This week, the National Treasury published its finalised financial inclusion policy framework for South Africa, titled “An Inclusive Financial Sector for All”, outlining the government’s roadmap towards a financial sector whose services and products are geared towards the population as a whole.
The first draft of the paper was published for public comment in October 2020. After comments had been taken into consideration, the revised policy framework was endorsed and approved by the Cabinet in August this year.
In an accompanying statement, the Treasury acknowledged that much progress had already been made: “While much remains to be done to achieve the financial inclusion objectives, the headline figures on financial inclusion in South Africa over the last decade reflect positively on South Africa’s progress, with more than 81% of the country’s adult population having bank accounts. However, given low economic growth and rising unemployment, many households are still restricted to using basic financial services.”
According to the paper, available on the Treasury’s website, ongoing challenges include:
• Low savings rates in the traditional formal sector.
• Low take-up of savings and insurance products, with the exception of funeral, credit, and legal cover.
• Inadequate or sub-optimal use of bank accounts.
• Underdeveloped payment options.
• The high costs of remittances and other financial products.
• The limited access small, micro and medium enterprises (SMMEs) have to financial services.
Government policy will rest on three pillars:
1. To deepen financial inclusion for individuals.
2. To improve access to and the use of financial products and services by SMMEs.
3. To improve the enabling foundations, resulting in a more diversified provider and distribution base.
Banking, savings and credit
Elaborating on the first of these pillars, the Treasury noted that while most South Africans had a bank account, in many cases this was not being used optimally.
“For instance, 23% of bank account holders withdraw all their money as soon as it is deposited, illustrating that many people, especially those in the low-income group, make sub-optimal use of bank accounts. This is a concerning trend, since the store-of-value aspect of transaction accounts is removed along with the ability to transact electronically. Users falling into this category, if they have no other products from financial services providers, cannot be considered to be financially included,” the paper said.
The Treasury acknowledged that cash remained the prevalent means of exchange in the substantial informal sector. Barriers preventing a more cash-light society include:
• The lack of a convenient service network that would allow the digitisation of routine payments, such as purchases at spaza shops and payments for groceries.
• The lack of knowledge of the benefits of transaction accounts.
• The high costs associated with ATM withdrawals (which incentivises a single withdrawal).
• Payment innovations favouring middle- and high-income clients (for example, smartphone apps).
On the subject of savings, the Treasury noted that although informal savings were widespread in South Africa (in the form of stokvels), the level of formal savings at regulated institutions “continues to be very low”.
The root causes could include the use of traditional distribution models by financial services providers, high eligibility requirements, unaffordability, and the unavailability of appropriately designed products and services that meet client needs, the policy paper said.
Another concern highlighted in the paper was the misuse of credit, particularly in the low-income sector.
“Retail credit advanced to low-income customers, although high, is primarily for consumption, rather than productive purposes or wealth accumulation, such as buying a house or starting a business. Credit bureau data indicates that most retail credit for low-income earners is unsecured loans, credit cards, and retail accounts. More concerning is that 47% of low-income earners have at least one line of credit that is three months or more in arrears, in comparison with only 20% of higher earners.”
“The low-level use of formal insurance products by the low-income market is concerning, as it reflects the reality that the most vulnerable people in society are not adequately protected against day-to-day financial risks. In times of a sudden (adverse) event, these households struggle to recuperate, thus perpetuating their unfavourable living conditions,” the paper said.
The Treasury said the low uptake of asset insurance and life and disability insurance could be due, among other things, to:
• The lack of affordable and suitable products in the market.
• The distribution model, which historically was aimed at servicing the middle and upper market segments.
• Inadequate financial education on insurance.
• Poor business conduct, including inappropriate sales practices.
The policy paper also recognises the benefits of streamlining the remittance system, whereby working people in the cities send money to relatives in other parts of the country or across our borders.
“Globally, remittances are an important and stable source of income for low-income households, particularly in developing countries. In some countries, the value of remittances is often on par with, or even exceeds, foreign direct investment and overseas development assistance,” the paper said.
It notes that many of the current remittance flows, especially cross-border remittances, go through the informal sector, with associated high costs and a lack of protection.
“Government and the private sector will need to develop this market with a view to achieving greater formalisation and efficiency. Key actions include expanding low-cost, accessible cross-border remittance options by enabling greater competition and increasing interoperability,” the paper said.