November 28, 2009
 By Bruce Cameron
Savings and the use of financial services products have taken a hit as a consequence of the recession, but even without the recession, the use of financial products by the wider population in South Africa is far from optimum.
The recession has seen nearly one million people lose their jobs, affecting the way they access and use financial products.
The effect of the recession is highlighted in two research reports released this week. The reports are:
The annual FinScope survey by TNS Research Surveys on behalf of the FinMark Trust, which has for the past nine years been tracking the use of financial services pro-ducts, as well as the behaviour of consumers relative to the financial services industry; and
The first biannual Old Mutual Savings Monitor, which tracks savings patterns and why people do or do not save.
The FinScope survey reveals that in 69 percent of households at least one person is a job-seeker, and that more and more people are becoming dependent on family and friends to survive financially.
Not only has the use of financial products been on a downward trend over the past year, but so have critically important savings.
The reports confirm other research that has found that South Africans, most of whom will not live past the age of 50, are dramatically underinsured against risks such as death and disability, leaving their dependants financially exposed.
Both reports:
Aim to highlight problem areas in how individuals structure their finances; and
Say that financial education is a key issue that needs to be addressed. Old Mutual has launched its own financial literacy campaign.
FinScope says that the area of biggest concern is the misunderstanding of key financial terms, particularly in the area of debt.
Even when people have heard the financial terms before, they have no idea what they mean.
Only 24 percent of the people surveyed in the FinScope survey had heard of the National Credit Regulator or the National Credit Act, while only 41 percent knew what "bad debt" as opposed to "good debt" was.
FinScope warns that "knowledge of financial matters is strongly linked to wealth and hence exposure to the financial system.
"It means that special care needs to be taken so that such people are carefully coached about what it all means. The need for more financial education and training is clear."
Using the financial industry
The financial services industry will need to find innovative and technologically advanced ways to get people into the industry.
If the financial sector fails to do so, the future economic development of South Africa could be undermined, Rob Powell of TNS Research Surveys warns.
In presenting the research report, Powell says a key factor is education, which should be more effective from school level.
The FinScope report shows that the number of people who use banking facilities decreased by 442 000 last year, despite a 2.2-percent increase in the population aged 16 or older. This is the first time in nine years that there has been a decrease in the number of people who are formally banked.
Powell says that the number of 16- and 17-year-olds who have never used banking facilities has risen from 80 to 87 percent over the past year. The same trend is apparent in 16- to 20-year-olds.
Powell says this is of particular concern, because people who do not have any knowledge of banking will find it extremely difficult to start their own successful micro or small businesses.
The decline in the number of people who use the formal banking sector has seen mainly women, 25- to 35-year-olds and those who earn less than R2 000 a month closing their bank accounts.
The main reasons people do not have, have closed or have never had bank accounts is because they are jobless, have no money to save, or have an irregular income.
However, the use of the Mzansi low-cost, simple-structure banking facility that was developed to attract low-income people into the banking system has grown, but much of the growth has come from people who are already in the banking system downgrading.
Powell says banks need to find ways to improve the "touch points" of banking, which have been traditionally based on bricks and mortar. This is particularly the case in rural areas, where it can take an entire day to reach a "touch point".
Most South Africans are not saving at all
Saving levels in South Africa continue to decline, according to research by FinScope and Old Mutual.
The FinScope research says that 62 percent of people simply do not save. Of those who do save, almost 13 percent do not use formal savings products but "keep their money under the mattress", while almost 10 percent use informal products, such as burial societies and stokvels.
The FinScope research reveals that there has been a growth in informal and under-the-mattress saving, with many people having to save for necessities, such as food.
Old Mutual's research, which was restricted to the metropolitan areas, found that one in two working households that had been saving, saved less over the past year, while only one in 10 households is saving more than a year ago.
But young, single people in metropolitan areas who were already saving are saving more compared with other age groups.
Against this, however, the FinScope research found that an increasing number of younger people are simply not saving, because they cannot find jobs.
Old Mutual says the people who had been saving and who are now finding it the most difficult to save in the recession are in the 36-to-39 age group. These households tend to have high debt as a result of home loans and vehicle finance, as well as children to raise and educate.
Old Mutual says the reasons people are saving less include: a poor understanding of savings products; over-indebtedness; inflation and interest rate fluctuations; and steep increases in property prices, creating a culture of saving in property, which in turn has low liquidity.
Funeral assurance is the number one savings vehicle for South Africans.
Old Mutual says of the people who save, 61 percent will include a funeral policy in their financial products.
However, funeral assurance cover has dropped from 43 percent to 40 percent of households overall, according to FinScope.
FinScope found that there has been a shift towards formal, regulated funeral assurance providers and away from burial societies, with banks in particular increasing their share of the market. And there is greater scope for improvement in this sector of the financial services market.
Rob Powell of TNS research Surveys says that ways have to be found to streamline the payment of benefits with formal sector products.
Most people who have funeral assurance want to be paid the benefits immediately, whereas they find that their claims are delayed by complex requirements, particularly for documents, Powell says.
The FinScope survey found that the average amount contributed by individuals involved in a funeral is R2 700, which is higher than the average monthly income of many households.
Old Mutual found that, after funeral assurance, among people who do save the next most used savings vehicles were pension or provident funds, followed by medical schemes, risk life assurance, cash in the bank, retirement annuities, stokvels and life assurance endowment policies.
Households that earn less than R6 000 a month are more likely to use informal savings vehicles.
Old Mutual found that 43 percent of black households that save do so through a stokvel.
Old Mutual says that among people who save, two out of every five households have a member of a pension or provident fund. Upper-income households are three times more likely to have a member of a retirement fund.
Life assurance
Only a third of metropolitan households in South Africa have some form of life and disability cover, Old Mutual has found.
Only one in 10 low-income households has cover, against seven out of 10 high-income households.
White households are three times more likely than black households to have cover. Cover is also skewed towards couples, who are twice as likely to have assurance as are single people.
  
 
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