Credit on the Cusp: Strengthening credit markets for upward mobility in Africa - FSD Kenya
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REPORT | SEPTEMBER 2016 Credit on the Cusp: Strengthening credit markets for upward mobility in Africa REDUCING POVERTY THROUGH FINANCIAL SECTOR DEVELOPMENT CONTACT US Palm Suite, Riverside Green Suites Riverside Drive, Nairobi P.O. Box 5980-00100 Nairobi, Kenya Phone: +254 20 402 4000 / Mobile: +254 729 729 111 Email: info@fsdafrica.org Twitter: @FSDAfrica Website: www.fsdafrica.org 1
Executive Summary Building healthy credit markets in market developments in finer grained Africa by 2026 detail in terms of product type and market segment. African economies are currently undergoing dramatic changes, including a In markets where cusper credit remains changing consumer base. Absolute poverty constrained, but could open very quickly is reducing as a new class of consumer— through new digital channels: the cusp group—emerges. This group • Regulators could encourage the (which we call “cuspers”) now accounts for expansion of a diverse range of credit 23% of sub-Saharan Africa’s population, offerings over electronic channels covers a segment of active earners getting as a means of expanding access at by on $2-$5 per day and is straddling significantly lower cost and potentially the formal and informal worlds. For at lower risk than previously possible, this group, healthy credit markets could especially in places where credit expand opportunity and enable upward information sharing mechanisms mobility, helping to build a true middle lag behind and only a small share of class. But, for this to happen, credit needs cuspers have formal salaries. to expand and to do so in healthy ways. We • Donors could support experimentation conclude that donors and policymakers with new kinds of person-to-person ought to take an active role in enabling (P2P) lending (an eBay for P2P cusper credit markets to open up in a lending, for example), helping to open positive way, seizing a once-in-a-generation the cusper credit market in ways that opportunity to leverage financial markets traditional banks have not. for upward mobility. • As new electronic lending takes hold, regulators and banks could introduce Across the entire sub-Saharan Africa machine learning e-arbitration of small region: disputes, enabling efficient and smart • Regulators, donors and lenders in all management of disagreements in a markets should take note of shifting quickly-growing market. demographics and the key importance • Regulators ought to invest in digital of the cusp group as a market, political identification and digital asset force, and as the future middle class registries. Outdated and largely in countries that create the right manual systems are inhibiting market conditions for them and their children development, rendering effective credit to thrive. information sharing impossible in • Regulators should improve their some markets and making it difficult credit market monitoring by refining to turn assets into collateral. This is reporting requirements for lenders, also exposing vulnerable consumers helping regulators to better track to fraud in some of their largest i
investments. Blockchain technology Background low credit-to-GDP ratios. Africa needs earn much, but they earn it regularly and and ubiquitous mobile phone more credit, and it needs better credit. A almost certainly through a bank account, utilization open new opportunities for Enthusiasm around the once-popular healthy credit market simultaneously offers where lenders have very high odds of registries that are clear, reliable and “Africa Rising” narrative is abating in accessible credit at a reasonable cost, has deducting their loan payments before the easily available to all. the face of slower-than-expected growth, robust lenders who strategise to endure, borrower has a chance to delay a payment macro volatility deriving from continued offers diverse forms of credit suiting or change her mind. Being relatively sure Where credit access is already very open reliance on raw material exports in many borrower needs, and has a preponderance of repayment, lenders are comfortable and indebtedness begins to pose a new countries, and the reality of persistently of credit that is value adding for consumers lending at very high levels of debt service kind of threat to cusper welfare: high inequality. Even through a period and lenders alike. against these formal incomes. • Regulators—or even private lenders— of high growth, we did not see large could introduce the concept of a numbers of people move into the middle Given major shifts taking place in And borrowers—especially when they get learner’s licence for credit, helping class (typically characterised by stable jobs, African economies, how can donors their first jobs—often take as much of that borrowers restrict their borrowing in budgets with space for expenditure beyond and policymakers guide credit market credit as they are offered. In a society early years while they learn the rules pure necessities, and the possession of development in a way that strengthens the wedded to the ideas of transformation and of the road and work towards a longer- collateraliseable assets like land, homes economic