A big part of our economy is untouched by registered lenders: the informal economy. That is an unintended consequence of credit regulations that make it impossible to lend to anyone who can’t produce a payslip and three months’ bank statements. If you’re an informal entrepreneur, you either must fund yourself or turn to illegal and often unscrupulous lenders.
The informal economy could be an important driver of jobs and economic growth. It makes up 30% of the national economy and provides 31% of employment. Given the oft-stated policy intention of stimulating small businesses, the informal sector represents a huge opportunity for development.
The National Credit Act and its regulations stipulate that lenders must undertake an affordability assessment before granting a loan. That applies to consumers and to businesses that have a turnover of less than R1m, but because informal businesses are not registered they are effectively sole proprietors and therefore seen as individuals.
Because those individuals are not formally employed (unless their business is a side hustle) they have no way of producing the required documents. Street-side hawkers, for example, have to have working capital to fund their stock. The absence of any formal lending makes it impossible for many people to enter the market, or to do so at expensive rates.
Historically there have not been big protests from the lending industry. That’s because the informal marketplace has been difficult to lend to anyway. Records are often scarce, there is limited accounting or assets to hold as security, and informal businesses can be hard to identify or locate. Thay are not creditworthy on traditional ways of measuring it.
But technology is changing all of that. Tencent, in which Naspers is a major shareholder via its 74% stake in Prosus, owns WePay in China which has developed credit-scoring techniques that rely on their vast data on users’ social, purchasing and payment behaviour.
Facebook has a patent that allows it to use a person’s social network to evaluate a loan application (if your peers are good payers, you are likely to be too). Amazon has millions of small business customers and offers them loans based on a long history of purchase and payment behaviour.
Banks in SA have also tried to crack the informal market. Standard Bank experimented with a smartphone app that tracked informal traders’ cash flows and geolocated them to make loans, but it did that in Ghana rather than SA.
FNB and Standard Bank offer small business loans that are based on cash-flow analysis. Capitec is getting into the SME market after its acquisition of Mercantile Bank but it will focus on formal businesses that are above the R1m National Credit Act cap. It would love to get into the informal sector if credit regulations made it possible.
As in the rest of the world, alternative credit assessments relying on big data may happen outside the banking industry. Retailers, for instance, know what you are buying, information which could be relevant to creditworthiness. Is a shopper with a basket of fresh vegetables a better credit risk than one with two bottles of wine?
Affordability vetting is an odd thing. No lender wants to lend to someone who can’t pay it back. But in SA the efficient legal system means that you can pursue defaulting borrowers cheaply and recover your money at great harm to the borrower.
So, the affordability assessment provides a layer of comfort to block consumer exploitation by lenders. However, the national credit regulator then had to provide a detailed stipulation of how the affordability assessment should be done, otherwise lenders could simply cook up ones that give the answers they want. And so the payslips and bank statements became a requirement.
With the development of big data and artificial intelligence (AI) in finance, the affordability assessment is old fashioned and a big barrier for perfectly creditworthy borrowers in the informal sector. The problem is that there does need to be an objective way of determining if borrowers can afford their loan.
But that should be possible by stipulating a different sort of of assessment approach for the informal sector. Just as with big companies, ratios are key — the ratio of debt service costs to profit, for example. A lender relying on big data should be able to draw up a likely income statement and balance sheet from their analysis.
This is something that the department of trade & industry, which oversees the National Credit Act, and the department of small business development should be pursuing with gusto.
Freeing up the formal lending industry to support a sector that makes up 30% of the economy could have dramatic effects on overall growth. While there is resistance in some government quarters, in that the informal economy is also hard to tax or enforce employment regulations, the economic growth upside is potentially huge.
By Graunt Kruger, PhD
Pension funds are the biggest investors globally but to date they have not directed much of their funds towards impact investments. However, the disconnect between their investment strategies and the wishes of their beneficiaries is becoming clear. Beneficiaries, as evidence from the UK shows, would like their pensions to drive impact, not just financial returns.
“Make my money matter” is a campaign in the UK to mobilise individual members towards encouraging their pension fund managers to direct investments to drive positive social and environmental outcomes and good governance. The campaign follows a study by the department of international development in the UK, released in September. The study found that seven out of 10 UK citizens with pension funds would like their pension investments to be used for good, not just for financial returns.
Impact investment advocates such as Sir Ronald Cohen – former private equity investor and chair of the Global Steering Group (GSG) on Impact Investing – believe that pressure from individual members is essential. Speaking at the GSG Global Impact Investment Summit in Buenos Aires this week, Cohen said: “$80-trillion are sitting in pension funds. We need to overthrow the dictatorship of profit … and use those funds for impact investments.”
The core challenge is shifting the mindset of pension fund managers from focusing only on the traditional risk-return nexus to a risk-return-impact paradigm. Understandably, pension fund managers are reluctant, as they must ensure that pension funds are not only protected but are also growing to meet future needs of beneficiaries.
