Targeting lower income earners becomes an African issue

Currently, financial services products generally cater for middle to higher income earners; there are very few products which target lower income earners. However, should the adviser get involved in the lower income market at all?

This has traditionally been a problem in Africa with the majority of the world's poorest nations being found on the African continent. In order to overcome this, a culture of savings - as well as access to financial products - needs to be encouraged and products need to be designed specifically for lower income earners.

While South Africa is one of the most developed nations on the continent, lower income earners make up a significant portion of the South African population. This can be seen by the number of workers who fall beneath the minimum tax bracket.

 

FinMark Trust, in partnership with the United Nations Capital Development Fund and the United Nations Development Programme in Malawi and through the Support to Financial Inclusion in Lesotho (SUFIL) recently conducted a study to document the savings landscape in Lesotho, Malawi and South Africa. The aim of the study was to understand the challenges and opportunities in promoting savings among low income individuals in these countries.

Savings are increasingly recognised as a major component of the poor's livelihood strategies, allowing them to respond to emergencies, smooth consumption and build necessary lump sums. Savings are now a key priority for a number of financial inclusion platforms and programmes, from the Alliance for Financial Inclusion, to the G20 Principles for Innovative Financial Inclusion.

 

FinMark Trust reports that the countries in this study were in part chosen to represent different levels of economic and financial sector development; with a relatively high financial inclusion country, South Africa, a middle income and middle level financial inclusion country, Lesotho, and a low income and low inclusion country, Malawi.

According to the study, Lesotho has a significantly higher savings rate in formal products, bank and nonbank, than South Africa but a lower overall formal access rate, particularly in banking services. This is in part driven by differences between the types of institutions offering savings in the two countries.

It is notable that Malawi, the poorest of the three countries and with the highest rate of financial exclusion (55%), has a significantly higher overall savings rate than the other two countries. This is partly an indication that the poor have a basic knowledge that saving money is something that every household should aspire towards.

The report also shows that informal savings mechanisms are important throughout the three countries, with savings group models recently expanding in all of the countries. Formal institutions are still being used and aspired to, despite low or negative real interest rates and the affordability challenges that formal accounts present such as fees, minimum balances and costs of transport.

The perception of the value proposition of banks as a safe place to store money was present throughout the three countries, as was the indication that interest rates mattered less than fees when choosing a bank. Savings accounts in both formal and informal sectors are often used in a transactional manner with lots of small deposits and transfers, rather than for building lump sums or to earn a return.

When households are building lump sums, they are usually doing so based on saving for an identified project such as school fees or farm inputs. These project funds are often used for emergencies if and when they are required.

While there may be a demand for financial services products aimed at lower earners in South Africa, one has to look at one of the key reasons why there are currently very few products being sold to this group.

Barry O'Mahony (CFP), Founder of Veritas Wealth Management and 2013 Financial Planner of the Year, says that one needs to look at what level would it be profitable for advisers to operate in this market.

"It is very important as a country that we develop products which are catered towards this market. A key finding of the FinMark Trust Report is that participants within this income group earn less than R3 000 per month. So there is very little ability for these income earners to save. And in order for it to be profitable for an adviser to operate within this industry, they will need to ask for an upfront fee. These can sometimes be costly and if you are asking this of lower income earners, will it be fair on the consumer? Not really," says O'Mahony.

This does not mean that the sector is being completely ignored. The South African government has been keeping an eye on the discussions within the industry regarding this group and have decided to launch their own products which it hopes will fill the void that is currently not being filled by the financial services industry.

"The recent announcements of the Retail Savings Bonds by government and the Preferred Savings Account are two products which will possibly make an impact in this sector of the market. It will be interesting to see how low government will set the minimum contribution level for these products," he says.

Although this is a commendable initiative by government, there also needs to be an improvement in the education levels in the country.

"Veritas did some research in the industry, and our respondents included people who had undergraduate university degrees as well as domestic workers. The level of education regarding basic saving is really bad. Stokvels are huge savings vehicles in this country, particularly among lower income earners, yet they are saving 7% through stokvel participation while paying off debts where interest rates are between 15% and 30%. There needs to be basic saving education introduced at a secondary school level. This is important," says O'Mahony.

Despite the need to develop products aimed at lower income earners, there are a lot of challenges associated with that target audience. Education will go a long way in resolving this issue. But channelling this education in the right manner is key. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.