well-being of the cusp group post-apartheid upward mobility, desire term financial future of building assets. and cars). Instead, we observed a shift over the next 10 years? FSD Africa, which is a powerful force. With large extended • Regulators should consider new from absolute poverty into a cusp group exists to help strengthen financial markets families often depending heavily on every approaches to restraining lender of those getting by on about $2-$5 per in sub-Saharan Africa, commissioned this one of those coveted formal salaries, behaviour, such as by introducing “Last day. This group straddles the formal research to seek answers to this question borrowers underestimate the demands on in, last out” rules, which would rank and informal economies, and while they through the experiences of cusp group their payslip from living expenses, let alone lenders’ claims on borrowers’ incomes strive for a stable middle-class future, they consumers, and the lenders serving them, loans. In South Africa, cuspers borrow to in the order in which lenders issued remain vulnerable and largely lacking in in three distinctive markets: South Africa, display their wealth; to announce to the loans. In the event of default, the last meaningful assets. Ghana and Kenya. world that they have arrived. lender to give a client a loan—tipping the scales of affordability—would Credit markets play an important role So borrowers overextend. Salaries are have the lowest priority in terms of in shaping cuspers’ destiny. On a macro Faces of cusper credit markets diverted nearly entirely to loan payments, repayment, thus encouraging lenders scale, credit facilitates growth, creating new leaving little to live on. The loss of that to be disciplined in the issuing of loans opportunities for cuspers across the region. Our research brought to life clear faces of formal job or the loss of the income of to already strained borrowers. At a micro level, healthy credit markets three very different cusper credit markets: a spouse places tremendous strain on • Donors could support fintech tools can improve the well-being of cusper borrowers who find it difficult to bounce that actively remind borrowers of their families by helping them smooth incomes South Africa we call “Stuck.” back. It’s more difficult in South Africa own debt service at the moment of and expenditures, increase and diversify Consumer lending to cuspers is extensive, than it is in the other markets for someone temptation by, for example, lighting up earnings, and accumulate assets even in the aggressive and highly formalised. There to start over with a low-capital trading a credit card in red when the balance face of economic fluctuations that tend to is plenty of money to lend, fuelled by easy business. Self-control seems to set in is approaching a dangerous limit, impact upon them, and the classes below availability of cheap domestic funds and only after painful and debilitating debt or sending borrowers a warning text them, disproportionately. a competitive, sophisticated finance and experiences. message when the balance grows at too retail sector eager to serve. The ticket into quick a pace. But today, Africa is severely under-lent. this vibrant borrowing wonderland is the One might expect lenders to tighten up Most countries in the region have very payslip. The formally employed may not to avoid defaults, but they are competing ii iii
to extend seemingly lucrative loans to proxy scores determining eligibility for macro-economic situation). The loans worthy persons—payroll clients and, cuspers. Eventually, when competition small starter loans, has expanded access that are trickling out are relatively small, to a limited extent, above-the-cusp entered and caught up, one of the early for many first-time formal borrowers in a expensive, and short in duration. Any entrepreneurs—squeezing the cusp group players making unsecured loans, African very short period. So far, these loans—led capital used for investment demands even more. Mobile lending schemes—like Bank (ABIL), competed by offering the by Commercial Bank of Africa’s (CBA) dramatic cutbacks in the household M-Shwari—could be incredibly valuable same borrowers more credit over longer M-Shwari product—have started very small. budget, since investments cannot produce in opening the credit market to cuspers in periods. These are risks that are often too But newer entrants, like Kenya Commercial sufficient returns within the loan durations Ghana, should a financial institution rise to heavy to bear for cuspers, whose jobs are Bank (KCB), are offering larger starter available. Those who are able to borrow the occasion. uncertain (especially over longer periods) loans, averaging $27 for a first-time typically do so from a place of weakness and whose budgets are tight. Bad loans borrower, up from $5 on M-Shwari. rather than strength, borrowing to rescue mounted, forcing the bank to be bailed out These short-term loans are often used for ailing businesses or avoid catastrophe Conclusion and restructured. convenience purchases and unexpected rather than to finance opportunity. needs rather than investments. As the loan Cuspers with a coveted payslip can try Credit markets will play an important South Africa now struggles with an size