Changes are afoot. Evidence is mounting that impact-focused investments outperform traditional investments. This means that investments with an impact-return focus deliver financial returns higher than those that focus only on financial returns. A report by Global Knightsreleased at the World Economic Forum in January showed that the world’s top 100 most sustainable companies made a net investment return of 127.35% compared with 118.27% for the MSCI All World Index – the global equity index that represents the performance of large- and mid-cap stocks across 23 developed and 26 emerging markets.
South Africa’s Public Investment Corporation (PIC) – the largest institutional investor in Africa – might be an exception when it comes to the inertia of pension funds managers to invest in impact-driven portfolios. The PIC, along with the South African impact investing organising committee, launched theAfrica Impact Report: Impact Investing Opportunities and Gap Analysisat the summit in Buenos Aires. The report highlights the investment opportunity that arises from Africa having the world’s highest forecasted population and urbanisation growth rates. The report also focuses attention on the energy sector that has the potential to unlock “multiple economic and developmental outcomes” and the vast opportunities in infrastructure investments.
Underlying Cohen’s call to action for member activism is a deeper issue that is worth highlighting. Members are actually the ultimate owners of the capital that pension funds use to invest. Up to now, because pension contributions are directly deducted by employers and moved to pension fund managers, members (or workers) are distanced from their capital. If this call to action works, it could not only cause a revolution in how pension funds direct their investments, but it has the potential to awaken a deeper connection to the economy, to society and to community by the true owners of the capital in pension funds: the workers. Now is the time to act and put Cohen’s idea to the test.
The next Global Impact Summit will be held in South Africa in September 2020.
One job of the CEO of an SOE is to fight the highly political battles and there are instances where business will have to back De Ruyter in these conflicts, say head of capital markets research at Intellidex, Peter Attard Montalto. Listen to the Interview on Classic Business
Intellidex’s view is that policy should be driven by evidence and it should be based on research on what would lead to the objectives we envision as a country, says Intellidex’s chairman Stuart Theobald. Listen to the full interview on SAfm
We will give André de Ruyter the benefit of the doubt but there isn’t time to learn on the job as many urgent decisions are required to turn Eskom around, says Intellidex’s Attard Montalto. Listen to the full interview on The Money Show with Bruce Whitfield
De Ruyter’s appointment as Eskom’s CEO is a surprise and it is unclear if he has the requisite experience considering that Nampak is a different kettle of fish and has not been clearly been successful, says Intellidex’s Peter Attard Montalto. Featured inEWN
SAA strike and inability to raise R2bn in working capital means that it will likely default on payments which will trigger demands from creditors that it immediately settle its debts, says Intellidex’s Peter Attard Montalto. Featured in Business Insider
Sometimes it is the smallest thing that riles the most.
I have a pet peeve, which is SA hotels, and particularly safari lodges, only offering bad, tasteless foreign gin instead of the amazing diversity of (only marginally more expensive) high-quality local gins.
It drives me mad that an inferior product I wouldn’t drink in the UK gets offered as somehow something that can answer the question of “what is the best, affordable, thing to drink”. Are there not local content rules on such things? The department of trade & industry should regulate gin now!
This situation rings quite a bell with the choice of a new Eskom CEO as well as many other state-owned enterprise (SOE) issues. There is much gnashing of teeth and moans of doom from the usual quarters, who would rather have the inferior product that is foreign to running a large complex organisation and lacks the requisite leadership skills.
In some sense SAA’s impending demise comes at just the right time for the wider SOE complex.
The economic death-cult of social compacting means many in the political economy mistake leadership and the self-confidence of knowing what needs to be done based on long experience for arrogance. It champions mediocrity on “skills” for the right tick boxes elsewhere in terms of the developmental state and cadre deployment.
Parts of the governing party are at risk of doing the same with SOEs. Listening to, rather than shutting down, contestation and vested interest groups who clearly don’t have the best interests of the employment and development at heart has delayed processes. This says a lot about a crisis of leadership in SA in general. That anyone can be put in any role because ultimately the compacting system will magically conjure up the right answers for such a deployed person to implement. This is crazy.
But in the end pragmatism, from the department of public enterprises especially, seems to be winning the day. The crisis Eskom is in means options are constrained to the point where only one choice is left standing. This is also increasingly happening (albeit with more of a lag) at SAA.
The presidency seems to still be stuck. Others, however, have come to their senses and pragmatism has won out — Tito Mboweni and Pravin Gordhan and their respective teams in particular (though, given nuance, sometimes pragmatism comes in different flavours that can conflict, but that is another story for another day).
What is about to happen at Eskom and SAA will be a fascinating experiment of which side of this debate can work out.
With Eskom, we certainly never want to hear “I never knew how bad it was”, which has been uttered by so many other SOE leaders.
But decisiveness and knowledge creates the potential for conflict, especially after double- and triple-checking all stakeholders have been consulted and vs the innumerable commissions and working groups. The roles of shareholder vs board vs c-suite at SOEs have never really been sorted out in the past because each was as weak as the other. It will now have to be sorted out for Eskom and other SOEs if Eskom is to be allowed to function and rescue itself.
In some sense SAA’s impending demise comes at just the right time for the wider SOE complex. It will highlight the hard decisions required, the need (and ability) to avoid pain by acting early.
