Despite their limited income, poor households manage their money actively across a large number of formal products or arrangements and informal financial instruments arrangements.
This was the finding of groundbreaking research by the University of Cape Town's Southern Africa Labour & Development Research Unit on how the South African poor manage their money.
The research project - called Financial Diaries - found that the formal financial products or arrangements used by poor households include bank accounts, pension and provident funds, funeral plans, insurance, store cards,
lay-byes and wage advances, Daryl Collins, the director of the Financial Diaries project, says.
Informal arrangements include stokvels (informal savings clubs), burial societies, credit from local spaza shops or shebeens, "mashionisa" loans (from a money lender or loan shark in a township), one-on-one lending or borrowing, and money guarding (in which the income earner gives money to another individual to look after).
On average, households used 17 different financial instruments over the course of a year, including four savings instruments, two insurance instruments and 11 credit instruments, Collins says.
The research was conducted among residents of Langa, in the Western Cape, Lugangeni in the Eastern Cape and Diepsloot in Gauteng and involved the compilation of detailed daily cashflows of households, as well as bi-monthly interviews over 13 months. Most of the households in the survey have monthly incomes below R5 000.
The researchers found that:
- The majority of lower income earners are not over indebted. Ninety-five percent of the households paid some form of debt every month, but only 26 percent of the households were highly indebted - where monthly payments towards debt are higher than 20 percent of household income.
- Access to formal sector financial services is present to a greater extent than earlier studies have indicated.
- Bank savings accounts tend to be used as transactions accounts rather than savings accounts.
- Savings instruments for the poor tend to be time- and event-bound. A total of 67 percent of households had a bank account, but these tended to be used for transactions rather than a means for accumulating long-term savings. Stokvels were used to save for a specific item or event, such as school fees.
- The poor face frequent financial events. The most frequent financial event experienced by the households in the survey were unexpected requests to contribute to the cost of funerals (for relatives who do not live in the household) - 81 percent of households had at least one such request for assistance during a 29-month period.