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BANKSETA IEDP Programme 2012

The role South African Banks should play in changing the savings culture of salaried individuals in South Africa

Revision: Final

Syndicate Members:

Lucas Mogashoa lucas.mogashoa@firstrand.co.za 0825744428 Lachelle van der Merwe lachellev@nedbank.co.za 0833268431 Craig Oliver craigoliver@wfs.co.za 0824466674 Firoze Bhorat firoze.bhorat@standardbank.co.za 0828287759 Kamogelo Manamela kamogelo.manamela@resbank.co.za 0827449720 Maggie Makube Maggie.makube@absa.co.za 0828384994

Syndicate Name: Leap Six (Syndicate 3)

Coach: Mark J. Peters mark.peters@wits.ac.za 0826005296

Effective Date: 19 October 2012

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CONTENTS

1. Executive Summary ............................................................................................................. 1

2. Scope .................................................................................................................................. 2

2.1 Scope Statement ............................................................................................................... 2 2.2 Context ............................................................................................................................ 2 2.3 Project methodology .......................................................................................................... 3

2.3.1 Current state analysis ................................................................................................ 3 2.3.2 Benchmarking and comparative studies ........................................................................ 3 2.3.3 Gap analysis and solution ........................................................................................... 3

3. Desktop research on the determinants of the low savings rate in South Africa ................... 4

3.1 GDP Growth ...................................................................................................................... 4 3.1.1 Unemployment .......................................................................................................... 5

3.2 Demographics ................................................................................................................... 6 3.2.1 Income level and stability ........................................................................................... 7 3.2.2 Wages ...................................................................................................................... 8 3.2.3 Income inequality and poverty .................................................................................... 8

3.3 Access to credit, household consumption and debt/income ratio .............................................. 9 3.3.1 Debt-to- income ratios ............................................................................................. 11 3.3.2 Household consumption ........................................................................................... 12

3.4 Education ........................................................................................................................ 13

4. Qualitative Research ......................................................................................................... 14

4.1 The psyche of saving ........................................................................................................ 14 4.1.1 Investor Paralysis .................................................................................................... 14 4.1.2 Investor Discipline ................................................................................................... 15 4.1.3 Trust ...................................................................................................................... 15 4.1.4 Disinclination to save ............................................................................................... 15 4.1.5 Conclusion .............................................................................................................. 16

4.2 Stokvel Association .......................................................................................................... 16 4.2.1 Banks and Stokvels ................................................................................................. 16

4.3 Banks ............................................................................................................................. 17 4.3.1 Banking penetration ................................................................................................. 17 4.3.2 Savings instruments ................................................................................................ 17

5. Comparative analysis - Uganda, India & United Kingdom .................................................. 19

5.1 Gross Savings as a percentage of GDP ................................................................................ 19 5.2 Determinants .................................................................................................................. 19 5.3 Lessons learnt from comparative studies ............................................................................. 22

5.3.1 Uganda .................................................................................................................. 22 5.3.2 India ...................................................................................................................... 23 5.3.3 United Kingdom....................................................................................................... 23

5.4 Conclusion ...................................................................................................................... 24

6. Key Research insights ....................................................................................................... 25

6.1 Unemployment ................................................................................................................ 25 6.2 Education and Financial literacy ......................................................................................... 25 6.3 Informal banking and group saving schemes ....................................................................... 25 6.4 Cost of savings ................................................................................................................ 25 6.5 Access to credit ............................................................................................................... 26 6.6 The paradigm shift ........................................................................................................... 26

7. Recommendations ............................................................................................................. 27

7.1 Unemployment ................................................................................................................ 27 7.2 Education and Financial Literacy ........................................................................................ 27 7.3 Cost of Saving ................................................................................................................. 28

7.3.1 Product cost structures............................................................................................. 28 7.3.2 Savings and taxation ............................................................................................... 28

7.4 Access to Credit ............................................................................................................... 29

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CONTENTS 7.5 Informal Banking ............................................................................................................. 29

8. Business Case .................................................................................................................... 31

8.1 Education and Financial Literacy ........................................................................................ 32 8.2 Product and Technological support ..................................................................................... 34

8.2.1 CreditSave .............................................................................................................. 34 8.2.2 Informal Savings Stokvels ........................................................................................ 35 8.2.3 Existing savings products ......................................................................................... 35 8.2.4 Technology Aids ...................................................................................................... 36

8.3 Financials ........................................................................................................................ 36

9. Conclusion ......................................................................................................................... 38

10. Abbreviations .................................................................................................................... 39

11. Reference List ................................................................................................................... 39

12. Appendices ........................................................................................................................ 41

12.1 Appendix 1 – Key Findings SWOT analysis .......................................................................... 41 12.2 Appendix 2– Summary of findings and recommendations from SWOT ..................................... 41 12.3 Appendix 3 – Culture web: Current and Future states ........................................................... 43 12.4 Appendix 4 - Detailed Financial Calculations ........................................................................ 44

12.4.1 Education ............................................................................................................... 44 12.4.2 CreditSave .............................................................................................................. 44 12.4.3 Informal Savings – Stokvels & Existing Savings ........................................................... 46

12.5 Appendix 5 – PESTLE Analysis ........................................................................................... 47 12.6 Appendix 6 – Savings instruments and Products analysis ...................................................... 49 12.7 Appendix 7 – Research inputs ............................................................................................ 51 12.8 Appendix 8 – Banking questions ........................................................................................ 51

FIGURES Figure 1: South Africa’s National Savings Rate ........................................................................ 2 Figure 2: Saving Rates relative to GDP Growth ....................................................................... 5 Figure 3: Ratio of Gross Domestic Savings to GDP .................................................................. 5 Figure 4: Unemployment rates ............................................................................................. 6 Figure 5: Age Dependency ................................................................................................... 6 Figure 6: Permanent Income hypothesis ................................................................................ 8 Figure 7: South African GINI coefficient (1993 – 2008) ............................................................ 9 Figure 8: Population living with under R388 per month ............................................................ 9 Figure 9: Credit granted by Credit Type ............................................................................... 10 Figure 10: Credit Granted vs. Gross Debtors book ................................................................. 10 Figure 11: Ratio of household debt-to-savings ...................................................................... 11 Figure 12: Estimated composition of credit extended in 2010 ................................................. 11 Figure 13: Net changes in credit extension to households ...................................................... 12 Figure 14: Gross savings as a % of GDP .............................................................................. 19 Figure 15: GDP Growth ...................................................................................................... 19 Figure 16: Unemployment and per Capita income (Source: World Bank) .................................. 21 Figure 17: Population Growth ............................................................................................. 21 Figure 18: Culture Web – Paradigm Shift ............................................................................. 26 Figure 20: National Savings Programme - Framework............................................................ 33 Figure 21: Culture Web – Current ....................................................................................... 43 Figure 22: Culture Web – Future ......................................................................................... 43 Figure 23: Credit Allocated/Affordability Limits ..................................................................... 44

TABLES Table 2 : Implementation approach ..................................................................................... 33 Table 3 : Summarised Financials ......................................................................................... 37 Table 4: Education ............................................................................................................ 44

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Table 5: Stokvels’ Financials ............................................................................................... 46 Table 6: Existing Savings ................................................................................................... 46 Table 7 : PESTLE Analysis .................................................................................................. 47 Table 8 : Savings instruments in South Africa ....................................................................... 49 Table 9 : Savings Products Analysis..................................................................................... 50

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1. Executive Summary

It has been noted that South Africans have very low levels of savings – a trend that shows little sign of improvement. This report is a study of the role South African Banks should play in changing the savings culture of salaried individuals in South Africa to positively influence our propensity to save.

Low savings levels have significant socio-economic consequences for South Africa. They impact particularly on the banking industry’s capital inflows, on the economy with low levels of liquidity, and on individuals who are less able to fund their socio-economic needs. The problem was addressed by researching and identifying key contributors to this situation in the local market. Some of the key determinants identified were GDP growth, specifically unemployment; demographics including income levels, income inequality and poverty; Access to credit and the impact of household consumption and debt-to-income ratios; and widespread levels of financial illiteracy in South Africa. The research was further enriched by a qualitative analysis of contributors to the low savings rate. A study into the psyche of saving looked at how people make financial decisions, and focused on critical factors such as procrastination, loss aversion and inertia. A further study looked at the contribution informal or social savings products such as Stokvels have on the savings culture in South Africa. It was noted that while there is an estimated R44-billion Stokvel fund value, there is evidence of their distrust of the formal banking system. In addition, Stokvels consider the social aspect of group saving very important and generally tend to save for specific reasons. Lastly, the qualitative research focused on the banks themselves, particularly in respect of banking penetration and the current savings products available to the market. It was determined that low interest rates made saving unattractive while banks appeared to focus more on credit products. The research concluded that slight changes to the current offerings could contribute to a significantly improved savings culture. Research was also conducted into the international market, specifically India, Uganda and the United Kingdom. A comparative study was completed to understand how progress in these countries could be applied in South Africa. It is interesting to note that while these countries had similar barriers to saving as South Africa, they had varying degrees of success in resolving these issues by focusing on education and customer-centric product offerings. Based on the research conducted we determined that the following areas need to be addressed to change the culture of saving in South Africa and create a paradigm shift: unemployment, education and financial literacy, informal banking and access to credit. To address these areas we developed a programme that focuses on financial literacy education, and is supported by three products designed to encourage and facilitate saving. Technology will also be harnessed to support, educate and assist clients to save. This programme aims to shift our current paradigm from “I can’t afford to save”; “Banks can’t give me what I need” and “I can get what I need right now on Credit” to a healthier paradigm of “Saving is for me, my family, my future and my country”; “Banks have educated me on how to save and made it easier” and “I can still get what I need on Credit (responsibly) without feeling guilty”.

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2. Scope

2.1 Scope Statement

This project investigates the determinants of low levels of savings in South Africa and proposes ways in which these can be addressed amongst salaried individuals. Included is a study of why the savings solutions currently offered by the formal banking sector have not been effective, and recommendations on how banks can improve savings levels. The study references other emerging economies such as India and Uganda to understand the role played by these economies in encouraging a savings culture. The UK is also referenced, with the aim of eliciting lessons learnt from a developed economy. Deliverables include a recommended strategy on how the banking industry in South Africa can amend the role they are playing to positively influence a savings culture. The project focuses only on South African salaried individuals’ savings behaviour and does not consider that of the unemployed, government and corporations.

2.2 Context

Savings plays a role as a critical ingredient for economic growth and a national buffer against international capital fluctuations. Literature suggests that South Africa has a low national savings rate when compared internationally (Figure 1), mainly as a result of a declining trend in domestic savings in recent years. Due to our low savings rate, South Africa relies on foreign capital inflows to finance its capacity for future growth. Given the uncertainty of capital inflows, such dependency is unhealthy, since investors often withdraw their funds at the slightest hint of bad news, which may hinder economic growth. While Government and Corporations are saving, the South African Reserve Bank reported that households had started to “dis-save” between 2006 and 2011. The state of South African household savings is therefore a cause for concern and poses a challenge for key stakeholders (e.g. the Banking Industry) who want to provide initiatives to address this challenge.

Figure 1: South Africa’s National Savings Rate

Source : South African Reserve Bank And World Bank Staff Calculations

-4%

6%

16%

26%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

South Africa's National Savings Rate as a % of GDP

Total Savings Corporate Household Government

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The socio-economic implications of a low savings culture are debilitating on a number of fronts, including those faced by:

Banks – An inability to attract funding through low cost savings vehicles results in a heavier reliance on capital inflows from portfolio managers. These are often costly, volatile and do not satisfy the liquidity requirements for Basel regulations.

The Economy - The government relies on excess funds over current spend to fund infrastructure development (power stations, roads etc.) and to invest in social upliftment initiatives (e.g. education, health, and care for the aged).

Individuals - A culture of low savings means that individuals cannot fund their socio-economic needs. This results in an increased burden on the government to provide social support rather than infrastructure development which supports GDP growth and resultant employment. Reliance on foreign investment is heightened which increases the country’s debt burden. In this case, often the only recourse is to increase taxes, which in turn exacerbates the initial dilemma.

To clearly articulate the situation regarding these savings culture issues, a detailed PESTLE analysis

was conducted, as indicated in Appendix 5, with a view of ensuring that all aspects influencing a

savings culture of South Africans are considered.

2.3 Project methodology The approach outlines below was used to solve the problem outlined in the scope. A full list of research inputs can be found in Appendix 7.