grows, but duration stays constant, their hand at bank credit, while the self- role in shaping the destiny of the cusp extensive indebtedness problem. But many some borrowers begin to feel pinched. employed are limited to group-based credit group. Without attention from donors of the tools that make a credit market They stop paying, prioritising the parts of and the risks thereof. Once they find a and policymakers, it will be exceptionally work are already in place: suppliers are their budget—including other kinds of lender who is willing to extend a loan, they difficult for most African countries to incentivised to expand their outreach, cost- loans—that feel more pressing. Technology tend to stick with them and grow their loan find Goldilocks credit markets that are effective income verification is available for is encouraging very rapid growth in formal limits slowly. Credit information sharing— able to extend opportunity to more the large formally employed sector, credit lending, and the forces of competition though mandated by law—is largely cuspers over the next 10 years, without information sharing is highly sophisticated, seem to be encouraging larger, longer elusive today, as enforcement of full lender risking over-leveraging and massive over- and there is a specific regulator watching loans. Kenya’s digital lending revolution participation is weak. indebtedness. The challenge is daunting, credit market conduct and monitoring could either pave the way for a rapidly but not impossible, and can begin with consumer debt. Still, the market is failing expanding credit market that begins to Group-liability microfinance loans have simple interventions like improved market to self-correct. offer more diverse forms of credit and been an important entry point into monitoring. Failure to act, though, means continues to unlock new value for cuspers, formal borrowing for many cuspers. At certain failure. It means that an entire Kenya we call “Uncertain.” or could give rise to heavy competition in Opportunity International Savings & Loans generation of cuspers will fail to rise. Loans have historically been based on short-term, primarily consumption-based (OISL), group liability is the only option collateral and relationships. Those who credit that could lead Kenyan cuspers for individuals unable to put up 150% wanted to borrow would first save for towards a “South Africa” debt situation. collateral. With group cohesion reportedly several months with the lender before a deteriorating amidst urbanisation and credit offer was extended. Though credit Ghana we call “Squeezed.” competition, OISL is considering changing information is now shared to some extent, Amid fiscal instability and high inflationary its focus to SMEs and individual borrowers borrowers tend to stay put with the same pressure, those with capital are choosing who can meet collateral requirements—in bank or microfinance institution in order to invest in risk-free treasury bills, which other words, moving away from most cusp to keep accessing larger loans. currently return 25% per year, rather group borrowers. than much riskier consumer lending But that landscape is changing. Mobile (particularly to the cusp group, which is Today’s incentives push lenders to phone-only lending, based initially on made even more unstable by the country’s consolidate their focus on fewer credit- iv v
Contents Executive Summary i Figures & Tables vii Acronyms ix About BFA xi About FSD Africa xii Credit on the Cusp: The Expansion Imperative 01 Background 03 Africa Rising? The failed emergence of a middle class 04 The importance of the cusp group 10 Theory: Credit & cusper well-being 10 In search of the Goldilocks credit market 13 Research methodology: Faces of cusper credit markets 14 Faces of Three Cusper Credit Markets 17 Demand-side decision making 18 “Stuck” in South Africa 22 “Uncertain” in Kenya 30 “Squeezed” in Ghana 40 Lending on the Cusp 57 Lender decision making 58 Unsecured lending in South Africa: African Bank 59 Alternative data mobile lending in Kenya: Commercial Bank of Africa’s M-Shwari 62 Microfinance in Ghana: Opportunity International Savings & Loan 64 A comparative view of business models 66 Healthy Cusper Credit Markets by 2026 69 When credit is good for cuspers 70 A call for intervention 71 Conclusion 75 Photo credit: Paul Saad End Notes 76
Figures & Tables Acronyms Figure 1 Domestic credit to private sector as a xii ABIL African Bank Investment Limited share of GDP in focus countries AfDB African Development Bank Figure 2 Real GDP growth per capita across 05 focus countries (annual percent) APR Annual Percentage Rate Figure 3 Foreign direct investment as a share of 05 ATP Ability to Pay GDP BFA Bankable Frontier Associates Figure 4 Composition of cusper expenditure 06 budgets, household surveys CapEx Capital expenditures Figure 5 Distribution of the population in cusp 07 CBA Commercial Bank of Africa households in focus countries CRB Credit Reference Bureau Figure 6 Interest rate spreads and prime lending 41 rates in focus countries FSD Africa Financial Sector Deepening Africa IMF International Monetary Fund Table 1 Overview of demand-side sample 12 LOP Logistics of Payment Table 2 Summary of credit market comparisons 20 NPL Non-Performing Loan in focus countries OISL Opportunity International Savings & Loan Table 3 Kenyan cusper borrower perceptions of 36 short and medium term loans OpEx Operating expenditures Table 4 Enforcing contract statistics, World 59 P2P Person-to-Person Bank’s 2016 Doing Business Report PPP Purchasing Power Parity Table 5 Summary of the basic features of three 60 lenders SME Small and Medium Enterprise Table 6 Summary of ABIL financial model 62 WTP Willingness to Pay Table 7 Stylised financial models of focus 65 lenders, circa 2013-2014 viii ix
