The Altron Fintech Household Financial Resilience Index (Afhri) for the second quarter has confirmed that the average household in South Africa enjoys a more advantageous disposition towards incurring and managing debt than before the Covid-19-pandemic.

The results of the Afhri index released in August also showed this, meaning that the long-term upward trend in the index is likely to continue in 2022.

The purpose of the Afhri index is to assess the state of micro-lending in South Africa from the perspective of the ability of borrowers to repay their loans. The data provides more clarity on the financial disposition of households and their ability to cope with debt.

Optimum Investment Group economic adviser Dr Roelof Botha says the results of the second-quarter Afhri show a consistent improvement in the ratio of South African household income to debt costs, with an improvement of 20% over the past two years, and the recovery of household disposable income since the first quarter of this year – a 3.3% gain.

“Although most of the constituent indicators of the Afhri have continued to recover in the second quarter, it is a point of concern that total private sector credit extension remains on a downward trajectory.

“This raises questions over the recent decision by the South African Reserve Bank to raise short-term interest rates at a time when insufficient progress has been made with a recovery of job losses.

“Owing to the strong positive correlation between private sector credit extension and gross domestic product (GDP) growth, it has become a matter of urgency for government to reconsider the undue regulatory burden that has been placed on the formal microfinance sector,” Botha explains.

He adds that, unless lower-income groups are allowed easier access to credit, the pace of employment creation in South Africa will remain muted.

Some of the Afhri indicators include pension lump sums, unit trust assets, annuities, civil debt defaults, household income to debt cost ratio and long-term insurance claims.

Following the predictable sharp downturn in the Afhri during the second quarter of 2020, a fairly swift recovery of most key economic sectors since the third quarter of 2020 has assisted the Afhri trend line in returning to a positive growth trajectory.

A V-shaped recovery has been evident in a number of other key economic indicators, especially GDP, retail trade sales and the Reserve Bank’s composite leading business cycle indicator. The latter indicator reached an all-time record high during the first quarter of this year.

Since the base period for the index, which spans more than seven years, only three of the 20 indicators have recorded negative outcomes, two of which are marginal. This confirms a systemic improvement in the ability of the median household in South Africa to incur and service debt.

Between the first and second quarters of this year, only six of the 20 indicators recorded declines, which is an indication of further progress with the recovery of the financial disposition of households.

Compared with the second quarter of 2019 (pre-Covid), seven of the indicators have recorded double-digit rates of improvement. Although half of the indicators are still languishing in negative territory, only one of them (credit impairments by banks) still has a meaningful negative trend, with the overall AFHRI having returned to growth mode, albeit marginal.

Unfortunately, the four indicators that possess the largest weighting in the index have not yet recovered from the effects of the Covid-19 pandemic. These are employment (public and private sectors) and salaries (public and private sectors).

Altron Fintech MD Johan Gellatly says the index was developed with the key purpose of providing the market with critical insights on the level of resilience of those who apply for credit. It has specific relevance to the provision and state of micro-credit, an important segment of the overall credit market, and often the only option for individuals and small businesses.

An econometric modelling exercise conducted in 2019 by Professor Ilse Botha from the University of Johannesburg indicated that, between the first quarter of 2015 and the third quarter of 2018, South Africa’s GDP would have been R191-billion lower in the absence of credit provided by microfinance institutions.

“The Afhri is premised on the fact that income is ultimately required to repay debt.

“Without income of some kind, individuals are not able to qualify for loans that allow for expanded access to the full range of goods and services that comprise private consumption expenditure, as well as the funding of working capital required to sustain or expand small and micro businesses,” says Gellatly.

Botha says it has become a matter of urgency for government to reconsider the undue regulatory burden that has been placed on the formal microfinance sector. Unless lower income groups are allowed easier access to credit, the pace of employment creation in South Africa will remain muted.