2.3.1 Current state analysis

Desk research and literature reviews were conducted in order to illustrate the extent of the SA problem and how this is measured (e.g. using Reserve Bank bulletins, SASI, Old Mutual BDO other Surveys ), with specific reference to households and available Bank products

Focused desk research was conducted on targeted household income segments to determine current savings rates and future potential (segmentation analysis)

2.3.2 Benchmarking and comparative studies

Desk research and literature reviews were undertaken in order to:

Understand the determinants of household savings in emerging economies such as India and China, with the aim of learning from these economies;

Review savings rates in Uganda to identify opportunities to explore on field visits

Investigate developed markets in the UK to explore potential lessons-learnt.

2.3.3 Gap analysis and solution

This was undertaken in order to:

Identify the gaps and constraints stemming from the above studies

Summarise findings in agreed format and workshop gaps and constraints using a SWOT analysis and other tools

Identify possible solutions and strategies to close the gaps

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3. Desktop research on the determinants of the low savings rate in South Africa

In order to address the low levels of saving in South Africa, we must first determine why the level of saving is so low. In order to do this, we need to fully understand all of the key determinants of saving and to analyse how South Africa is performing against each of those determinants. Each of these key determinants is outlined in the executive summary below, with a more detailed analysis following from Section 3.1 below. The first pair of determinants is GDP growth and unemployment. S.A’s GDP growth is not sufficient to stimulate employment, a key factor in improving levels of disposable income and hence savings. Unemployment in South Africa is currently at 25%. The result is an increased burden of dependency on the economically active, which further contributes to the low levels of saving. Another determinant of savings in South Africa is the demographic characteristic of the nation. South Africa has a very young population who are predisposed to spending rather than saving. Also there is a high dependency on the middle-aged population, who are the most economically active. The result is that this sector of the population is over-burdened by having to look after the younger and older members of society, thus reducing the propensity for this sector to contribute to savings. Income levels and the stability thereof is yet another determinant. As many people in South Africa do not have comparably high or stable incomes, it becomes very difficult to anticipate their cash flow and as such, they find it difficult to save. While South Africa has seen real wage growth, inflation has also been high. This has eroded workers’ purchasing power, which in turn has inhibited their ability to save. Income inequality and poverty diminishes savings and South Africa has an extremely high level of income inequality, as well as a high number of people living in poverty. As people struggle to survive it does not leave much to save. Access to credit, household consumption and debt-to-income ratios is another determinant examined. South Africans have enjoyed unprecedented access to credit. These increased levels of access to credit have fuelled consumer consumption and have dis-incentivised the need to save, since people can simply borrow money to meet their needs. Further to this is the level of household consumption, which is driven partly by need but largely by aspiration. People are fully leveraged, having to fund the debt that is financing their very conspicuous consumption. These high debt-to-income ratios leave little or no money for saving. Lastly, despite an advanced financial sector, there still exists a widespread level of financial illiteracy in South Africa. This has led to a rising trend of unsustainable consumer behaviour, culminating in high levels of debt and low levels of savings.

3.1 GDP Growth GDP growth is crucial to emerging economies, as growth provides employment and thus creates the capacity for savings. It also allows the Government to focus spend on infrastructure development, rather than on the social upliftment of the unemployed (and the families supporting them).

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Countries with average annual GDP growth >6% all achieved domestic savings rates in excess of 20% (Figure 2).

Source: World Bank

Figure 2: Saving Rates relative to GDP Growth South Africa’s GDP growth remains well below the targeted range of 6 – 7%. Our domestic savings rate has trended around zero since 2000 (Figure 1 in Section 2.2 above), with total savings well below global domestic rates. India and China have experienced GDP growth above 6% since 1980. Gross domestic savings by 2009 were at a level close to 50% in China and 30% in India (Figure 3), indicating a strong correlation between GDP growth and savings performance. It is estimated that GDP at SA’s targeted rate of 6% would create 5 million jobs – and as studies of these successful emerging market economies show, job creation contributes towards the establishment of the means to save.

Figure 3: Ratio of Gross Domestic Savings to GDP

Source: World Bank

3.1.1 Unemployment South Africa’s unemployment rate of 25% (33.4% including discouraged workers) is well above its BRIC counterparts as seen below (Figure 4). Of this figure, unemployed individuals below the age of 25 years make up an alarming 51% of the population who are dependent on the economically active. This situation renders remote the ability to save of even those who are actively employed.

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Botswana China India Korea Singapore Median

Savings Rates in countries with GDP>6%

GDP Growth Gross Domestic Savings

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India GDP Growth & Savings correlation

GDP Growth (3 yr moving avg) Gross domestic savings to GDP

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Figure 4: Unemployment rates

(Source World Bank Survey on SA Savings and Investment)

3.2 Demographics A key factor influencing savings in South Africa is the demographics characteristics of the nation. The Life-Cycle Hypothesis (LCH) is a theory concerning the spending and saving behaviour of individuals over their lifetime. It suggests that young people are likely to spend more than they save, since they borrow against future income as they seek personal financial growth. The middle aged population tend to save more than they spend as they try to secure their future and their family’s futures, while the aged are in the process of ‘dis-saving’ as they use their accumulated savings to fund their retirement. Therefore it stands to reason that the age composition of the population could impact the level of savings of the nation. The age dependency ratio is the ratio of dependents, i.e. people younger than 15 years or older than 64 years relative to the working population (individuals aged between 15 and 64 years). If we apply the theory of the LCH, then it would also stand to reason that an increasing dependency ratio would lower the nation’s potential saving rate.

Figure 5: Age Dependency

(Source: World Bank survey on South African saving and investment) Typically the propensity to save increases when the working population is relatively high compared to the younger or older segments. However, South Africa’s dependency ratio is relatively high at 54% compared to other countries (Figure 5). Particularly noteworthy is the fact that we have a very young population of 46% who are dependent on the working populace. Compared to developed

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Brazil South Africa India China Russia

Unemployment in 2010 in BRICS

<25yrs 18%

<25yrs 51%

<25yrs 17%

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economies whose young population is below 30%, a high youth dependency places pressure on the nation to provide education and create employment opportunities. South Africa’s current unemployment rate of 25% suggests its inability to absorb young people into the workforce, which further extends their dependency on income earners. Developed economies conversely experience problems with an ageing population which increases public pension liabilities and places further pressure on state finances. While India has a similar dependency ratio to South Africa, it does have a higher GDP growth and higher savings rates. The primary reason behind this difference in saving is the much lower level of unemployment. India is in a better position to absorb new entrants into the workplace and is therefore able to increase the portion of the population that has a propensity to save, thereby reducing the number of dependents in the economy. The youth dependency ratio in China has dropped from a high of 60% to just 28%. This was a direct result of China’s one child policy. It did coincide with an increase in the elderly dependency ratio and the net effect of these changing dynamics was a steep increase in savings from 5.67% in 1979 to the current 27%. Some of the reasons for this could include the fact that child-related expenses were reduced, which made more income available for savings. Also, because Chinese people cannot necessarily rely on children to take care of them in their old age, they plan their retirements carefully by saving for this eventuality.

3.2.1 Income level and stability The level and stability of income is another key determinant of saving. Typically the more disposable and consistent income people have, the more likely they are to save. However, if an individual has an erratic or low-level source of disposable income e.g. from odd jobs, they are highly unlikely to save. The Permanent Income Hypothesis (PIH) highlights how the savings rate is determined by income level and income stability. The theory suggests that people base their level of consumption and savings on anticipated lifetime income. It also suggests that short-term changes in income have little impact on consumption and savings, and that in order for savings and consumption to be impacted, income needs to have longevity and stability.

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Figure 6: Permanent Income hypothesis

(Source: World Bank survey on South African saving and investment)

The above graph (Figure 6) illustrates the propensity to consume relative to changes in disposable income. We see that South Africa has the highest propensity to consume versus all the countries analysed, coupled with the lowest growth in disposable income. This is of particular concern when viewed in conjunction with other developing economies such as Brazil, Russia, India and China, all of whom have shown growth in real disposable income and have considerably lower levels of consumption. This means that not only are we as a nation not saving, but we are using debt to fund our consumption.

3.2.2 Wages While South Africa has seen real wage growth, it has been driven by a militant workforce that is predisposed to consumption – and which demands above inflationary increases in wages to fund that consumption. Employers often reach settlements with unions at increased levels that defy economic rationale. As this cycle continues, two things happen that exacerbate the situation. Firstly, the higher cost of production fuels inflation, which in turn feeds back into further wage demands by workers. Secondly, employers are discouraged to employ, and given the increasing cost of employment, this can, in effect, fuel the unemployment rate. This interaction between wages, employment and inflation ultimately contributes to the state of low savings in the economy.

3.2.3 Income inequality and poverty Income inequality and poverty also reduce the incidence of savings in households, as any disposable income is spent on basic necessities. South Africa has an extremely high level of income inequality as measured by the GINI Coefficient (Figure 7).

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Figure 7: South African GINI coefficient (1993 – 2008)

(Source: World Bank survey on South African saving and investment) At 66%, South Africa has one of the highest GINI Coefficients in the world – significantly higher than other comparable emerging economies and developed economies. This signifies that South Africa has a large percentage of people living below the poverty line.

Figure 8: Population living with under R388 per month

(Source: World Bank survey on South African saving and investment) Whilst the number of people living below the poverty line has reduced since the turn of the century (Figure 8), this has been a result of government disbursement of more social grants rather than organic income growth through employment. Such welfare resources place a huge burden on government resources and as such, have had to be financed through higher taxation. An increase in taxation erodes disposable income which inevitably leads to a lower level of savings. This is further exacerbated by grant recipients who have a higher propensity to consume rather than save.

3.3 Access to credit, household consumption and debt/income ratio According to the national credit Regulator of South Africa, unsecured loans grew by nearly 60% in both the third and fourth quarters of last year (2011). Unsecured credit as a percentage of total credit granted continued to grow from 21.45% for the quarter ended September 2011 to 24.58% for the quarter ended December 2011 (Figure 9).

67.2%

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Percentage of population living under R388 p/m (in 2008 Constant Rand)

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Figure 9: Credit granted by Credit Type

(Source Consumer credit market report Q42011)

The value of credit granted to consumers increased by R8.70 billion (8.80%) from R98.90 billion for the quarter ended September 2011 to R107.60 billion for the quarter ended December 2011 (Figure 10). The size of loans also increased, with consumers are now able to access loans of up to R150 000, payable over seven years.

Figure 10: Credit Granted vs. Gross Debtors book

(Source: Consumer credit market report Q42011)

A financial wellness index recently launched by Momentum, the Bureau for Market Research and the University of South Africa showed that 5% of local households fall into a category called "anchored unwell." Consumers in this category have very little chance of being extricated from debt without outside intervention such as debt counselling. A further 48.5% of households fell into the “drifting into unwell” category which refers to households in an unstable debt position that could become entrenched. A recent article in the Business Day suggests that this growth in the unsecured lending market is fuelled by banks scrambling for a bigger share of the market due to shrinking demand for mortgages. This growth is so much of a concern that the Reserve Bank has launched an enquiry into the perceived boom in unsecured lending. Anecdotal belief is that much of the unsecured credit extended in South Africa is being used to finance day-to-day expenses and "aspirational" or discretionary spending, once again fuelling the inability to save.

Agreements R'000 2010-Q4 2011-Q1 2011-Q2 2011-Q3 2011-Q4

2011-Q4 %

Distribution

% Change

(Q4/Q3)

% Change

YoY

Mortgages 26 867 971 24 759 915 25 448 516 30 278 386 29 313 825 27.2% -3.2% 9.1%

Secured Credit 28 120 840 27 447 578 26 961 813 30 779 506 33 394 502 31.0% 8.5% 18.8%

Credit Facilities 10 245 638 10 431 232 12 064 178 14 882 323 16 596 388 15.4% 11.5% 62.0%

Unsecured Credit 16 834 873 16 694 204 18 954 134 21 213 694 26 451 931 24.6% 24.7% 57.1%

Short Term Credit 1 462 223 1 420 539 1 650 746 1 745 095 1 847 546 1.7% 5.9% 26.4%

Total 83 531 545 80 753 468 85 079 387 98 899 004 107 604 192 100.0% 8.8% 28.8%

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Gross Debtors Book Total Credit Granted

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3.3.1 Debt-to- income ratios The increased propensity of South Africans to acquire debt and the declining propensity to save is reflected below (Figure 11). It shows the ratio of household debt and household savings to household disposable income – which is current income less direct taxes.

