The multiplier effect of stokvel credit will reverberate in the growth of GDP
The more I wrestle with how to deal with economic inequality, the less I think it is only about money. It is about common purpose, it is about changing the behaviour of people. It is about trust, not doubt. It’s about enablement, not entitlement. It’s about growth, not transfer. These are the conflicts that should be considered in the solution design. But to get it done, actually implemented and pervasive, the will of the government is needed.
People are all born equal as human beings, but they are not all born into equal economic circumstances or even equal opportunity sets.
It is therefore essential to intervene, with energy and resolve, to create the economic equilibrium in SA’s society that will be the foundation of prosperity and the assurance of enduring peace.
Credit for the so-called credit unworthy can be their ruin. People have material aspirations, virtuous or otherwise, beyond their current economic means. While it does not make sense to fund consumption expenditure with debt (because neither income nor capital are created to service and repay that debt), it does make sense to leverage capital to create value — to build a business, for instance.
The essence of banking is founded on its ability to leverage the equity in its balance sheets, under appropriate supervision.
Depositors’ money is debt to a bank; loans are its assets.
Because of the permissible and supervised high ratio of deposits (liabilities) to equity, a relatively small net profit earned on its total asset base (loans) multiplies into a big return on its base capital. But there must be base equity.
Poor people, really poor people, don’t have any equity, they don’t save.
The purchase of primal needs cannot really be deferred.
In truth, though, people do save, however little. Sometimes they gather in groups, to provide community nest eggs — a little bit of money, stored in a tin or under the proverbial mattress, as a source for rotating credit supply or in case of emergencies among them.
These collectives have been established globally, particularly in less developed countries.
In SA, they are called stokvels. While the stokvel may help people out when it’s their turn, growth in the funding base is limited. And yet there is equity, however small, that can be leveraged.
Stokvel members have already demonstrated the first principles of creditworthiness, discipline and trust.
Of course credit would be limited at first, and of course it will need to be monitored (that’s where technology comes in, real time), but even if stokvels only lent up to the amount in the savings kitty (now a deposit in a bank) they would have doubled the funds available to the participants and they would have invited informal money into the formal economy.
The multiplier effect of this would, in time, have a measurable effect on GDP growth.
Credit, at a price that could fund small business growth, rather than strangle it, as street credit does, becomes the friend of business, not the enemy.
A case study in the success of funding small rural savings groups is provided in what Nabard Bank, a “development bank of the nation for fostering rural prosperity”, has achieved with this model in India.
The unintended consequences of this incremental growth model, this attitude towards inequality, are many — some risky, many virtuous. Anyone can list the risks.
The virtuous by-products include financial literacy, trust in the formal credit system and a fundamental change in human behaviour as the prospect of individual economic dignity dawns on those previously doomed to perpetual poverty.
The alternative, adopted by many governments, is cash handouts, which have quite the opposite effect, creating dependency and entrenching inequality, except in deserving cases of obvious social despair or incapacity, which must remain the responsibility of the state.
The economic sense of financial inclusion needs to be measured in the broadest sense. It is not just the margin that the participating banks may make, it is the creation of a financially independent population: a middle class that is able and happier to pay tax, which in turn will be used to fund the infrastructure of a sound, itself financially independent, sovereign economy.
That is where the return will be measured; that is where the votes will be counted.
Attempts to coerce the private sector banks to assume this role will fail, (although it has proved to be worthwhile business with very low default rates). Ultimately the initial momentum, the solution, lies with an open-minded, determined government that will take the first step.
SA had better start now.
CASH HANDOUTS HAVE THE OPPOSITE EFFECT, CREATING DEPENDENCY AND ENTRENCHING INEQUALITY