Average household in SA better positioned to incur and manage debt

Recovery in household income has seen more average South African households in better positions to incur debt and repay loans than before the start of the pandemic, findings from the Altron Fintech Household Financial Resilience Index (Afhri) for the first quarter of 2021 indicate.

The quarterly index, created by Altron Fintech in partnership with Dr Roelof Botha, economic advisor to the Optimum Investment Group, is aimed at gauging the level of financial resilience among South African households and their ability to service loans.

Botha revealed during the Afhri launch on Wednesday (August 25) that this trend is likely to remain consistent for a while.

“The results of the first Afhri, released today, show that the average household is better able to incur and manage debt than before the Covid-19 pandemic began, and that the long-term upward trend in the index is likely to continue in 2021 and 2022,” he said.

Listen: Dr Roelof Botha discusses the index with Fifi Peters

Rationale

According to Altron Fintech MD Johan Gellatly: “The Afhri is premised on the fact that income is ultimately required to repay debt. Without income of some kind, individuals are not able to qualify for loans that allow for expanded access to the full range of goods and services that comprise private consumption expenditure, as well as the funding of working capital required to sustain or expand small and micro businesses.

“In an attempt to provide clear and quantitative guidance on the disposition of South African households, on average, to engage in viable borrowing activities, it was decided to design a composite index that portrays their financial resilience. Despite the devastating impact of the pandemic and lockdown restrictions on the economy, the results of the Afhri demonstrate that household income has rebounded, and that borrowers are able to repay loans.”

The index comprises 20 different indicators weighted according to the demand side of the short-term lending industry. It is calculated on a quarterly basis, with the first quarter of 2014 as the base period (equalling an index value of 100).

Resilience dip

The findings show that from the onset of the base period, the household resilience index was on a steady climb, however, it significantly dropped between the first and third quarters of 2020. Botha cited Covid-19 as the main contributor to the decline as there was a massive contraction in the labour market, and workers incurred salary cuts.

Between Q4 2020 and Q1 2021, however, the financial resilience of medium households started elevating as lockdown levels were now lenient, allowing for more economic activities to resume.

Read: Have loan, will shop

Botha noted that Covid-19 saw the emergence of intriguing sources of revenue such as surrenders of long-term insurance policies.

“It is a very bad idea, but the fact of the matter is that it does enhance the financial resilience of households because it gives you a lot of money all of a sudden, and hopefully, you start sailing immediately again.”

He also noted that when the debt costs as percentage of household income indicator declines, it demonstrates positive household financial resilience. This indicator saw a steep spike between Q2 2020 and Q4 2021 due to the pandemic as well, but remained below levels last seen in 2015.

The Afhri is one of two indices developed by Altron Fintech. The second index, developed by economist Keith Lockwood from the Gordon Institute of Business Science and set to be launched in September, will unpack the economic impact of short-term credit in South Africa.

Listen to Fifi Peters’s interview with John Manyike, head of financial education at Old Mutual (or read the transcript here):

Palesa Mofokeng is a Moneyweb intern.