South Africans use less credit as Covid-19 limits spending

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South Africans used less short-term credit during the Covid-19 disruption between the first quarter of last year and the first quarter of this year, leading to an estimated drop in economy-wide sales of 790 million rands with 1,400 fewer jobs supported and 96 million rands less in taxes collected, according to the results of the first AFSCI (Altron Fintech Short-term Credit Impact) index released yesterday.

The extension of short-term credit, a key financial instrument for low-income households and micro-enterprises, contracted by 12.3% during the review period.

Altron Fintech developed AFSCI in partnership with Keith Lockwood, independent economic consultant and adjunct faculty member at the Gordon Institute of Business Science (GIBS).

Lockwood attributed the decline in the number of creditworthy credit applicants to the 1.4 million drop in total employment recorded during the pandemic and the decline in average real incomes in South Africa during the same period.

“Just as net additions to the extension of credit can generate positive economy-wide economic impacts that are a multiple of the value of the credit granted, the contraction of the net extension of credit generates multiplier effects. negatives throughout the economy. Companies that received additional sales from credit made available to their customers will experience a decline in sales, ”Lockwood said.

“They will then employ fewer factors of production and place orders of lower value with their suppliers. The process will continue with indirect and induced impacts serving to amplify the negative impacts.

According to the AFSCI, despite the partial normalization of the economy, the value of short-term loans granted fell by 20% and the number of loans granted was 25% below their levels before Covid or in the fourth quarter of 2019 .

In the first quarter of this year, Rand 1.97 billion of short-term credit was advanced through 715,000 loans with an average value of Rand 2,758.00.

Compared to other types of consumer credit, a much larger proportion of short-term credit has been given to people earning less than Rand 15,000 per month. While this group only accessed 11 percent of total consumer credit in the first quarter of this year, it got 57 percent of advanced short-term credit.

Lockwood explained that in an attempt to improve the accessibility of loans, there has been a significant extension of the average repayment period (duration) of short-term loans. While loans with a maximum term of one month accounted for 64% of the value of short-term loans advanced in the last quarter of 2019, by the first quarter of this year that percentage had fallen to 54%. During the same period, loans with terms of four to six months increased their share from 26% to 34%.

Altron Fintech CEO Johan Gellatly said credit is an important cog in the engine that drives economic growth.

“An increase in the extension of credit reinjects money that was previously out of circulation into the economy and thereby generates a flow of economic activity and income,” Gellatly said.

Altron Fintech stated that it has mandated AFSCI to assist credit providers in the short-term credit market in their risk assessment and credit extension and to better understand the role that this form of credit has played in the South African economy. and society.

He said short-term credit is a relatively poorly understood form of credit, despite the critical role it plays in the economy.

Gellatly said that while short-term credit is only a very small share of total consumer credit, it is an important market because it provides early access to credit for many people who are not there. had never had access before, such as low-income households with a proportionately greater than that advanced to them by other forms of credit.

The AFSCI index is the second of two indices developed by Altron Fintech focused on the supply of credit in the economy. The company launched AFHRI last month to provide a critical overview of household finances by assessing the state of credit extension from the perspective of borrowers’ ability to repay their loans.

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