Figure 11: Ratio of household debt-to-savings

The average level of household debt has increased from 55% in the early 2000s to 80% in 2008, settling at just over 78% in 2010. At the same time, the ratio of disposable income that is saved declined from 2.7% in 1994 to a dis-saving of 1% in 2008. This trend continued in 2009 and 2010 by around 0.3%. It can be argued that these low levels of saving mean that households have limited buffers against unforeseen financial problems such as job losses or medical expenses. As such, they risk becoming debt stressed or over-indebted while further increasing the need for lines of credit.

Figure 12: Estimated composition of credit extended in 2010

(Source: SARB quarterly bulletin via Quantec)

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The table above (Figure 12) indicates the composition of credit available to each income/LSM grouping by credit type and shows that consumers in LSMs 1 to 3 obtain almost 85% of their credit through a combination of furniture loans and store cards. Mortgages account for around 62% of the total credit advanced to people in LSMs 7 to 9 and unsecured loans make up more than a quarter of the credit advanced to consumers in LSMs 4 to 6. The above trend reflects the inverse correlation between rising debt and declining savings. Low levels of savings means that there is no buffer to cater for unforeseen expenditure which often results in failure to meet debt repayment. Consumers in LSM 4 to 6 are most at risk with exposure evident across most of the credit categories.

3.3.2 Household consumption Recent statistics show that South Africa is fast becoming one of the most expensive countries in which to live. Contributors to this situation include Eskom increases; high levels of taxation; Government linking rates and taxes to the market value of houses; toll roads and petrol prices (incidentally, Namibia pays + - R 7.50 per litre and they get their fuel from S.A.). Consumer credit enables households to bring forward their purchases of goods and services. These purchases may be designed to generate additional income in future – such as the financing of education, or the provision of working capital for start-up businesses – or may be purely for consumption purposes – such as spending on food, home appliances and household furniture. Figure 13 below, shows the ratio of net new credit extension to the household sector as a percentage of the final consumption expenditure by households for the corresponding period. It provides some indication of the extent to which new consumer credit is being used to finance current economic activity by households.

Figure 13: Net changes in credit extension to households

This graph reflects a significant increase in the average household’s propensity to take on additional debt to finance their consumption between 2002 and 2006 – from about 2.5% to 12.6%. This was followed by a dramatic fall back to 2% in 2009, and slight recovery in 2010 to 4.5%.

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Focus groups in a NCR study revealed that the motivation for obtaining credit is driven by social aspiration. This, coupled with the propensity for households to take up additional credit to finance household consumption, appears to suggest that there is lack of available funds or disposable income to facilitate saving.

3.4 Education

Despite the rapidly changing and complex financial decisions confronting individuals today, there still exists a widespread level of financial illiteracy in South Africa. This has led to a rising trend of unsustainable consumer behaviour, culminating in high levels of debt and low levels of savings. Low financial literacy is correlated with poor savings. Education is a strong predictor for wealth since it improves individuals’ money management behaviour, spending habits, use of financial services and ultimately, may motivate individuals to save. In comparison to its BRIC counterparts, South Africa was ranked below the rest of the member countries in the VISA 2012 study of Global Financial Literacy. Brazil was ranked 1st, China 16th, Russia 19th and India 23rd out of 28 markets. It is clear that countries that exhibit higher financial literacy all show higher saving rates, indicating a strong link between financial literacy and wealth accumulation.

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4. Qualitative Research

4.1 The psyche of saving Emotions and intuition play an important role in people’s decision-making processes, often resulting in systematic and predictable errors (Benartzi, 2011). People use “two minds” to make decisions, namely the following:

“Intuitive” mind: this makes fast, effortless and automatic decisions, which can lead to wise decisions but at times result in irrational and poor financial decisions. For example, if we have to make a choice between buying a foodstuff that is “98% Fat Free” and another that is “Containing 2% Fat”, we will choose the first option, as we respond negatively to the word “Containing Fat” and positively to “Fat Free” even though the two are identical.

“Reflective” mind: this makes slow, effortful and conscious decisions which are mainly rational and thoughtful, and can be used to correct mistakes made by the “intuitive” mind.

Other critical aspects that affect people’s aversion to saving include:

Procrastination: The promise of investing in the future without putting mechanisms in place to ensure that this is done when the future arrives.

Loss aversion: The fear of losing out on ones investments either from fees or non-performance of the investment vehicle. The focus is on what may be lost rather than on what may be gained.

Inertia: Knowing that saving for the future is good but finding it difficult to do it today. A number of tools have been developed to influence these negative behaviours of people, and they specifically focus on addressing the following:

Investor Paralysis: The fear that the recent financial crisis of 2008 might affect investors, as well as the fear of providing wrong information by Financial Advisors

Investor Discipline: The herd mentality of humans whereby we religiously follow the principles of “buy high, sell low” in the markets, without truly understanding the fundamentals leading to these actions, and thus making impulsive decisions.

Trust: Key ingredients to displaying trust are the competence of financial advisors, as well as their understanding of their clients, so that they may be in a position to support them in times of need, as well as keep regular contact at all times.

Disinclination to save: The desire for instant gratification, the inability to see the rationale for saving for retirement when one cannot envisage why they should be spending money for a period they cannot easily relate to, lead people to have a strong disincentive to saving now.

The following are the challenges faced and techniques used to improve financial decisions:

4.1.1 Investor Paralysis

Investors are afraid of saving for the future, as they fear the possibility of the repeat of the 2008 financial crisis, and they face the potential of losing out on bull markets. Advisors are also fearing the risk of providing wrong advise against the chance of being right. The tool suggested to assist with this dilemma is called SMarT (Save More Tomorrow). This tool addresses issues related to the following psychological factors:

Procrastination: where clients are encouraged to pre-commit to increase their savings rates in the future, which has no visible impact on their take home pay.

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Loss Aversion: the clients’ future commitments are linked to the anniversary of their pay increases, thus avoiding the sensitivity of a loss, as the impact on their take home pay is very minimal

Inertia: since the committed increase in contributions happens automatically until a pre-agreed ceiling is reached, inertia issues are overcome as what people know should be happening happens automatically each year.

An example of a situation where SMarT is applicable, is when employees participate in contributing towards a retirement plan. Most employees fail to participate in these plans, in spite of the organisation contributing matching funds for every extra contribution that the employee makes. What SMarT does, is to link an employee’s increased contribution to their salary increase, to ensure that there is no impact on the employees take-home pay. Furthermore, the employee is committed in advance for the annual contribution increases which are aligned to salary increases. This ensures that when the increased contributions are effected, the employee does not encounter any loss, and thus they benefit by both their increased contributions and those of the employer. This method simultaneously tackles the Procrastination and the Loss Aversion factors.

4.1.2 Investor Discipline There is a lot of information and hype in the financial industry around the performance (and lack thereof) of financial instruments, and these lead clients to start behaving using a “herd instinct”. Financial advisors must assist clients to understand the bigger picture related to investment decisions, come up with understandable actions plans that will assist clients to determine when best to invest (or disinvest), and for both (Client and Investor) to commit themselves to following through with the agreed plans of actions (whilst understanding the positive and negative consequences of decisions taken). They need to ensure that clients are not affected by the “noises” in the crowd, so that they do not become susceptible to errors. This approach will ensure that clients and advisors have a working relationship that will be based on

mutual understanding and with investment decisions made based on proper thought-processes, as

well as in empowering the client to make decisions on time should there be material changes in

market forces.

4.1.3 Trust

The 2008 financial crisis negatively impacted the trust that clients had in banks, thus to regain that trust, banks need to exercise patience, humility and hard work to win back the trust. The following have been identified as key tenets that advisors need to know about client relationships (which have two components – the technical and the personal):

Banks and their employees must actively demonstrate their competence in the services they provide; and

Banks and their employees must have empathy for their clients, especially in tough times. Constant engagement and empowering of clients is critical for the survival of this relationship.

4.1.4 Disinclination to save

When people save for retirement, the current feeling is like giving money to a stranger years into the future, without grasping the importance of doing so. A tool referred to as the “Behavioural Time Machine” has been developed to make people see themselves as they are now, with their projected

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future images at different ages (and different expressions – from very sad to very happy, depending on the level of savings from low to high). When people saw themselves on these images, their desire to save improved based on the future self they saw i.e. for a happier future self, people saved more than when the future self was sad.

4.1.5 Conclusion

Banks need to consider the behaviours of their clients whenever they engage them – from the initial advisory touch-points, to the customisation of products and services – as well as have an overall understanding of the issues that make specific clients tick. Financial Advisors (and customer-facing Bank employees) need to be empowered with the skills and tools to assist them in engaging with clients, so that they are in a position to provide appropriate services and advice. This will increase the trust clients have for banks, and result in clients improving their savings behaviour.

4.2 Stokvel Association

A recent study by African Response estimated the fund value of Stokvels at R44-billion, indicating that more than 50% of Stokvel Members in the mass market do not have a bank account. Stokvels continue to thrive and evolve in the presence of banks because:

The social aspect of Stokvels is appealing

Collective savings enables clients to afford necessities and accumulate lump sums for special occasions, white goods, holidays, etc.

Bank charges can be avoided

Banks do not offer need-specific finance Community-based banking is a culture in townships and social activities are the highlight of many Stokvels. Stokvels operate on trust; that each Member will continue to contribute after their pay out. Members provide assistance to one another beyond just financial, i.e. Members help out during weddings and funerals. There are, however, challenges in the form of:

late payments

low contributions

safety of contributions - many Stokvels have lost member contributions due to theft and fire

Unavailability of venues and gossiping between Members.

4.2.1 Banks and Stokvels

Banks have tried to attract Stokvel funds by offering low or no deposit fees, providing SMS withdrawal alerts and lucky draws. Interviews revealed that members feel that:

Product offerings are not need-specific (savings for holidays, special occasions, etc.)

interest rates are low and opening processes complicated

They need assistance with providing transaction histories i.e. proof of deposits, etc.

Formal banking environments are impersonal and members are not respected.

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4.3 Banks

4.3.1 Banking penetration

Interviews conducted with Banks, as per appendix 8, have shown that currently, low or zero interest rates offered by many local banks to ordinary customers makes saving an unattractive prospect. It would appear that banks are concentrating more on creating credit offerings than encouraging saving by providing products such as access bonds (that is, access to equity in home loans), mortgage bonds and vehicle finance without deposits. Access to credit has increased since the late 1990s – primarily secured credit to finance house purchases, as well as unsecured credit – whilst the household savings rate has fallen steadily over time. As pointed out by Adams and Vogel (1986), easy access to credit can have the unintended effect of discouraging savings. Credit weakens the case for deferred consumption, thereby reducing the need to save. The World Bank ‘Doing Business 2010’ report ranked South Africa as the second easiest country to get credit – out of a group of 183 countries worldwide. South Africa was second only to Malaysia, and ahead of developed countries including Australia, the United Kingdom and the United States. The low or no interest on savings accounts by banks has led to many South Africans to put their savings into other parts of the financial services sector (dominated by long term insurers, asset managers and institutional investors) in the form of retirement savings. This, according to a 2012 National Treasury report, constitutes nearly 60 per cent of South African household savings. To address the low propensity to save, banks could look at increasing the interest rate on household deposits to make it more attractive for customers to invest at a bank. It may also be mentioned that whilst different products may make a difference, there is no ‘one size fits all’ solution to saving; rather what is needed is a cultural change to improve the savings behaviour of South Africans.

4.3.2 Savings instruments

Banking networks represent the leading distribution channel for savings and are in a position to persuade their regular current account customers to make effective use of the broader suite of financial services – including savings. Low-income households saving through the formal sector tend to use low-cost bank accounts and savings products that provide liquidity. Some low-income households also save through retirement funds, particularly provident funds, although their rates of preservation are very low. Higher-income households generally use a wider variety of formal channels, including life insurance policies, retirement annuities, pension and provident funds, residential housing and collective investment schemes. During the period 1999-2010, nominal savings flows to various asset classes attributed to households were reasonably high (refer Table 9, Appendix 7). Bank offerings, as highlighted in Table 10, Appendix 7, indicate a dis-incentive to save created by low interest-bearing products. While some of these products offer tiered rates, they are still considered to be low. The accounts are all fully transactional and are typically used as such. Most Savings Accounts are accessed through ATM/debit cards (Visa Electron or Maestro) and through Internet, Telephone and Cellphone banking. Funds are available immediately, as opposed to investment vehicles where a notice period is required.

