South Africans used less short-term credit during Covid-19 disruption between the first quarter last year and the first quarter this year, resulting in an estimated economy-wide decline in sales of R790 million with 1 400 fewer jobs supported and R96m less in taxes collected, according to the results of the first AFSCI (Altron Fintech Short-term Credit Impact) Index released yesterday.
The extension of short-term credit, a key financial instrument for low-income households and micro-businesses, contracted by 12.3 percent during the reported period.
Altron Fintech developed the AFSCI in partnership with Keith Lockwood, an independent economic consultant and adjunct faculty member of the Gordon Institute of Business Science(GIBS).
Lockwood attributed the decline in the number of creditworthy credit applicants to the 1.4 million drop in total employment experienced during the pandemic and the decline in average real incomes in South Africa over the same period.
“Just as net additions to credit extension can generate positive economy-wide economic impacts that are a multiple of the value of the credit extended, so does the contraction of net credit extension generate negative multiplier effects throughout the economy. Businesses that were receiving additional sales as a consequence of the credit made available to their customers will experience a decline in sales,” said Lockwood.
“They will then employ fewer factors of production and place orders of less value with their suppliers. The process will continue with indirect and induced impacts serving to magnify the negative impacts.”
According to the AFSCI, despite the partial normalisation of the economy, the value of short-term credit extended was down by 20 percent, and the number of loans advanced was 25 percent below their pre-Covid, or fourth quarter 2019, levels.
In the first quarter of this year, R1.97 billion of short-term credit was advanced via 715 000 loans with an average value of R2 758.00.
When compared with other types of consumer credit, a much larger proportion of short-term credit was advanced to people earning less than R15 000 per month. Whereas this group only accessed 11 percent of total consumer credit in the first quarter this year, they obtained 57 percent of the short-term credit advanced.
Lockwood explained that in an attempt to enhance the affordability of lending, there had been a significant extension of the average repayment period (term) of short-term loans. Whereas loans with a term of up to one month accounted for 64 percent of the value of short-term credit advanced in the last quarter of 2019, by the first quarter this year, this had dropped to 54 percent. Over the same period, loans with terms of four to six months increased their share from 26 percent to 34 percent.
Altron Fintech managing director Johan Gellatly said credit was an important cog in the engine which fuelled economic growth.
“An increase in credit extension injects money that was previously out of circulation back into the economy, and thereby, generates a stream of economic activity and incomes,” said Gellatly.
Altron Fintech said that it commissioned the AFSCI with a view to assisting credit providers in the short-term credit market in their assessment of risk and credit extension and in building a deeper understanding of the role that this form of credit played in the South African economy and society.
It said that short-term credit was a relatively poorly understood form of credit, despite the critical role that it played within the economy.
Gellatly said, while short-term credit made up a very small share of total consumer credit, it was an important market as it provided first-time access to credit to many people that had never had access before, like lower-income households with a proportionately greater share of credit than is advanced to them by other forms of credit.
The AFSCI Index is the second of two indices developed by Altron Fintech focused on credit provision in the economy. The company launched the AFHRI last month to provide critical insight into the financial state of households by assessing the state of credit extension from the perspective of the ability of borrowers to repay loans.
BUSINESS REPORT ONLINE