On the surface, South Africa appears to be financially inclusive compared with other emerging markets: 70% of adults, for example, have a transaction account. However, it’s not nearly as inclusive as most mature markets, and serious and stubborn gaps remain, according to a new report by The Boston Consulting Group.
Improving Financial Inclusion in South Africa, which is based on primary research consisting of surveys and interviews and a fresh analytical approach, shows that South Africa remains largely a cash society and that low-income consumers are wary of fees and distrust many financial services.
“South Africa has several strengths that it can build upon to create a more financially inclusive society but also many troublesome weaknesses that will require dogged effort and cooperation to overcome,” said Adam Ikdal, a co-author of the report and head of South Africa’s Johannesburg office. “For example, financial institutions will need to work with telecom operators and others to create digital banking channels.”
Given the importance of financial inclusion in promoting socio-economic development and well-being, the report concludes that “the South African government needs to take the lead in improving financial inclusion, while financial institutions themselves need to make radical changes in their operating models.”
A better way to measure financial inclusion in South Africa
Improving Financial Inclusion in South Africa and a companion report, How to Create and Sustain Financial Inclusion, unveil a new tool to measure financial inclusion that is both more sophisticated than common benchmarks and more user friendly. Most financial inclusion tools simply measure how many people have a transaction account. The BCG tool measures usage and sustainability—not just adoption—and it covers four product categories—credit, savings, and insurance, not just transaction accounts. It also pinpoints specific areas where South Africa or any other country should focus attention.
The tool is built on 12 assessments related to adoption, usage, and sustainability among the four product categories. Of the 12 individual assessments, South Africa is financially inclusive in one, somewhat inclusive in eight, and not inclusive in three.
Transaction accounts. Despite South Africa’s strong adoption of transaction accounts, many low-income residents don’t use them. Only 24% make more than three monthly transactions such as withdrawals, transfers, or card swipes, through their account.
Savings accounts. Moderate numbers of South Africans have opened savings accounts, but the nation’s overall savings rate is among the lowest in the world. “Developing a savings culture is a critical element of creating a strong economy and reducing dependence on foreign capital,” said Klaus Kessler, a co-author who is a BCG senior partner.
Insurance. South Africa has a relatively high number of life insurance policies per capita. But high premiums raise questions about the overall sustainability of insurance for consumers. Moreover, the vast majority of policies cover the costs of funeral and burial, important cultural events in sub-Saharan Africa, but relatively few provide long-term benefits to survivors.
Credit. South Africa, a modest borrower of “formal” credit, is potentially overextended in informal credit. The nation is on a par with other emerging markets in terms of the share of adults who have borrowed from a financial institution in the past year. However, informal channels, such as loan sharks (mashonisas), grassroots credit unions (stokvels), and friends and family, are larger than formal channels. Unsecured personal credit is growing faster than GDP, and defaults on unsecured personal loans are high.
The path to financial inclusion
Improving Financial Inclusion in South Africa concludes with a call for the public and private sectors to work together to improve the nation’s financial inclusion. “Acting alone, financial institutions cannot solve financial exclusion. They will need regulatory relief and support from a larger ecosystem of private companies. Likewise, the government cannot decree financial inclusion.
A copy of the two reports can be downloaded at www.bcgperspectives.com.