Caught in a debt trap

Financial Mail - Investors Monthly - - Opinion -

For fi­nance min­is­ter Pravin Gord­han, debt man­age­ment is a huge prob­lem. Na­tional debt ser­vic­ing costs are R169bn for 2017 and they’re swal­low­ing up an alarm­ing amount of his bud­get.

So he knows how most South Africans feel be­cause, as in­di­vid­u­als, we’re also drown­ing in debt.

Only one in four of us have any money left at the end of the month.

And 86% of adults bor­row money (the high­est level any­where, ac­cord­ing to a 2015 World Bank re­port).

This level of in­debt­ed­ness has a back story which is im­por­tant to un­der­stand.

Prior to 1994, the ma­jor­ity of the na­tion didn’t have ac­cess to for­mal lines of credit and lacked ed­u­ca­tion re­gard­ing their use.

Af­ter we achieved democ­racy, ac­cess to credit was opened across the board, with pos­i­tive and neg­a­tive con­se­quences.

Ac­cess to lines of credit be­yond the lim­i­ta­tions of stokvels and the harsh in­ter­est rates of the mashon­isas (loan sharks) fu­elled the ex­tra­or­di­nary rise of the mid­dle class.

It drove the growth which reached its peak around 2008.

But much of that money was bor­rowed on an un­sus­tain­able ba­sis.

Or it was used for un­pro­duc­tive pur­poses with a lack of un­der­stand­ing of the core di­vide be­tween good debt, which en­ables the build­ing of an as­set base, and bad debt, which usu­ally meets a want, which may not con­trib­ute to build­ing wealth.

No wide­spread sav­ings cul­ture was ever de­vel­oped so the boom div­i­dend was largely spent on debt ser­vic­ing, with 75% of net dis­pos­able in­come cur­rently de­voted to that pur­pose.

This meant that when the macroe­co­nomic tide turned against us, very few had any­thing to fall back on.

The ob­vi­ous phys­i­cal con­se­quences of our debt lev­els are wide­spread im­pov­er­ish­ment and an in­abil­ity to im­prove cir­cum­stances.

But the psy­cho­log­i­cal dam­age is also enor­mous and has a huge im­pact on fam­i­lies, en­tire com­mu­ni­ties and on na­tional pro­duc­tiv­ity.

The MMI Unisa Ef­fec­tive Em­ployee In­dex demon­strates that stress about debt usu­ally af­fects worker pro­duc­tiv­ity sig­nif­i­cantly.

At the start of my work­ing life I briefly ex­pe­ri­enced the par­tic­u­larly acute sense of vul­ner­a­bil­ity which comes from feel­ing caught in a debt trap.

For­tu­nately for me I had the emo­tional and prac­ti­cal tools to suc­cess­fully man­age the bur­den. I was able to come out on the other side.

But too few have those tools. They need to be given them — ur­gently.

Many pos­i­tive things have been done by gov­ern­ment, the Na­tional Credit Reg­u­la­tor, the Fi­nan­cial Ser­vices Board and the courts to rein in ir­re­spon­si­ble and usu­ri­ous lend­ing prac­tices.

But no amount of reg­u­la­tory mea­sures can en­force re­spon­si­ble be­hav­iour on the part of in­di­vid­u­als.

Some­how we have to broadly en­trench the con­cepts of ba­sic bud­get­ing and plan­ning which lead to per­sonal fi­nan­cial well­ness.

We also need to have the abil­ity to ex­er­cise pa­tience in ex­e­cut­ing our needs in­stead of reach­ing for in­stant grat­i­fi­ca­tion.

Fi­nan­cial ser­vices com­pa­nies have a re­spon­si­bil­ity here, as do em­ploy­ers, who must as­sist their work­forces in tack­ling the bur­den of debt.

At gov­ern­ment level the so­lu­tion lies not with the fi­nance min­is­ter but with his coun­ter­parts at ba­sic and higher ed­u­ca­tion.

Fi­nan­cial well­ness must be taught ef­fec­tively at schools and var­si­ties. There’s sim­ply no ex­cuse for the next gen­er­a­tion fail­ing to un­der­stand how to use money wisely.

Debt lev­els lead to greater poverty and do enor­mous dam­age to fam­i­lies, com­mu­ni­ties and pro­duc­tiv­ity

Nzukuma is CEO of Metropoli­tan Re­tail

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