Eskom needs to be stabilised (both operationally and financially) while also undergoing radical shifts in its role as part of a just energy transition. The government is so bad at these things precisely because these processes require the choosing of winners and losers, and as such the death-cult of social compacting can achieve little.
A theoretical path out has now been laid for Eskom by the department of public enterprises but can easily be derailed with too many cooks and too much sticky status quo developmental monopoly mindset from some parts of government.
SAA equally is more at risk of a sudden stop in sentiment forcing a shift towards sustainable solutions and where winners and losers will have to (legally under business rescue) be picked.
It was extremely tough to get to this point in both cases. A running out of other options and so “late” arrival at the necessary place were the order of the day, though the government will still demand praise for the decision (and should get some).
It has been the same on child tourist visas, where the government wants praise but has completely messed up the process and shot the tourism industry in the foot over the past two years. Similarly on spectrum auctions, a huge amount of pressure has had to be applied to get the government to now try to finally move, but only by bypassing the minister-shaped blockage.
Reform is happening, but too slow and creating too much uncertainty, cost and fallout risk in the delayed interim. A different way of doing things is now going to happen at Eskom and SAA, forced by a lack of alternatives.
Attard Montalto is head of Capital Markets Research at Intellidex
Both sides try to inflict injury on the other until a messy synthesis is achieved in which no-one will be happy
The strands of ideology that shape SA’s political economy are deep. Sometimes we are not even conscious of them. One of the most important is Marx’s theory of history, a vision of the world that spans the ANC alliance from left to right. It sets the terms for debate and action. It will play a powerful background role in attempts by the Treasury to cut back the public service wage bill by R50bn a year and save us from a ratings downgrade.
Marx’s dialectical materialism conceives of the world as a fight between implacable foes for material benefit, with history unfolding in its wake. Those foes are classes in society, principally labour and capital. This way of seeing the world defines what is possible — the kinds of engagements we can have with each other and even the ideas we can convey.
We will see this clearly over the next 90 days as the Treasury tries to achieve its cuts before the February budget. Finance minister Tito Mboweni is deeply embedded in dialectical materialism, though he has switched from labour to capital between his Mandela-era career as labour minister and his latter career as finance minister.
His first strike in the dialectic came in the medium-term budget policy statement (MTBPS), with the headline-grabbing stats that public servant salaries have grown 66% over inflation in the past decade and that there are now 29,000 civil servants paid over R1m a year. This was a sabre rattle.
Labour was quick to respond, with Cosatu calling Mboweni’s stats “either fundamentally dishonest or innocently delusional” and saying that savings should be made by cutting the salaries of executives and targeting wasteful expenditure.
And so it will go, with both sides attempting to inflict injury on the other until some messy synthesis can be achieved in which no-one will be happy.
If only we South Africans were able to engage differently. Some countries have changed the paradigm. Germany did it through its co-determination laws, which ensure labour has a large representation on company boards. That has also been adopted in Sweden and Denmark, among others.
The UK flirted with “third way” politics during Tony Blair’s prime ministership, though the Labour party has now retreated deeply into a Marxist paradigm, much to the frustration of those in the UK who would like to see progressive policies actually implemented.
These examples show what can be done when we escape the dialectic, when we shrug off the labels “labour” and “capital” and start having genuine conversations about what we can do as a single society. South Africans have done it before. The Codesa process brought together opposed sides to forge a democratic dispensation. You could even point to the World Cup as an example of all sides working together. But as soon as it was done we went back to our camps. And those camps are built into our body politic, most obviously in the form of Nedlac, which is an institutionalised form of materialist dialectic. It is also a failure, the place where good policies go to die.
The biggest casualty of a dialectic paradigm, as it functions now, is the truth. We are not much interested in evidence, in seeking out policies that work. Instead we are interested in the lobby for “our” side, in accumulating power for either labour or capital, and hoping to triumph. In that effort it is logical to take extreme positions, anticipating that the outcome of the process is going to be some sort of synthesis (along the lines of Hegel’s dialectic, which Marx saw himself as developing).
When that is how you see the world, an extreme position is a tactic deployed to sway the centre towards the outcome you want. I don’t think anyone on the Left desires the nationalisation of all banks, for example, just as I don’t believe anyone on the Right really believes we should privatise everything. But by advocating for these extremes, the resulting synthesis might be close to what we do want. The casualty in the process is any attempt to seek out proper evidence and setting out of policy ideas that would be good for the country. We cannot escape the roles that historical materialism imposes on us.
“Evidence-based” policymaking is in part a rejection of this stalemate and was popularised by the Blair government. Social scientists are employed to test and marshal evidence about what policy is best. The approach was heavily influential in the development of our National Development Plan. Attempts have been made to drive it into government, for example using cost-benefit analyses of proposed policies. But our society is a long way from adopting evidence as our guiding light. As a result, the Treasury and labour are set to butt heads intractably.
• Theobald is chairman at Intellidex.
South Africa’s chances of avoiding a downgrade after the February budget are 50:50 and a cut could result in R73bn of outflows, says Peter Attard Montalto, Intellidex’s London-based head of capital-markets research. Featured on Bloomberg
Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.