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Johannesburg - South Africans were the world’s biggest borrowers in 2014, with 86% of the population taking out a loan that year, according to a recent World Bank report.
While it is a massive wake-up call to all South Africans,it is not a hugely surprising result, said Khanyi Nzukuma, CEO of Metropolitan.
Why South Africans?
He said on the opposite spectrum South Africans are poor savers with only 20% of adults invested in a savings product from a formal financial institution – one of the lowest rates in the world.
This lack of saving is directly related to our borrowing habits. The less prepared South Africans are for a financial emergency, the more money they will need to borrow if something happens.
"Credit is too readily available in South Africa. This, coupled with the ease and speed at which people can access money from informal private lenders, further contributes to the high rate of borrowing," said Nzukuma.
"The danger lies in the outrageously high interest rates charged by mashonisas, who often resort to strong arm tactics if not repaid in the agreed period. The victims of these informal lenders are compelled to borrow more money to pay off their loans, forcing them into a vicious cycle of debt."
To add to this, South Africans are increasingly guilty of conspicuous consumerism, driven largely by poverty and our troubled past. Individuals feel pressured to possess the latest brands, gadgets or luxury items (very often purchased on credit), in an attempt to indicate their ‘success’ and social standing.
"As a population we are guilty of living for the here and now, demanding instant gratification. Instead of planning and budgeting for a big purchase, we buy things on credit – which can be unnecessarily expensive if it is not something that we need urgently," he said.
How to solve the borrowing dilemma?
Financial education is key to solving the borrowing problem, and it needs to be prioritised by the entire educational system, employers, the financial services industry, government, financial planning bodies and regulators – right through to the stock exchange, in his view.
"There needs to be a better understanding on why we borrow; do we borrow for consumption, to acquire assets, generate income (start a business), or for a goal such as education? Once we understand this, we are able to fully appreciate the cost of borrowing, that is the interest we will pay," said Nzukuma.
Basic financial principles such as budgeting, saving, investing and insuring can go a long way in teaching South Africans better money management, helping many to avoid unnecessary debt. This education needs to start at school level and be continually reinforced. It also needs to be relevant to those individuals being targeted.
"Financial service providers will have to build better relationships with clients and earn their trust. South Africans need to feel safe and secure when investing or insuring with a financial services company. By equipping people with the correct financial tools and solutions, hopefully we can start preparing our clients for the future, empowering them to be able to handle any unexpected financial bumps in the road," he cautioned.
"The responsibility lies with all of us to start re-assessing our ‘must have now’ mindsets. It is up to all of us to break this cycle of borrowing, and instill a culture of saving rather than one of spending. We need to start with ourselves and our families, if we are to see the ripple effect we desire."
