How to help those at the edges of the financial ecosystem
Access to financial services holds the key to unlocking economic development and growth in SA and other emerging markets. It should serve all segments of society, including entrepreneurs, whether as groups or individuals across the urban and rural divides.
In the run-up to the president’s state of the nation address and the finance minister’s budget speech, a review of the adequacy of our current financial ecosystem is necessary, including whether it offers sufficient finance for our development priorities. Reviewing the necessary conditions for financial inclusion that lead to economic transformation of key growth sectors must take centre stage if we are to grow our economy beyond 2024’s meagre 0.6% projected growth.
The regulatory authorities emphasise the provision of affordable and suitable products throughout the financial value chain. However, SA’s economic landscape is characterised by concentration and exclusion in the financial, mining, manufacturing and retail sectors, necessitating transformation of the financial ecosystem to encourage new entrants and investments in established and new sectors of the economy. While it is important to broaden portfolios of existing private sector investments, crowdfunding for public sector investments using subordinated debt, grant and concessionary funding becomes critically important.
A constraint in SA is the high concentration in the banking sector, where four banks control more than 80% of sector assets. This results in reduced competition, with SA banking fees being among the highest in the world, while creating potential financial exclusion for a large majority. Access to financial services is also influenced by factors such as income and employment levels. To transform the low-income economy, our critically high unemployment rate and the low growth rate of less than 1% that SA is trapped in, a different economic strategy through the transformation of the financial ecosystem is imperative.
Notwithstanding a sophisticated banking sector, access to credit and formal borrowing remains low, sitting at just 12% of the population. Despite more than 70% of the population having access to some form of bank account, it is crucial to shift focus from simple access. We must examine the usage and frequency of use of these products. Our financial institutions have been slow to expand financial services to the underserviced, unbanked and those who have previously been unsupported by the financing structures.
SA’s diverse banking sector has 18 domestic commercial banks, 13 local branches of foreign banks and 29 foreign banks. However, the concentration primarily exists within life insurers, with the top five organisations accounting for 82% of the total market, largely offering funeral cover products. If we are to increase the availability of financial products that cultivate inclusive economic growth and wellbeing, we must prioritise capital provision to development finance institutions that target the “missing middle ”— those not financed by traditional banks due to risk aversion and lack of collateral.
Recapitalisation of institutions that have track records of providing youth, women and entrepreneurs with innovative financial products to start and expand existing businesses is vital to further SA’s development goals and those of redistribution and structural reform. Providing sustainable financial support with lines of credit to businesses will catalyse the transformation of economic sectors and increase the market penetration of these new entrepreneurs, especially where conventional finance mechanisms have been unable to serve this population.
Therefore, recapitalisation of development finance institutions that support the missing middle and target economic sectors and segments of the population not serviced by the traditional financing mechanisms is necessary to extend the democratic dividend across the economic sphere. Key here is the National Empowerment Fund (NEF), which has a solid track record of good governance and robust processes that limit risky investment.
Strengthening linkages between key financial entities, including the Public Investment Corporation, Industrial Development Corporation and the NEF is vital to enable sustained investment and financial flows, driving a new generation of blended public and private sector investment strategies.
The predictable allocation of funds by the government and co-funding partnerships with the private and public sectors for enterprise and supplier development are necessary to drive equity and growth in sectors that dismantle the oligopolistic structures of targeted industries and to overcome the historical exclusion of the black majority across all economic sectors.