The problem of household debt – and how to deal with it – promoted Nelson Mandela University academic Dr Tapuwa Roseline Karambakuwa to examine its nature and causes in South Africa – and to develop a framework for managing it.
The research paper, “Determinants of household over-indebtedness in South Africa”, was co-authored with Professor Ronney Ncwadi.
Dr Karambakuwa, a post-doctoral research fellow in the faculty of business and economic sciences at the Eastern Cape institution, says that financial literacy and protection from predatory lenders are two major factors influencing household over-indebtedness.
“These factors cause families to enter into debt without considering the impact and affordability. Low household disposable income, coupled with rising living costs, leads to low or no savings, which (in turn) increases household debt.”
Solutions to the credit crunch are desperately needed, as figures keep climbing: repo rates have increased from 5.5% to 6.25% and prime rates – the rate at which commercial banks charge clients when lending money – from 9% to 9.75%.
Interest rates are rising across the globe and the trajectory is expected to continue in the coming months. This rise in interest rates can significantly impact people’s ability to keep up with their debts, says Dr Karambakuwa, because as rates go up, so too does the amount of money people are forced to cough up.
The effects will be felt by anyone with a mortgage, vehicle loan, student load, or any other type of loan. Added to the cost of living, it is the perfect storm.
Some factors which come into play include gender, the household head’s education level, age, health, employment status, whether the home is rented or owned, and if householders receive social security grants.
It is vital that households practise responsibility and consider their ability to repay debts before borrowing from money-lending institutions, says Dr Karambakuwa.
The paper recommends a framework for managing household debt in South Africa based on pillars of success: upskilling households, review of interest rates by money-lenders, debt insurance and bank information disclosure to customers seeking loans.
“Households need to pay more attention to their debt, come up with ways to reduce (that) debt, live within their means and consider all possible expenses before committing to long-term debt,” she says.
There was also a need for partnerships to ensure effective financial education in communities.
Stakeholders, including learning institutions, have a part to play in encouraging the National Credit Regulator to empower households about finances.