Prescient’s investment into SA’s overly indebted public sector helps employees get back on their feet

Conway Williams, Head of Credit at Prescient Investment Management

A unique debt restructuring model reduces the financial burden on lower LSM employees while simultaneously improving financial literacy.

The daily savings struggle facing South Africans continues to be well documented. Aggravated by the pandemic, the latest research shows that more than half of South Africa’s 19 million credit-active consumers are over-indebted . At the same time, it is expected that by the end of 2022, the average household will be spending as much as 75% of their take-home pay on debt.

Over the past 18 months, Prescient Investment Management (Prescient), through its Prescient Income Plus Fund, has partnered with Africa Direct Edubond (ADE) in piloting and then assisting in scaling its credit repair facility, “Bond Optimiser”, ADE’s unique debt restructuring model that ultimately consolidates both secured and unsecured credit agreements into a single mortgage-backed facility. The result is a high-impact offering that has shown to drastically improve the lives of materially indebted South African government employees by quantifiably improving household cash flows.

Simply put, Bond Optimiser assists in consolidating debt facilities into one, which, when supported by property as security, results in a significant savings for its clientele. To put numbers to this, the savings for clients vary but could range between 40% and 50% of their net disposable income, which is material when considering the level of earnings of the market in question.

In addition to alleviating clients' financial burdens and allowing them to become more financially secure, ADE looks to create positive, long-term shifts in financial behaviour by enrolling borrowers on its 12 month financial literacy programme “Edvance”. To date, over 280 borrowers are making progress with or have completed the 24-module programme. Further to this, the relief provided has resulted in borrowers allocating significant amounts of their savings toward educating their children.

An added benefit to clients is that over time, ADE’s clients’ credit scores improve, enabling them to re-enter the formal credit market and ultimately make better financial decisions than before, including direct spending on constructive activities such as home improvements, tertiary education, or a new vehicle; things that many clients previously considered unattainable.

Another stand-out is the significant increase in female borrowers in ADEs loan book, with women representing 47% of ADE’s total client base. This is a big step towards further improving the level of financial independence for women, especially within the lower LSM market. While female borrowers are not specifically targeted, women are known to be often solely responsible for the financial well-being of several dependents, and improving the level of education is thus a positive outcome.

Gaining access to this debt restructuring facility provides ADE’s clients with the breathing room to get back on track with debt repayments and onto a consolidated path towards achieving greater financial freedom. While still in its growth phase, ADE’s Bond Optimiser initiative has the potential to make a real difference to hard-working public servants, whose self-worth, in most cases, is crippled by various socio-economic pressures, including the high level of indebtedness they face.

Given the success in the pilot phase, Prescient has continued its support of the ADE offering in a measured manner. The initial investment took place in December 2020, whereafter the deal team closely considered the practicality and economics of the structure, and made certain tweaks thereto to ensure that the transaction actually made commercial sense while allowing the structure to achieve the desired impact and reach. The close working relationship with ADE, the structural changes made and then also the growth of the business ultimately allowed us to deploy further capital into this business.

At Prescient, we believe that we have the responsibility of ensuring that the capital we invest contributes to the greater good of the economy, the environment and broader society. It is thus particularly rewarding for us to support initiatives such as this, where we can earn commercial returns for clients while making a real difference.

To better understand ADE’s positive impact, click here to watch police officer and widow Lulama Mhambi-Jobela as she tells her story.