Distressed consumers borrow money to cover basic needs: Finmark Trust

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Speaking at the recent Joint Credit and Over-indebtedness Summit 2012 held in Midrand, Strassburg tells I-Net Bridge that this borrowing trend partly explains why unsecure lending is ballooning so much.

Unsecured credit increased from R21.95bn in the quarter to March to R25.8bn in the quarter ending June, according to the National Credit Regulator.

Borrowing from friends and family members also underscores the financial distress consumers are facing as power utility Eskom keeps asking for double-digit electricity increases and fuel prices skyrocket.

Borrowing for basics

"When we look at reasons for borrowing which was quite interesting, people borrow for basic necessities like water, electricity, food and transport and not for investment purposes but for basic necessities to make ends meet," Strassburg says.

"So it means if you won't be able to pay for it this month you also less likely to be able to pay for it in the next month which brings you in a cycle of indebtedness.

"In that sense we have also seen how important friends and family have become over the years.

"If we compare data in 2010 and 2011 we have seen an increase of 11% of adult of South Africans only relying on family in 2011, whereas in 2010 it was 6%.

"So we have seen an increase in unsecured lending and borrowing from informal sources whereas in formal mechanisms such as banks has been fairly flat which shows that there hasn't been an increase there."

Strassburg continues to say that South Africans mostly rely on family and friends because financial institutions do not lend to them to cover their basic needs.

Borrowing trends

Information and research specialist says the household trend she has picked up is that people borrow from financial institutions for bigger purchases, and borrow from family and friends when they don't have money to buy food and other basic necessities.

"When they get an income they pay their bills, go for big groceries and when approaching month end it gets complicated and then you need someone to rely on, that's when they go to family members for meat and small groceries.

"They mostly will borrow between R100 to R200. We have discovered that 46% of people have been living without any income and 21% have gone without electricity which is quite shocking."

Different mechanisms

Instead, Strassburg suggests that there is a whole range of borrowing mechanisms people can use. "Often they don't just don't use one mechanism so there is an overlap ... they would take out a loan at a bank, have loan from an informal lender and borrow from friends or family.

"The reasons for borrowing are quite different, whereas when you take out a loan it has to be for larger purchases and so forth.

"Money you take from friends and family you take when you don't have another choice or small amounts," Strassburg says.

"So when you see that you don't have money for food at the end of the month that's when you go to friends and family because obviously financial institutions won't give you a loan for this like that."

She told I-Net Bridge that with this overview on South Africans financial habits means they are under strain.

"With our findings based on people's perceptions show that South Africans are struggling to cope. It is possible that you have gone without food for a couple of days and every week."