Why the informal financial sector needs a framework for real inclusion
Lucrative savings groups are marginalised by a formal industry that has a skewed perception, writes Rabelani Dagada
The formal financial sector is often accused of not providing access to rural, indigenous communities, most of whom do not have a bank account. Efforts to promote access to banking services for the marginalised communities through the Mzansi Account met with limited success. Most accounts had to be cancelled due to culture shock, inferior service quality and the onerous cost of the service.
Our recent study on access to stock investment services shows that the marginalisation of underprivileged sectors is not declining, as local collective investment groups remain removed from equity investment opportunities. Portfolio managers and investment strategists contend that this market segment is poor, challenged by stock investment apathy and is often inaccessible due to limited knowledge of English and the high financial cost of servicing these markets.
Informal savings groups are accused of prioritising social capital, saving for conspicuous consumption and pursuing non-profit financial objectives. It is this long history of indifference and condescension that has resulted in the JSE having less than 15% of stock investments from the majority African demographic of SA in 2018.
Asian informal savings groups and microlending outfits grew to be successful indigenous banks, largely due to government involvement in the form of regulation and policy reforms aimed at improving and formalising the sector
The negative characterisation is defunct and overlooks the strategic shift and realignment in business strategy that is under way in the informal savings sub-sector. Whereas in the past most savings groups were populated by the elderly and were mere burial societies and stokvels, modern savings groups have membership across all socioeconomic classes and are using pooled capital to generate profit through acquisition of assets and microlending, especially for small businesses and survivalist entrepreneurs. Despite the disregard for the traditional African financial system, recent research by African Response suggests that the informal financial sector is highly lucrative and stokvels alone receive contributions of up to R54bn annually.
Sector changes emerging from the informal savings market mirror similar developments on the Asian peninsula, in particular India, Pakistan and Bangladesh. Asian informal savings groups and microlending outfits grew to be successful indigenous banks, largely due to government involvement in the form of regulation and policy reforms aimed at improving and formalising the sector. Regulatory frameworks stipulate acceptable capital-adequacy ratios, requirements for licence issuance, parameters that inform investment decisions and ethical proprietor conduct.
This intervention has led to stability and growth in the sector and real financial inclusion for the underclass, despite some instances of mission drift. The much-lauded success of the Grameen Bank and countless other domestic financial service firms stemmed from the formalisation of the informal financial market. These sector-wide successes later attracted private equity investment from marque Wall Street brands, including Goldman Sachs, Morgan Stanley and Citigroup. These indigenous institutions were profitable, posting return on equity averaging more than 50% at a time when Lehman Brothers and Bear Stearns were closing shop.
The evolution of grassroots savings co-operatives and microfinance into leading home-grown financial services champions suggests that public policy plays a fundamental role in promoting inclusion in the financial services industry and equity for those at the bottom.
Our field research revealed the two streams of financial saving and investment are also converging in Swaziland, led by the banks. Financial service firms adopted a strategy of proximity and service to the largely rural communities, and their outreach programmes are sensitive to the local norms and culture. This marketing drives a focus largely on investing community funds and providing banking accounts to members of local communities at their place of origin.
The expansion of the equity investment market requires the adoption of strategies to secure an investment mandate from the forgotten sectors of society. Indeed, Capitec Bank has grown to be one of the largest South African banks largely by targeting clients the other leading lenders were disregarding, namely the low-to middle-income demographics. Contrarianism is thus one of the major pillars of the framework linking the equity investment sector with the informal financial savings subsector.
Although Botswana has a number of international financial services firms, the local formal financial sector has not alienated itself from the indigenous financial sector. A number of wealth management companies and banks have developed equity investment products aimed at the local communities.
The most popular of these products are exchange-traded funds, unit trusts, education investment products and equity-linked money market investment packages.
These investment products are flexible, have varying maturities, are communicated in the local language, include short-dated instruments for the Motshelo savings community and enjoy active fund management by dedicated teams.
The Botswana financial services sector promotes universal access, anchored on a national ethos of inclusion and adoption of strategy to empower local people. This approach has brought benefits for the country: Botswana has the highest savings rate in Africa and is among the leading savings economies in the world. Its gross savings rate as a percentage of GDP is 43%, slightly below the leading savings economy in the world, namely China, at 46%. SA’s savings rate is significantly lagging at 16% of GDP.
Harvard University economist Luigi Zingales observed during the global financial crisis that throughout history finance has been perceived as a rent-seeking activity.
The South African financial services sector has the opportunity to discredit this assertion through a change of course. The disjuncture between the informal savings sector and the formal equity investment stream can be ended, thereby growing the financial services sector and promoting inclusion and greater access to the formal stock investment market for underprivileged communities. Public policy, issuance of mandate to local players, proximity and indigenisation of operations act as a cog in the real empowerment of all communities.
• Dr Dagada (@Rabelani_Dagada) is a founder of GrandPoint Capital.