Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
REPORT | SEPTEMBER 2016
Credit on the Cusp:
Strengthening credit
markets for upward
mobility in Africa
REDUCING POVERTY
THROUGH FINANCIAL SECTOR DEVELOPMENT
CONTACT US
Palm Suite, Riverside Green Suites
Riverside Drive, Nairobi
P.O. Box 5980-00100 Nairobi, Kenya
Phone: +254 20 402 4000 / Mobile: +254 729 729 111
Email: info@fsdafrica.org
Twitter: @FSDAfrica
Website: www.fsdafrica.org
1
Executive Summary
Building healthy credit markets in market developments in finer grained
Africa by 2026 detail in terms of product type and
market segment.
African economies are currently
undergoing dramatic changes, including a In markets where cusper credit remains
changing consumer base. Absolute poverty constrained, but could open very quickly
is reducing as a new class of consumer— through new digital channels:
the cusp group—emerges. This group • Regulators could encourage the
(which we call “cuspers”) now accounts for expansion of a diverse range of credit
23% of sub-Saharan Africa’s population, offerings over electronic channels
covers a segment of active earners getting as a means of expanding access at
by on $2-$5 per day and is straddling significantly lower cost and potentially
the formal and informal worlds. For at lower risk than previously possible,
this group, healthy credit markets could especially in places where credit
expand opportunity and enable upward information sharing mechanisms
mobility, helping to build a true middle lag behind and only a small share of
class. But, for this to happen, credit needs cuspers have formal salaries.
to expand and to do so in healthy ways. We • Donors could support experimentation
conclude that donors and policymakers with new kinds of person-to-person
ought to take an active role in enabling (P2P) lending (an eBay for P2P
cusper credit markets to open up in a lending, for example), helping to open
positive way, seizing a once-in-a-generation the cusper credit market in ways that
opportunity to leverage financial markets traditional banks have not.
for upward mobility. • As new electronic lending takes hold,
regulators and banks could introduce
Across the entire sub-Saharan Africa machine learning e-arbitration of small
region: disputes, enabling efficient and smart
• Regulators, donors and lenders in all management of disagreements in a
markets should take note of shifting quickly-growing market.
demographics and the key importance • Regulators ought to invest in digital
of the cusp group as a market, political identification and digital asset
force, and as the future middle class registries. Outdated and largely
in countries that create the right manual systems are inhibiting market
conditions for them and their children development, rendering effective credit
to thrive. information sharing impossible in
• Regulators should improve their some markets and making it difficult
credit market monitoring by refining to turn assets into collateral. This is
reporting requirements for lenders, also exposing vulnerable consumers
helping regulators to better track to fraud in some of their largest
i
investments. Blockchain technology Background low credit-to-GDP ratios. Africa needs earn much, but they earn it regularly and
and ubiquitous mobile phone more credit, and it needs better credit. A almost certainly through a bank account,
utilization open new opportunities for Enthusiasm around the once-popular healthy credit market simultaneously offers where lenders have very high odds of
registries that are clear, reliable and “Africa Rising” narrative is abating in accessible credit at a reasonable cost, has deducting their loan payments before the
easily available to all. the face of slower-than-expected growth, robust lenders who strategise to endure, borrower has a chance to delay a payment
macro volatility deriving from continued offers diverse forms of credit suiting or change her mind. Being relatively sure
Where credit access is already very open reliance on raw material exports in many borrower needs, and has a preponderance of repayment, lenders are comfortable
and indebtedness begins to pose a new countries, and the reality of persistently of credit that is value adding for consumers lending at very high levels of debt service
kind of threat to cusper welfare: high inequality. Even through a period and lenders alike. against these formal incomes.
• Regulators—or even private lenders— of high growth, we did not see large
could introduce the concept of a numbers of people move into the middle Given major shifts taking place in And borrowers—especially when they get
learner’s licence for credit, helping class (typically characterised by stable jobs, African economies, how can donors their first jobs—often take as much of that
borrowers restrict their borrowing in budgets with space for expenditure beyond and policymakers guide credit market credit as they are offered. In a society
early years while they learn the rules pure necessities, and the possession of development in a way that strengthens the wedded to the ideas of transformation and
of the road and work towards a longer- collateraliseable assets like land, homes economic well-being of the cusp group post-apartheid upward mobility, desire
term financial future of building assets. and cars). Instead, we observed a shift over the next 10 years? FSD Africa, which is a powerful force. With large extended
• Regulators should consider new from absolute poverty into a cusp group exists to help strengthen financial markets families often depending heavily on every
approaches to restraining lender of those getting by on about $2-$5 per in sub-Saharan Africa, commissioned this one of those coveted formal salaries,
behaviour, such as by introducing “Last day. This group straddles the formal research to seek answers to this question borrowers underestimate the demands on
in, last out” rules, which would rank and informal economies, and while they through the experiences of cusp group their payslip from living expenses, let alone
lenders’ claims on borrowers’ incomes strive for a stable middle-class future, they consumers, and the lenders serving them, loans. In South Africa, cuspers borrow to
in the order in which lenders issued remain vulnerable and largely lacking in in three distinctive markets: South Africa, display their wealth; to announce to the
loans. In the event of default, the last meaningful assets. Ghana and Kenya. world that they have arrived.
lender to give a client a loan—tipping
the scales of affordability—would Credit markets play an important role So borrowers overextend. Salaries are
have the lowest priority in terms of in shaping cuspers’ destiny. On a macro Faces of cusper credit markets diverted nearly entirely to loan payments,
repayment, thus encouraging lenders scale, credit facilitates growth, creating new leaving little to live on. The loss of that
to be disciplined in the issuing of loans opportunities for cuspers across the region. Our research brought to life clear faces of formal job or the loss of the income of
to already strained borrowers. At a micro level, healthy credit markets three very different cusper credit markets: a spouse places tremendous strain on
• Donors could support fintech tools can improve the well-being of cusper borrowers who find it difficult to bounce
that actively remind borrowers of their families by helping them smooth incomes South Africa we call “Stuck.” back. It’s more difficult in South Africa
own debt service at the moment of and expenditures, increase and diversify Consumer lending to cuspers is extensive, than it is in the other markets for someone
temptation by, for example, lighting up earnings, and accumulate assets even in the aggressive and highly formalised. There to start over with a low-capital trading
a credit card in red when the balance face of economic fluctuations that tend to is plenty of money to lend, fuelled by easy business. Self-control seems to set in
is approaching a dangerous limit, impact upon them, and the classes below availability of cheap domestic funds and only after painful and debilitating debt
or sending borrowers a warning text them, disproportionately. a competitive, sophisticated finance and experiences.
