Given South Africa’s history and economy, financial inclusion is a serious issue for the country. It is committed to making up for the disparities of the apartheid era and it wants and needs to improve the lives of its poorer citizens, as much for the economy as for the sake of the people themselves. As such, the country has worked for more than a decade to get more South Africans banked and serviced by financial institutions, with various programmes and policies implemented and no shortage of investments made.

The results have been mixed. There is still plenty of work to do, in part due to some initiatives that did not quite pan out, but at the same time the percentage of unbanked individuals has dropped, and regulators will rightfully point out that while the country does have a problem, it is relatively small when compared with other economies in the region. “It is not a case of 90% of the market being unbanked,” said Rene van Wyk, head of bank supervision and registrar of banks at the South Africa Reserve Bank (SARB), the country’s central bank.

The Unbanked 

An estimated 23.5% of the people in the country are out of the system, while R12bn ($1.04bn) in cash is believed to be held outside of banks. While the country is in some ways very advanced, parts of society remain severely challenged economically. Approximately 25% of the population is unemployed and about 39% lives in poverty, 21.7% of which live in extreme poverty.

The banking sector itself is somewhat structurally unsuited to push into the poorer and more remote corners of the country. It is highly concentrated and conservative with regulations that focus on soundness and stability, all of which can make it difficult to commit resources to collecting smaller deposits and making smaller loans. The World Bank has suggested that a tiered system of licensing be introduced, whereby specialised institutions are specifically designed for the lower strata of the market. Similar programmes are currently in place elsewhere in Africa, such as Ghana, where licensed rural banks provide retail loans, often, though not always, to lesser-banked markets.

Tech Savvy 

At the same time, the strengths of the sector have also worked in some ways in favour of the unbanked. Because South Africa’s institutions are large and stable, they have been able to make significant investments in technology that could help to bring banking to the low-income segment. The country has well-developed systems for financial distribution, including a low-cost pointof-sale (POS) network, mobile banks and retail outlets that act as intermediaries. Standard Bank noted that despite the majority of the unbanked being poor, they are nonetheless comfortable with technology. An estimated 89% of South Africans have mobile phones (the same as the US), and of that segment 39% have smartphones.

The high uptake of technology has resulted in private sector efforts to reach the unbanked through unconventional channels. One such initiative is Standard Bank’s AccessAccount. The institution developed the product in 2013, with an eye to creating a system that allows people to conduct transactions outside of the traditional branch networks. The interface is simple and easy to use, the connections are fast and the platform allows for the establishment of retail agents. A linked debit card is provided for cash-in, cash-out, bill payments and transfers at these retail agents, which are conveniently located around the country. The app also allows sales agents to open new accounts, and it is hoped that this feature will result in more customers in normally hard-to-reach areas.

The proposition is also driven by an attractive fee structure, which sets the prices low and for the most part pay-as-you-go. The account design is conducive to those who cannot afford regular monthly payments and to those customers who must keep an eye on costs. Cash withdrawals at POS agents are free of charge, as are payments at POS locations, mobile banking, internet banking, bill payments and pre-paid recharge. Cash deposits and withdrawals at an AccessPoint cost just R1.50 ($0.13) – though branch cash transactions will incur a fee of R30 ($2.59) or more.

Years In The Making

South Africa has been working for some time to get the unbanked into the system. Under the 2004 Mzansi account initiative, for example, the country’s “Big Four” banks and the South African Post Office (SAPO) created a new set of products that were specifically designed for low-income individuals. These products had a cap on pricing and no monthly management fee.

A raft of other measures have also been introduced. The Financial Sector Charter, which was published in 2004, called for banks to commit 0.2% of their after-tax profits to supporting financial education. A microinsurance framework was published in 2011, while the South African Postbank Act was passed in 2011. It will regularise the institution, which had operated under a Banks Act exemption; under the new act, the SAPO will receive a banking licence. A Cooperative Banks Act was also passed in 2007 to formalise what to date had been informal and poorly regulated institutions, such as savings pools. The first cooperative under the act was chartered in 2011.

These policies, programmes and efforts have had mixed results so far. While the Mzansi initiative was a success in terms of the overall number of accounts opened, the programme languished. Accounts became inactive and banks stopped promoting them. The institutions found that the limits on design made the products relatively unprofitable, and they started to offer alternative low-income accounts. As a result, authorities and other sector participants started to focus on delivery channels and competition to drive inclusion. The microinsurance framework, meanwhile, was dropped, and the decision was made to roll it into the so-called Twin Peaks legislation, due for 2015. The SAPO licence has been delayed, while only two cooperatives have successfully registered with the SARB. Minimum capital levels were set, and most institutions that were otherwise qualified to be registered were unable to meet the threshold.

End Result

Despite some of the programmes being ineffective, South Africa has done well in terms of getting people banked. Finmark’s “FinScope South Africa 2014”, a survey published at the end of 2014, found that financial inclusion had hit 86%, up from 61% in 2004. Research indicates that the country is well served, especially when compared with Africa as a whole, where US-based consultancy McKinsey & Company estimated that 80% of people are not banked.

Relatively speaking, the current rate is quite high when compared with other services and utilities. Only 81% of South Africans have running water and only 64% have flush toilets. Finmark did, however, note that bank usage has not budged in recent years, stuck at 75% in 2013 and 2014. It also found some distressing results in terms of formal savings products. Only 20% of South Africans have such accounts and only 44% of salaried individuals have savings or retirement accounts.

Major Roadblock

The failure of the African Bank is quite relevant to the inclusion debate. The bank made unsecured loans to many of the country’s poorer residents, and while it has attracted criticism for some of its more aggressive sales tactics, it is also seen as performing an important role in providing credit to individuals who otherwise would be outside of the banking system and pushed into informal networks. The bank itself was not deemed by the authorities to be too big to fail, but was seen as too key to central aspects of the economy to be allowed to collapse. Because of its role in pushing and expanding inclusion, the SARB felt compelled to keep it going. The rescue of the bank was seen as much an effort to help the poor as to help the bank itself.

The authorities are stuck with the same conundrum when it comes to the more general subject of household debt. While it is widely acknowledged that consumers have borrowed too much, with perhaps half of those with debt behind on payments, and that some institutions have been lax in their credit analysis, the expansion of credit is good for financial inclusion. It is certainly important that the new standards on assessing borrowers be implemented, but the new guidelines, if followed too strictly, could choke off credit where it is most needed. Striking a balance between encouraging credit growth and ensuring people are qualified to borrow will be a difficult but important task ahead.