Measuring financial inclusivity

Johannesburg, 20 Oct 2021
Read time 5min 10sec
Johan Gellatly, MD, Altron FinTech.
Johan Gellatly, MD, Altron FinTech.

When the government announced the initial state of emergency early last year, the microfinance industry was not included as an essential service and was therefore unable to operate until the government moved the country to level four of lockdown.

Johan Gellatly, MD of Altron FinTech, says: “It was disheartening. Banks could conduct business, it didn’t make sense for this sector to be declared a non-essential service. As a result, their business dropped off significantly and micro financiers’ customers were negatively impacted by a sudden lack of access to emergency finance. The sector lobbied government to have the industry included as an essential service. However, when it finally happened, customers were nervous to go into branches to apply for credit.”

However, this ever-agile sector adopted a non-face-to-face, online solution and started trading again. Not at pre-pandemic levels, but business showed a steady uptick and is now close to previous trading levels of a year ago.

“While there has been a steady recovery, we’re not close to where we’d like to be. The impact of COVID-19 has been severe, with some of our customers having to close down their businesses. It’s my belief that the microfinance industry needs more support than it’s currently getting from a regulatory and political perspective.”

The challenge is that the government can’t measure the informal sector’s impact and contribution to the economy. “A street trader or SME will never get credit from a bank because they can’t comply with all of the bank’s requirements; they’re considered a risk. So, their only recourse is to approach the unsecured credit providers for working capital.”

Gellatly goes on to explain: “Official unemployment is at around 36%. With the support from informal microfinanciers, unemployed families are managing to make ends meet by selling goods, fruit and vegetables or other items, making just enough money daily to feed their families. This type of economic activity is classified as part of the informal economy. People are eking out a living for themselves and we should support fuelling this informal economic activity that weans people off relying on government handouts – and this is what this industry is doing.”

Not only were unregulated, non-NCR registered money lenders unaffected by being declared non-essential during the early stages of the pandemic, they also aren’t affected by any government regulations. The National Credit Regulator (NCR) can audit all other lenders, but the unregulated lenders are under the radar, despite playing a critical role in the economy.

This critical role was highlighted in the results of the Altron FinTech Household Financial Resilience Index, which talks to financial inclusivity and tries to encompass as much of the South African population as possible in the hope of widening the net of people who can transact in the formal economy. “It’s too complex to measure the informal economy currently, but if we can get them to cross the divide from transacting with cash to transacting with instruments, we can measure their contribution.”

The regulated microfinance sector, which are NCR registered service providers, is often regarded by regulatory bodies and politicians as exploitive. However, the data provided by the index shows that the industry isn’t as disreputable as populist role-players claim. “We’re hoping that the data will change perceptions of the microfinance industry and the contribution that it is making to the country’s economic growth. The index highlights that the customers of microfinanciers are very responsible borrowers. They repay the credit that they apply for, and they do so diligently. This was encouraging to see.”

He highlights that the index results are based on NCR-regulated micro-lenders and their customers and does not include the unregulated ones. “Unregulated microfinanciers outstrip the number of registered providers by three- or fourfold, which is why one has to consider the contribution that non-regulated lenders are making to SA’s economy, and why this type of credit should be regulated and measured. The rands generated by this sector are easily converted into employment or retail spend. Supporting industries see the benefit of this type of credit fairly soon after it is granted.”

This type of credit is traditionally extended for emergency funding, such as a burst geyser, car repairs or even bridging finance for a business. The average banked person uses their overdraft for this type of emergency. But there’s a large sector of the economy that can’t meet the banks’ requirements for a loan or overdraft facility, and these people turn to microfinanciers for relief. Gellatly says: “The index clearly shows that these loans aren’t being used for frivolous purposes: The majority of people who apply for this credit use it for growth, emergency and home or business improvements.”

He goes on to explain that when the government started increasing the regulation of microfinanciers, this type of credit declined drastically overnight. “Had they kept fuelling the industry instead of clamping down on it, the numbers might have looked very different. Instead, the credit extended in this sector was halved. In addition, only the regulated lenders were affected, the non-regulated ones just carried on conducting business as they always have.”

Clamping down on above-board microfinanciers resulted in some legitimate businesses closing down, and others simply becoming non-regulated because it was just too onerous to conduct business under the new regulations. “There must be regulation and oversight, but this needs to be balanced against the benefits that this sector holds for the economy,” concludes Gellatly.

View the results of the latest AFHRI Index here.

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