message when the balance grows at too retail sector eager to serve. The ticket into
quick a pace. But today, Africa is severely under-lent. this vibrant borrowing wonderland is the One might expect lenders to tighten up
Most countries in the region have very payslip. The formally employed may not to avoid defaults, but they are competing
ii iii
to extend seemingly lucrative loans to proxy scores determining eligibility for macro-economic situation). The loans worthy persons—payroll clients and,
cuspers. Eventually, when competition small starter loans, has expanded access that are trickling out are relatively small, to a limited extent, above-the-cusp
entered and caught up, one of the early for many first-time formal borrowers in a expensive, and short in duration. Any entrepreneurs—squeezing the cusp group
players making unsecured loans, African very short period. So far, these loans—led capital used for investment demands even more. Mobile lending schemes—like
Bank (ABIL), competed by offering the by Commercial Bank of Africa’s (CBA) dramatic cutbacks in the household M-Shwari—could be incredibly valuable
same borrowers more credit over longer M-Shwari product—have started very small. budget, since investments cannot produce in opening the credit market to cuspers in
periods. These are risks that are often too But newer entrants, like Kenya Commercial sufficient returns within the loan durations Ghana, should a financial institution rise to
heavy to bear for cuspers, whose jobs are Bank (KCB), are offering larger starter available. Those who are able to borrow the occasion.
uncertain (especially over longer periods) loans, averaging $27 for a first-time typically do so from a place of weakness
and whose budgets are tight. Bad loans borrower, up from $5 on M-Shwari. rather than strength, borrowing to rescue
mounted, forcing the bank to be bailed out These short-term loans are often used for ailing businesses or avoid catastrophe Conclusion
and restructured. convenience purchases and unexpected rather than to finance opportunity.
needs rather than investments. As the loan Cuspers with a coveted payslip can try Credit markets will play an important
South Africa now struggles with an size grows, but duration stays constant, their hand at bank credit, while the self- role in shaping the destiny of the cusp
extensive indebtedness problem. But many some borrowers begin to feel pinched. employed are limited to group-based credit group. Without attention from donors
of the tools that make a credit market They stop paying, prioritising the parts of and the risks thereof. Once they find a and policymakers, it will be exceptionally
work are already in place: suppliers are their budget—including other kinds of lender who is willing to extend a loan, they difficult for most African countries to
incentivised to expand their outreach, cost- loans—that feel more pressing. Technology tend to stick with them and grow their loan find Goldilocks credit markets that are
effective income verification is available for is encouraging very rapid growth in formal limits slowly. Credit information sharing— able to extend opportunity to more
the large formally employed sector, credit lending, and the forces of competition though mandated by law—is largely cuspers over the next 10 years, without
information sharing is highly sophisticated, seem to be encouraging larger, longer elusive today, as enforcement of full lender risking over-leveraging and massive over-
and there is a specific regulator watching loans. Kenya’s digital lending revolution participation is weak. indebtedness. The challenge is daunting,
credit market conduct and monitoring could either pave the way for a rapidly but not impossible, and can begin with
consumer debt. Still, the market is failing expanding credit market that begins to Group-liability microfinance loans have simple interventions like improved market
to self-correct. offer more diverse forms of credit and been an important entry point into monitoring. Failure to act, though, means
continues to unlock new value for cuspers, formal borrowing for many cuspers. At certain failure. It means that an entire
Kenya we call “Uncertain.” or could give rise to heavy competition in Opportunity International Savings & Loans generation of cuspers will fail to rise.
Loans have historically been based on short-term, primarily consumption-based (OISL), group liability is the only option
collateral and relationships. Those who credit that could lead Kenyan cuspers for individuals unable to put up 150%
wanted to borrow would first save for towards a “South Africa” debt situation. collateral. With group cohesion reportedly
several months with the lender before a deteriorating amidst urbanisation and
credit offer was extended. Though credit Ghana we call “Squeezed.” competition, OISL is considering changing
information is now shared to some extent, Amid fiscal instability and high inflationary its focus to SMEs and individual borrowers
borrowers tend to stay put with the same pressure, those with capital are choosing who can meet collateral requirements—in
bank or microfinance institution in order to invest in risk-free treasury bills, which other words, moving away from most cusp
to keep accessing larger loans. currently return 25% per year, rather group borrowers.