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The products are functionally slightly more limited than a cheque or current account as there is no access to overdrafts, cheque books or cheque cards. The customer decides how much and at what frequency money is deposited and / or withdrawn. Access to savings is good as long as FICA regulations are complied with. Savings accounts are very “safe” as banks will guarantee the savings (plus interest), which is not the case when it comes to investments. From a cost perspective, other than an opening deposit, customers do not have to pay to open a savings account. Depending on the savings account product chosen, a minimum balance may have to be maintained in the account. Customers are however, charged for transactions such as depositing money and making withdrawals. At some banks these charges fall away if a certain balance is maintained in the account. This can range from R5 000 to R10 000. In summary, we can conclude that while savings products are plentiful and fairly accessible, there are opportunities to review interest rates. In addition, Banks could also look at making products less ‘transaction accessible’ by managing behaviour through costs structures, such as the creation of tiered interest models linked to balances maintained. This could then fund better interest rates.

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5. Comparative analysis - Uganda, India & United Kingdom A comparative analysis of savings across Uganda, India and the United Kingdom was undertaken with the aim of establishing whether lessons learnt from these countries can be applied in South Africa. We found that while many of the determinants mirror problems experienced in South Africa, these countries’ approaches to improving the situation have met with success.

5.1 Gross Savings as a percentage of GDP

Source: World Bank

Figure 14: Gross savings as a % of GDP Savings rates across Uganda, United Kingdom and South Africa reflect close correlation; however India has achieved a significant turnaround (Figure 14). 70% of India’s savings comes from the household sector, which has seen growth from a level of 8.6% in 1951 to 33.7% by 2010.

5.2 Determinants

Source: World Bank

Figure 15: GDP Growth GDP growth: This has already been established as a major contributor to South Africa’s poor savings culture, and whilst South Africa continues to struggle to lift GDP growth above 4%; Uganda has averaged growth of 6.9% since 2007 (Figure 15). Levels above 6% generally indicates a propensity for job creation, yet Uganda’s savings rate, whilst marginally better than that seen in South Africa, has not benefitted. This is due to government policies which have favoured investment and related exports in the telecommunication industry (accounting for 53% of Uganda’s GDP) over investment into labour intensive industries (i.e. Agriculture which contributes only 22%).

19%

12%16%

34%

0%

20%

40%

2007 2008 2009 2010

Gross Savings as a % of GDP

Uganda United Kingdom

South Africa India

7%

3%

7%

1%

-5%

1%

6%

2007 2008 2009 2010 2011

GDP Growth

Uganda South Africa India UK

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India’s average GDP growth by comparison has tracked close to that of Uganda, but savings as a percentage of GDP is exponential. While it is true that GDP growth in India has driven up income levels, which in turn has facilitated the ability to save, banks in India embarked on a program of “Financial Deepening.” This, in essence, is the improvement of financial inclusion and the accessibility to formal financial instruments. While there's a high degree of urbanisation, a significant portion of the population in India remains rural and agricultural. Outside of the urban areas people do save, however they would primarily save in the form of ‘physical savings’ (investing in property and other tangible assets was considered saving by many). India’s “Financial Deepening” programme was achieved in two ways:

The first was to ensure a more pervasive distribution of banks in terms of where they were represented. Having more branches available to rural communities enables those communities to access formal financial saving instruments. Increasing small savings through instruments such as mutual funds and pension schemes has been a critical component to India's saving success.

The second was by increasing financial intermediation, the extent to which financial institutions bring borrowers and investors together that leads to the deepening of the financial system. Financial deepening and household savings are positively correlated; therefore a higher level of intermediation through financial institutions increases the level of financial savings. Through driving awareness amongst the general population (especially in the rural areas of India) of saving instruments such as mutual funds and pension schemes, financial institutions in India have been very successful at financial intermediation.

UK GDP Growth between 1995 and 2007 was led by consumer spending, a rise in borrowing as well as by the government reducing public ownership and containing the growth of social welfare programmes. The UK experienced poor economic growth performance in 2008 and 2009 due to recession, and in 2011 with GDP growth of 0.7% which was influenced by the rise in household consumption, a fall in investment by 0.6%, low contribution of 1% from net exports and a 1.2% fall in the production industry output. UK Gross Savings fell to 12.5 % by 2009 and was reported at 7.7% in 2011, driven by the increase in household expenditure and partially offset by increased wages and salaries and net property income. UK household debt as a proportion of GDP is reported as high, a serious problem at individual level. Research reported the level of real household disposable income decreased by 0.2% and that there are 6.2million ‘vulnerable’ households, of which 4.3 million have low or no savings in the UK. UK Household Savings increased between 2008 and 2009 and began declining due to low interest rates, low inflation, excessive lending by banks to the household sector, loose credit conditions, high asset prices and the economic boom. The Household Savings Ratio increased to 7.7% in 2011 and was reported at 7.4% in Q2 of 2012 as a result of the increase in households’ real disposable income, which rose by 1.2%. The household decision to save or spend is dependent on their expectation of future economic growth and easy access to credit. Household saving increased due to, among others, uncertainty about future positive growth prospects, non-availability of credit economy, increased job uncertainty, a decrease in net financial wealth, and lower expected future income. Contributors to lower savings in the UK was as a result of the rise in debt and the decline in real interest rates, which reduced the return on savings and redistributed income from savers to borrowers. Increasing house prices increased collateral values and reduced the incentive to save, and relaxed lending conditions and increased credit availability in the financial sector encouraged borrowing for consumption.

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Unemployment and Age Dependency: the debilitating impact of South Africa’s 54% dependency ratio on saving has been documented above. While the absence of GDP growth and related job creation influence in the number of dependents reliant on disposable income of the economically active, population growth plays a key role (Figures 16 and 17):

Figure 16: Unemployment and per Capita income (Source: World Bank)

Source: World Bank

Figure 17: Population Growth

India’s population growth rate has declined since early 1980’s. Now that a more aspiring, literate and tech-savvy young person is entering the job market, they are more readily absorbed into the formal economy. This has helped India to improve employment levels and thus reduce the age dependency ratio. At the heart of this is the emphasis that the government and society place on education. Compared to other BRIC nations India is producing a more educated and better skilled workforce. A skilled workforce coupled with a favourable labour environment makes India an attractive destination for foreign companies, further driving growth and employment. Increased employment means more people have more disposable income which in turn is available for saving. By comparison, Uganda’s population of 33m has grown at a rate of 3.2% since 2000. Government’s promotion of continued growth has seen high reproduction rates and the average child ratio per family has grown to 7. With low levels of investment into labour intensive industry, it is unlikely that government will have the infrastructure in place to put this future labour force to productive use in growing the economy. This is already evidenced by a 32% youth unemployment ratio. South Africa’s population has similarly continued to grow, albeit at a much lower and more marginal rate. As reported this has resulted in unprecedented unemployment levels.

4%

4%

7%

24%

21%

22%

23%

24%

25%

26%

27%

0%

2%

4%

6%

8%

2007 2008 2009 2010 2011

SA

Unemployment

Uganda India UK South Africa

3.2%

1.2%

1.4%

0.7%0%

1%

2%

3%

4%

2007 2008 2009 2010 2011

Population Growth

Uganda South Africa India UK

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While the population growth in the UK remained stable over the years, unemployment increased sharply during the financial crisis, rising by more than 2.5% over the household expectation of unemployment. The increase in unemployment rate continues to be a concern even during 2012. In 2011, the unemployment rate was reported at 7% and increased to 8.4% in Q2 of 2012, the highest rate since 1995. The impact of unemployment is noticeable in the 16-24 age brackets (currently 21.9%) and in the increase in unemployed women. However, the increase in unemployment and low future income had a positive effect on consumers as it led households to be more cautious and encouraged them to increase their savings and cut consumption.

Access to credit & household loans consumption: South Africans’ reliance on credit to fund consumption expenditure and the resultant impact on debt to income has been discussed in Section 2. Whilst micro-finance institutions are prolific in Uganda, unlike similar industries in South Africa, they have thrived on providing loans predominantly to fund the business activities of the self-employed. This has assisted with reducing unemployment. India has similarly focused on embedding a culture of savings. Even though wealth has grown and millions have been lifted out of poverty, it has not translated commensurately into proportionately higher consumption. In fact emphasis is placed on saving more rather than consuming more. This is a fundamental difference in culture between India and most other nations including S.A., where similar prosperity has driven primarily conspicuous consumption. This culture can be attributed to education from a very young age about the importance of saving, not just for the individual, but also for the benefit of society as a whole. It would seem that individuals in Indian society feel a strong sense of responsibility for the government deficit and believe that it is their duty to save in order to help reduce reliance on foreign debt – and hence reduce the deficit. In the UK, risk-free interest rate has a major influence on household consumption and savings. Over the past decade, the long-term interest rate in the UK was at historically low levels, making it possible for households to obtain credit easily. Banks in the UK played a role in influencing the consumption and savings patterns of households, since excessive lending in the form of secured and unsecured lending has encouraged individuals to increase consumption and decrease savings in the past 10 years. However, this situation reversed during the economic slowdown. In addition, annual inflation rate fell to 3.4% in Q1 of 2012 due to VAT hikes, falling energy prices and weak nominal wage growth. This squeezed the consumer’s disposable income and impacted the levels of savings even further.

5.3 Lessons learnt from comparative studies

It is clear from the findings in this section that the same determinants of low savings in South Africa are prevalent in both Uganda and India, however both these countries have achieved higher savings rates by addressing various aspects of the problems experienced in different ways:

5.3.1 Uganda

The banking industry in Uganda has grown rapidly in the last decade, with four main tiers emerging: Tier 1 - 25 Commercial Banks with 468 branches Tier 2 - 3 Credit institutions with 44 branches Tier 3 - 4 Micro Deposit Institutions with 98 Branches Tier 4 - >1200 Micro Finance institutions

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Only 28% of Ugandans are urbanised and many of the Tier 1 and 2 bank branches are located in Kampala itself, with branches in some cases 200m to 300m apart and reports of some new business entrants being visited by up to 15 banks in one day. They survive by catering to specific market niches and designing consumer centric products. Some examples include:

Finca, one of the smaller commercial banks, started as a micro-financer servicing the Female market in group savings schemes. It is not uncommon to see a gathering of women sitting on the banking hall floor counting their collective savings for deposit.

Eco Bank targets a specific market for an entire year, attempting to bank the entire service chain. For example, targeting University Students would involve banking the university itself as well as the suppliers of goods and services to that university (books, stationery lecturers etc.).

Centenary bank introduced products which catered specifically to consumers’ needs. Their “Good Life Loan,” provides finance to fund specific lifestyle purchases, e.g. televisions, washing machines, etc.

Brak, a micro-financer, establishes outlets within the community itself and provides finance to stall owners by involving a group of individuals who will support the business owner.

The opportunity in Uganda lies in the fact that in excess of 70% of the population is unbanked. A USA Aid survey into savings and investment in rural Uganda showed that in excess of 75% of Ugandans were saving, but only 10% in a formal institution. 20% stored cash at home and a further 40% viewed the purchase of goods for future use i.e. food, livestock, land, etc. as their investment. Whilst the biggest hindrance to savings is low income, the reasons for not utilising formal institutions include access to facilities (both advice and withdrawal facilities), high minimum deposits, stringent opening criteria and cost of savings. Respondents to the survey reflected that their main expenses in order of priority are school Fees, medical, food, rental and transport. Consumers wanted the ability to add to investments when disposable income allowed, indicating a need to design products to cater to their circumstances. Education around financial products also proved to be an important factor around encouraging savings in formal institutions. 20% of respondents said they lacked information on why and how to save, 14% didn’t see the benefit of saving, whereas 27% had no personal interest in savings. However, it should be noted that ‘security of funds’ was quoted as the main reason for switching to formal banking.

5.3.2 India

Lessons learnt from India mirror much of what consumers re-iterated in the Ugandan / US Aid survey. Success was seen when financial institutions accelerated the rate of financial inclusion by banking the unbanked, being more pervasive in their distribution and presence and by offering people the right type of products and services to enable financial savings.

5.3.3 United Kingdom

To encourage savings culture, banks tightened policies to discourage debt and reward consumers who save. Examples include the ‘Child Savings account’ by Barclays Bank in an attempt to encourage the savings culture from childhood, as well as the launch of the “Save the Savers” national campaign (www.saveoursavers.co.uk) - a joint initiative between financial institutions and the government to address issues raised by savers in order to achieve the country’s long-term economic prosperity.

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This campaign aims to create consumer awareness around savings, highlight issues that affect savings and provide a platform to campaign for the changes needed to bring government policy and decision making closely in line with the needs of the savers. This gives financial institutions an opportunity to align their financial solutions to consumer savings solutions. Proposals have been put forward for government to further investigate ways to reduce the impact of interest rates, inflation and tax on household savings.

