FinMark Trust launches its annual FinScope Consumer South Africa 2023 results today through a virtual webinar. This year's findings highlight the pressing financial challenges South Africans are facing, as 40% of adults are reportedly resorting to borrowing money to buy food and 20 million adults have gone without electricity because they could not afford it in the past 12 months.

Johannesburg, 23 April 2024 – Food costs consume approximately one-third of South African residents' income, and rising costs weigh heavily on consumers’ budgets. Living expenses, which include groceries, energy, transportation and communication, account for about 85% of monthly income. Specifically, groceries make up 30.4% of expenses, energy 11.5%, transportation 9.1%, communication 8.8%, and routine household maintenance, rental and rates 8.5%.

These rising costs affect not only the ability to invest in education and insurance but also contribute to the inability to repay debt. According to the National Credit Regulator's Credit Bureau Monitor for March 2023 report, 23% of consumers missed instalment payments, further highlighting the vulnerable financial position many consumers face. “It is considered highly burdensome to allocate more than 10% of income to household energy expenses, including electricity. The year 2024 may not alleviate the cost to consumers, as they have recently endured a staggering 12.74% increase in Eskom’s tariffs, with no indication of interest rates decreasing anytime soon,” said Jabulani Khumalo, Senior Data and Analytics Specialist at FinMark Trust. “Due to financial constraints, two out of every five individuals reported their homes being without electricity in 2023.”

Impact on people’s wallets

The rising cost of living profoundly impacts people’s wallets, affecting their financial stability and overall well-being in several ways. Since a large portion of their income is allocated to cover necessities, people have less money available for savings, investments and leisure activities. This makes it increasingly difficult for them to make long-term plans and achieve their financial goals. According to the FinScope results, 30 million economically active adults in South Africa, or six out of seven (86%), do not have a retirement plan. Additionally, about two-thirds of middle-class individuals, earning between R9,999 and R20,000, do not have retirement financial products. Consequently, priorities shift from saving for the future to meeting immediate financial demands.

Increased debt and unmet development financing

In 2023, more than 27 million adults were active credit users, primarily due to credit facilities, unsecured loans, and secured loans. About 35% of credit-active consumers, or 15.6 million individuals, borrowed money or used credit in the previous year mostly to pay for unforeseen bills or everyday needs, resulting in a rise in personal debt. The ability to save money and borrow money to cover necessities hinders the ability to reach financial ambitions like investing in a business or accessing decent housing. Approximately 15% of South African residents want to invest or launch a business, while 47% of them need financing for housing.

Financial risk protection is hampered

The increase in living expenses also makes it more challenging for many households to purchase insurance financial products, which are designed to reduce financial risks. This trend is seen in both savings and borrowing. In South Africa, funeral insurance continues to be the most popular type of insurance: around 22 million adults, or 48% of the adult population, hold a funeral policy in their name. In 2023, only 11% of individuals, or about 5 million, possessed non-life insurance. Additionally, 42%, or 19 million adults, face hazards associated with climate change, such as unforeseen weather-related difficulties including floods (26%) and droughts (23%).

Around 10 million of the South African adult population are regularly at risk of climate-related disasters. While we cannot prevent climate-related events from happening, financial inclusion is a tool that can help people, including those experiencing poverty, to build resilience to climate shocks. However, as the FinScope data illustrates, the reality in South Africa is that only 12%, or 5.4 million, of those who faced risks related to climate change implemented measures to lessen the impact of financial shocks. In the last year alone, approximately R19.7 billion was spent on risk mitigation related to climate change. When asked how they would handle the effects of climate change in the future, 22% of South Africans said they "did not know" how they would handle the challenges. Another 19% said they "did not want to ponder" over the risks associated with climate change until it happened, essentially saying they would cross the bridge when the situation arose.

Declining economy adversely affected the bottom lines of the financial sector

Twenty years after the initial release of the FinScope consumer data, the 2023 study demonstrated a notable rise in financial inclusion – from 66% in 2003 to 98% in 2023. With a large proportion of the population having bank accounts and increasing digital adoption, South Africa has made considerable strides towards broadening access to financial services. However, it appears that the impact of financial inclusion on people's lives is still minimal, as there are unmet financial needs such as development financing, financial life goals and protection from financial shocks.