than much riskier consumer lending
But that landscape is changing. Mobile (particularly to the cusp group, which is Today’s incentives push lenders to
phone-only lending, based initially on made even more unstable by the country’s consolidate their focus on fewer credit-
iv v
Contents
Executive Summary i
Figures & Tables vii
Acronyms ix
About BFA xi
About FSD Africa xii
Credit on the Cusp: The Expansion Imperative 01
Background 03
Africa Rising? The failed emergence of a middle class 04
The importance of the cusp group 10
Theory: Credit & cusper well-being 10
In search of the Goldilocks credit market 13
Research methodology: Faces of cusper credit markets 14
Faces of Three Cusper Credit Markets 17
Demand-side decision making 18
“Stuck” in South Africa 22
“Uncertain” in Kenya 30
“Squeezed” in Ghana 40
Lending on the Cusp 57
Lender decision making 58
Unsecured lending in South Africa: African Bank 59
Alternative data mobile lending in Kenya: Commercial Bank of Africa’s M-Shwari 62
Microfinance in Ghana: Opportunity International Savings & Loan 64
A comparative view of business models 66
Healthy Cusper Credit Markets by 2026 69
When credit is good for cuspers 70
A call for intervention 71
Conclusion 75
Photo credit: Paul Saad End Notes 76
Figures & Tables Acronyms
Figure 1 Domestic credit to private sector as a xii ABIL African Bank Investment Limited
share of GDP in focus countries
AfDB African Development Bank
Figure 2 Real GDP growth per capita across 05
focus countries (annual percent) APR Annual Percentage Rate
Figure 3 Foreign direct investment as a share of 05 ATP Ability to Pay
GDP
BFA Bankable Frontier Associates
Figure 4 Composition of cusper expenditure 06
budgets, household surveys CapEx Capital expenditures
Figure 5 Distribution of the population in cusp 07 CBA Commercial Bank of Africa
households in focus countries
CRB Credit Reference Bureau
Figure 6 Interest rate spreads and prime lending 41
rates in focus countries FSD Africa Financial Sector Deepening Africa
IMF International Monetary Fund
Table 1 Overview of demand-side sample 12 LOP Logistics of Payment
Table 2 Summary of credit market comparisons 20 NPL Non-Performing Loan
in focus countries
OISL Opportunity International Savings & Loan
Table 3 Kenyan cusper borrower perceptions of 36
short and medium term loans OpEx Operating expenditures
Table 4 Enforcing contract statistics, World 59 P2P Person-to-Person
Bank’s 2016 Doing Business Report
PPP Purchasing Power Parity
Table 5 Summary of the basic features of three 60
lenders SME Small and Medium Enterprise
Table 6 Summary of ABIL financial model 62 WTP Willingness to Pay
Table 7 Stylised financial models of focus 65
lenders, circa 2013-2014
viii ix
About BFA About FSD Africa
BFA (Bankable Frontier Associates) is Financial Sector Deepening Africa (FSD
a global consulting firm specialising in Africa) is a non-profit company funded
the development of financial services for by the UK’s Department for International
low-income people around the world. Development, which promotes financial
Our approach is to seek out, create and sector development across sub-Saharan
implement solutions to the challenges Africa. It is located in Nairobi, Kenya.
faced by low-income people in managing FSD Africa sees itself as a catalyst for
the financial matters that underpin change, working with partners to build
their lives. We purposefully partner with financial markets that are robust, efficient
cutting-edge financial and nonfinancial and, above all, inclusive. It uses funding,
institutions that touch the lives of low- research and technical expertise to
income customers. In creating solutions, identify market failures and strengthen the
we integrate our deep expertise in capacity of its partners to improve access
customer insights, business strategy, new to financial services and drive economic
technology and growth-enabling policy growth. FSD Africa is also a regional
and regulation. Founded in 2006, our platform. It fosters collaboration, best
clients include donors, investors, financial practice transfer, economies of scale and
institutions, policymakers, insurers and coherence between development agencies,
payment service providers. BFA has offices donors, financial institutions, practitioners
in Boston, New York and Nairobi. and government entities with a role in
financial market development in sub-
For more information, please visit: Saharan Africa. In particular, FSD Africa
www.bankablefrontier.com provides strategic and operational support
to the FSD Network. FSD Africa believes
strong and responsive financial markets
will be central to Africa’s emerging growth
story and the prosperity of its people.
For more information, please visit:
www.fsdafrica.org
Photo credit: Peter-Wachira Irungu
x xi
Credit on the Cusp: The Expansion Imperative
Enthusiasm around the once-popular below them, disproportionately. Whether
“Africa Rising” narrative is abating in credit is available to cusp borrowers
the face of slower-than-expected growth, and the nature of its effect on their lives
Figure 1: Domestic credit to private sector as a share of GDP in focus countriesi macro volatility deriving from continued depends on the health of local credit
reliance on raw material exports in many markets, which are changing substantially
Domestic Credit to Private Sector as % GDP, World Bank Indicators countries, and the reality of persistently in the face of rapid urbanisation, persistent
high inequality. Even through a period inequality and informality, technological
of high growth, we did not see large transformation, and perpetually weak state
numbers of people move into the middle institutions.
class (typically characterised by stable jobs,
budgets with space for expenditure beyond But today, Africa is severely under-lent.
pure necessities, and the possession of Most countries in the region have very low
collateraliseable assets like land, homes credit-to-GDP ratios (see Figure 1).
and cars). Instead, we observed a shift
from absolute poverty into a “cusp” But Africa does not just need more credit,
group getting by on about $2-$5 per it needs better credit. A healthy credit
90 - 110% day. This group straddles the formal market simultaneously offers accessible
and informal economies, and while they credit at a reasonable cost, robust lenders
strive for a stable middle-class future, they who strategise to endure, diverse forms
remain vulnerable and largely lacking in of credit suiting borrower needs, and
meaningful assets. The group is large— a preponderance of credit that is value
cusper households encompass nearly a adding for consumers and lenders alike.
quarter of Africans today—and politically
important. Their successful entry into the
middle class—a real engine for sustained
Ghana Kenya South Africa United States Theorized “Turning Point” growth via domestic markets—is by no
means guaranteed.
Credit markets play an important role in
shaping that destiny. On a macro scale,
credit facilitates growth, creating new
opportunities for cuspers across the region.
At a micro level, healthy credit markets
can help improve the well-being of cusper
families by helping them smooth incomes
and expenditures, increase and diversify
earnings, and accumulate assets even in
the face of economic fluctuations that
tend to impact upon them, and the classes
1
Background Photo credit: Ollivier Girard 2 3
Background FSD Africa, which exists to help Figure 2: Real GDP growth per capita across focus countries (annual percent)iv
strengthen financial markets in the
region, commissioned this research to Annual Growth in GDP Per Capita (%)
answer one driving question: Given major
shifts taking place in African economies, Ghana
how can donors and policymakers guide
credit market development in a way that Kenya
strengthens the economic well-being of
the cusp group over the next 10 years? We South Africa
sought answers in the experiences of cusp
group consumers, and the lenders serving Sub-Saharan
them, in three distinctive markets: South Africa
Africa, Ghana and Kenya. Dissecting (all income
these stories, we begin to question our levels)
old “rules” about how to build healthy
credit markets and begin to envision new
interventions that can help nurture credit
markets across the continent. Figure 3: Foreign direct investment as a share of GDPv
Foreign Direct Investment as % GDP
Africa Rising? The failed emergence of
a middle class
Ghana
In the past five years, a number of highly
publicised reportsii on the economies of Kenya
Africa have painted an optimistic view of
the continent’s future and predicted the South Africa
emergence of a new middle class. But the
reality is that both growth and investment Sub-Saharan
have been more moderate than expected Africa
in the past few years. Rather than a new (all income
era of stability, many economies are facing levels)
continued macroeconomic volatility and
persistent inequality. The predicted
expansion of the middle class has failed to
materialise.
