Credit extension is growing faster than job creation, and the moribund economy cannot carry that burden forever

A 2014-15 World Bank report declared that South Africans were the world’s "biggest borrowers". Consumer credit-use statistics — a comparison of employment and credit consumer numbers — suggest that South Africans are failing to manage their debt responsibly and that some credit providers might be missing the mark regarding their criteria in affordability assessments.

Despite tougher affordability requirements and large-scale efforts to educate consumers, credit use is outpacing employment growth, and the over-indebted gap is widening.

There were 16.9-million credit-active consumers in 2007, the national credit regulator’s Credit Bureau Report reads. At the time, 6.38-million (or 37.7%) had an impaired credit record. In 2013, there were 20.21-million credit-active consumers, of whom 9.69-million (47.9%) had impaired records.

A record is declared impaired if a debtor is three or more months in arrears on an account, if the debtor is under administration or if there are judgments against the debtor.

In the fourth quarter of 2016, there were 24.31-million credit-active consumers, 9.76-million of whom had impaired records — 40%, or two out of every five credit-active consumers.

While employment has increased by only 18% since 2007-08, the number of credit consumers has grown by almost 44%. The percentage of consumers in bad standing grew from 37.75%, to 40.15%. There are now 24.31-million credit consumers — more than 8-million more people than the total number of employed people in SA.

Even allowing for the fact that some people such as financially supported students may not need a job to qualify for certain credit accounts and not all SA’s employed people will be credit active, there is a huge difference in the numbers.

The official credit statistics for 2016’s fourth quarter peg collective consumer debt at more than R1.69-trillion. A significant portion of this — R8.75bn or more than half of debt book value — comprises mortgages, which are considered a wealth-creation type of debt.

For most people, a home loan will be the largest personal debt they incur in a lifetime.

If we move from rand value to sheer number of credit facilities by type, the numbers shift significantly. Mortgages only represent 4.47% of credit accounts. Credit facilities such as credit cards, overdrafts and store cards make up 65% of credit accounts and unsecured credit 14.6%.

These figures do not account for informal debt. Credit bureaus do not list what consumers owe municipalities, in school fees or unpaid medical accounts. One estimate is that only 40% of consumer-debt information is captured by credit bureaus.

As private loans and lending granted outside the formal system, such as loan sharks or mashonisa loans, are not captured, the problem is likely to be much larger than official numbers indicate.

World Bank survey data from a sample of 1,000 people in the Global Findex Report showed that 86% of South Africans took loans in 2016, mostly from acquaintances or private microlenders.

If risk pricing is added to the picture, the poorer end of the consumer market is out in the cold. All credit on offer — from loans to store cards or hire purchase agreements — is priced for risk: the higher the perceived chance of default, the higher the interest rate charged. Low-income earners will, therefore, usually be charged more than high-income earners for the credit on offer.

Instead of excluding poor and risky consumers from credit, many providers allow access but at higher interest rates. Prohibitive rates, greater need — due to lack of generational wealth or more insecure income — and a lack of financial education collide, often overwhelming the most economically vulnerable.

Under apartheid, most South Africans were denied access to certain financial services including credit, either through direct policies or systemic barriers. When that political system was dismantled, there was a desperate need to reform the social system and the barriers to financial inclusion.

The government has been chipping away at the legislation ever since with repeals, new acts, amendments to existing legislation, patches and policy reimagining. The goal is a very narrow sweet spot — increasing financial access while limiting opportunity for abuse of the hungry-for-credit populace.

The Usury Act of 1968 was replaced by the National Credit Act of 2005. The National Credit Amendment Act in 2015 was a further tightening of the reins, especially in terms of the affordability assessments that credit providers are now required to perform. With each new piece of legislation, the government has tried to get one step closer to that dual target.

Their success is a matter of debate, depending on which side of the market you find yourself. One particularly controversial move was the credit information amnesty, or as the credit and legal fraternity know it, the Removal of Adverse Consumer Information and Information Relating to Paid-up Judgments regulations, 2014.

It compelled credit bureaus to remove information of judgments, defaults, and terms such as "delinquent" or "slow paying" from consumer credit profiles, provided that the capital amount owing had been cleared.

This became a requirement of the bureaus and the credit providers supplying payment information to them. It also meant that no matter how abysmal consumers’ track records of debt payments were, if it was paid up, they were given a clean slate by credit providers doing new assessments.

It was championed by the Department of Trade and Industry and one that caused some ructions between it and the Treasury. In 2015, the then chief director of financial sector development at the Treasury, Ingrid Goodspeed, said that the Treasury had "fought that credit information amnesty, we fought it to the last day".

Credit providers needed "more information, not less", she said at the time.

"The fact that you wipe it out has not … changed anything. The same people who were overindebted before are now even more overindebted."

The Treasury was asked to update its position on the matter, but was unable to respond in time for publication.

Officially, two out of five consumers are credit-stressed, and unofficially, the picture is much worse. By omitting municipal, education, private or loan-shark debt, and education debt, our country’s credit numbers underplay a significant portion of the personal debt carried by the average consumer.

Add to that the pressure of crippling debt-recovery measures such as garnishee orders and asset attachment, insecure employment, stretched regulators, loopholes in the laws and the rising cost of living and the picture is far worse.

Economists say that the amount of consumer debt a country can support depends on the health of the underlying economy. SA may be about to find out what the limits are.

• Reporting for this story is supported by Code for Africa’s impactAFRICA fund and the Bill and Melinda Gates Foundation.