October 2021 – The use of credit is almost as old as trade itself, with merchants, farmers and shopkeepers trading their goods with the understanding of future payment by their trusted customers. Mpho Sadiki, Head of Function in Trading Products and Solutions at Nedbank, looks at how affordable credit is a vital element in achieving financial inclusion objectives.
Even early civilisations, like the Babylonians, have recorded the first known laws relating to interest rates, to facilitate trade and access to goods in growing cities, thousands of years ago.
Since then, a sophisticated global credit system has evolved, but this has also unfortunately brought along an informal lending market that has placed millions under a crushing mountain of personal debt. Online lender, Wonga estimates that there are over 40 000 informal lenders operating in South Africa, who often charge exorbitant interest rates to recoup their costs as quickly as possible.
With South African household debt to disposable income at an excessive percentage of 77%, consumers struggle with a revolving door of debt that leads them to the doors of these ruthless lenders.
This, however, could all be avoided, or at least kept to a minimum with some empowering financial education, along with access to credit products that promote greater financial inclusion, even at the lower end of the market.
The first thing that people have to understand, is the price of credit, or interest. In the formal sector, this is regulated, to protect consumers from unscrupulous practices, ranging from a minimum of 7% (prime) to a maximum of 18%. But in the often-predatory informal market, people can be held at ransom by relatively high and punitive interest rates, which are unregulated. They can charge as much as 50% in interest.
In reality, credit isn’t something to be feared, and can in fact be a valuable tool in wealth creation and asset growth, when used wisely.
A credit card is the fastest and easiest way of accessing consumer credit for those small emergencies that may arise, but it can also be a great vehicle for earning rewards, cashback vouchers and loyalty benefits. This is if the outstanding balance is paid in full, and on time, because even at a reasonable rate, maintaining a revolving door of debt can balloon out of control very quickly.
When used responsibly, a credit card helps to build up you credit score, as credit bureaus observe your healthy financial habits over time. This then empowers you to negotiate much better interest rates than the average person when making bigger purchases, like a vehicle or a home loan, or even when applying for a business loan. While a 0,5% lower interest rate may seem insignificant, it can mean hundreds of thousands in savings on large loan repayments over a lifetime.
Unfortunately, access to credit cards in South Africa has always been the preserve of the middle class, with lower-income earners being excluded by an outdated requirement of a monthly income of at least R7 500.
This forces a huge segment of hard-working people to use mashonisas or loan sharks in the informal sector.
As Nedbank’s new Gold Credit Card drastically cuts the minimum income clients need to earn down to R5 000, with a monthly fee from R40, a whole new segment of consumers suddenly don’t need to take desperate measures when they find themselves in emergencies.
This is true financial inclusion, where more people can access secure credit from an authorised provider. Whether it’s for a family commitment, school fees, car trouble, or simply plugging a gap in the basics, like food and petrol, a much more affordable option is now available for the majority of South Africa’s working population.
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