McKinsey researchers highlighted the also increasing, peaking in 2007 at $87
Periods of high growth have been high fact that continent-wide growth between billion—nearly the magnitude of flows
water marks in economies with persistent 2000 and 2008 was about 4.9% (almost 2% going to China.iii This investment was
macroeconomic instability. Many of these higher than the global average of 3%), thought to usher in a new decade of
“Africa Rising” reports have highlighted fuelled by a commodities boom and the consistently high growth rates.
the high growth rates across the continent. end of violent conflicts in some parts of But, if we look at the growth experiences
For example, The Economist pointed out the region. The Economist projected this of our focus countries, we see that growth
that six of the 10 fastest growing countries growth rate to increase to 6% between has been moderate. South Africa has been
between 2001 and 2011 were African. 2012 and 2022. Foreign investment was growing very slowly, and Ghana has faced
4 5Figure 4: Composition of cusper expenditure budgets, household surveys xiv,xvxvi Figure 5: Distribution of the population in cusp households in focus countriesxx
Composition of Cusp Consumption Budgets (%) Distribution of Cuspers on Income (%) by Country
27% Ghana 11.2 million
% Poor
32%
Food
42%
4%
4% Transport % Cusp
5% 7%
6% 6% Kenya 12.6 million
7% 9%
Utilities % Middle
4% class &
60% rich
48% Housing
40% South 16.1 million
Africa
Other
Ghana Kenya South Africa
declining growth and macroeconomic export commodities. Without significant away from agricultural livelihoods would quite high, above 50% in some markets.
volatility in spite of high levels of growth in manufacturing and other more expand the middle class. A middle class is Where the share of the budget going to
investment. employment-intensive sectors, it’s unclear important for reasons beyond the welfare food may drop—for example in South
whether Africa’s economies will be able of those who are able to graduate out of Africa with a sophisticated and efficient
Demographic dividend or demographic to absorb the large, educated youth poverty. It is middle-class consumers who retail industry—those costs are replaced
curse? Many have argued that Africa population into their workforces. drive domestic demand and continued by spending on necessary transportation,
will soon capitalise on a “demographic GDP growth, and many political scientists utilities and housing, which are also
dividend” achieved by a large youth believe that a larger middle class ensures relatively inelastic necessities.
population moving into the workforce Incidence of poverty—in terms of greater political stability.
with higher levels of education than headcounts and “lived poverty”—remain The structure of cusper budgets makes
previous generations.vi But whether the strikingly high. High levels of inequality The African Development Bank (AfDB) these households particularly vulnerable to
demographic dividend is actually realised have meant that the gains of the past 15 reported that Africa’s middle class had inflation and exchange rate fluctuations,
relies on education investments keeping years have not been evenly distributed. grown to 34% of the African population serious problems in all three of our focus
pace with increases in school enrolment Rates of “lived poverty”, based on by 2010, up from 27% in 2000. However, markets.xii In Kenya and South Africa,
and on the capacity of the economy to incidence of families going without basic nearly all of that growth was in the where we have disaggregated data on
create jobs for a larger, more educated necessities, have changed very little since subgroup they call the “floating class”, consumer prices, we find that low income
workforce.vii 2002.viii A large share of the population getting by on just $2-$4 per day. Over the groups—the groups less capable of dealing
continues to go without sufficient food, same period, the rate of transition from with price increases—typically experience
Labour productivity in sub-Saharan Africa medical care, water, cooking fuel and cash the floating class into the more stable larger increases in inflation than the
has been improving, growing at a rate of income. Seven out of 10 of the region’s middle class categories of $4-$10 per day headline rate and the rate for higher
2.7% per year between 2000 and 2008. people still live on less than $2 per day. has been negligible. xi income earners.xiii
ix
But these gains have been fuelled largely The number of impoverished people on
by rapid urbanisation, which accounts the continent has doubled since 1981.x We find $2 to be an incredibly low bar for The nature of the cusper labour market
for 20-50% of the increase in labour entry into the “middle class.” AfDB authors also leaves them vulnerable. Cuspers
productivity in some African countries. Instead of a growing middle class, we have argue that at this level, a household’s food occupy the low-skilled labour market,
Also, recent volatility in growth across the a new, vulnerable cusp group. In Africa, consumption expenditure drops to below often in the informal sector. Even when
region has highlighted how dependent analysts have thought that the combination 50% of income. But, we see that the share they have formal jobs, those jobs are often
many of the region’s economies are on of growth, urbanisation and a general shift of cusper budgets going to food remains uncertain and unstable.
