Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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
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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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-

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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
Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
Background

Photo credit: Ollivier Girard

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Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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                                                                                                                                                   5
Figure 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                                                                                                                                                                                              7
19% | 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                                                                                                                                                                                                                    9
They 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                                                                                                                                                                                                11
Table 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                                                                                                                                                                  13
quantifiable 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                                                                                                                             15
Faces of Three Cusper
                                             Credit Markets

Photo credit: John Ferguson (Oxfam)

16                                                        17
Faces 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                                                                                                             19
Table 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                                                                                                                                                      23
had 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

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