Johannesburg, 15 Jun 2022
The fourth Altron FinTech Short-Term Credit Impact (AFSCI) Index, which tracks the impact of short-term credit[1] extension on the South African economy on a quarterly basis and is compiled independently by economist Keith Lockwood, was released today. The results show that while short-term lending was still impacted by COVID-19, there was some recovery in the fourth quarter of 2021. However, National Creditor Regulator (NCR) data for the first quarter of 2022 is expected to show a decline.
The index acts as an important barometer of the financial health of a vulnerable and often neglected portion of South Africa’s population and aims to improve the understanding of the role that short-term credit plays in the economy through its support of sales, employment and tax collections, and ultimately the country’s gross domestic product (GDP).
New data in play
In this latest index, trends in short-term credit extension were supported by insights offered by Altron FinTech’s own technology platforms to provide an indicator of likely trends in the broader short-term credit market in the first quarter of 2022. This ensures the long lead times associated with official NCR credit data are compensated for.
Highlights of the index
Excluding the Altron FinTech data, there was a 2.6% increase in the index from the third to the fourth quarters of 2021, and a 3% rise year-on-year. According to Lockwood, based on the lending of Altron FinTech-supported credit providers, the NCR data for the first quarter of 2022 is expected to show a relative decline of 5.2%, although this is largely seasonal and would mean that new credit extension was still 4.4% higher in the first quarter of this year than it was a year ago.
He adds that given the lag in the release of credit data by the NCR, it is also worth remembering what was happening in the economy between October 2021 and March 2022 – the period that relates directly to the credit data covered in this edition of the index.
“Omicron resulted in a surge of new infections during this time. However, within the context of improved immunity due to both vaccination and prior infection, there were significantly lower hospitalisations and deaths, with the government maintaining South Africa at adjusted alert level one until 4 April 2022 when the National State of Disaster was finally lifted.
“As a result, the normalisation of economic activity continued. This is reflected in the performance of real GDP and real household consumption expenditure, both of which experienced consistently positive growth from the second quarter of 2021 to the first quarter of this year. Despite this, both indicators were only able to return to their pre-COVID-19 levels in the first quarter of 2022.”
Lockwood says, unfortunately, employment trends did not experience the same level of normalisation. “Despite an uptick in the first quarter of this year, total employment was still 9% lower than before the pandemic began and the number of unemployed people was 21% higher.”
There were also qualitative shifts in employment. Compared with the pre-COVID-19 period, there was a 70% increase in the number of unpaid people working in households, a 10% decrease in the number of people employed by others, and a 12% decrease in the number of employers.
“On the positive side, the average number of employees per employer has been trending higher. After falling from 18.3 people in 2017 to just 11.6 people at the height of the lockdown in the second quarter of 2020, this increased to 15.7 people in the first quarter of 2022.”
What these quantitative and qualitative differences effectively mean, says Lockwood, is that there were still significantly fewer people earning regular incomes in the first quarter of 2022 than before the pandemic started.
“This has implications for the number of people that are deemed to be creditworthy. Nevertheless, the NCR data indicates that there was a slight decrease in the rate of rejections on credit applications – from 67% in the third quarter of 2021 to 66% in the fourth quarter, which suggests that there may have been a slight improvement in the financial position of some individuals and households towards the end of 2021 as the normalisation of economic activity continued.”
Lockwood also points out that the NCR recognises and collects data on different types of credit, including mortgages (bonds), secured credit, credit facilities, unsecured credit, short-term credit and developmental credit. “As at the end of the fourth quarter of 2021, the value of credit still on the books of registered credit providers amounted to R2.11 trillion – up 5.1% on a year earlier. Over 52% of this consisted of mortgages, with more than 22% being secured credit. Short-term credit only accounted for 0.1% of the total.”
He adds that in the year to the end of the fourth quarter of 2021, the total value of consumer credit on the books of credit providers increased by almost R102 billion. “However, this increase was supported almost entirely by the growth in mortgages, which accounted for 89% of the increase, secured credit 14%, and credit facilities 4%. Small increases in developmental credit and short-term credit made marginally positive contributions to the growth, but unsecured credit contracted.”
While short-term credit makes up a very small share of total consumer credit, it remains an important market for several reasons, including:
- This credit is generally advanced outside of the formal banking system by individuals and institutions using their own capital rather than the deposits of their clients;
- It provides first-time access to credit to many people who have never had access before;
- It provides lower-income households with a proportionately greater share of credit than is advanced to them by other forms of credit;
- It is a source of funding to households with low incomes and limited wealth assets in the event of unforeseen developments and emergencies; and
- It provides finance to micro-business for working capital and stock and asset purchases.
“Short-term credit is also relatively more accessible to lower income groups than other forms of credit. This is due in part to short-term lenders operating within local communities and being able to use their personal knowledge of applicants to assess the risk of default in ways that are different to the more rigid risk assessment criteria applied by commercial banks,” explains Lockwood.
The index shows that whereas people with monthly incomes of R15 000 and above accessed 88% of the total consumer credit advanced in the fourth quarter of 2021, those with monthly incomes of less than R10 000 received only 7% of the total. “By contrast, people earning more than R15 000 per month received 43% of the total short-term credit advanced, while those earning less than R10 000 per month accessed 41%.”
People with monthly incomes of R5 501 to R7 500 accessed just 2% of total credit, and 12% of short-term credit, while those earning R3 500 or less receiving 6% of short-term credit and only 1% of total credit. This indicates that the people most vulnerable in South Africa’s economy continue to struggle to access most formal credit markets.
According to Johan Gellatly, CEO of Altron FinTech, the AFSCI Index provides important information. “Because we provide technology platforms to registered short-term credit providers, we are able to collect data that builds a deeper understanding of the market our customers serve so that we can ensure our platforms are in fact meeting their expectations.”
Gellatly says that importantly, though, given that in South Africa there is almost no measurement of how the informal economy contributes to GDP, in sponsoring the index, Altron FinTech is providing some analysis and understanding of this contribution.
“What’s more is that the AFSCI Index is now providing regulators, policymakers, statisticians and our customers with a reliable quarterly benchmark for the entire industry and how it reacts in relation to what is happening in the South African economy and in the country as a whole.”
[1] Short-term credit is defined as loans with values not exceeding R8 000 that are repayable within six months.
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The Altron FinTech Short-term Credit Impact (AFSCI) Index
Since it is the sales that short-term credit extension facilitates that gives rise to its employment-supporting and tax generating impacts, the index is derived from those sales values. It is indexed to 100 in the first quarter of 2015, reaching a peak of 177 in the fourth quarter of 2015 but trending lower since then. At the height of the COVID-19 lockdown, it reached a low of 41, but recovered significantly in the quarters that followed. In the fourth quarter of 2021 it increased to 85 from 83 the previous quarter. This means that short-term credit extension was making 15% less of an impact on the economy in the fourth quarter of 2021 than it was at the start of 2015 but close to 110% more of an impact than at the height of the lockdown.