5.4 Conclusion

Research clearly indicates that entrenching a savings culture is a common problem in both emerging and advanced economies, reflecting similar determinants, consumer behaviours and issues. South Africans appear to have little appreciation for the need to save and an industry has been built around their desire to consume. The cost to the financial industry of excess debt and overburdened consumers is still evident in low earnings and high bad debt. Education around the need and importance of saving for both the individual and the country is required at the most basic level. A mind shift of ‘Save to spend’ rather than ‘borrow to spend’ is required. The benefits of this for consumers and banks are obvious and, whilst the profitability of the consumer credit industry cannot be overlooked, a balance is required. Both Uganda and India have achieved this by focusing lending on business activities which provide much needed employment. South African Banks would do well to re-evaluate their types of offerings, to determine whether or not they deliver against or answer the real human need.

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6. Key Research insights Our research in the preceding sections identified a number of determinants contributing to the low savings levels in South Africa as well as initiatives employed abroad to mitigate against these determinants. By undertaking the SWOT analysis (see Appendix 1 – key findings SWOT analysis) some additional insights were garnered. These included:

6.1 Unemployment High unemployment rates lower the propensity to save. While our paper deals with employed individuals only, the impact of unemployment is still felt through an increase in dependency ratios. Further to this our research has shown that high income volatility correlates strongly with low savings rates.

6.2 Education and Financial literacy Financial illiteracy and addressing our disinclination to save is recognised as a key determinant of saving. Initiatives that mitigated the Education determinant were particularly successful in countries which embarked on an education drive on the importance of saving. It was noted that financial education must start at a young age. 85% of clients surveyed in 2012 Old Mutual survey affirmed that they would welcome more financial education. It was further determined that the Unbanked lack access to financial education. Our low financial literacy contributes to the lack of understanding of banking products and the benefits of saving, unsustainable or risky consumer behaviour, over-indebtedness and poor retirement planning. Further to this it also contributes towards customers gravitating to informal savings mechanisms.

6.3 Informal banking and group saving schemes Research has shown that Group Savings Schemes are popular, particularly amongst low income earners. These individuals prefer pooling cash resources to extract benefits on a group scale. Savings in groups also tends to be used for specific purposes such as education, vacations, travel, small business funding and for purchases around specific holiday seasons. In addition, the popularity of group savings, while important, has also introduced barriers for banks to access the emerging market segments, because banks have traditionally attempted to force-fit clients into Euro-centric products.

6.4 Cost of savings Barriers to saving include the costs charged by financial institutions, low interest rates offered, and complex processes, particularly governance and the opening of banking accounts. Further barriers included low disposable incomes and access to credit. The tax rate on interest on investments and savings is a disincentive to save. From local and international research, we determined that some of the main reasons for saving included saving for specific goals, such as school fees, medical expenses, or just for a “Rainy Day”, indicating a need to provide “Goal-Specific” savings products.

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6.5 Access to credit Research in both the local and international markets has shown that a high level of debt correlates strongly to low levels of saving. We have found that our banks are highly dependent on credit revenue streams while consumers are hungry for further credit. While the national credit regulator has regulated the environment to protect the consumers, it has until now, not succeeded in reducing the dependency on credit.

6.6 The paradigm shift Based on our research and key take outs we determined that a paradigm shift is required by South Africans. Further to the research, we used a Culture Web model (see Appendix 3– Culture Web model) to determine the paradigm shift required in South Africa. The approach was to evaluate the current beliefs and realities about the savings culture in South Africa, specifically looking at stories and myths, symbols, power structures, organisations, control systems and rituals. When these were compared to a desired future belief system we were able to determine what paradigm shift was required:

Figure 18: Culture Web – Paradigm Shift

The recommendations that follow aim to facilitate the paradigm shift required.

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7. Recommendations Based on the determinants as well as the key insights uncovered during our research we have made a number of recommendations to address the low levels of saving in South Africa. The section that follows explores a number of recommendations aimed at addressing the low savings rate. It should be noted that while this is a comprehensive set of recommendations we have, through a process of prioritisation and consultation with industry experts both locally and abroad (see Appendix 2 – Summary of findings and recommendations), focused only on education, product innovations and technology. These are also discussed in more detail in the Business case section.

7.1 Unemployment

As we have seen, South Africa’s high unemployment rate significantly lowers the individual’s propensity to save. While this is a macro-economic issue and there is little that banks can do to influence employment levels, there is an opportunity for banking institutions to work closely with government institutions to create a better platform for individuals to save. Through the implementation of practical policy frameworks, some of the barriers leading to financial exclusions can be removed. For example, an incentive to save could be created by reducing or abolishing taxation on retirement and investment income (the main savings vehicles utilised amongst salaried earners in the middle market).

In addition, banks should be looking at;

Promoting SME lending to labour intensive small businesses; and

Providing student loan products to assist with up-skilling.

7.2 Education and Financial Literacy The implementation of a National Savings Programme is recommended as a transformational approach to tie product and technology initiatives together. This will ensure that a savings culture is embedded at grass-roots level, which over time will build a generation of savers. A savings-cultured nation will be empowered to balance consumerism and savings, not only for their individual benefit, but also to improve socio-economic conditions and ultimately build a better country for economic growth (leveraging some of the lessons learnt from India on fostering a culture of national responsibility). The main focus of the programme will be on macro-economic benefits, financial concepts, the benefits of saving, behavioural barriers, practical applications and related measures. Reaching individuals with the right medium of engagement is crucial in driving the culture. Intervention mechanisms such as TV and Radio Programmes, Theatre Shows, Websites, School Projects (e.g. Eskom Science Expo), Active Campaigns, Social Media, Personal Bankers/Insurers should be explored and applied appropriately to maximise the impact. The campaign will be enhanced with the introduction of a budget and financial application that is easy to use and easily accessible. The application’s aim would be to encourage good financial disciplines by using information supplied (through the budgeting process) to make recommendations on how disposable cash can be used and what should be saved. While this approach addresses why South Africans should save, it will only work with further product innovations that facilitate how people save.

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7.3 Cost of Saving

7.3.1 Product cost structures To address the disincentive to save, banks would do well to consider increasing the interest rate on household deposits to incentivise clients to save. Introducing an attractive online savings account which offers higher interest rates, no fees, no minimum balance, insurance and a quick application process would also entice customers to save more. Banks will benefit from the introduction of an online savings account in the following ways:

Savings Deposits are the cheapest form of funding and replacing wholesale with Retail funding would reduce funding costs.

Cost savings will be realised from the introduction of a digital channel.

Increased market share – it will attract more customers, and also creates an opportunity to cross-sell additional products.

The customer will benefit from an online savings account as follows:

They will earn better income from their savings due to higher interest rates and the fact that no fees are charged.

While not having easy access to the account can be an inconvenience for the customer, the upside is that it creates longer term saving. Higher interest rates and a longer savings period create motivation for the customer to want to save more as they watch their funds grow.

Product offerings should also be revised to cater to client needs. Comparative studies showed that significant lift in savings was achieved when banks styled contractual products to assist clients in funding household specific needs, ( for example schooling or saving for white goods.)

7.3.2 Savings and taxation Individuals in South Africa are taxed on a tiered rate – the more you earn the more tax you pay. While tax policies are beyond the banks’ control, they could certainly play an influential role with the government on tax matters. For example, Government should be urged to review the tax policy to allow individuals to earn a tax-free interest income from their bank savings accounts. This will encourage the majority of small taxpayers with lower salaries and low interest-bearing savings accounts to save more and for longer periods. This will also create a win-to-win situation between banks and their customers. Banks will get low cost funds while customers will earn funds which will be out of the income tax net. Lessons can be drawn from India where, after the deregulation of interest rates on bank savings accounts by the Reserve Bank of India in 2011, banks raised the rate of savings interest from 3% to 4% and then to 7%. This incentivised more customers to keep more money in savings accounts. With the Tax Reforms anticipated in 2014, banks still have the opportunity to influence these matters.

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7.4 Access to Credit One of the primary determinants that impacts upon the savings culture in South Africa is the ease of access to credit. A further dynamic that compounds this issue is the fact that much of this borrowing is to fund consumption, rather than asset accumulation and/or wealth creation activity, such as starting a business. The complexity in dealing with this issue lies in the fact that lending is a primary source of revenue for banks and throttling this activity would have a severe impact on the bottom line of financial institutions. This in turn would have an impact on profitability and ultimately growth in the economy and invariably on the level of employment. So it would seem counterintuitive to suggest that banks need to slow down the rate of lending to consumers. What is required then is a different approach to stimulate savings in a very fertile lending environment. Our recommendation is to use the lending opportunity to drive savings amongst individuals. This would manifest itself in a new product offering from banks, where a customer would be granted a loan based on affordability, the difference being that included in the affordability calculation would be the additional contribution of a monthly premium that would be transferred into a savings account. This contribution would run the full length of the loan agreement and then, at the end of the loan term, the customer would have amassed a small lump sum of cash as savings. The customer would be incentivized through better interest rates offered when they choose to include the savings option. In essence this amounts to putting structures in place to assist the customer in saving, without which the customer would have generally spent the cash. This product would be designed to ensure that the loan repayment and savings component would be secured early in the month, once the customer's salary has been deposited. This would be a mandatory payment that a customer would have to make every month. The benefit to the customer is to have some savings accrued at the end of the loan term. The benefit to the bank at an aggregate level is to have balances on book that help reduce the funding gap, increase liquidity and improve the bank’s margin on lending.

7.5 Informal Banking It was apparent from research that Stokvels are valuable to communities since they serve numerous different needs of their members. The aim of our recommendations here is not to absorb Stokvels into the formal system but rather to improve their operational efficiency and effectiveness; that is, to support them with appropriate products that will stimulate a savings culture. Many banks have introduced savings products for Stokvels, however members are still reluctant to utilise formal banking instruments. Banks should therefore be innovative and offer products that add value and cater for the specific needs of Stokvel members who generally save for variety of reasons, for example to purchase furniture, pay school fees, go on holidays, etc. For instance, for those who are saving for holidays, banks could provide an account specifically designed for holidaymakers and arrange discounts or better deals with tour operators or hotels. Further incentives such as loyalty schemes and price

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concessions could be introduced to encourage members to maintain the membership for beyond the savings need. Banks can also set up infrastructures for individuals to bank cash at major retailers so that Stokvel members can bring deposit slips to meetings rather than cash. Products should also be linked to a national savings campaign to assist in mitigating the problems associated with financial illiteracy (as we have seen high rates of this in the Stokvel segment). Further to this, products should leverage on basic mobile technology to facilitate account management at an individual and group level.

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8. Business Case

Based on our recommendations in the section above, we have prioritised Education, Cost of Savings and Informal Banking, as we believe that banks can play the biggest role. Our business case has been built off a framework underpinned by education around financial literacy. This is supported by the development of three products designed to encourage and facilitate savings, and on technological enablement to support, educate and assist clients to save:

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8.1 Education and Financial Literacy

Our research, both locally and internationally, revealed that low levels of education, financial illiteracy, and lack of knowledge and understanding of financial products affect the savings decisions of consumers. Uninformed decisions lead to consumers accumulating high levels of debt, making insufficient provision for retirement, and low levels of savings. Others gravitate towards informal savings mechanisms which have proven to work within their communities. The perceived loss of disposable income when people have saved and a lack of understanding of the economic impact of savings add to the consumer’s negative attitude. We therefore believe that education is a critical component to be addressed in influencing the savings behaviour of South African individuals. Changing the savings culture does not only involve a mind-set change in individuals, but also requires a fundamental change in both financial institutions’ and the government’s attitudes towards “savers”. It also requires a change in terms of how we approach educating individuals about the benefits of saving. One way to achieve this is to establish a national education programme with an integrated approach to facilitate consistent and aligned messages as well as interventions aimed at addressing the savings culture. This would also create an open platform where savers and borrowers are brought together to engage on these matters (leveraging a concept similar to “Save Our Savers” in the UK, as highlighted in our research above). In South Africa, a number of initiatives to address the savings culture have been launched by different institutions, but there has been a lack of proper coordination at a national level to measure the impact, and to draw on lessons learned for further improvement. Our proposed National Savings Programme, (Figure 20 below) takes a transformational approach, aiming to tie all these initiatives together to ensure that the culture is embedded from grass-roots level. Over time this will build a “savings-cultured” nation, working together to balance consumerism and savings for the individual’s benefit; to contribute towards improved socio-economic conditions and ultimately, to build a better country for economic growth.

