The Importance and Challenges of Financial Inclusion

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The perceived lack of financial inclusion in South Africa has an increasing number of international agencies voicing concern around the number of “unbanked people” and the “high prevalence of cash as a financial medium in the country”. The recent Financial Action Task Force (FATF) grey listing can be seen as a clear example of this.  According to Amplifin, this is not, however, a problem that can be immediately solved for a number of reasons unique to the South African economy including corruption and a general lack of willingness among South Africans to pay their taxes.

“The global transition to a cashless economy is accelerating as more consumers adopt alternative payment systems to cash,”  says Riaan de Swardt, Managing Director for Amplifin, adding, “However, this statement is not necessarily true for a defined sector of businesses operating in our country.”

“Financial inclusion” is the idea that “individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way”.

According to the World Bank as many as 12 million South Africans do not have a bank account, and many others have limited access to banking. The World Bank and other organisations have openly stated that it is essential South Africa increases financial inclusion in order to arrest the use of cash, reduce inequality, kick-start financial growth and ultimately establish greater controls of the kind demanded by FATF.

According to de Swardt the digital way the first world does business is simply not how most South Africans see money.

“The majority of South Africans are not part of the formal economy, once measured against international standards. For them future savings come through stokvels with funeral assistance coming through a funeral parlour (both foreign concepts in a first country economy). Taxis are used for transportation and most purchases are made through informal traders and Spaza shops. These are all cash businesses,” de Swardt says.

De Swardt explains that the prevalence of cash in South African society comes as a direct result of the perception of tax abuse in the country, and a rejection of the high tax rates as a result.

“South Africans believe their taxes are too high, and that they are being abused. For instance, there is a perception among taxi owners and taxi drivers that the levy incorporated in the petrol price is already too high and should be the totality of their contribution to paying tax and their contribution to the economy,” says de Swardt.

“Unless the political environment changes, corruption is addressed and the abuse of the formal sector’s tax money ceases, various businesses classified as informal and “cash rich” and who do not require access to credit, will remain informal,” he says.

De Swardt further explains that many of the international requirements and regulations, which make sense within a first world context don’t make sense in a developing economy.

“Things the people in a developed economy assume simple, are not always applicable here. There are rules that banks need to apply to open a bank account for the average South African – this is before we have even gotten to granting credit to them,” he says.

“This is part of where the banking system’s dilemma lies. We need to stay within the broader international requirements, but it remains difficult to allow many of these participants to operate more fully in an electronic manner,” says de Swardt.

Despite all of this, there have been moves by companies like Amplifin to include more South Africans in the formal economy. Pienaar Zietsman, Chief Finance Officer for Amplifin, explains that no one is questioning the importance of financial inclusion.

“It is absolutely vital for economic growth, and there are enormous benefits for those who are brought into the formal economy as well. Having a bank account allows people to plan for the future, save money, build assets and take out loans, all of which could help them develop a secure financial future. It’s also safer than carrying cash, which is an important consideration in South Africa,” Zietsman says.

Instead of purely considering bank accounts and loans, it might be appropriate for international agencies to consider the increased financial inclusion of eWallet offerings for instance. Amplifin eWallets are a facility that allows businesses and employers to pay money to their clients or employees who do not yet have accounts and according to Steven Maier, Chief Brand Officer for Amplifin, the Amplifin eWallet base is growing constantly.

“Over the last 3 months, an average of R 450 million was paid into eWallet accounts via 271 000 individual payments per month,” says Maier.

An Amplifin eWallet can be opened for any person with nothing, but a copy of an identity document or passport at 740 separate Amplifin eWallet locations.

The balance of the account may not exceed R10,000 for eWallet and R25,000 for eWallet Pro and it may also not receive more than R25,000 within a 30-day period, meaning the Amplifin eWallet fully complies with the risk-based assessment under FICA.

Amplifin eWallet users are also able to obtain an EMV enabled VISA branded Feza debit card or link a cellular number to the eWallet Account as an access mechanism to withdraw funds on an FNB ATM without a card.  The first R 3 000.00 of cash withdrawals can also be made free of charge from FNB ATM via a withdrawal sponsorship functionality.

According to Maier, these eWallets make electronic payments that much simpler, and the increasing uptake of the facility shows it is working to bring the consumers on board. However, he explains that the company has noted some interesting patterns of user behaviour, which reflect the issues outlined by de Swardt.

“We have noted that 72% of the eWallet Account Holders who received the capital advanced under a credit agreement would make use of an ATM and draw the full amount out in cash – an amount equating to 93% of the value paid into those accounts,” says Maier.  “This means only 28% of individuals and only 7% of the value is being electronically transacted with the eWallet debit card in the form of debit card purchases. We see similar patterns with SASSA grant recipients who receive their SASSA grants via a Postbank account.”

The problem then is that of smaller businesses in South Africa choosing to remain cash based due to the issues around tax and corruption, making the willingness of consumers to pay with an eWallet or debit card significantly less impactful.

As with the eWallet offering, Amplifin does have solutions for businesses who want to be financially included – perhaps with an aim to establishing a credit record and accessing a business loan. Amplifin has made it possible for these businesses to be granted a point-of-sale device and accept payments electronically, which will help them to build an electronic footprint and allow entities granting loans to evaluate the risk of a possible loan.  The uptake has, however, been less enthusiastic than it perhaps should have been despite extremely beneficial rates and services. “For many businesses, it seems financial inclusion and building an electronic footprint is not a priority. They do not benefit from reclaiming input VAT either. Contributing to the South African economy by paying company and personal tax is not a consideration but staying below the “government tax radar” is,” concludes de Swardt.

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