The latest research from the National Credit Regulator (NCR) has found that up to 10 million South Africans are currently overburdened with personal debt.
Stagnant wages, a downturn in the global commodity price cycle, a vicious drought and now a contracting economy have pushed a country renowned for a notoriously high reliance on credit, to the brink of a personal debt disaster.
So serious are the problems many are experiencing that an increasing number of South Africans are having to find a second source of income to help make ends meet. Those who cannot increase their income are turning to lenders like Wonga SA to bridge gaps between income and expenditure. However, while that may help to alleviate problems in the short-term, unless macroeconomic factors change in the longer-term, many could find their current lifestyles are unsustainable.
What is the bigger picture?
Statistics from the NCR show there are 25 million people in South Africa with active credit records and 10 million who are in severe arrears. In 2016, the total amount of consumer credit in the country increased to R1.66trillion, representing a year-on-year increase of 2.94 percent.
A large part of the problem is thought to be the introduction of the National Credit Act in June 2007, which was designed to open up lines of credit to those who had previously struggle to obtain it. However, if anything, the Act worked too well and put many consumers who had not previously been able to access credit on a slippery slope to debt. Now, 10 years on, South African is one of the most over-indebted consumer nations in the world.
Rather than using the increased access to credit to purchase wealth creating assets such as properties or obtain business funding, the vast majority of borrowing has been expensive, unsecured credit which has been spent on consumption and has not helped to boost the wealth of individuals.
At first glance, the South African income-to-debt ratio of 74 percent, compared to the UK's ratio of 145 percent, looks healthy. However, in the UK, the vast majority of that debt is in the form of mortgages that are being repaid at typical interest rates of 2 percent. In South Africa, most of the debt comprises of unsecured debts which are being repaid at much higher rates.
What is the role of financial literacy?
One of the biggest problems South African consumers face is the low level of financial literacy in the country. A recent survey by the OECD/INFE International Survey of Adult Financial Literacy Competencies measured the financial knowledge of 30 countries and economies and placed South Africa at the bottom.
The survey of 50,000 respondents found that 30 percent of South Africans achieved a score of less than five out of seven, which was the lowest of all the countries involved. Other worrying signs include the fact that just 48 percent of consumers said they always paid their bills on time, while a third said they had to borrow money to cover their living costs. A situation which is clearly not sustainable.
Are you struggling to deal with high level of personal debt? What plans, if any, do you have to deal with? Please share your thoughts in the comments below.