Some stumbling blocks to saving
In his budget speech on Wednesday, 21 February, Trevor Manuel made a number of appeals to consumers to focus on saving rather than spending. His request echoes the views of Reserve Bank governor Tito Mboweni, who frequently makes similar appeals during hi
What good is a flash sports car when you're 65 years old? And how much more will you enjoy the skiing holiday when you can cannon down the slope rather than watching others do it?
The task of encouraging consumers to save is a difficult one. Threats of rising interest rates have little impact, as do the commonsense pleadings of financial advisers and politicians.
There are a number of reasons that South African citizens prefer not to save. Instant gratification is one of them - but the behaviour of lending institutions (particularly private label credit cards) is another.
Questionable credit products
The problem is not limited to the mindset of the South African consumer. Banks and other financial product providers play a big roll in determining what financial products consumers purchase through their marketing and sales activities. Right now, credit products are more attractively packaged and marketed - and some of the so-called savings products make little sense.
Consider First National Bank's (FNBs) 'Million-a-Month' savings account. Bank customers are invited to save in multiples of R100 and stand the chance of winning millions in prizes. The problem is that no interest is paid on this money, and the client is effectively holding a R100 lottery ticket with a very small chance of any return.
ABSA Bank which offers a range of 'innovative' lending products featuring payment holidays is another prime culprit. In our view, a bank should concentrate on strict lending criteria to ensure that a client can afford the repayments on any credit finance granted. To allow for 30 day or 90 day payment holidays seems to fly in the face of sensible lending.
"Get your cash flowing, with a 90 day skip-payment option," cries one of ABSA's latest offerings. The advertisement is for a term business loan which allows customers to skip three loan repayments, though only two in a given year.
A quick calculation on a term loan of R100, 000 over sixty months at 12.75% per annum reveals that the interest portion of the loan repayment could increase by more than 15% if three payments are 'skipped'. The impact would vary depending on the timing of these payment holidays. Of course, the banks are in the business of making money from the interest on these loans.
More sensible short-term savings options required
A number of the short-term savings options available to investors are either pointless in the feeble returns they offer, or made pointless due to the fees charged on the transaction. Savings in ordinary current accounts offer interest as low as 0% rising to 5% on amounts of R100, 000 or more. Other accounts offer combinations of zero interest and zero bank charges if clients maintain a certain positive balance.
Moving funds to money market accounts to take advantage of better savings rates incur such high charges as to make use of these facilities pointless, unless large amounts of money are moved.
Other options, such as the Government Retail Bonds offer reasonable interest rates (they could be better) but tie money in for a longer period of time - currently not less than 24 months.
The savings issue in South Africa will only be solved when products offering decent returns become more readily available.
Editors thoughts:
We still believe that the best way to encourage savings is to offer incentives to save. The current tax exemption on interest should be raised, and the exemption on retirement annuity contributions maintained. Send your views on the matter to gareth@fanews.co.za.
