Wonga’s got it wrong about why people are in debt

icrolender Wonga. com could not be more wronga. In fact, it could be considered to having gone bonga when it issued a statement this week saying a survey of its client base showed that most South Africans are not living beyond their means.

Wronga bonga Wonga. com says 43 percent of its customers need to borrow only when they have an emergency such as vehicle repairs.

By my definition, anyone who needs to take out a high-interest, unsecured loan, with all the additional costs of administration charges and life assurance premiums, is not making ends meet.

Wonga. com’s head of communications, Debbie Sharwood, was quoted in Business Report as saying that people do not save because they lack financial education.

She is quite right on financial education, but the inference of what her company is saying could lead people up the wrong path.

A loan, for no matter what purpose, and its a c c o mpanying c o s t s must be paid back. Where income equals spending, those payments will tip the balance into negative territory.

It is irresponsible for Wonga.com to imply that this is not the case.

Such phoney research conclusions undermine every effort by people trying to make South Africa more financially literate.

The far more telling statistic about South African debt comes from the Credit Bureau Monitor, published by the National Credit Regulator, for the first quarter of this year. There are 9.53 million consumers with impaired records. That means that 48 percent of a total of 20 million credit-active consumers have impaired credit records.

These are people desperately trying

Mto escape the clutches of microlenders and the banks. If people have to borrow to pay for emergency repairs to a motor vehicle, they are living on the edge. If they are just making ends meet, particularly with the inflation rate and rising petrol and electricity costs, they go over the edge into financial instability.

Someone living within their means does not tip over the edge financially when there is unexpected or unplanned additional pressure on the household budget. They would have an emergency fund to deal with the problem.

Against this Wonga. com nonsense I attended an Alexander Forbes Hot Topics seminar for retirement fund trustees this week. Much of the seminar focused on financial literacy of retirement fund members and the roles many people and institutions must play to ensure improved individual financial literacy, which would result in people not having to knock on the doors of companies like Wonga. com when they have an emergency.

GENERATION SOLUTION

A very valid point was made at the seminar by Belinda Sullivan, a senior Alexander Forbes consultant, was that if this generation can retire financially independent, then the next generation has a far better chance of also being financially independent.

Instead at the moment we have what is called the “sandwich generation”, who have not saved enough for their own retirement but need to bail out parents and support unemployed children into their twenties and thirties.

One of the speakers at the Alexander Forbes seminar was Lyndwill Clarke, head of consumer education at the Financial Services Board (FSB), who, among other things, detailed the attributes of a person who could be regarded as financially literate.

These attributes were tested in a study on financial literacy in South Africa, commissioned by the FSB and conducted by the HSRC in 2011. The study will now be the baseline for future studies to see whether we as a nation are becoming more financially literate as a result of various educational programmes. These range from work being done by the FSB through to initiatives by the South African Savings Institute (Sasi), which launched its National Savings Month, focusing on financial literacy, this week.

Clarke says the assessment of individual financial literacy was divided into four “domains” (see “How good are you with money?”, right).

In a remark that about sums up the necessity for financial literacy, Clarke said: “Crooks in suits sell products to people who do not know what they are buying. The problem of the lack of financial literacy is that a lot of us don’t know what we don’t know.”

At the launch of National Savings Month, Sasi chairperson Prem Govender said the lack of financial knowledge is compromising South Africans’ financial wellbeing and is evident in many households – even the seemingly affluent – that are struggling to make ends meet, having trouble paying debts, and not planning for retirement.

Those fortunate enough to have jobs do not know how to manage their limited income or understand the benefits of saving earlier and longer for retirement, and many people are using the wrong products for their needs, Govender says.

Financial literacy is the only thing that will protect you from the nonsense of companies like Wonga.com and those that sell you poorly-structured, high-cost education policies and funeral policies – products severely criticised by Clarke as often not meeting the reasonable expectations of consumers.

The main point of being financially literate is that you understand the advice you receive and can structure your finances so that, incrementally over the medium to long term, you can become increasingly financially secure, and hopefully able to provide for your dependants and for yourself in retirement.

A useful first step is the FSB’s educational site www.mylifemymoney.co.za