What could the South African Government do to afford low-income South African individuals, households and businesses an opportunity to enjoy the benefits of banking in the formal financial sector, but without charging exorbitant interest rates and removing location barriers? It could be that South Africa’s intentional move towards financial inclusion, and the innovative ways in which financial inclusion is being promoted, is the answer.
Microfinance versus financial inclusion
In order to define ‘financial inclusion’, its relationship with microfinance must first be understood.
Microfinance is a financial service offered by financial institutions, such as banks, to low-income individuals, households and businesses. The financial institutions aim to grant such persons the opportunity to access financial services, which is an opportunity they would not normally have due to their compromised financial circumstances. These financial institutions often provide lending services. The goal of these financial institutions is, therefore, to assist these persons to become financially self-sufficient, and in the process aid in the alleviation of poverty in South Africa in general.
Financial institutions have, however, been heavily criticised in the last decade. Instead of alleviating the burden on the impoverished, these institutions end up charging a high-interest rate on loans provided.
The condemnation that microfinance has received fostered the need for a new and more effective tool to financially assist the impoverished. This tool eventually emerged as ‘financial inclusion’.
Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services, such as savings, credit and insurance, that meet their needs and is delivered in a responsible and sustainable way.
How financial inclusion is being promoted in South Africa
One of the largest categories of financial inclusion in South Africa is branchless banking. With branchless banking, the impoverished can access financial services without having to physically open a bank account or make use of the services of a bank. Branchless banking plays an integral part in promoting financial inclusion in South Africa.
One such branchless banking incentive in South Africa is called ‘mobile money’. Mobile money is described as a payment service performed from mobile phones. In other words, mobile money allows users access to their money when it is needed, without the need to open a bank account.
The procedure for mobile money is as follows: First, users of mobile money must be subscribed to a cellular service, and then proceed to purchase a SIM card. The SIM card acts as a type of ‘bank account’ into which the user may deposit funds. Deposits are facilitated by purchasing a mobile money scratch card, which is used to deposit funds into the mobile device. The user may then pay another user for goods or services purchased using the mobile device. Payment and receipt thereof will be relayed via text message.
The benefits of mobile money include lower transaction costs than charged by formal financial institutions. Further, users of mobile money are not required to travel to bank branches to access and manage their finances; nor do they need to waste time by queueing to see a bank cashier. Furthermore, the risks associated with carrying lump sums of cash on one’s person is avoided.
Another initiative by South Africa to facilitate financial inclusion is the restructuring of the Postbank. In 2003, the Post Office realised that all South Africans deserved a bank and launched a project where recipients of social grants were able to open a Postbank account.
In 2010, the South African Postbank Limited Act 9 of 2010 was promulgated which made it possible for Postbank to change from a deposit-taking institution to a full-fledged bank, opening up the possibility for any South African to save, transact, and invest with minimal hassle and ultimate reward.
Pitfalls can be identified within the Postbank initiative, however, it is not a branchless provider of financial services. Therefore, beneficiaries of the Postbank initiative still need to travel to a bank to make use of its services.
To summarise, South Africa is actively seeking to find new ways to promote the access of low-income South African individuals, households and businesses to useful and affordable financial products and services in a responsible and sustainable way.