Poor households bank on debt to buy food - survey

Johannesburg - A study has shown that South Africa's poor households were taking up loans to meet basic necessities, with 18 percent of respondents saying they borrowed money to buy food.

The research by FinMark found that despite the significant inroads banks and financial institutions had made in providing financial services, it was disturbing that poorer people relied on debt to survive, rather than having access to savings or insurance mechanisms that would be less expensive and allow them to deal with financial shocks better. In the survey, FinMark studied the perceptions and expectations of South Africans about access and usage of financial services.

Information provided by the FinMark study revealed that between 2005 and 2006, the number of South Africans with bank accounts increased by 1.5 million to 15.9 million people. However, the historical divide in the perception of financial services or products continues to prevail.

While white and Asian respondents said they would borrow money to pay off assets, bolstering their long-term financial standing, black people and coloured people were more likely to seek loans to meet everyday survival needs.

The study showed that the volume of debt being used for reactive purposes showed the limited availability of products to deal with the risks that poorer people faced.

These risks centred around the loss of income stream into families that tended to be supported by one wage earner. More individuals said they received money from friends or family than from company wages and salaries, an indication of fewer income earners supporting larger family and friend networks.

According to Thami Bolani, the chairman of the National Consumer Forum, the trend of poor households borrowing to sustain themselves was "not a new thing".

He said this had to do with high levels of poverty, unemployment and rising food prices. Some poor families were using more than 50 percent of their income to buy food, and where there were shortfalls they would borrow, and they could only get loans from microlenders.

Statistics show that the food component of the inflation rate, as measure by the consumer price index has been increasing the most, rising from 8.5 percent in September to 9.9 percent in October.

Bolani said the problem was that even where income was regular, it was too low for people to have recourse to banks to borrow.

However, once these individuals got into the clutches of microlenders, they got trapped in a vicious cycle in which a greater part of their income went into servicing the punitive interest charges, and they had to borrow more to offset the resulting negative cash flow.

Bolani said the status quo was only widening the gap between people who could afford to use financial services, and those who could not. He added that even if financial services such as insurance products were developed to help poor people deal with uncertainties, affordability would remain a problem. With rising interest rates and inflation, there was a high probability of poor people getting rid of their insurance policies.

For low-income people who could afford to use financial services such as banking, facilities were far away and relatively expensive. Meanwhile, the FinMark study found that black people were more than twice as likely to save through an informal vehicle, such as a stokvel, than through a retirement annuity or pension fund. The motivation to save was to cover emergencies, funeral costs and food. In the past year, 5 percent of those surveyed said they had lost a bread winner.

Knowledge of financial products and how to save was limited, with 33 percent of adults saying they would like to be educated on how interest rates worked. Perceptions about banks in the low-income category remain less optimistic, with adults in the living standards measure (LSM) 1 to 5 group being sceptical of banks.

Only 41 percent considered banks to be an appropriate service provider for them. Surprisingly, the belief that banks take advantage of the poor correlated with income, urbanisation and LSM grouping.