6 719% | 2.8 17% | 27.7 32% | 3.9 49% | 17.7
CUSPERS MILLION CUSPERS MILLION CUSPERS MILLION CUSPERS MILLION
Mali Nigeria Chad Sudan
26% | 4.2 6% | 3.6
CUSPERS MILLION CUSPERS MILLION
Burkina Faso DRC
33% | 4.4 25% | 22.5
CUSPERS MILLION CUSPERS MILLION
Senegal Ethiopia
29% | 10.4
CUSPERS MILLION
Uganda
LIVING ON THE CUSP 31% | 6.0
CUSPERS MILLION 30% | 12.6
CUSPERS MILLION
Côte d‘Ivoire
Kenya
23% of sub-Saharan Africans are living in “cusper” households that get by on $2-$5 per
45% | 11.2
person per day. This map shows their total percentage per country (relative to the overall CUSPERS MILLION 23% | 10.8
CUSPERS MILLION
country population) and size in millions. Ghana
47% | 0.8 Tanzania
CUSPERS MILLION
Gabon
38% | 8.1
CUSPERS MILLION
Cameroon
36% | 1.5
CUSPERS MILLION
Congo
27% | 5.5 4% | 0.9
CUSPERS MILLION CUSPERS MILLION
Angola Madagaskar
33% | 0.7 35% | 0.7 11% | 1.5 31% | 0.4
CUSPERS MILLION CUSPERS MILLION
CUSPERS MILLION CUSPERS MILLION
Namibia Mauritius
Botswana Zambia
31% | 16.1 15% | 1.7 18% | 4.4
CUSPERS MILLION CUSPERS MILLION CUSPERS MILLION
South Africa Rwanda Mozambique
8 9They are less likely to have a written or 2. The experience of credit in this group of credit may have a negative effect on than would be the case during business
long-term contract and are more likely of consumers has important policy growth. Some studies suggests that when cycle recessions. Credit crunches lead to
to lose their jobs during downturns.xvii and political ramifications. This private credit extension exceeds 90%- larger declines (usually 10 times greater)
In South Africa, for example, 62% of group is politically important and 110% of GDP, credit can slow or even than other types of recessions. The bigger
unemployed cusp earners lost their most their experiences can induce the reverse growth.xxiv Credit does more to the build-up of private debt before a crisis,
recent jobs involuntarily compared with creation of new credit regulation—or help middle income countries grow than it the harder the fall in household spending.
43% of their wealthier peers.xviii modifications of existing regulation— does for higher income countries.xxv With xxx
affecting credit markets well into the the exception of South Africa, all of our
future. At relatively low income levels, focus countries today are well below this Credit & consumer well-being. Apart from
The importance of the cusp group they remain somewhat vulnerable, and threshold (Figure 1). encouraging economic growth, consumer
negative experiences in credit markets credit can cushion individual families from
We believe this cusp group is not just in particular can then be felt deeply Credit & crises. Credit booms can be downturns, particularly by smoothing
an artefact of African development and dramatically. destabilising for an economy, given the consumption and enabling better job
trajectories, but an important new 3. This group is likely to be an engine of empirical link between credit booms and searches after retrenchment.xxxi In Africa,
segment, deserving of our attention for growth through consumer spending banking crises.xxvi Of 129 banking crises credit can help enable livelihood shifts,
many reasons. as budgets shift away from an studied by Laeven and Valencia, 45 were especially from agriculture into small
overwhelming focus on food. Should preceded by a rapid expansion of credit. enterprise. It can also help finance and
First, who are the cuspers? We define the they find solid footing in the middle Almost no country has avoided a banking education spending, important for the
cusp group as those individuals who: class, they will also provide the benefits crisis,xxvii including our focus countries: upward mobility of the next generation.
1. Live on $2-$5 per day per capita. They to consumption and political stability Kenya (1984 and 1992), Ghana (1982) Both of these choices—a shift away from
do not live in absolute poverty, but that a larger middle class affords. and, more recently, South Africa.xxviii agriculture and increases in education
neither are they on the kind of solid Similarities exist across banking crises:xxix spending—are hallmarks of movements
footing that avails them significant Theory: Credit & cusper well-being towards a middle class.xxxii
month-to-month purchasing power. 1. Asset price booms are common, many
2. Actively earn their incomes. They are What role do credit markets play in this with overvalued housing or mortgage Credit for consumption has also been a
not solely dependent on remittances or story of upward mobility? prices. These booms tend to be fuelled powerful force for bringing new welfare-
social safety nets. This group is earning by rising credit resulting in increased enhancing technologies—like cars and
an income actively, striving to achieve Credit & growth. A positive relationship asset leverage. Once these prices fall, washing machines—within reach of cuspers
middle-class living standards. between financial deepening and growth consumers often find themselves and the middle class in markets like the US
3. Straddling formal and informal has long been a cornerstone of economic struggling with reduced household and Brazil. In both cases, rising incomes
worlds. They are not purely confined theory.xxi Credit affects growth through two wealth, putting pressure on debt were met with rising credit extension,
to the informal economy in terms of primary channels: firms and consumers. repayments. which produced both huge welfare gains
labour markets, consumption markets Credit helps new firms enter the market, 2. The probability of a crisis increases with and unintended consequences.
and financial services. Instead, their achieve economies of scale, invest in a boom—and the longer and larger the
economic activities straddle both productivity gains, innovate, and cushion boom, the greater the probability. In the United States, economic historian
worlds. the impact of fluctuating terms of trade 3. Credit booms are often associated with Louis Hyman describes the way that rising
and exchange rate volatility.xxii The IMF a deterioration in lending standards, incomes and consumption borrowing led
We believe the cusp group is particularly points out that strong financial sectors leading to systemic risk. to the rise of discount stores that made it
important as we think about evolving credit make monetary policy more effective harder for small retailers to compete:
markets in Africa for three main reasons: and widen the fiscal policy space.xxiii For Pre-crisis periods are usually characterised
1. This group is large. We estimate that consumers, credit can boost aggregate by benign macroeconomic conditions. “Rising incomes had enabled Americans to
about 23% of sub-Saharan Africans, or demand, contributing towards growth. However, higher debt leverage makes borrow more than ever before. But because
227 million individuals (cusp earners households and financial systems more they locked up all their future income in
and their families) belong to cusp Of course, credit is not always a force fragile. Financial crises lead to recessions houses, cars, and furniture, they needed
group households.xix for good in an economy. High levels which are larger, and generally longer, everything else to be cheaper.” xxxiii
10 11Table 1: Overview of demand-side sample In Brazil, a series of social reforms and Regulators ought to care about both the
a commodities boom enabled a massive volume and the quality of credit in their
expansion of the middle class, bringing markets if their aim is to build “healthy”
South Africa Kenya Ghana those within that class into relatively stable credit markets. We propose that a healthy
employment and freeing them up for credit market exhibits four key features:
Johannesburg & Nairobi & Accra & greater consumption spending. Banks,
Areas included
Rustenburg Nakuru Kumasi flush with capital from the commodities 1. Accessible. In a healthy market, there
boom, were eager to lend to this expanding are as many credit-worthy people as
Number of group of consumers, largely through retail possible, and ideally all of them are able
30 30 29
participants instalment credit for the purchase of things to receive “reasonable” loan offers. This
like motorbikes, televisions and washing requires lenders to be appropriately
Male % 57% 50% 53% machines. This credit both helped cuspers incentivised to reach a broad market
acquire new consumer goods and tempted with credit tools that deliver real value
Main % many to over-commit, leaving little income at a reasonable cost.xxxvii
income formal 37% 50% 43% left after paying off credit bills each month. 2. Robust. Lenders must be strong and
xxxiv
employment When consumers experienced small resilient. In healthy markets, not only
Main % disruptions in their regular income and do they serve as many clients as possible,
income self- 27% 43% 43% expenses, they had difficulty keeping but they also do so with a long-term
employment up with payments, leaving delinquent perspective which enables them to
borrowers branded as “negativizado.”xxxv do it prudently, with manageable and
Average
median ZAR 6,000 KES 32,000 GH₵ 790 They were then blocked from further sustainable risks to their balance sheets
monthly income
credit—a lifeline—for five years. In a and shareholders. They strategise to
for household
nationwide survey of Brazilian adults, BFA endure.