About BFA About FSD Africa BFA (Bankable Frontier Associates) is Financial Sector Deepening Africa (FSD a global consulting firm specialising in Africa) is a non-profit company funded the development of financial services for by the UK’s Department for International low-income people around the world. Development, which promotes financial Our approach is to seek out, create and sector development across sub-Saharan implement solutions to the challenges Africa. It is located in Nairobi, Kenya. faced by low-income people in managing FSD Africa sees itself as a catalyst for the financial matters that underpin change, working with partners to build their lives. We purposefully partner with financial markets that are robust, efficient cutting-edge financial and nonfinancial and, above all, inclusive. It uses funding, institutions that touch the lives of low- research and technical expertise to income customers. In creating solutions, identify market failures and strengthen the we integrate our deep expertise in capacity of its partners to improve access customer insights, business strategy, new to financial services and drive economic technology and growth-enabling policy growth. FSD Africa is also a regional and regulation. Founded in 2006, our platform. It fosters collaboration, best clients include donors, investors, financial practice transfer, economies of scale and institutions, policymakers, insurers and coherence between development agencies, payment service providers. BFA has offices donors, financial institutions, practitioners in Boston, New York and Nairobi. and government entities with a role in financial market development in sub- For more information, please visit: Saharan Africa. In particular, FSD Africa www.bankablefrontier.com provides strategic and operational support to the FSD Network. FSD Africa believes strong and responsive financial markets will be central to Africa’s emerging growth story and the prosperity of its people. For more information, please visit: www.fsdafrica.org Photo credit: Peter-Wachira Irungu x xi
Credit on the Cusp: The Expansion Imperative Enthusiasm around the once-popular below them, disproportionately. Whether “Africa Rising” narrative is abating in credit is available to cusp borrowers the face of slower-than-expected growth, and the nature of its effect on their lives Figure 1: Domestic credit to private sector as a share of GDP in focus countriesi macro volatility deriving from continued depends on the health of local credit reliance on raw material exports in many markets, which are changing substantially Domestic Credit to Private Sector as % GDP, World Bank Indicators countries, and the reality of persistently in the face of rapid urbanisation, persistent high inequality. Even through a period inequality and informality, technological of high growth, we did not see large transformation, and perpetually weak state numbers of people move into the middle institutions. class (typically characterised by stable jobs, budgets with space for expenditure beyond But today, Africa is severely under-lent. pure necessities, and the possession of Most countries in the region have very low collateraliseable assets like land, homes credit-to-GDP ratios (see Figure 1). and cars). Instead, we observed a shift from absolute poverty into a “cusp” But Africa does not just need more credit, group getting by on about $2-$5 per it needs better credit. A healthy credit 90 - 110% day. This group straddles the formal market simultaneously offers accessible and informal economies, and while they credit at a reasonable cost, robust lenders strive for a stable middle-class future, they who strategise to endure, diverse forms remain vulnerable and largely lacking in of credit suiting borrower needs, and meaningful assets. The group is large— a preponderance of credit that is value cusper households encompass nearly a adding for consumers and lenders alike. quarter of Africans today—and politically important. Their successful entry into the middle class—a real engine for sustained Ghana Kenya South Africa United States Theorized “Turning Point” growth via domestic markets—is by no means guaranteed. Credit markets play an important role in shaping that destiny. On a macro scale, credit facilitates growth, creating new opportunities for cuspers across the region. At a micro level, healthy credit markets can help improve the well-being of cusper families by helping them smooth incomes and expenditures, increase and diversify earnings, and accumulate assets even in the face of economic fluctuations that tend to impact upon them, and the classes 1
Background 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 24 25
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