Improved household capacity to contract and manage debt

The Altron Fintech (Afhri) Household Financial Resilience Index for the second quarter confirmed that the average household in South Africa enjoys a more advantageous arrangement to incur and manage debt than before the Covid-19 pandemic.

The Afhri Index results released in August also showed this, meaning that the index’s long-term uptrend is expected to continue into 2022.

The objective of the Afhri Index is to assess the state of microcredit in South Africa from the perspective of the ability of borrowers to repay their loans. The data provide more clarity on the financial disposition of households and their ability to cope with debt.

Optimum Investment Group Economic Advisor Dr Roelof Botha says Afhri’s second quarter results show a steady improvement in the ratio of South African household income to debt costs, with a 20% improvement over the past two years, and the pickup in disposable income of households since the first quarter of this year – a gain of 3.3%.

“Although most of Afhri’s constituent indicators continued to recover in the second quarter, it is worrying that the full extension of credit to the private sector remains on a downward trajectory.

“This raises questions about the South African Reserve Bank’s recent decision to raise short-term interest rates at a time when insufficient progress has been made with a resumption of job losses.

“Due to the strong positive correlation between the expansion of private sector credit and the growth of gross domestic product (GDP), it has become urgent for the government to reconsider the undue regulatory burden that has been imposed on the formal sector of microfinance, ”Botha explains.

He adds that unless low-income groups are allowed easier access to credit, the pace of job creation in South Africa will remain subdued.

Some of Afhri’s metrics include lump sum pensions, mutual fund assets, annuities, civil debt defaults, household income / cost of debt ratio, and long-term insurance claims. term.

After Afhri’s predictable sharp decline in Q2 2020, a fairly rapid recovery in most key economic sectors since Q3 2020 has helped Afhri trendline return to a positive growth path.

A V-shaped recovery has been evident in a number of other key economic indicators, particularly GDP, retail sales and the Reserve Bank’s Composite Business Cycle Leading Indicator. The latter indicator hit a record high during the first quarter of this year.

Since the reference period of the index, which spans more than seven years, only three of the 20 indicators have recorded negative results, two of which are marginal. This confirms a systemic improvement in the ability of the median household in South Africa to incur and repay debts.

Between the first and second quarters of this year, only six of the 20 indicators recorded declines, indicating further progress in improving household financial health.

Compared to the second quarter of 2019 (before Covid), seven of the indicators recorded double-digit improvement rates. Although half of the indicators are still languishing in negative territory, only one of them (credit write-downs by banks) still has a significant negative trend, AFHRI having generally returned to a growth mode, albeit marginal.

Unfortunately, the four indicators with the highest weight in the index have not yet recovered from the effects of the Covid-19 pandemic. These are employment (public and private sectors) and wages (public and private sectors).

Fintech Director of Altron Johan Gelatinous says the index was developed for the primary purpose of providing the market with essential information about the level of resilience of those applying for credit. It is particularly relevant to the supply and state of microcredit, an important segment of the global credit market, and often the only option for individuals and small businesses.

An econometric modeling exercise carried out in 2019 by the professor Ilse Botha of the University of Johannesburg reported that between the first quarter of 2015 and the third quarter of 2018, South Africa’s GDP would have been R191 billion lower in the absence of credit provided by financial institutions. microfinance.

“Afhri is based on the fact that income is ultimately needed to pay off debt.

“Without income of some sort, individuals cannot qualify for loans that allow expanded access to the full range of goods and services that make up private consumption expenditure, as well as working capital financing. necessary to support or develop small and micro-enterprises. companies, ”says Gellatly.

Botha says it has become urgent for the government to reconsider the undue regulatory burden that has been placed on the formal microfinance sector. Unless lower income groups have easier access to credit, the pace of job creation in South Africa will remain moderate.

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John A. Bogar