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Improving financial inclusion in South Africa - BCG

South Africa has made gains in providing previously unbanked people access to accounts, the most basic measure of financial inclusion. However, a significant trust deficit and lack of financial literacy is holding the country back from achieving greater socio-economic development.

The country remains largely a cash society, with low-income consumers wary of fees and a sense of distrust of many financial services, a report on Improving Financial Inclusion in South Africa by The Boston Consulting Group found. The report measured four product categories: credit, savings, insurance, and transaction accounts.

Addressing a Forum at the Gordon Institute of Business Science (GIBS), senior partner at BCG Johannesburg, Adam Ikdal “On the metrics, compared to other emerging markets, South Africa is below average.” 

Financial inclusion challenges
Although 70% of the population has access to a transactional bank account, usage is low with 27% of people withdrawing their money immediately from their accounts. 

One of the reasons for this is a high level of suspicion: “There is a deep mistrust of the existing system and a perception that charges are high, which they are relative to other emerging markets,” Ikdal said. 

South Africa’s national savings rate is among the lowest in the world, as “people value instant gratification rather than saving for the future,” Ikdal explained.  “There is an inflated view of what the government will be able to provide and many expect to receive of social grants on retirement.” 

The recent sovereign credit ratings downgrade would “exaggerate this vicious cycle.” 
The impact of the downgrade on ordinary citizens had been “deeply underestimated,” Ikdal said. “It is very negative for everyone. But the rhetoric is getting very dangerous around how it is perceived by the political class.”

Due to high usage rates of informal channels, such as loan sharks (mashonisas), grassroots credit unions (stokvels), unsecured personal credit is growing faster than the country’s GDP, and defaults are high at 12%. 

High premiums raise questions about the overall sustainability of insurance for consumers, despite the relatively high number of life insurance policies per capita. 

Financial education and literacy 
There is a dire need for financial education and literacy, as positive advocacy from friends and family were one of the only sources of financial information, the report found
Head of Financial Inclusion at the Banking Association of South Africa, Khulekani Mathe said the industry had agreed to collaborate on financial literacy programmes “as it is absolutely critical for inclusion.” However, “there are limits to what the financial sector can do to solve inclusion,” he added.

The need for government and the education sector to broaden financial literacy could no be bypassed, Ikdal argued. “Financial literacy cannot be provided at scale without government,” he said. 

Director Insurance at the National Treasury, Dr Reshma Sheoraj told the forum financial inclusion was a “key priority for Treasury. South Africa has a significant savings and protection gap. Consumers are over indebted and small business is faced with constraints for accessing credit.”

Digital solutions?
Ikdal noted that digital payment channels were not commonly used amongst lower earning consumers, and there was a deep level of skepticism around digital, even among the youth. 

Digital distribution models would not be the answer to inclusion challenges in the short to medium term, and a combination of physical and digital distribution would remain, especially in credit and insurance: “Digital won’t be the silver bullet that everyone is hoping for,” he said. 

Dr Sheoraj noted the complexity of products offered to lower income consumers and the layers of cost involved were a challenge. “There is a clear need for more appropriate and affordable products,” she said.  

Managing Director of Hollard Affinity and Direct Insurance, Mandla Shezi argued financial inclusion cannot just be a social initiative for companies, but must also be financially sustainable. “The needs of the emerging market sector are very different. We need targeted savings products that offer flexibility and allow for emergency withdrawals without penalties,” he said. 

The way forward 
“South Africa faces many troublesome weaknesses that require dogged effort and cooperation to overcome,” Ikdal said, but added “financial institutions cannot solve financial exclusion acting alone.”
He said that banks and insurance companies are “genuinely passionate” about financial inclusion, but the cost to serve the lower end of the market is prohibitive.  
While even mature economies have their inclusion challenges, cross sector initiatives are key for improvement. “There is no one player that can solve this alone. It has to be done along the value chain,” he concluded. 

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