(local currency) mean ZAR 7,275 KES 40,387 GH₵ 933 found that 34% had been on the blacklist 3. Diverse. A healthy credit market offers
(k
at some point in their adult lives and 23% variety in terms of the credit offerings
Average were currently on the list.xxxvi The country available to a wide range of equally
monthly income median $472 $318 $214 launched a positive credit reference bureau diverse borrower segments. Borrowers
for household in 2013. have de facto options of loan types that
($—not PPP- fit their various borrowing needs.
mean $573 $402 $252
adjusted) 4. Value adding. Credit can be a powerful
In search of the Goldilocks credit and helpful tool for borrowers, opening
Average market new opportunities and helping meet
monthly income median $1,113 $791 $760
critical needs otherwise unobtainable
for household Achieving just the right amount of credit at the moment of need. But credit can
($—PPP mean $1,350 $999 $897 in a market is no easy task, but it’s an also be wasteful and costly if consumers
adjusted)xxxviii important one: too little credit and develop an over-dependence on it. We
opportunities are missed, too much and believe that healthy credit markets
borrowers face overwhelming debt burdens have not just sufficient credit, but a
and economies are at risk of banking crises. preponderance of “good” credit, which
Reaching the appropriate equilibrium is credit that produces more value for
is primarily a regulatory problem. The both the consumer and the lender than
nature of credit as a temptation clouds the costs. From the lender side, that
consumer judgment. Money today is a includes operation costs and costs of
powerful force, particularly for cuspers who funds, meaning the loans are profitable.
are strapped for cash. From the consumer side, it means the
12 13quantifiable benefits of having accessed and regulators. We focused on specific
the loan are greater than the interest lending models in each country that
paid and opportunity costs incurred by were particularly prevalent within the
making those payments. cusp group. In South Africa, we looked
closely at unsecured lending, particularly
A value adding mortgage, for example, the case of African Bank. In Kenya, we
enables a borrower to acquire an asset: a examined alternative algorithm credit
home that can be wealth building for the scoring, in which lenders like Commercial
borrower and reduce expenditures on rent. Bank of Africa, through its M-Shwari
If the borrower experiences a net gain in product, are extending loans to clients
wealth from reduced rent payments and by judging initial credit worthiness from
retained or increased value in the home things like their phone and M-PESA
(above interest paid on the mortgage), usage records. In Ghana, we examined
she is better off. The loan has been value traditional microfinance models, like
adding for her. If the lender has earned that implemented by Opportunity
a profit on this loan, the loan has also International.
been value adding for the lender. Value
addition is not the sole preserve of asset- On the demand side, we targeted two
based lending. Loans for consumption urban areas per country, looking at the
and school fees can also be value adding country’s largest city and a secondary
so long as the benefits to consumers and city that has been growing quickly
lenders simultaneously outweigh costs. In in population size. We recruited 30
healthy credit markets, this dual-benefit individuals per country to participate in
value in lending relationships is the norm in-depth discussions with our team, lasting
rather than the exception. between 90 minutes and two hours, to
understand their borrowing attitudes and
experiences in the broader context of
Research methodology: faces of cusper their life stories over time. We focused on
credit markets cusp group individuals, also including a
few who had risen from the cusp into the
Our driving question for this project middle class, in order to understand those
was: Given major shifts taking place trajectories. In South Africa and Kenya,
in African economies, how can donors where BFA has previously conducted
and policymakers guide credit market Financial Diaries, we also included some
development in a way that strengthens the former Diaries respondents who qualified
economic well-being of the cusp group for the study. This gave us an opportunity
over the next 10 years? We sought to to build on previous relationships and
answer this by better understanding the to see how these individuals’ credit
experiences of cusp group borrowers, and experiences during the Diaries were
the lenders who serve them, in our focus continuing to shape their current lives.
countries. Audio from all of the demand-side
interviews was recorded and transcribed.
From the supply-side perspective, we
conducted interviews with individual
banks, lending associations, credit bureaus Photo credit: Caroline Gluck (Oxfam)
14 15Faces of Three Cusper
Credit Markets
Photo credit: John Ferguson (Oxfam)
16 17Faces of Three Demand-side decision making borrowing, hoping that he or she will
Cusper Credit As we look at the life and borrowing continue earning at his or her current
experiences of cuspers across our focus levels or—in some cases—be able to
Markets markets, it’s helpful to keep in mind increase earnings by taking a loan.
the key factors that influence cuspers’ These assessments may not always be
decisions to borrow. We focused on four accurate and, for borrowers, are mostly
key variables: made by individual guess rather than
any kind of quantitative modelling.
1. Need for funds now. This can come in • Expectations of future expenses.
many forms, including an opportunity Borrowers consider their upcoming
to invest in things like a new or expenses when they consider the
expanded business; a problem, like the affordability of loans, but often this
urgent need to repair the roof of one’s is only a salient factor in borrowers’
home or pay a medical bill; or a desire, minds when they have a large future
like the impulse to buy something that expense looming, like paying school
is outside of one’s budget, but that feels fees for a child or paying off another
attainable in the presence of credit debt.