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Figure 19: National Savings Programme - Framework

We believe that by integrating awareness, knowledge, technology-based solutions, practical and appropriate products (supported by joint sponsorship across key stakeholders) improvements in the savings culture will result. Banks have an important role to play in this framework (refer Figure 20 above) by influencing government policies, contributing to the schools’ curriculum and school projects, as well as by driving their own product and technology-based campaigns to reinforce the savings culture. By participating in the National Savings Programme, we believe that the banks, through their expertise, knowledge and the relationships they have with consumers, can play a prominent role in designing and measuring the impact of the programme. The cost of developing this framework is estimated at around R5-million (refer detailed financials in Appendix 4). The following Implementation approach is recommended:

Table 1 : Implementation approach

Focus Improving the Savings Culture of individuals within South Africa

Objectives To launch a sustainable National Savings Programme to educate South African households on the individual, socio- and macro- economic benefits of saving.

Ownership South African Savings Institute (SASI), as the custodian on behalf of, and mandated by, the participating stakeholders

Sponsorship Financial Institutions, BASA, SARB, SASI, Government, Stokvel Association, JSE following a BankSeta approach to funding.

Task Forces The Programme Committee with members from each of the stakeholder groups.

Programme The Programme Office, hosted by SASI. Ensuring governance and overall coordination of the

B

B

B B

B

B

B = Banks’ participation in the Education Framework

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Management programme.

Information Strategic focus as well as all information requirements for this programme will be determined and agreed by the Programme Committee

Controls Mechanisms such as the code of conduct, measurements to monitor the strategic effectiveness of the programme, and related policies will be established by the Programme Committee together with the Programme Office

Reviews Implement quarterly reviews to assess the impact of the programme, to identify areas of intervention and to improve on the approach.

Change Management

Top Leaders from Government and the participating stakeholders (executive level) should be seen as champions of this national programme. They need to be visible in campaigns and be seen to speak the same national messages (as leaders of this country) without selling their organisations.

Resource Allocation

Programme Office, National Website, National Campaigns and school projects. Subject Matter expects will be seconded from participating stakeholders.

Action Plan (next steps)

Banks to approach BASA with the proposal (to obtain support from all banks)

BASA to lobby SASI for support and custodianship.

SASI to lobby Government bodies and other identified stakeholders

SASI to convene initial kick-off meeting with participating stakeholders to finalise agreement, elect the Programme Committee with the relevant Terms of Reference and to agree on action plans to build and embed the framework

8.2 Product and Technological support

To support the proactive education approach, we have defined three products and a technological aid to assist clients in their financial literacy journey.

8.2.1 CreditSave

Our recommendations acknowledge that whilst access to unsecured credit is one of the main determinants of South Africa's inability to save, these products generate high margins for banks and thus suggestions to curb this form of lending would negatively impact bank profits. We do, however, see merit in using this product as a means to generate savings through adding a “savings” premium to clients’ monthly repayments. We have seen examples of this working in Uganda, and recent findings in the UK have banks introducing this type of product in order to access household deposits to meet liquidity requirements. This savings “premium” will be channelled into a savings product which clients will have access to at the end of the loan term, provided they do not default on loan repayments. Our detailed financial modelling demonstrates that clients have scope in affordability testing to meet monthly payment requirements which include this savings buffer. The benefit to the bank would be access to cheaper funding, which funding would also act as a form of additional credit protection and risk mitigation. Clients would be enticed into this product by a reduction in loan interest rate, equal to a proportion of the funding benefit of additional savings (generated at the average Negotiable certificate of deposit rate (currently 6%) which is the cheapest form of wholesale funding banks commonly utilise to fund asset growth). Our detailed financial assumptions calculate the loan interest reduction at 25bpts funded off 40% of the NCD funding benefit. This benefit is calculated at R267-million, assuming clients fund a savings ”premium” of 10% of monthly instalments. (Refer business case financials for this product in Appendix 4). The benefits to the client include a reduced interest rate and access to lump sum savings at the end of the loan term.

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8.2.2 Informal Savings Stokvels

The opportunity to access the R44-billion pool of “grey money” circulating within Stokvels is well documented. The social nature of these “clubs” however, has posed a barrier to entry for most banks who, in addition, have failed to understand the groups’ requirements for need-specific products and fund tracking. An afro-centric approach is therefore required. Our proposal centres around maintaining the social construct of the Stokvel, whilst providing facilities to assist members to remove the risk of transacting and storing cash, and also providing value-added loyalties to incentivise. We see this working as follows:

Bank enters into agreements with large retailers with widespread presence in informal/rural areas i.e. Shoprite, PEP, and Bears, to accept and pay-out cash on behalf of the Bank to Stokvel members. (Mpesa/Vodacom principle.)

Stokvel members deposit cash at retailers and produce deposit slips at Stokvel meetings.

Risk and cost of cash removed from Bank, thus Bank charges very low admin fee only. In return for fee, Bank provides Members with mobile statements of cumulative deposits; Stokvel receives statements of cumulative deposits of all members.

In addition to providing facilities for cash handling, Banks utilise loyalty programmes and bargaining power to extend benefits to Stokvel members, for example, an Education Stokvel may enjoy discounts at PEP stores. A Christmas Stokvel could receive discounts for transport of goods/ bus trips to rural areas. In this way, loyalties need not necessarily add costs to Banks.

The obvious benefit to banks is their ability to access a proportion of the R44-billion in deposits. Our detailed business case financials assume benefits off attracting 10% of these funds at an opportunity cost of 6%, which is the average NCD rate, on the assumption that these additional deposits will replace funding at wholesale rates. (See detailed financial workings in Appendix 4).

8.2.3 Existing savings products

As illustrated in the product analysis in Appendix 6, banks have a plethora of savings products on offer, but are widely criticised for their high fee structure and low to zero interest rates, thus there is little incentive to save. To address these issues the following is suggested: Product Range - Our studies at EcoBank in Uganda showed that their success in attracting clients was obtained from providing solutions that cater specifically to clients’ needs, rather than trying to fit clients to existing products. To this end, World Bank savings surveys in the country revealed that clients save for schooling, medical expenses and “Rainy Day contingencies.” By designing contractual type products focused around these needs, Eco was able to build their deposit base. In the UK, Metro Bank have re-introduced a level of simplicity to their product offering which has seen the funding of 40 new branches. It would appear that South African banks would benefit from simplifying their surfeit of product offerings to provide:

A pure transactional product which attracts fees and zero interest.

Contractual-based savings product marketed specifically around client household pressure points (i.e. schooling) with high transaction fees and tiered interest dependent on amount saved.

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Savings deposits are the cheapest form of bank funding, costing around 1% on most banks’ balance sheets. Average Negotiable Certificate of Deposit rates (NCDs,) the most common form of bank wholesale funding, currently average 4-5% higher than this. Banks would benefit by increasing savings rates to a margin of 2-3% of the NCD rate in an attempt to increase household deposits, thereby reducing wholesale funding. Our detailed financial workings show a benefit of 90-million per 1% shift in savings growth through such initiatives. Detailed Financial workings in Appendix 4 calculate this benefit at R240-million, assuming the product attracts 20% of Stokvel funds.

8.2.4 Technology Aids

Other than the actual determinants hindering saving in South Africa, which require major economic shifts to address, people often believe that they just cannot save. This is sometimes driven by their inability to manage their money effectively, rather than by external factors hindering their savings. There is therefore an opportunity to use technology to help enable people to save. With the advent of mobile apps and the plethora of banking apps, it would be beneficial to the consumer to include a money management tool. This tool would be designed to assist the customer to budget effectively and manage their household cash flow in a more effective manner. We envisage the system being semi-automated where it is programmed with the income of the household and preloaded with all of the mandatory commitments of the household, e.g. the mortgage payment, car repayments, insurance, etc. The system would then automatically appropriate the monthly household income to the various payment commitments. It would also accrue typical household expenses such as groceries, entertainment, school fees, etc. Once all of these commitments have been accounted for the household net position is calculated. The idea behind this app is that not only does it appropriate the funds; it actually ensures payment of the accounts, thus facilitating convenience for the customer and helping them to save on banking fees. It also takes the fear out of electronic banking and payments while still giving the customer full control of their money by allowing them to approve all payments before they are affected. The biggest advantage that would emerge from such an app is its ability to suggest how surplus household funds could be appropriated. The idea is that through an intelligent back-end that assesses, amongst other relevant information, household debt, current interest rates and the most current investment products, it also provides the "next best action" for the surplus funds. It would therefore suggest to the user whether to pay additional surplus funds into their mortgage, to reduce any other debt, or to put the money into specific savings and investment products. Once they have made their choice, it automatically does it for them. This introduces a level of savings discipline and reduces the propensity of the human condition to want to spend any surplus funds on consumption. Once again this would be a prompted action so that the customer still has full control over their money.

8.3 Financials

Based on the summarised financials (refer Table 3 below), it is conservatively estimated that the framework suggested will generate R10-billion of additional savings. This equates to a 4% growth on current total market balances which is significant given that total savings year-on-year to July grew by 10%. In addition, assuming that these balances will replace funding with wholesale Negotiable Certificate of Deposits, which currently cost 6%, an additional R550-million in interest income can be generated.

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Table 2 : Summarised Financials

Initiative Objectives

Develop 3 products to support framework & encourage clients to save.

Quantifiable Bank Financial Benefits/Costs R000 Key Financial Assumption

(20 000)

357 988

Informal savings 240 000

Existing savings products 169 000

(40 000)

Customer Benefits (Cost to Bank) R000 Cost to Bank

98 400

Existing savings products 84 300

Net Benefit 524 288

Balance Sheet Benefits R000

CreditSave

Informal Savnigs

Existing savings product

Total estimated savings balance growth. Represents growth of 5% on current savings

balances. (YTD Jul savs growth was 10%)

CreditSave - Interest differential on NCD wholesale funding

(@6%) vs funding with savs deposits (@0%)

6 000 000

4 400 000

2 300 000

12 700 000

Build tech enablement & market above products

Assumes 25% of 6% funding benefit will be passed to clients in

the form of a 25bpt loan rate concession

Assumes savings rate increased by 3% to attract additional funds.

1% additional savings growth anticipated.

Conservative estimate based on attracting low volumes

CreditSave

Technology Enablement & Marketing

Education framework Estimated cost of bank's portion of operational & initiative costs

Assumes client will fund savings of 20% of new busines annually

calculated at 70% of July 2012 YoY growth

Assumes banks attract 20% of R44b Stokvel

Reduction in wholesale funding cost calcualted at 6%(current NCD

rate)

Develop an education framework on financial literacy to raise

awareness.

- CreditSave

- Informal savings

- Existing Savings

- Technology enablement

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9. Conclusion

Our study concluded that South Africa faces many challenges in order to reverse the current trend and positively influence our savings culture. Not only do potential savers need to understand the importance of saving at an individual level, they also need to understand and appreciate the potential benefits for our country as a whole.

To achieve this, investment is required from all stakeholders, including the government, the banking industry and other financial institutions. These stakeholders will need to support the proposed programme at a financial level, as well as be prepared to make the changes at a product level. While it is important that stakeholders buy into the national benefits that a positive savings culture promises, it is just as important that they have an appetite for the long-term investment required to turn around behaviours that have been brought about by decades of conditioning.

A paradigm shift is required and while this study recognises that this is a challenging prospect, we have uncovered enough evidence to suggest that, should these proposals be followed, South Africa will, in the near future, have a savings culture that is positive, contributes to our economy and is one that makes all of us proud to be South Africans.

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10. Abbreviations BANKSETA Banking Sector Education and Training Authority BASA Banking Association of South Africa SASI South African Savings Institute NCD Negotiable Certificate of Deposit NCR National Credit Regulator LSM Living standards measure BRIC Brazil, India, China LCH Life Cycle Hypothesis

11. Reference List

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3. August, R. R. (2004): Costs of Saving for Retirement: Options for South Africa, Presented at the 2004 Convention of the Actuarial Society of South Africa, [http://www.treasury.gov.za], (Accessed 02 July 2012).

4. Bartlett, C.A., McKinsey and Co. (1996): Managing Knowledge and Learning, Harvard Business Review, [http://hbr.org/product/mckinsey-co-managing-knowledge-and-learning/an/396357-PDF-ENG], (Accessed 22 August 2012).

5. Bellingham, R. (2001): Corporate Culture Change. Amherst, MA: HRD Press. 6. Benartzi, S. (2011): Understanding the Psychology of Saving to Help You Save More,

[http://www.ninetynineways.net/2012/04/understanding-the-psychology-of-saving-to-help-you-save-more.html], (Accessed 15 August 2012).

7. Central Intelligence Agency, CIA World Factbook, [http://www.indexmundi.com/g/g.aspx?c=ch&v=30], (Accessed 11 June 2012).