Twenty-year overview of the South African economy

According to the FinScope Consumer South Africa 2023 survey, South Africa has an adult population (16 years and older) of 44.7 million, including around 3.5 million foreign-born nationals. This marks an increase from 26.9 million in 2003, recording a 40% adult population growth. The number of employed people climbed from 12.6 million to 17.4 million between 2003 and 2023, representing an employment growth of 4.8 million. However, this employment growth is insufficient to keep up with the 18 million population growth during the same period.

It is evident that during the 20 years, the labour force has shrunk from 47% in 2003 to 39% in 2023, failing to keep up with the population growth. The formal sector is primarily responsible for this decrease, with a decline from 32% in 2003 to 20% in 2023. Although the informal sector grew by 21%, this growth was insufficient to offset the 40% rise in the adult population since 2003.

Tapping into the unserved or underserved market – the informal economy

The data shows the vibrancy of the informal sector in South Africa, which is hard to ignore. The 20-year data comparison reveals that the formal economy is unable to absorb the growing population entering the labour force. Those who cannot secure employment in the formal sector turn to the informal sector to earn a living. Though the informal sector is not the preferred option as it pays lower remuneration, the role tips play in terms of supplementing income is crucial. According to FinScope Consumer data, the average personal monthly income in the informal sector was R4,199, which is higher than both the national average (R3,864) and minimum wage (R3,710).

Despite its importance, the South African informal sector is relatively small, accounting for only 19% of the total adult population, compared to the informal sector in peer-group countries. However, this figure could change with the support of the financial sector. The data shows that around 7 million adults in 2023 wanted to invest in or start their own businesses. The FinScope Consumer and MSME surveys provide a rich data source that can be used to better understand the informal sector. Data from these surveys can reveal opportunities for the financial sector to solve challenges for people and businesses in the informal economy.

How have livelihoods changed in the past two decades?

The number of people reliant on social assistance, including subsidies and outside support, has significantly increased. Individuals receiving social assistance increased from 10 million, or 37%, in 2003 to 30 million, or 68%, in 2023. In 2003, only 13% of adults received government social grants; by 2023, this figure had risen to 46%. Since 2003, the number of entrepreneurs has not increased; in 2023, it remained at 9%. The increase in the number of adults receiving social assistance indicates a change from the cash economy in 2003, characterised by a strong peer-to-peer rate, to the digital payment economy in 2023, with both peer-to-peer and government-to-person rates, mainly because the government’s preferred channel was digital.

Has financial inclusion changed since?

Since 2003, there have been notable rises in the following financial products: bank accounts, ranging from 52% to 84%; formal credit, from 26% to 60%; formal channels for money transfers, from 35% to 56%; and informal savings from 10% to 30%.

"The need to pay for necessities and provide social support may be the driving forces behind the uptake in the usage and ownership of these financial activities," Khumalo continued.

At the same time, financial products that enable goal setting, risk mitigation, and future planning are stagnating, falling or getting worse. Only 13% of people in 2003 borrowed money to purchase food in the previous year; by 2023, that number had risen to 40%. Policies for non-funeral insurance marginally decreased from 24% in 2003 to 22% in 2023. Since 2003, non-life insurance policies have remained at 11%, while medical assistance and retirement products have decreased from 17% to 12% and 12% to 7%, respectively. According to this data, working-age persons in formal employment have greater access to insurance and retirement goods in South Africa. In contrast, coverage rates for those employed in the informal sector are lower.

Since its inception in 2003 by FinMark Trust, FinScope Consumer South Africa has garnered a strong reputation in the sector for offering comprehensive data insights on financial inclusion in the nation. Thanks to funding from a syndication model comprising regulators, policymakers, development partners, insurance companies, banks, and other financial institutions, FinMark Trust has been able to undertake the surveys since its establishment.

FinScope's meticulous data collection process has produced a data mine of information, offering the sector a plethora of knowledge and insights to enhance financial services and innovative products for the informal economy, and to inform policy.