(this might cover things like a new
phone, a vacation or an expensive pair 4. Willingness to pay and expectations
of shoes). of enforcement. When potential
borrowers are considering whether
2. Availability of credit. The validity of to take a loan and, if so, from where,
these three needs as justifications for part of the decision is influenced by
borrowing can increase and decrease how painful—and how fair or unfair—
with the perceived availability of funds they expect enforcement to be in
to fulfil them. Where credit is tight, the event they are unable to keep up
borrowing for a vacation seems absurd. with payments. This has to do with
Where it is not, living “like a monk” the financial costs associated with
seems equally unfathomable. mounting arrears or potential court
fees, consequences related to non-
3. Ability to pay. Borrowers enter payment such as the termination of a
credit agreements with the intention credit relationship or negative credit
of repaying the loan that was given record, and also with the social stigma
to them, and their expectation of and humiliation that can come with
being able to repay is based on their collections and repossessions.
understanding of the cost of the loan
and the future resources available to As we look across these markets, we see
service it. that the nature of these factors—shaped by
• Cost. The total cost of the loan—to the macro conditions and culture—vary widely,
extent that the borrower actually knows shaping the nature of credit experiences.
and understands this cost—factors into
borrower assessments of whether a loan
is affordable.
• Expectations of future income. Like
a lender, a borrower takes a risk when
18 19Table 2: Summary of credit market comparisons in focus countries
Ghana Kenya South Africa Availability of cusper
credit
Mid-sized loans Expanding rapidly for Diverse types available
available, w/short very small loans for anyone with
terms, high interest payslip
“SQUEEZED” “UNCERTAIN” “STUCK”
High interest rates Many good credit High levels of CONSUMER DECISION-MAKING MODELS
and macro uncertainty stories in past, but indebtedness, waiting
make informal cuspers poised for aggressive for market self-
unattractive risk growth in digital correction Primary need for
lending funds now
REGULATORY ENVIRONMENT Solve a problem Seize an opportunity Fulfil a desire
Functioning of credit ABILITY TO PAY
bureau
Think of cost as total Think of cost as total Think of cost in terms
Traceability and Cost
interest paid interest paid of instalment size
contactability
Contract
May expect stability,
enforceabilityxxxix
but actual pattern of
Expectations of High levels of Strong and self-
harsh ups and downs
MARKET CONDITIONS future income uncertainty determining
and limited ability to
Size of cusp increase earnings
population (% and 45% 30% 31%
# of people in cusp 11.2 million 12.6 million 16.1 million
households)
Credit-to-GDP ratio 20% 34% 151%
Expectations of
future expenses
Interest rate spreads 22% 10% 3% Biggest expenses Plan ahead for big Workers cater for
are recurrent investments, such as many others; expect
Market expenditures, mainly school fees or housing rapid lifestyle
concentration— food and school fees transformations
banking sectorxl
Share of adults with
a mobile money 13% 58% 14%
accountxli
Share of adults with a
35% 55% 69%
bank accountxlii
Share of salaried
23% 17% 80%
employeesxliii
20 21“Stuck” in South Africa a boom in readily available credit— But most were able to overcome even this
particularly that extended to salaried setback quickly after they returned to work.
In South Africa, cuspers occupy a relatively workers—has been financing the lifestyle
low space on the national income dreams of cuspers looking forward to the There are two distinctive credit stories:
distribution, between the third and sixth promise of post-apartheid prosperity. the first is temptation and vulnerability,
deciles. They are still waiting for the but the second is the transformation that
promise of post-apartheid prosperity to In Johannesburg, we heard stories of credit alongside career growth can bring,
reach them. Many have benefited from cuspers striving for regular employment, particularly when the temptations of youth
state-sponsored housing and government but finding that jobs were seldom stable. can be overcome.
cash grants, but are striving to enter the Those who found jobs were expected
middle class through formal employment. to support an entire household. Many The first toe dipped into the formal credit
Formality is the law of the land in South expected that a salary should enable them market is typically with store cards and
Africa: 75% of adults are banked, including to live a lifestyle that, in reality, their wages furniture hire purchases. Most of our
60% of cuspers.xliv Formal employment could not support. Striving to transform respondents’ first borrowing experiences
is common, though this also differs by their lives overnight, young people were either with a store credit card at a
income with 29% of cusp adults having a overextended themselves in debt and were retail chain like Jet, Edgars, Woolworths
formal labour contract versus 66% in the quickly buried when faced with shocks to or Mr. Price. Retail businesses, including
middle class or above.xlv But those formal their income—cuts in hours, periods of clothing retailers and furniture dealers,
jobs in the cusp group are not particularly maternity leave, the loss of a spouse’s job. can afford to take more risk than most
stable. They look back with regret. Government banks, since they earn a margin on both
grants provide some safety net, but getting the merchandise and credit. Their
Borrowing in South Africa is widespread. another job can be tough. Trying to get business model also incorporates increases
FinScopexlvi, which often under-reports back on one’s feet in the informal sector in earnings from sales generated from
borrowing, shows that 35% of the sample is also daunting with retail dominated by getting to know the purchasing and
of adults had borrowed in 2013, either large, formal, low-cost chains. payment histories of card users, targeting
through a loan or other formal credit them with new offers by SMS and mail
facility. This figure includes 22% of In Rustenburg, we spoke mostly to families once they register, and increasing their
cusp group households. Roughly 11% linked to mining. Men came when they credit limits over time, which can drive
of cusp group households were using were young to build a life they hoped increased purchases in their outlets.
formal credit or credit products, such as would pull their extended families out
retail cards or credit cards. Overdraft of poverty. Many were successful, slowly When it comes to these retail cards,
facilities and mortgages were rarely used, climbing the ranks and regularly sending lenders look for the borrowers rather than
covering just 1% of cusper households in resources back home to educate and house vice versa. Ivan told us, “When you walk
2013. According to the National Credit their extended families. The mining around the streets in town, you’ll find
Regulator, the market added six million labour recruitment and management them sitting outside the store and asking
new credit-active clients in the past seven service, Teba, enforced saving habits people to open accounts.”
