For many South Africans, living in debt can be likened to a financial quicksand. Could the Covid-19 pandemic cause further trouble for those struggling to meet their financial obligations?
According to the National Credit Regulator (NCR), there are approximately 82 million active credit accounts in South Africa as of December 2019. This store is just one of many which allows South Africans access to money. PHOTO: Michael Brown.
For Ivonne Liebenberg, the debt keeps on rising. She currently has three loans outstanding which she is struggling to keep under control. Under her name, there are two loans to pay off for two cars, and one personal loan to pay off the renovations on her new house.
In total, she owes the bank R210 000.
Her employment in the tourism industry has given her no favours as her monthly income was slashed in half due to the Covid-19 pandemic. After being placed under debt review, Liebenberg is unable to take out further loans to afford basic living expenses, and she has become increasingly worried for her future well-being.
“Covid- 19 turned our world upside down and we are struggling to keep our heads above water,” she admitted.
A worrying trend
Liebenberg is not an anomaly. According to the National Credit Regulator (NCR), there are 25.20 million credit users in South Africa as of December 2019. Of this number, there are 10.71 million credit users who are three months or more behind on their payments.
“There is evidence to suggest that demand for debt was on the rise for the most part of last year [2019],” said Siphamandla Mkhwanazi, an economist at FNB who releases weekly reports on the state of the South African economy.
According to their data, household disposable income has been on the decline in recent times, contracting by 0,4% in the first quarter of 2020.
This graph depicts the general decline in disposable household income since 2002. This can be observed through the trend line which has continued to fall sharply. All raw data is in accordance with the South African Reserve Bank (SARB). GRAPH: Michael Brown.
“Worrying, is that this debt uptake was more on unsecured credit components which generally attract higher interest payments. Unfortunately, this was not matched by income growth, which leaves consumers exposed to economic shocks,” explained Mkhwanazi.
According to Neil Roets, founder and chief executive officer of Debt Rescue, a South African debt counselling firm, there are various reasons why South Africans find themselves indebted. Of these reasons, the lack of financial literacy is a primary cause for concern.
“The lack of financial literacy in South Africa has a massive impact on consumers at this stage. Especially amidst this Covid pandemic, because of the fact [that] nobody was prepared for this,” said Roets.
In addition, he listed the fairly easy access to credit and people’s desire to “keep up with the Joneses” as other prominent reasons for why people get into debt.
“They feel that they want to drive the same car as their neighbour, and they will probably overextend themselves just to afford that car,” clarified Roets.
Neil Roets, Debt Rescue CEO, explains the effect of lockdown on consumer debt and why he believes the payment holidays offered by monetary institutions will not benefit those in debt.
Roets also explained that after the implementation of the National Credit Act in 2005, access to secured loans became more difficult for the ordinary South African. However, this has led the public to turn to unsecured loans as a means to satisfy their demand for credit.
“So the banks actually entice people to take out debt that they cannot really afford, and that’s one of the problems in South Africa. They [South African consumers] feel that if an institution as big as a bank allows them this credit, then they should be able to afford it without doing their own calculations and affordability assessments,” explained Roets.
A devastating storm
“Although it’s impossible to determine the full impact of the hard lockdown based on just one quarter, the four-year-trend shows that for most consumers debt levels are steadily increasing,” said Benay Sager, chief operating officer at DebtBusters, another debt counselling firm, in a press release.
Nevertheless, for DebtBusters, some of the effects of lockdown and the pandemic are already visible in their Quarter 2 report. Clients, who earned over R20 000 in net income, had an unsustainable debt-to-income ratio of 138%, which is 12% points more than the same period in 2016. In addition, unsecured debt levels rose 42% points since Quarter 2 in 2016.
Neil Roets, Debt Rescue CEO, discusses why South Africans must not use the recent repo rate cuts as a sign to take out further credit.
Despite lockdown’s projected effects on this consumer debt, it must still be observed as a single contributing factor towards this socio-economic issue, according to Cobus Venter, the macro service manager at the Bureau for Economic Research.
“The impacts of Covid, means that many economies had both supply and demand shocks that will filter through the economy for a long time. South African regulations are, in many respects, some of the harshest anywhere, and are in some instances certainly influencing the depth of the impact. It is especially in losses in employment where the consumer will feel the pain,” said Venter.
This graph depicts the consistent demand for credit among households in South Africa. Without exception, the demand for credit has increased each year with 2019 demanding over R1.7 trillion worth of credit. All raw data is in accordance with the South African Reserve Bank (SARB). GRAPH: Michael Brown.
Venter also believes that the effects of the pandemic will force many to take out further loans in an attempt to maintain living expenses. If these loans are not granted, he suggested it could leave people vulnerable to Mashonisas or “loan sharks”.
A new hope?
Although the struggle to break free from the shackles of debt are challenging, Kristia van Heerden has proven that, even in difficult circumstances, it is possible.
The financial journalist said that in the early stages of her life she found herself in approximately R100 000 worth of debt on an income of R10 000 a month.
“If you don’t have any understanding what it is you want from your life, and what it is you want from your money, then you become incredibly susceptible to suggestion,” recalls Van Heerden as she remembers how easily she spent her credit.
Kristia van Heerden, financial journalist at Just One Lap, describes how her spiral into debt began at a young age.
However, with a careful strategy in place and an informed financial education, she eventually excavated herself out of the situation. As the months went by, she focused on paying off one credit account at a time, before she was finally debt free. Today she works at Just One Lap, an organisation which aims to provide people with the financial knowledge to succeed in life.
“I think my story is such a great source of hope for people because I didn’t increase my income. I just needed to learn some basic things, and to look at the one thing I could control, which is my expenses,” said Van Heerden.
Nevertheless, in the midst of a pandemic, Van Heerden believes that this time is ideal for those in debt to reflect on the importance of financial health, and if possible, to save.
“It’s an opportunity to save money, but it is also a really good opportunity to just take some time to reflect on what you have and what you should be grateful for,” Van Heerden suggested.