26 October 2017

The big reflection

My Money Matters |

South Africa’s new Finance Minister, Malusi Gigaba, raised some eyebrows recently when he equated inclusive growth with radical economic transformation. But his point was well made that “there can be no economic progress that leaves the majority of our people behind”.

Since the advent of democracy, inclusive growth proved an elusive goal, since the benefits of post-1994 wealth creation have not reached the masses by any stretch of the imagination. Inclusive growth can be defined as growth that sees greater participation in the economy by the poor and marginalised, as well as an increase in sharing the benefits of a country’s growth (Deputy President Cyril Ramaphosa recently called it “growth that people are able to see, feel and touch”).

According to the International Policy Centre for Inclusive Growth, South Africa has low inclusiveness compared to other developing countries, in large part due to unemployment and high income inequality. However, while our sluggish GDP growth is a factor, economic growth alone cannot guarantee inclusiveness because it does not necessarily create employment. In fact, Frederick Fourie, research coordinator of the Research Project on Employment, Income Distribution and Inclusive Growth, has said that employment expands at only half the rate of GDP growth. Receiving benefits from formal sector growth in the form of social grants contributes to inclusive growth, but does not generate more money within the financial system.

But it’s not all doom and gloom. “Life is a lot better today than it was pre-1994,” says Armien Tyer, Absa’s Head of Investment of the Wealth and Investment Management cluster.

“Many of the metrics have improved, such as basic healthcare and housing, but there are areas in which we haven’t done well. We haven’t created enough jobs, which results in a lack of dignity; there are 17 million people relying on social grants and there is a question mark next to our having created any semblance of a black middle class.”


  • South Africa has a low level of inclusiveness when compared with its emerging market peers.
  • The financial services sector has been slow to change and current regulations have not facilitated financial inclusion and access.
  • Stakeholders often require incentives to make changes for the right reasons.
  • Banks need to come up with simple financial solutions for the low-income market.
  • A more enabling environment would go a long way towards creating conditions in which the financial services sector can innovate.
  • Banks need to ask themselves which activities low-income earners are engaged in during the course of their day-to-day lives, and how these activities can be addressed by banking services.
  • Inclusive growth, in which all sectors of the population have a greater share of the benefits of the economy, requires that South African business works with government to evolve.

Only when business begins to open its eyes to these challenges and apply a shared value mindset to solutions built around tangible needs, can we expect change of any significant degree. The foundation of shared value is intrinsically about supporting inclusive growth in a way that benefits society and is also good for business.

Time for banking to step up

Financial inclusion is intimately related to social inclusion, which makes it a pillar of inclusive growth. According to The Road to Inclusion: Mastercard Financial Inclusion Survey of 2016, “financial exclusion defines those who are currently not able, or not willing, to fully participate in the banking services offered in their country”. The South African government has challenged the financial sector to achieve financial inclusion of 90% for 2030, which is a distinct possibility. According to the 2016 FinScope survey, 77% of all adults currently have a bank account (if one excludes social grant recipients, the figure is only 58%). This suggests that financial exclusion is not that easy to overcome – but it is undeniable that significant progress has been made in this area since 1994. Nevertheless, this doesn’t take into account the financially underserved, who may have traditional bank accounts but either don’t use them or don’t make use of benefits like savings and loans.

According to BANKSETA, 42% of Mzansi (low income transactional banking) accounts became inactive, indicating that financial access doesn’t automatically lead to inclusion.

Government has further argued that the financial services sector has been too slow to transform and the Financial Services Charter could be reviewed in order to fast-track Black Economic Empowerment. Tyer agrees that current regulations have not facilitated financial inclusion and access. “We are good with policies, white papers and so on, but we’re hampered by poor execution,” he says. A banking-consumer disconnect as Postbank readies itself to enter the financial services space, it is worth reflecting on the fact that many initiatives to bank the unbanked, and thus pull marginalised members of society into the socio-economic mainstream, have not had the desired results. While our strict regulatory environment makes nimble innovation tricky, Vodacom’s M-Pesa and MTN’s Mobile Money appear to have failed because customers had to open bank accounts at bank branches and pay bank charges – obstacles for low-income earners to overcome, particularly when income is irregular (these were not mobile wallets in the true sense of the term). While the idea was a good one, execution fell short of actually understanding what customers really need. This begs the question: did these companies not ask customers what they needed, or undertake research to establish the same? Similarly, it seemed logical for banks to partner with stokvels to drive inclusive growth, but less than half the stokvels in South Africa have opened bank accounts, largely due to banks’ paternalistic approach to community initiatives. So, linkage banking (business partnerships between regulated financial institutions and independent institutions) may not be the hoped-for silver bullet (the FinScope survey shows that only 33% of adults are saving money, with 15% of those saving through banks and 14% saving with other formal (non-bank) institutions). In addition, selling traditional products in the stokvel market seems short-sighted, because there is essentially nothing wrong with stokvels as they are.

Again, the issue is looking at what customers need and finding a way to bring this about. For example, Chijioke Kennedy Oji’s paper Promoting Financial Inclusion for Inclusive Growth in Africa, published by the South African Institute of International Affairs, shows that lower- and middle-class Africans prefer using informal savings and credit schemes because they are considered cheaper, they can borrow from the schemes at any time with little difficulty, and no compliance is required (such as submitting proof of residence or an identity number). In addition, they do not have to provide collateral and do not have to travel to find a bank. The majority of the unbanked are looking for safe, simple ways to move money around that do not complicate their lives unnecessarily.