8. Donnelly, L. (2012): South Africa needs to start saving seriously, Mail & Guardian, 14 June 2012, [http://www.mg.co.za/article/2012-06-14-sa-needs-to-start-saving-seriously], (Accessed 8 July 2012).

9. FinMark Trust (2002): Stokvels in South Africa, Press release, [http:// www.finmark.org.za], (Accessed 3 August 2012).

10. Finscope (2009): South Africa in black and white, [http://www.finscope.co.za/new/pages/Initiatives/Countries/South-Africa.aspx], (Accessed 08 July 2012).

11. Harjes, T. & Ricci, L. A. (2005): What drives saving in South Africa? In Nowak, M and Ricci, L.A (Ed). 2005. Post-apartheid South Africa – The first ten years. International Monetary Fund, Washington DC, 48-63.

12. International Monetary Fund, International Financial Statistics, 1995-2005. 13. Jappelli, T. & Pagano, M. (1998): The Determinants of Saving: Lesson from Italy, Centre for Studies in

Economics and Finance Working Paper No. 1 March. 14. Jappelli, T & Padula, M. (2011): Investment in financial literacy and saving decisions,

[http://www.voxeu.org/article/investment-financial-literacy-and-saving-decisions], (Accessed 02 July 2012). 15. Kibuuka, L.E. (2006): Informal Finance for the Middle and High Income Individuals in South Africa: A Case

Study Of High Budget Stokvels In Pretoria, University of Pretoria, [http://www.upetd.up.ac.za/thesis/available/etd-07182007-150711/.../dissertation.pdf], (Accessed 1 July 2012).

16. Loayza, N. & Shankar, R. (2000) : Private Saving in India, World Bank Economic Review, World Bank Group, 14(3), 571-594.

17. Lukhele, A.K: 20 years of Stokvels and Financial Institutions in South Africa, no date. Electronic correspondence with Andrew Lukhele, 07 August 2012.

18. Lusardi, A. & Mitchell, O. S. (2009): How Ordinary Consumers Make Complex Economics Decisions: Financial Literacy and Retirement Readiness, National Bureau of Economic Research, Working Paper, no. w15350.

19. Luthans, F. (1992): Organizational Behaviour. Singapore: McGraw-Hill

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20. Mapenzauswa, S. (2012): South Africans live for the now, ignore calls to save, Reuters, [http://www.reuters.com/article/2012/06/01/us-safrica-saving-idUSBRE85010P20120601], (Accessed 29 July 2012).

21. Markides, C.C. (1999): A Dynamic View of Strategy, Harvard Business Review, [http://hbr.org/product/dynamic-view-of-strategy/an/SMR042-PDF-ENG], (Accessed 1 September 2012).

22. Martins, E.C. and Terblanche, F. (2003): Building organizational culture that stimulates creativity and innovation, European Journal of Innovation Management, 6(1), 64-74.

23. Momentum & UNISA (2011) : The Momentum Household Financial Wellness Index Results, Personal Finance Research Unit & Bureau of Market Research, College of Economic & Management Sciences, [http://www.moneyweb.co.za/mw/action/media], (Accessed 6 June 2012).

24. National Treasury (2011): OECD-FSB Conference on Financial Literacy: Financial Education for All, [http://www.treasury.gov.za/comm_media/speeches/2011/2011102702.pdf], (Accessed 19 July 2012).

25. National Treasury (2011) : Keynote Address at the 10th Anniversary of the South African Savings Institute and Launch of Savings Month 2011, [http://www.info.gov.za/speech/DynamicAction?pageid=461&sid=19955&tid=37235], (Accessed 30 May 2012).

26. National Treasury (2012). Strengthening retirement savings: An overview of proposals announced in the 2012 Budget, [http://www.treasury.gov.za/comm_media/press/2012/2012051401.pdf], (Accessed 3 August 2012).

27. National Treasury (2012): Budget Retirement Savings Draft Proposals Press Conference, [http://www.treasury.gov.za/comm_media/press/2012/2012051403.pdf], (Accessed 8 August 2012).

28. New banking facility almost ready (2004). Business Day, [http://www.bday.co.za], (Accessed 31 July 2012). 29. Prinsloo, J.W. (2000): The Saving Behaviour of the South African Economy, South African Reserve Bank

Occasional Paper No.14 November, 1-29. 30. Pearson, A. E. & Ehrlich, S. P. (1990): Honda Motor Company and Honda of America, Case No. 9-390-111,

Harvard Business School. 31. SASI : Background information (no date), [http://www.savinginstitute.co.za/info_background.doc], (Accessed

29 May 2012) 32. South African Reserve Bank (2012) Quarterly Bulletin, March. 33. Stokvels worth R44bn (2011), City Press, 22 November 2011,

[http://www.citypress.co.za/Business/News/Stokvels-worth-R44bn-20111122], (Accessed 22 July 2012). 34. The rise of the Stokvel (2011): News by Greater Good South Africa. Monday December 5th 2011,

[http:/www.myggsa.co.za/news/3553], (Accessed 22 August 2012). 35. The World Economic Forum (2012): The Global Competitiveness Report: 2011-2012,

[http://www.weforum.org], (Accessed 4 June 2012). 36. United Nations (2002), World Population Prospects: The 2002 Revision. New York: United Nations. 37. Visa (2012): Global Financial Literacy Barometer, [http://www.visacemea.com/av/press/press26.jsp],

(Accessed 10 August 2012). 38. Wood, A. (1995): Determinants of Private Savings in Barbados: Savings and Development, No.1 (XIX), 79-95. 39. World Bank (2009): Doing Business 2010: Reforming through Difficult Times, [http://www.worldbank.com],

(Accessed 2 July 2012). 40. World Bank (2010): World Development Indicators. [http://www.worldbank.com], (Accessed 2 July 2012). 41. Yang, D. T., Zhang, J. & Zhou, S. (2011): Why are Saving Rates so High in China, NBER Working Paper, 16771,

NBER Programme, EFG.

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12. Appendices 12.1 Appendix 1 – Key Findings SWOT analysis

Strengths

- Access to facilities / banking channels - Technology and infrastructure - Access to large market share - Strong balance sheet in terms of capital

adequacy

Weaknesses

- Education . awareness . financial literacy

- Easy access to credit - Processes - Product complexity - Bank costs - Low interest on savings

Opportunities

- Higher penalty on retirement spending - High unbanked market - High demand for financial education

(financial planning) - Informal savings mechanisms - Mobile technology - Specific products e.g. savings product for

education - Partnership to close value chains - High proportion of SMMEs - Lend for business rather than

consumption - Reduce cost of funding (infrastructure

spend) . target industry-specific growth areas

- Support for savings initiatives from government – simplify processes, e.g. use RICA method to open accounts

Threats

- Low disposable income - Level of consumption

Alternatives to personal loans - Regulation (Financial Services Board –

FICA requirements, National Treasury, South African Reserve Bank and South African Revenue Service – tax on savings, i.e. tax on income earned)

- Unemployment has an impact on dependency ratio

12.2 Appendix 2– Summary of findings and recommendations from SWOT

Findings Recommendations

Main Reasons for Savings: School Fees Medical Rainy Day

Design products which cater specifically to saving for these needs Link value chain i.e. if you bank the student, bank the university and all its suppliers Provide solutions not products

Education: Success evident in countries which embarked on an education drive on the importance of savings. Education to start with children 85% of clients surveyed in 2012 Old Mutual survey affirmed that they would welcome more

Develop life stage education programmes from primary education to retirement age. Create “dream” specific products around life stages, i.e. save for first car, save for retirement Banks to fund education initiatives outside of University Study Loans i.e. skills development.

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Findings Recommendations

financial education Unbanked lack access and education

This will assist unemployed to find work and contribute to the savings pool and lower age dependency ratio Develop National Pride Product – e.g. Madiba Product (“help build roads”) Develop appropriate product, access through mobile and education-linked savings

Barriers to savings: Costs Low interest rates Complex process (Governance & Opening) Low disposable income Access to credit

Low cost products i.e. utilise mobile infrastructure and leverage future infrastructure potential (Stafford Massie). Zero Fees on savings

Revisit cost of paying higher interest rates vs. external funding Utilise Rica/Biometric for ID simplify opening process Encourage savings at the lowest level i.e. products that encourage saving x% of salary Save to apply for credit - insist on 2 months instalment deposit with Personal Loans Deposit-linked secured lending: i.e. If 90% loan granted create term savings deposit for the 10% deposit. Cost savings generated via this method of funding vs. treasury funding and provide preferential rate Convert unsecured loans for consumption purposes to unsecured for funding small business Create CreditSave product as an alternative to unsecured loans. i.e. EcoBank “Good Life” loan which encourages individuals to save for white goods, Lay Bye concept

Tax Rate on interest on investments & savings is a disincentive to save

Lobby Government for lower tax rates on savings and pension withdrawals Stricter penalties on early withdrawal

Group Savings Schemes popular Create community/family savings product Create Group administered Funds product where group decides withdrawal etc. parameters Include value chain i.e. Christmas Fund includes transport for goods etc. Social Media type product

Social Grants Create compulsory savings with social grants, i.e. if for a child, create education fund

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Findings Recommendations

Banks do not market to GDP growth areas Target growing industries who would be net employers to elicit clients

12.3 Appendix 3 – Culture web: Current and Future states

Figure 20: Culture Web – Current

Figure 21: Culture Web – Future

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12.4 Appendix 4 - Detailed Financial Calculations

12.4.1 Education

Estimated cost of education framework:

Table 3: Education

12.4.2 CreditSave

Our recommendations have acknowledged that whilst access to unsecured credit is one of the main determinants of South Africa's inability to save, these products generate high margins for banks and thus suggestions to curb this form of lending would negatively impact bank profits. We do however, see merit in using this product as a means to generate savings through adding a “savings” premiumto clients monthly repayments , which will be channeled to a savings product which clients will have access to at loan term end. The benefit to the bank would be access to cheaper funding which would also act as a form of credit protection and risk mitigation. Clients would be enticed into this product by offering a small reduction to loan interest rate, calculated at a percentage of the funding benefit of savings deposit vs NCD funding rate as reflected below. In order for this to work, banks need to find affordability beyond the client’s loan repayment. To test whether clients can afford the additional “savings premium,” on top of their normal loan repayment we analysed credit granted over a 6 month period at a financial service provider, over total affordability limit, which reflected that, on average, clients utilise below 10.5% of total affordability :

Figure 22: Credit Allocated/Affordability Limits

Assumptions Calculations Cost

Programme Office Resources:

1xprogramme manager R750 000pa 750 000

1xco-ordinator R450 000pa 450 000

1xwebsite administrator R450 000pa 450 000

1 200 000

National Website 500 000

Set-up costs (once-off) R1.2 mil 1 200 000

Maintenance fees (annual) R 500 000 500 000

Quarterly National Events

Events Management R1mil x 4 4 000 000

National Role Model R20000 x 4 80 000

TV Programme (weekly slot) R200k pw 10 000 000

School Projects R 300 000 300 000

School Curriculum Government Funded

Annual Cost 19 430 000

Income band Sum 0-8k 8-20k >20k

Mar2012 10.6% 9.1% 5.7%

Apr2012 10.7% 9.9% 6.0%

May2012 9.9% 9.3% 6.0%

Jun2012 10.6% 8.8% 5.4%

Jul2012 10.4% 8.8% 7.4%Aug2012 10.3% 8.8% 3.7%

Total 10.4% 9.2% 5.7%

Credit Allocated/Affordability Limits

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Based on this analysis, we calculated assumptions on clients having to fund a 20% “savings premium” on total loan value over the life of their loan. Assuming 20% savings requirement: Growth in the market in the last 12mnths was R40.5b. Assuming a 5%pm attrition rate (70% of rate extracted from financials of large credit provider), new business in next 12 months = R106 billion Assuming this reduces by 20% given current market “noise” on unsecured credit bubble, estimated new business in next 12 months is R106b x 80% = R 85 billion Client savings R85bx20% = R 17 billion Assume 35% of clients take up product R13b x 35% = R 6 billion This represents 2% growth on the total savings market of R281-billion which grew 10.3% year-on-year to July 2012. In reality this balance would obviously be built up over a 2 year period, but assuming consistent growth, we have assumed additional average savings of R6-billion. An annuity calculation was performed to ascertain the average repayment on R30b (R85*35%) of loans at a fixed rate of 21% over 24 months PMT= (PV(30b),FV(0),Nper(24mnths)IR(21%)= 1,5b pm. An annuity calculation was then performed to ascertain average % of monthly repayment required (assuming a fixed rate on the loan,) to arrive at a R6-billion savings over a 2 year period: (PMT=(PV(0),FV(R6b),IRR(0%),Nper24mnths))/24mnths/Repayment(250m pm) = 16% (i.e. if client instalment is R100pm he will repay R116pm.) The opportunity cost of losing cheaper savings funding accumulating at a Rate of 6% of repayment was then calculated at the average current cost of wholesale funding with NCD’s = R358-million. Assuming 25% of this benefit is given back to the client in the form of a rate concession, an annuity calculation was performed to solve for the rate concession. This concession is 25bpts Thus: Assuming clients rate is reduced by 25bpts, financial outcomes are as follows: @21% interest Total Repayment = 37 003 m Applying 40% NCD concession of 10bts, total repayment = 36 905 m

