sustainable financial inclusion.

Towards a financially inclusive future

Take your pick of governments around the world – from South Africa to Samoa – and you’ll find many challenges and issues for them to address. But there are abundant reasons why fixing financial inclusion should feature prominently among their priorities. Our dashboard can help pinpoint which element of financial inclusion should be addressed as a priority and what to do about it.

Bringing people into the financial system can quantifiably improve household and national wellbeing. It can improve the lives of individual citizens and the overall economy. It can help drive positive social change and strengthen businesses large and small.

Now, that sounds like the kind of public impact any policymaker would be happy with.


Want to read more? Check out How to Create and Sustain Financial Inclusion and Improving Financial Inclusion in South Africa


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