Moneyweb
*Why Blade is right about unsecured lending * /It undermines micro growth platforms/ *Shawn Hagedorn, Moneyweb, Johannesburg, 20 April 2012*JOHANNESBURG - The insights of non-mainstream areas of specialisation often travel odd paths to achieve broad recognition.Development economics is a complex field with insights that frequently elude top decision makers.Hence the impact of low-income unsecured lending on SA's troubled economy is poorly understood by leaders in key fields as diverse as manufacturing, financial services, government and the unions.That exposing this threat is left to the general secretary of the SACP is however particularly odd.
Many still believe that if only the country can grow at, say, 7% or 8%, that the nation's unemployment and broader ills will largely resolve themselves.But in the four or five years leading up to the global financial crisis, SA - as well as many other countries currently experiencing severe challenges - enjoyedhigh growth rates with questionable long-term benefits.
GDP is not only a deeply flawed metric of economic progress but rapid growth can provoke asset bubbles. Financially literate people understand the risks of financial bubbles whereas the risks of low-income unsecured loans are more subtle but just as perilous.
When an asset bubble pops it feels like an economic heart attack.The insidious effects of low-income unsecured lending are more analogous to a cancer.If you are getting on in years, choosing to rely on the care of your local cardiologist could extend your life -- unless you are suffering from an undiagnosed aliment which requires a different type of specialist.
SA's leaders listen to capital market economists like the cardiologist example, they are very knowledgeable and nearby.But many core risks to the economy have remarkably little to do with what capital market economists are trained to decipher.Capital market activities predominantly focus on pricing assets.They have a vast tool chest for such tasks which is not well suited for dealing with or even unravelling many development issues.
For an economy to be healthy it must be sufficiently competitive that opportunities arise for the young people who study diligently and are prepared to work hard.The next generation should then have access to still better opportunities by virtue of their and their parents' efforts. Families have always been the essential development institution. In SA today the education systems fails most young people then opportunities are further constrained by government policies which discourage the local and foreign investments necessary to spur job creation.
The epicentre of development is the critical step-up from marginal survivalists to lower middle class.This is the difference between potential life-long dependence on the state versus having a grip on an upward sloping ladder.Unfortunately, this is also the target market for many lenders' most pernicious products.From a banking or capital markets perspective there is no problem so long as the loans are repaid -- or at least so long as this lending sector remains relatively small. Yet even modest volumes of excessively-priced low-income loans undermine SA's fragile development of human capital.The loans are destructive whether they are repaid or not.
The core micro-growth platform today is still: families. Those rare young SA couples who escape the poverty traps perpetuated by failures of the education system and government labour policies are then seduced by SA's insidious twin social memes:instant consumer gratification funded through excessively priced debt.
Warren Buffett recent letter-to-shareholders distilled his investment objective down to:"forgoing consumption now in order to have the ability to consume more at a later date." Expensive loans are the antithesis to his financial principles and they are dissolving what should be the backbone of SA's future economy.
Low-income lending has been romanticised over the years as a boon to development.But this only holds if the proceeds are used for productive purposes and not to accelerate consumption.When five women in India coalesce to access a loan to buy a cow and repay it from sellling milk, that makes for an inspiring story.The benefits are increased if the loans are inexpensively provided by NGOs. However local low-income lending rarely resembles such attractively-priced cow loans and well-resourced, experienced competitors often limit start-up opportunities in SA.
Large international NGOs have been debating increasing their involvement in low-income lending but as the sector's reputation is drifting from romanticised cow-loan stories to destructive consumption-accelerating loans, their interest has been constrained.NGOs could lower the cost of funding such loans but their ethos would never provide the innovation that the private sector could stimulate. Yet SA banks have thus far demonstrated quite modest capacities for customer-benefiting innovations in this sector for much the same reason that the other SA, Saudi Arabia, does not provide innovative leadership in green energy.There is an extreme over abundance of people willing to pay excessively to accelerate consumption in SA and scarcity - not abundance - breeds innovation.
Thus pernicious lending undermines the household stability of SA's most essential group for advancing development: ascending low-income workers.
There is no impediment to SA's growth which is easier or cheaper to address than the deleterious effects of such expensive loans.Parliament must again amend its usury/credit regulations such that excessively priced loans are illegal.
Just as restaurants feared changes to the smoking regulations, changing the nation's usury laws will likely have a negative short-term effect on some banks and retail businesses but over the long-run everyone will be much better off.We should then see banks -- which are often brilliantly creative at marketing and merchandising to compete for market share -- terminate offerings which undermine development in favour of product innovations which advance broad prosperity.
It is unlikely that banks will soon be sending "thank you" cards to the head of the SACP but some such acknowledgements should be forthcoming.
* Shawn Hagedorn is an independent analyst.Write to Shawn Hagedorn: [email protected]*From: http://www.moneyweb.co.za/mw/view/mw/en/page492379?oid=567294&sn=2009+Detail <http://www.moneyweb.co.za/mw/view/mw/en/page492379?oid=567294&sn=2009+Detail>*
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