South Africa, May, 17 2012 -
Loan sharks and micro-finance offices have mushroomed in South Africa's inner-city centres. The lure is attractive - borrow R10,000 and create your dream life by growing your business. But in a country where half the population lives in poverty and much more live in debt, a greater understanding of how they use money could lead to more appropriate financial services.
In the late 1990s, Wall Street equity manager Daryl Collins came to South Africa. Driving through the Cape Flats, the native New Yorker would pass by townships like Langa and Khayelitsha. Collins was sent to South Africa to manage a financial portfolio, but her imagination was captured by what was going on inside those shacks.
"I kept wondering: 'What is happening inside there and how are people managing their money?' I decided to shake my life up a little. I moved away from asset management to become an academic at UCT. I lectured in finance and during that time went to see Stuart Rutherford about his work on Financial Diaries in Bangladesh. A light bulb went on in my mind and I knew that this is what I wanted to do," Collins says.
Rutherford is a renowned independent researcher and financial services pioneer for the poor. He lives in Bangladesh where he invents new financial services for the marginalised, who often don't have access to funds that suit their specific needs outside of their communities.
After meeting Rutherford in India, Collins came back to South Africa and, together with the FinMark Trust and the Ford Foundation, started a South African version of the Financial Diaries.
This research evolved into a book called Portfolios of the Poor: How the World's Poor Live on $2 a Day by Collins and Rutherford, with Jonathan Morduch and Orlanda Ruthven. The local portfolios in the book come from a year's worth of fieldwork overseen by Collins in Langa in Cape Town, Diepsloot in Johannesburg and Lugangeni, a rural village in the Eastern Cape. The field work will continue this year, expanding into Kenya and beyond.
"When we first started doing this research we thought that people might say no to us very easily, given that we wanted to keep financial diaries of their lives. Surprisingly, if you approach people in the right way, and if you're well vetted by the community, people are actually quite generous of their time," says Collins, adding: "In part it is a matter of paying people respect and respecting their time. You develop a relationship with the community and with people, and that's how you gain their help and trust."
Contrary to popularly held myths about the poor, Collins found that people living in poverty have careful, accurate if not complex financial lives. "They save, they take credit, they have their own businesses, they are very active credit givers and they insure themselves: they have burial insurance and personal insurance. What the research showed us is that these people had very active portfolios that they were managing," Collins says, speaking to iMaverick from the US.
One thing Collins never appreciated about marginalised locals is how helpful stokvels are in terms of getting people to save. "Of the people we surveyed, about 21% of what households made each month was put into a stokvel saving. It is a matter of discipline. People would make sure they go to the bank and put money in every month because other people were counting on them for that money. We found that people were much more likely to follow through on a savings plan like that," she says.
Stokvels work in different ways in South Africa. Some use banks, while for others it's a matter of keeping the money somewhere safe in an elected member's home. "Or the people in the stokvel would lend their money out to people in the community. They would charge very high rates - the rates in the townships are about 30% per month," Collins explains.
"In places like Diepsloot, people would spend a lot of money on transport, but food is still the big winner and people in this township would spend about 30 to 35% of their money on food. A fair amount of money is spent on funeral plans," she says.
"What surprised me is that people in rural areas were just as financially literate as people in urban areas. In rural areas people were lending and borrowing back and forth quite a bit. They arranged credit from each other and the local shops on an informal basis. They were involved in stokvel societies and a lot of them had bank accounts and were getting their social grants through bank accounts," says Collins.
The research looked at access to capital and here Collins says the assumption that a pipeline to loans equals an escape out of poverty is false. "Access to capital doesn't necessarily mean that people living in poverty will automatically increase their revenues or profits. It is not as if people make money and open one shop after another to become incredibly successful. I think it is important to remember that not everyone is an entrepreneur, and not everyone has that appetite for risk."
Collins says often what's preferable to what could be a projected dream of entrepreneurial success is to prevent vulnerability, so that marginalised families aren't wiped out by one financial shock. "If a big financial crisis or need hits a family, access to smaller amounts of cash could mean they don't get themselves heavily into debt or sell all their assets."
"I came out of this research thinking that aspiring to capital or aspiring to microfinance is not as grounded in reality as one would like to think. What is probably more realistic is a slower path out of poverty. A path where people are able to make adequate money for nutrition, to pay for schools and have business opportunities that are sustained and don't get derailed," she says.
There's this romantic view of poverty - shared by opportunists in financial services - that one bigger lump sum will be invested by those in poverty to grow their businesses and raise them up out of poverty fairly soon. It's the dream sold by many a loan shark to many a marginalised person who isn't an entrepreneur.
"Maybe what they need is much smaller amounts of money that help them patch cash flows so that they can ensure they can keep these businesses going," says Collins. "I think that microfinance is very backward. What these institutions normally do is to give a sum of money that is much larger than most people need, imagining that people will make an investment and try to grow their businesses. Mostly what people were trying to do is just to keep their businesses ticking over."
Collins says her experience was that what people need is much smaller amounts of money, but on a higher frequency basis. "Instead of giving somebody R10,000 and saying: 'Here. Go buy a new shack and open up a spaza shop', rather say: 'In January when you need to pay all your school fees, and you don't have enough money because you've spent it on Christmas - and you can't buy stock - come and borrow R1,000. Pay it back in a month or so when you get back on your feet.' It is much smaller amounts that are needed more often in these communities," she says.
The bottom line for people living in financial destitution is that access to lump sums of capital isn't automatically going to lift them out of poverty within a generation. This is possibly why there are so many mushrooming micro-finance businesses in inner city centres that are doing so well. They're staying in business by helping people become indebted, while stokvels are likely a more useful way of getting households in poverty through a cash crunch.
Poverty doesn't only make the poor vulnerable, it makes society vulnerable. Everyone knows the stats because they've been bandied about so much. Half our population lives below the poverty line, which means making do with only R500 a month. There has been a slight improvement in these numbers since 1993.
While the government's patting itself on the back for marginally reducing poverty, it might want to take a look at an Oxfam report published earlier this year. Called Left behind by the G20? the report predicts that a million more people will be pushed into poverty locally and that the number of people living in absolute poverty may increase.
"Looking ahead, inequality in South Africa is so high that our model predicts that, even if it remains static and is accompanied by strong GDP growth of around 3.7 percent, the number of people living in absolute poverty in South Africa is likely to increase. The poverty rate would fall, but not enough to offset the impact of a rapidly growing population, so the absolute number of people living in poverty would still rise," says Caroline Pearce, who co-authored the report.
"The fact is poor people missed out on their fair share of the prosperity of the boom years and have been hit hardest by the crisis that followed," says Pearce.
The Oxfam report goes further to compare inequality in net household income using the gini coefficient. The results for our country are damning. South Africa is the most unequal country in the G20 by a "considerable distance".
Data on how income is shared in this country shows that the biggest concentration of wealth is at the top end of the income scale. Increases in inequality have escalated since 2000, and the report states that: "Strong economic growth in South Africa will not stop the number of people living in poverty increasing by 2020 unless inequality is brought under control."
While South Africa's elite class increases the gap between itself and those living in poverty, it would be wise for the former to pause for a moment to understand what growing inequality means: if poverty makes for a compliant populace that's more accepting of tyranny in the short term, in the long term it could prove fuel for insurrection and instability, just the right forces to profoundly threaten elite wealth.