Clients Save 98 m

Bank Earns less interest on the unsecured loan of - 86 m Bank Earns variable between savings and NCD rate of 6% 358 m

Total Benefit to Banks 272m

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12.4.3 Informal Savings – Stokvels & Existing Savings

Table 4: Stokvels’ Financials

Table 5: Existing Savings

Assumption Calculation Interest Benefit

Attract 10% Stokvel funding R44bx10% 4 400 000 000 0% -

Reduce wholesale funding by equivalent amount

@ current NCD rate -4 400 000 000 6% -264 000 000

Interest savings 264 000 000

Assumption Calculation

Addit Savs

generated per 1%

shift Interest Benefit

NCD Rate 6%

Increase savings rate from 1% to 4%

Total savings market R281b

Per 1% savings growth shift

Increase cost of savings from 1% to 4% R281b*1%x 3% 2 810 000 000 3% -84 300 000

Reduce Wholesale funding by R10m R281b*1%x 6% 2 810 000 000 6% 168 600 000

84 300 000

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12.5 Appendix 5 – PESTLE Analysis

Table 6 : PESTLE Analysis

Factor Analysis

Po

litic

al

Government relies on savings to fund infrastructure spend which in turn creates employment. In a recent survey published by the South African Institute of Race Relations, unemployment amongst our youth aged 15-24 currently stands at 51%. This creates negative sentiment against current governing bodies and poses one of the biggest threats to political and financial stability in the country. Policies to invest in employment intensive growth opportunities would tackle the high unemployment rate amongst the youth – and address the low savings rates in the mass market.

Government policy can also play a significant role in influencing savings rates. An incentive to save could be created by reducing or abolishing taxation on retirement and investment income (the main savings vehicles utilised amongst salaried earners in the middle market).

Eco

no

mic

The South African household’s consumption expenditure is currently at 112%, indicating a negative net savings rate. Poor savings result in a lack of liquidity in the country, against which government and institutions can borrow to finance key economic growth initiatives. This leads to offshore funding being sourced for these initiatives which exposes the country to further costs due to currency fluctuations. Such funding also tends to be volatile, especially in an emerging economy, where the slightest sign of instability prompts investors to want to move their money.

Furthermore, South Africa’s household debt to disposable income ratio was reported to be at 80% during 2011. This means that South Africans used 80% of their disposable income to service debt. This becomes a problem when the cost to service the debt becomes too large relative to disposable income, resulting in individuals having to liquidate assets to finance debt and expenditure. This in turn may cause asset prices to fall, leading to a credit crunch and worsening the savings situation in the country.

In addition, research reveals that a mere 10% of South Africans can afford to retire comfortably. This lack of financial planning for retirement places immense pressure on government coffers, which, if not properly managed, will result in an increase in government’s fiscal spending and drive up inflation.

Soci

al

FinMark Trust reports that 65% of the target market uses their savings to transact. In addition, 34% of South Africans (16+) use savings products for ‘target’ savings rather than to save for the long-term. These findings highlight that 66% of individuals do not have or do not use savings products and services; and of this 66%, 6% keep their savings at home, while 4% rely on an informal mechanism to save. However, research also reveals that a willingness to save in this target market is very strong, despite competing demands on individual income.

The age dependency ratio in SA is 54%, meaning that 54% of the population is dependent on the working populace. Trends such as low or uncertainty of income, the aging South African population, increasing family sizes, increasingly high youth dependency and health issues such as the HIV/AIDs pandemic continue to increase this dependency ratio, putting pressure on individual income, which in turn contributes significantly to a decline in individual savings. In addition, South African households have a culture where finances are not openly discussed – making it difficult for individuals to manage dependency expectations and allow a reasonable capacity for savings. Research further reveals that South Africa has high levels of consumption and indebtedness, which is aggravated in most cases by the social status of individuals, and which is associated with materialism. An increased access to credit facilities promotes this culture of debt, which impacts negatively on the savings culture. Financial education is also lacking from a young age, and this, coupled with parental behaviour of ‘buying-off’ children as a substitute for quality time and attention, leads to a lifestyle and culture that is carried through to adulthood. This ultimately translates to a culture of consumption as opposed to saving.

A culture of low savings means that individuals cannot fund their socio-economic needs. This results in an increased burden on the government to provide social support, rather than channelling funds to infrastructure development which supports GDP growth and its resultant employment.

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Factor Analysis

Tech

no

logi

cal

A review of literature reveals that the South African banking sector has invested heavily in research and development over the years, implementing advanced technology to enable individuals to access banking products and services that are both functional and cost effective. As a result, individuals are now able to conduct their banking via the internet, cellphone banking and other mobile banking channels at lower costs than over-the-counter transactions at branch level. Through these improvements, banks are now able to provide savings products to those who are based in the rural parts of South Africa, many of whom previously preferred to save via Stokvels and burial societies rather than through banking institutions.

Technology also allows for different strategies and new models in banking that challenge the traditional ways of conducting business at reduced transaction costs. Further reductions can be expected as additional automation and efficiencies are applied, thereby enabling banking institutions to look for more innovative products and solutions to address the savings needs in the country. Technology might even introduce ‘non-bank’ industries into banking.

Lega

l

In recent years the government has developed regulatory systems and policies to support and encourage household savings. Government has proposed legislation called the ‘New tax-free savings instrument’ as well as a National Social Security Fund to encourage individuals to save. During the course of 2012, various discussion papers will be issued by the National Treasury in this regard.

In addition, the National Treasury has released a policy document called ‘A Safer Financial Sector’ to better serve the needs of South Africans. This covers, inter alia, issues relating to financial inclusion and private and public sector retirement reforms which could lead to an increase in national savings.

There is an opportunity for banking institutions to work closely with government institutions to create a better platform for individuals to save. Through the implementation of practical policy frameworks, further barriers leading to financial exclusions can be removed.

Envi

ron

me

nta

l

When environmental disasters strike, they can have a significant impact on the cash flow of households affected, as well as an impact on the individual’s ability to save. For example, droughts and other environmental disasters are significant risks faced by the farming industry every year. These risks are passed onto the individuals employed in this sector, raising employment uncertainty which impacts on their savings capacity.

Additionally, the cost of electricity continues to increase as a result of Eskom having to service the $3.75 billion loan from the World Bank – borrowed to build more coal-fired power stations. This also impacts the cash-flow of South Africans and their ability to save. Recent debates around increasing the cost of water in an attempt to reduce consumption will threaten the individual’s cash-flow still further.

An international study on the potential relevance of ISO 14000 on the banking industry worldwide will focus some attention on environmental factors when assessing the risk of banking transactions in future. In addition, the South African government is looking at growing the ‘green economy’ with a view to migrating workers from economies impacted by environmental factors, such as the agricultural and tourist industries. The creation of the Green Climate Fund through the World Bank will help developing nations (such as South Africa) to adapt to climate change.

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12.6 Appendix 6 – Savings instruments and Products analysis

Table 7 : Savings instruments in South Africa

Source: Association for Savings and Investment South Africa, South African Reserve Bank, JSE

Savings instrument Amount Percentage

Long term life insurance premiums R404 billion 22%

Retirement Fund contributions by employers

R388 billion 21%

Retirement Fund contributions by members

R251 billion 14%

Demand deposits R203 billion 11%

Unit trusts stock R188 billion 10%

Money market funds R164 billion 9%

Mortgage advanced repayments R131 billion 7%

Deposits < 6 months R 38 billion 2%

Deposits > 6 months R 21 billion 1%

Exchange Traded Funds R 23 billion 1%

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Table 8 : Savings Products Analysis

Institution Absa Absa Capitec FNB MTN Nedbank Nedbank Postbank Standard Bank

Standard Bank

Standard Bank

Wizzit

Account Name Flexi Account

Money Builder

Global One Banking Facility

Smart Account

Mobile Money Account

Savings Deposit

Transactor Plus Account

Flexi Card Account

Eplan PlusPlan PureSave Wizzit Account

Age Criteria (years) Over 18

18 or letter from parent or guardian in case of minors

18 or letter from parent or guardian in case of minors

Over 18 Over 16 Over 19 Over 18 Over 16 Over 18 Over 18

18 or letter from parent or guardian in case of minors

18 or letter from parent or guardian in case of minor

Monthly income criteria Not applicable

Not applicable

Not applicable

Not applicable

Not applicable

R 0 Not applicable

Not applicable

< R5000 Not applicable

Not applicable

Not applicable

Minimum opening balance

R 50.00 R 20.00 R 10.00 R 0.00 R 0.00 R 50.00 R 50.00 R 35.00 R 50.00 R 500.00 R 50.00 R 0.00

Debit card issued

Maestro or Visa Electron debit card

None Maestro debit card

Visa Electron debit card

Mobile Money MasterCard

Maestro or Visa Electron Debit card

Maestro or Visa Electron debit card

Visa Electron debit card

Maestro debit card

Maestro debit card

None Maestro debit card

Monthly Fee R 11.00 R 0.00 R 4.50

Unlimited option – R49, PAYU transact option – R11

R 0.00

R16.00 (R0.00 if monthly balance more than R5 000)

R 9.50 R 8.70

R10.00 (R5.00 if more than 60 years & 11 months)

R16.00 (R0.00 if monthly balance more than R1 000)

R 0.00

R0.00 (R39.99 once off start up fee)

Monthly Internet Banking Subscription fee

R 0.00 R 0.00 R 0.00 R 0.00 Not available R 16.00 R 10.00 Not available

R 22.00 R 0.00 n/a R 19.99

Fee rebate No No No Yes No Yes No No No Yes No No

Penalty fees Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Interest Rates 0.00% Tiered – up to 3.90%

Tiered – up to 5%

Tiered – up to 2.75%

0.00% Tiered – up to 1.00%

Tiered – up to 1.00%

Tiered – up to 0.20%

1.00% Tiered – up to 1.75%

Tiered – up to 2.75%

0.00%

Rewards Schemes Not available

Not available Not available

Not available

Not available Not available

Not available

Not available

Not available

Not available

Not available

Not available

Source: http://icgrowth.co.za/bankmonitor/savings-accounts/ (last updated July 2012)

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12.7 Appendix 7 – Research inputs

Interviews:

o Banks – Two interviews were conducted at two major Banks in South Africa o SASI - An official was interviewed to determine what State initiatives and private sector actions are planned/required to improve the behaviour

of South African households o Stokvels Association – A meeting was held with the association to understand the role of Stokvels and how these savings find their way into the

formal banking sector. Stokvel members were also interviewed o Uganda and UK Banks – Key stakeholders were interviewed regarding savings within their countries (mainly used for comparative analysis).

Literature Reviews: A number of documents were reviewed, as shown in our Reference List; however research outcomes are mainly drawn from some of these documents.

Desktop Research on Stokvels, from the National Treasury, The World Bank, Statistics SA, FinMark and other credible sources (e.g. Global Competitiveness Report)

Benchmarking and comparative studies.

12.8 Appendix 8 – Banking questions

# Question 1. What are the major barriers to saving in your country? 2. From our research, we understand the following:

Savings mobilisation is low in developing countries, but creating and implementing policies to raise the savings rate is difficult.

Q. What savings products have the banks introduced to provide incentives for clients to save?

Low savings might be a consequence of poor access to flexible, convenient and affordable savings products.

Q. What have banks in your country done to improve access to financial services and to encourage saving?

3. Does your bank have policies and procedures that may be hindering saving? 4. Which Government policies have the greatest impact on household saving and why is

that so?

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# Question 5. Given that access to credit is relatively easy and has an impact on the level of saving –

how do you balance the provision of credit with the need for consumers to save? 6. Some of the determinants of the levels of saving are education, income levels, income

stability and unemployment – what role do you see your organisation playing in improving these socio-economic factors in order to positively impact saving?

7. How are you attracting the informal component of the economy e.g. Stokvels?