A problem around banking the unbanked concerns one of apartheid’s most pernicious legacies: a poor understanding of what banks are and what banks do among the financially illiterate and semi-literate. Low levels of financial literacy bedevil efforts to convince people that banks can be trusted and are not there to ‘steal money’. The complexities of banking drive a wedge between the formal economy and ordinary people, and it may be a challenge to find a model that can truly bridge the gap. Another problem is that banking services don’t ensure the availability of capital due to the risk involved, which makes it difficult for people who work in the informal sector to participate in economies. “Part of the answer must lie in finding ways to enable those that are excluded from formal sector employment to find (or remain in) sustainable, paid employment or self-employment in the informal sector and grow their income from such work,” says Fourie. Fourie believes that an explicit inclusive policy strategy is needed to increase employment and to increase self-employment earnings in the informal and formal segments of the economy. He believes both the public and private sectors should address factors marginalising and excluding disadvantaged people from participating in employment and work.

A more enabling environment would go a long way towards creating conditions in which the financial services sector can innovate. However, just how far can the sector go, given that international regulations cannot be subverted (the principle of know your customer is a good example)? How can one close the gap between the demands of compliance and the day-to-day needs of people?

Time to rethink innovation

According to banking education expert Dr Derek Shirley: Another issue is the fact that investors may not have the incentives they need to form the kind of partnerships that could drive real progress. For example, looking into rewards-based products that would encourage customers to use their bank accounts to purchase food, airtime, electricity and so on (rewards could be cash, food vouchers and so on); another possibility is linking a free mobile money service to paid advertisements.

To date, Net1 UEPS (with Grindrod) and Capitec Bank have been most successful in terms of responding to the market’s needs. Investors may have baulked at Net1’s contract with the South African Social Security Agency, but they remain bullish about Capitec’s performance, despite rumblings about reckless lending and bad debt. But are there not important lessons to be learnt in terms of how these organisations have approached the low-income market? Innovation is important, but Shirley, who is also CEO of Cornerstone Performance Solutions, warns that it must be needs-driven. “Innovation means nothing to me as a customer, I’m not interested in tech for tech’s sake,” he says. “What I do want is to see where my money goes each month, and make better financial decisions without being charged more than I’m willing to pay.” Tyer believes that listening to what people really need is vital. “We can certainly listen more, but that is not the only issue,” he says.

“It’s also about changing our approach. We have to consider the social impact of every profit-seeking investment opportunity. Partnering with start-ups and social entrepreneurs is a good idea, but we must also bear in mind that start-ups can fail; where we can’t provide, we have to provide capital. Corporate South Africa has to make that happen if it wants to leave a real legacy.” Tyer suggests that bank segmentation may hold some clues to finding a solution. “It is useful to engage with different kinds of thinking. Find out what black people, millennials, the youth, consumers at the bottom end of the pyramid want,” he says. He argues that “enlightened self-interest on steroids” may be the answer, but stakeholders often require incentives to make changes for the right reasons.

“The real issue is how to diversify the economy and create jobs. Foreign direct investment is important, along with incentives that will allow us to make the most of our competitive advantages. You can’t plan economic growth looking at the next year or two; you need a long-term vision and long-term capital to produce sustainable results.”

In line with shared values

Shirley believes that banks need to place greater emphasis on lasting value and customer value, but this means thinking beyond short-term impact on an income statement. “Companies with a scientific management background don’t think like that – this is ecosystemic thinking, which is more recent. Ultimately, you think of customer value first, focus on sustainable growth, and let the income statement look after itself. But this means taking a less short-term approach,” he says.

“Any shortcomings in the inclusive banking space are really a function of not being able to think of commercially viable solutions that create enough value to the client – or people haven’t found a way to make them commercially attractive yet.” Many models are high-risk, high-cost models with low returns, but offering high-end banking services is not the answer. Banks need to ask themselves which activities low-income earners are engaged in during the course of their day-to-day lives, and how these activities can be addressed by banking services.

“Sometimes a customer just needs a cash management channel – savings on a cash distribution network could be passed on to clients, as when a supermarket plays the same role as an ATM,” says Shirley. “Thinking whose success may depend upon getting services to unbanked people may also be a useful exercise. Ultimately, you need to think about what combination of transacting, saving, borrowing and managing risk will make sense at a particular price to enable low-income earners to prosper.”

Researcher Oji says planning around inclusive growth is no longer just about expanding infrastructure to cater to rural people, he believes it is “a holistic concept with practical and quantifiable gains for countries, with an impact on processes linked to socio-economic development”.

He suggests an enabling regulatory environment would go a long way towards boosting small businesses, for example, along with developing strategies to bring the financially excluded into formal financial institutions so they can take advantage of a variety of financial products. Looking into lending models that do not call for collateral could also be fruitful.

South Africa has a major advantage that many other African countries do not have – a highly developed, mature financial sector that functions extremely well. However, a top-down approach to low-income earners could alienate them from the formal sector, so a mindset change may be in order.

“Ultimately, it comes down to how you can create real value for your customer,” says Shirley. “It is lasting value that is sustainable”.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.

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