years. But along with growth has come on new mineworkers that helped them
indebtedness. Over the same period, avoid some of the early temptations of Sometimes, opening the account is itself
the share of credit-active consumers with debt in their young lives, allowing them a signal of having made it into the middle
impaired credit records has risen from a to make investments—mostly in their class, signalling status by opening cards for
low of 36% to a high of 48%, settling back rural homes—through accumulated higher end stores or buying furniture from
to 45% by December 2014. savings. Mineworkers’ lives were gradually pricier shops. Lynn recalled:
transformed, with debt stress only
When we listen to the stories of South emerging during protracted strikes, when “Hey! I had so many accounts. Let me
African cuspers, we hear the ways that arrears accumulated while income stalled. tell you, let me be honest. I had Edgars, I
22 23had Truworths, I had Woolworths, I had payslip. This meant you received monthly But the payslip also elevates demands on “In less than six months [after getting my first
American Swiss, I had African Bank, hee! cash flows and you had a bank account cuspers’ consumption budgets. While job] they started sending me the pre-approvals.
...Almost everything I had… Yes, Geen and from which those cashflows could be formal employment is prized—not I don’t know how they got my details because
Richards, it was one of the most expensive! tapped directly. least for this access to the wider credit they always claim that we got your details from
It was in style, and Morkels also.” market—it often brings with it many new the database blah blah blah. And then I don’t
When Lindiwe got her first formal job at responsibilities, which the newly employed know what database is that…The more you
Automatic increases on credit card a casino and was struggling to keep up worker is expected to cover from his or her are a good payer in South Africa, that’s where
and store card limits make the savvier with all the needs at home, her colleagues salary. Often a large number of household you get a lot of pre-approvals.”
borrowers particularly concerned. Many encouraged her to just take her payslip to members—and sometimes extended
developed the habit of using their entire the banks and request a loan: family—depend on just a single income Before long, many find they have
credit limits on their cards regularly, paying earner for their sustenance. committed huge shares of their salary to
them off over many months. Automatic “[It wasn’t difficult at all] with African Bank monthly debt payments. Once income
increases in credit limits made many and Capitec. They just loan you even if they When Nomsa got her job in the in the household falters, serious debt
fearful that they couldn’t keep up with can see that you can’t afford to pay them supermarket, her mother believed their problems emerge. A number of our
payments. Ivan, who used a credit card for back they just give you…they just want your entire family could now live differently. households in South Africa were in the
groceries between paydays, explains: payslip and your expenditure only and give Without consulting Nomsa, she took midst of serious debt stress. They had
you money.” a dining set out on credit at Ellerines, stretched themselves thin with borrowing,
“The credit card doesn’t have a problem, it’s expecting Nomsa to make the monthly leaving little room to manoeuvre when
just that you’ll keep on swiping and when they Without a payslip, there is a much higher payments on her behalf. This became a things went wrong.
see that your balance is going down they’ll bar for borrowing eligibility. One must problem for Nomsa, given other debts,
increase your credit [limit]… You’ll find that prove that sufficient cash flows will be once she went on maternity leave and Sipho’s family had just got a government
the limit was $236 (ZAR 3,000) now it’s coming through the bank account to faced a pay cut. The dining set was house, and he wanted to borrow some
$276 (ZAR 3,500). So in that way I realised enable automated deductions. So, many of repossessed. money to wire the home for electricity
that this will be ongoing debt. It won’t get our self-employed respondents felt locked and plaster the walls. He borrowed about
finished…I said no, this is not okay. It will out. Those who are working are expected to $2,362 (ZAR 30,000), but used about
get up to $787 (ZAR 10,000) and how will make outsized contributions to help with $1,654 (ZAR 21,000) to pay other debts
I pay back? Sometimes you end up using it Sizwe, who runs a computer repair shop, things like school fees and funerals. If first, leaving only about $630 (ZAR 8,000)
unnecessarily because it is money.” explained: they do not, they will be ridiculed. As one for the repairs. The debt service left him
respondent explained, people will ask only with about $197 (ZAR 2,500) a month
Respondents told us that African “I’ve never even asked [for a loan]. I know “What are you paid with? Stones?” to live on. That was fine as long as his wife
Bank would do something similar with the regulations and can see that I’ve got a was working. When his wife lost her job,
unsecured loans, offering more and more disadvantage…It’s not easy to see how much I And an entry into the credit bureau plus his outstanding loan quickly grew to $4,173
credit once you had taken a loan. Lynn in earn by looking on my bank statement. ‘Cause a payslip invites more aggressive lending. (ZAR 53,000). Blacklisted and buried in
Diepsloot told us: it’s not everything that goes into the account.” Once our respondents had a payslip and debt payments, he sought help with a debt
began borrowing formally, they told us counselling service, which defrauded him
“They can give you $787 (ZAR 10,000) this Instead, those who can’t borrow for that they were bombarded with new credit of several months of payments without
month and the following month they’ll tell you themselves often ask the employed to offers and offers to increase their credit making the agreed payments against his
that you qualify for a $3,947 (ZAR 50,000) take the loans on their behalf. Lindiwe limits. debts. He feels hopeless:
loan.” borrowed for her husband to buy a car
on the back of her casino payslip. Zack, Ken, a former loan officer himself at “I blame myself, I can’t blame the banks
A payslip opens new credit doors. While working in the mines, borrowed for an Ellerines, African Bank and a number of because I needed cash. I blame myself why
even those in the informal sector could uncle who needed to pay lobola (bride microlenders, felt that as soon as the credit I took so many credits now it is difficult for
often get a store card or hire purchase, price). It’s hard to turn down these bureau showed he was a good payer, it was me to pay back. As I said before it was easy
credit options, including unsecured loans, requests given social norms of sharing and as if everyone wanted a piece of his pocket: the time my wife was working. Others were
really opened up when one had a formal helping. phoning me and sell their products if I’m
24 25You can also read
