A decline in the extension of short-term credit in South Africa has impacted on the economy through the loss of sales, fewer jobs and lower tax collection, the inaugural Altron Fintech Short-Term Credit Impact (AFSCI) shows.

The AFSCI, which unpacks the economic impact of short-term lending, found that, between the first quarter of 2020 and the first quarter of 2021, the extension of short-term credit, which is a key financial instrument for low-income households and micro businesses, contracted by 12.3%.

This resulted in an estimated economywide decline in sales of R790-million, 1 400 fewer jobs supported and tax collection declining by R96-million.

From the fourth quarter of 2020 to the first quarter of 2021, the short-term credit extension decline was 1.4%.

The AFSCI, which was developed in partnership with independent economic consultant and Gordon Institute of Business Science adjunct faculty member Keith Lockwood, shows that, despite the partial normalisation of the economy, the value of short-term credit extended was down 20% and the number of loans advanced was 25% lower than in the fourth quarter of 2019.

During the first quarter of 2021, R1.97-billion in short-term credit was advanced through 715 000 loans with an average value of R2 758.

Lockwood, in a statement accompanying the report release, attributes the decline in the number of creditworthy credit applicants to the 1.4-million drop in total employment and the decline in average real incomes in South Africa during the Covid-19 pandemic.

“Just as net additions to credit extension can generate positive economywide economic impacts that are a multiple of the value of the credit extended, so does the contraction of net credit extension generate negative multiplier effects throughout the economy. “Businesses that were receiving additional sales as a consequence of the credit made available to their customers will experience a decline in sales,” Lockwood explains.

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

The index shows that a much larger proportion of short-term credit is advanced to people earning less than R15 000 a month, compared with other types of consumer credit.

“Whereas this group only accessed 11% of total consumer credit in the first quarter of 2021, they obtained 57% of the short-term credit advanced,” he continues.

Prepayment Period

In an attempt to enhance the affordability of lending, there has been a significant extension of the average repayment period of short-term loans.

“Whereas loans with a term of up to one month accounted for 64% of the value of short-term credit advanced in the fourth quarter of 2019, by the first quarter of 2021, this had dropped to 54%. “Over the same period, loans with terms of four to six months increased their share from 26% to 34%,” he says.

“Credit is an important cog in the engine which fuels economic growth. An increase in credit extension injects money that was previously out of circulation back into the economy, and thereby generates a stream of economic activity and incomes,” says Altron Fintech MD Johan Gellatly, noting that, despite the critical role that it plays in the economy, short-term credit is a relatively poorly understood form of credit.

He explains that, while short-term credit makes up a very small share of total consumer credit, it is an important market as it provides first-time access to credit to many people that have never had access before; lower-income households with a proportionately greater share of credit than is advanced to them by other forms of credit; a source of funding to households with low incomes and limited wealth assets in the event of unforeseen developments and emergencies; finance to microbusiness for working capital and stock and asset purchases; and a barometer of the financial health of a vulnerable, and often neglected, portion of South Africa’s population.

The ASFCI was initiated to assist credit providers in the critical microfinance sector in their assessment of risk and credit extension and in building a deeper understanding of the role that this form of credit plays in the South African economy and society.

The AFSCI Index is the second of two indices developed by Altron Fintech focused credit provision in the economy.

Last month, the company launched the Altron Fintech Household Financial Resilience Index to provide critical insight into the financial state of households by assessing the state of credit extension from the perspective of the ability of borrowers to repay loans.