By: Brett van Aswegen
South Africa has a well-developed formal financial sector, however, according to the World Bank, a population that ranks high in terms of debt.
In addition to these high borrowing levels, South Africans are also distinguished by poor repayments and many of them are trapped in a spiral of debt.
This suggests that in our country, financial literacy skills are important but underdeveloped. In my opinion, the onus is on lenders to identify entry points for improving financial literacy as a stepping stone to financial strength.
Interventions to improve financial inclusion aim to empower lenders to make more informed financial decisions and strengthen their behavior for better budgeting, better planning and better informed borrowing.
An analysis of financial inclusion in South Africa shows that affordability limits poor households’ access to formal financial services. While financial inclusion is typically addressed by improving financial infrastructure, it’s important to note that a higher degree of financial literacy has a clear beneficial effect.
Many financial education initiatives are implemented by a number of institutions, but these initiatives are peppered with low levels of coordination. Since a significant portion of our population is ill-equipped to make sound financial decisions, it is our responsibility as lenders to improve understanding of financial products and awareness of risk. This enables people to make informed choices, know where to turn for support, and overall improve their financial well-being.
People who are financially literate are less likely to accumulate credit card debt or long-term debt, while their less financially literate counterparts struggle with debt and fall behind on repayments. Due to limited financial literacy, people with low incomes are often suspicious of financial institutions, wary of the fees they incur, and do not understand the benefits they can offer.
South Africa’s National Credit Act prohibits credit providers from entering into reckless credit agreements. An agreement is defined as reckless if, at the time of its conclusion, the lender has not performed an affordability assessment; or if, after performing the appraisal, the evidence either suggested that the borrower did not understand the agreement or that it would make the borrower over-leveraged.
This is an opportunity for lenders to differentiate themselves as a responsible lending institution, operating under strict legislative requirements and using fair lending practices to protect consumers.
I believe financial literacy will have a profound impact on consumers and their ability to provide for their future. Low or no levels of financial education lead to low or no levels of consumer protection as they do not have a clear understanding of their unique financial needs, their rights as financial consumers and products and financial services available to them.
I encourage lenders to lead the way through educational initiatives that will ultimately result in financial behavior change.
Brett van Aswegen is the CEO of Wonga.
* The opinions expressed here are not necessarily those of IOL or the title sites.
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