Indebtedness in South Africa (Latest Data)

Indebtedness in South Africa (Latest Data)
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EXECUTIVE SUMMARY

  • This paper presents an analysis of household indebtedness based principally on the data from the 2000 and recently released 2005/2006 Income and Expenditure Survey (IES) cunducted by Statistics South Africa
  • The analysis highlights the continued deepening of credit markets in South Africa. According to the 2005/6 survey 53% of South African households have at least one outstanding loan
  • Usage of retail credit (provided by both clothing and furniture retailers) increased noticeably across all household income segments in the period between the two surveys. Penetration of vehicle finance also grew strongly, albeit in segments of the market earning in excess of R3,500 per month. With regard to mortgages, penetration overall increased slightly and appears to have declined across lower and middle income segments. Mortgage penetration increased only for households earning R20,000 or more
  • The survey collects data on the value of outstanding loan balances owed by the household rather than on debt servicing costs. A range of assumptions regarding interest rates and outstanding loan terms is therefore required to estimate debt servicing costs. With regard to loan terms, two scenarios have been used. In the first (Scenario A) it is assumed that one third of the loan term remains while in the second (Scenario B) it is assumed that two thirds of the loan term remains
  • The analysis indicates that between 4% (Scenario B) and 9% (Scenario A) of households allocate 50% or more of their disposable income to debt servicing costs and might therefore be considered to be over-indebted
  • An alternative indicator of over-indebtedness or debt stress adjusts this threshold for basic expenditure items - lower income households typically allocate a higher share of their income to items such as food, transport, housing and education and are therefore unlikely to be able to allocate as much as 50% of their incomes to servicing debt. A composite threshold that combines both basic expenditure and debt servicing costs has therefore been used. In addition, other indicators of financial stress have been incorporated into the indicator
  • The alternative indicator defines an over-indebted household as one that is credit-active and allocates 70% or more of its disposable income to basic expenditure items and debt servicg costs, or has municipal arrears or is exceptionally poor, as measured by low per capita incomes
  • Using this comprehensive indicator as many as 2.3 million (Scenario B) to 2.7 million (Scenario A) South African households (between 18% and 22% of all households) could be considered to be over-indebted. So measured, over-indebtedness appears to be more prevalent in the middle-to-upper income segments of the market rather than in lower income segments
  • Perhaps of greater interest to both regulators and credit providers is the percentage of credit active households (as opposed to all households) that appear to be over-indebted. Using the comprehensive indicator of over-indebtedness described above the analysis indicates that a significant percentage of credit users are over-indebted across all segments, but particularly in lower income segments. For example, around half of all credit active households with a monthly income of between R1,500 and R3,500 appear to be over-indebted
  • Aside from the problem of over-indebtedness, there is some concern that the usage of consumer credit limits the ability of lower income households to access mortgage finance. In this regard the analysis indicates that while use of consumer credit does reduce the capacity of low income households to access mortgages, the impact is not dramatic
  • The robustness of the findings is of course limited by any weaknesses in the underlying data and assumptions. In some sense, however, the findings are broadly corroborated by the experience of many providers who have had to develop advanced collections systems and processes to enable them to operate profitably in the market
  • Alternatively, the expectation that relatively low income South African households would be able to service debt without some financial stress is unrealistic. These households, indebted as they are, may well be better off than other households who are unable to access credit. 
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