Financial Inclusion in post-Covid South Africa
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Financial Inclusion in post-Covid South Africa

Financial inclusion is generally defined as the agency that people have to access a variety of financial services. These financial services include bank and savings accounts, credit cards, loans and insurance products. Households that experience financial exclusion cannot take part in various forms of savings or wealth accumulation, ranging from paying bills via direct debit to gaining favourable forms of credit; thus experiencing a self-perpetuating cycle of exclusion. Access to financial services have also been shown to make households more resilient against unforeseen financial emergencies; with the Covid-19 (coronavirus) pandemic highlighting the need for poor households across the globe to gain access to favourable financial services. According to a study done by the Global Economic Prospects in 2020, the COVID-19 pandemic and resulting containment measures that different countries implemented is estimated to have resulted in an economic contraction of almost 3% in Sub-Saharan Africa, where financial illiteracy and exclusion is prevalent. In addition to the impact the pandemic has had on the economy, the crisis also posed a deep threat to financial inclusion efforts in Sub-Saharan Africa. Lockdowns and curfews designed to curb the spread of the virus resulted in the closure of major bank branches and halted operations of mobile money agents in compliance with restrictions. Despite this, there's evidence that COVID-19 has also served as the catalyst needed to initiate growth and motivate the financial industry to overcome some of the biggest challenges facing Africa’s payment sector. Government officials and healthcare workers encouraged use of cashless and contactless modes of payment to reduce the risk of spreading the virus through the handling of cash, thus creating new opportunities for the adoption of Digital Financial Services (DFS). Small businesses and low-income households can directly benefit from digital solutions such as mobile money services, online banking and other financial technology innovations. Recent evidence suggests that digital financial inclusion could significantly contribute to economic growth, reduce poverty and narrow income inequalities without necessarily causing adverse effects on financial stability given the appropriate regulatory framework. This solution is limited by access to technology and the internet however, which poor households generally experience in tandem with financial exclusion.

In South Africa, the second largest economy in Sub-Saharan Africa, there have been mixed outcomes with regard to the progress of financial inclusivity efforts. The financial services available in South Africa range from the well-known ones such as bank accounts and credit cards to the less well known ones such as hire purchase agreements and loans taken from local loan sharks. In the South African context, a bank account remains the most used financial service, with a steady decline in the number of unbanked adult individuals from 17 million to 14 million over fourteen years. With the promotion of adopting DFS during the pandemic, this number is expected to have experienced a slight decrease. Despite this, the circumstances facing households that did not experience financial inclusion prior to the pandemic have at best remained unchanged. These households are generally made up of poor and vulnerable groups, such as the elderly, women, the rural poor and youth, which have borne the brunt of the economic consequences resulting from the pandemic. These very same households have also been shown to rely on the informal sector as a means of attaining income, and according to statistics from the Global Findex database, individuals working in the informal sector have been shown to be among the most affected categories of workers. In a report by , which looked at the use of financial goods and services over a period of seven years, it was found that there was a general increase in the use of formal financial services which was severely skewed to households with higher incomes. An analysis of financial inclusion in South Africa shows that the affordability of financial services is what has limited poor households’ access to formal financial services. In addition to the affordability of formal financial services, individuals from low-income households have also been found to have a deep mistrust of the formal financial sector. This is rooted in fears of exploitation stemming from past abuses, such as the inappropriate marketing and sale of financial products to people that do not have financial literacy, which have shown that low-income households are highly susceptible to exploitative commercial interests.

Unfortunately, the issues posed by financial illiteracy is a systemic education problem within South Africa that cannot easily be addressed without regulatory change. For financial inclusion initiatives to be successful, particularly given the economic resilience that formal financial services provide, those that are financially excluded need to have a sense of trust and control in the process. The attitude that many South Africans have towards DFS provides an interesting opportunity for the development of new forms of digital payment services. While many people in the low-income bracket do not utilise mobile and internet banking simply due to lack of familiarity, the fear of fraud involving ATMs and internet banking has been cited as the number one reason for preferring to transact in cash. There is also an understanding that the financial services industry has also created substantial barriers for individuals to access products such as loans, requiring payslips and bank statements, which many South Africans are unable to produce. This also presents an opportunity for the development of more flexible and pragmatic financial services that offer simple, effective and efficient solutions. While regulation by the government can act as a catalyst, financial institutions will need to work together with the public and private sector to realize the goal of widespread financial inclusion. The payment platforms used nationally will have to evolve from commoditised propositions into strategic solutions that address the needs of low-income individuals and add value to their lives. Expanding the financial inclusion of the population has previously shown to have the ability to enhance GDP growth, reduce poverty and create new market opportunities for the private sector.

“Financial services can help drive development. They help people escape poverty by facilitating investments in their health, education and businesses. They make it easier to manage financial emergencies – such as a job loss or crop failure – that can push families into destitution. Many poor people around the world lack the financial services that can serve these functions. Instead, they rely on cash, which can be unsafe and hard to manage” – World Bank

Liam Smith