Could credit education solve SA’s debt problems?
Imagine a world where consumers understand the cost and implications of credit. Imagine a world where individuals are able to manage their debt and commit to their financial goals. Picture an economy of well-informed individuals that necessitates healthy competition amongst banks and credit providers.
This perfect picture may seem an impossible feat in a country where nearly 60 percent of South Africans do not understand the term “interest.” According to credit bureau Compuscan’s latest reports, more than 2.8 million consumers’ reports indicate one or more accounts that are three or more months in arrears. Furthermore, we see that 1.2 million consumers face a court judgment as their worst status on their credit report and with over 146 000 consumers declared over-indebted and currently part of the debt counselling process, we may well have some work to do.
Despite recent credit amnesties, interventions and educational efforts by a variety of institutions, Compuscan’s statistics for the first quarter of 2016 indicate that consumers remain in a position of financial strain. Furthermore, the weakening rand, mounting economic pressures, fuel increases and political instability certainly makes a compelling argument for government, industry members and consumers to find a solution to alleviate consumer over-indebtedness.
We’ve seen many different approaches to consumer debt relief around the world. In developing countries, G20 members like Russia implemented a National Strategy for Financial Inclusion to address the growing global demand for financial literacy programmes as well as more comprehensive strategic approaches aimed at wider access to financial products.
Although there is little evidence of the impact of formal financial literacy programmes in most developing countries, we know that the majority has either implemented or advanced their efforts. Argentina, China, France, Italy and Saudi Arabia are amongst the G20 countries that are yet to consider a formal approach. Amongst those with a more advanced strategy, Uganda’s consumer education campaign has addressed the lack of formal banking and financial management systems to see more than 300 000 bank accounts opened within a period of three years.
Looking to the West, we find that America is in fact not as credit savvy as expected. Surveys found that only 18% of young adults are able to understand and calculate compound interest as they lack basic financial skills. America however had some success in their efforts as studies show a direct correlation between the time spent on consumer education and higher saving rates.
Since the collapse of major world economies in 2008, many first-world countries turned to formal consumer education as a solution. A 2013 study by the European Union Commission revealed that the main cause of over-indebtedness involve the “incapacity to deal with financial products” and a “lack of money management skills”; two major symptoms that are addressed through consumer education.
According to the EU Commission, debt advice has proven successful across Europe despite the fact that not all its member countries have adopted a formal approach. Amongst its success stories is Netherlands, where one euro invested in consumer education resulted in a saving of three euros of losses for the society.
In South Africa, the Financial Services Board and Department of Treasury placed consumer education on the national agenda in 2010 and proposed a National Strategy for Financial Literacy. This called for a joint effort by industry bodies, the private sector and the newly formed National Industry Steering Committee (NISC) to address consumer credit skills relating to budgeting, financial planning, decision-making and understanding the cost and risk of credit.
The Consumer Education Materials Project, a joint initiative between the Banking Association of South Africa and Bankseta, is one of many initiatives that came to fruition since then. By providing the industry with high quality, standardised and user-friendly consumer credit education content, credit providers and other industry members are able to access independent and impartial consumer credit information.
Another noteworthy project involves Ithiuseng Credit Solutions (trading as the National Debt Mediation Association), who has conducted ample research on the topic. Presenting at the CSH Credit Conference (September 2015), NDMA CEO Magauta Mphahlele argued for effective financial education on a national level. Mphahlele stressed the fact that this would require a coordinated approach, structured targeted interventions, continuation of efforts, long-term view and financial commitment by the industry and a wide variety of partners.
The NDMA has mediated more than 7 000 cases and handled more than 45 000 calls to its helpline since 2010. They established a National Responsible Credit helpline in 2011 to assist consumers. To further promote their agenda, the NDMA embarked on a number of projects to educate consumers primarily through mass media. As a result, their efforts have seen a significant influx in consumer debt queries to their call centre.
These projects all focus on imparting knowledge to the consumer during a “teachable moment”, relevant to the specific life-stages such as taking out a student loan or buying a home. Further studies by industry bodies revealed that consumer education structured around these “teachable moments” may well be the answer. The OECD and National Treasury recently did a survey and found that the overwhelming majority of consumers seek financial help from another family member; more reason to empower individuals to impart their knowledge on a macro-level. It can be argued that, once the lessons learnt through consumer education are shared amongst consumers, it may become part of our cultural understanding and their credit habits.
In order to see results, we need to ensure that these strategies are implemented, measured and maintained successfully. We know that it would take time, effort and commitment, but evidence suggests a positive impact is possible. These strategies ultimately rely on an integrated approach to consider and address the quality of educational content, ownership and funding, its target market, distribution channels, frequency and reach.
Consumer Education may not be a ‘quick fix’ solution, but we’ve seen across the globe that these efforts can have a positive impact on the way people think about and behave towards credit. More so, by taking responsibility beyond just these initiatives, other approaches such as responsible lending practises by credit providers will ultimately empower consumers and aid in economic development.