Group 4 Bankseta Iedp Alp Final

ACTION LEARNING PROJECT REPORT

PROJECT:

Improving the current savings culture within the target

population of LSM Groups 1-5 in South Africa

Coach

Desray Clark

Sponsor

Andre Hattingh, VISA South Africa

Syndicate

IEDP Group 4 (Insync)

Syndicate Members

Marietjie Ferreira

Nicholas Nkosi

Premeshin Naidoo

Sagree Padayachee

Table of Contents

1 Executive summary ..................................................................................................... 1

2 Introduction ................................................................................................................. 2

3 Problem statement and description ............................................................................. 2

4 Project Rationale/ Objectives of the investigation ....................................................... 4

4.1 Project Aim.................................................................................................................. 4

4.2 Project Scope.............................................................................................................. 4

5 Fact Base Development .............................................................................................. 4

6 Findings & Analysis ..................................................................................................... 5

6.1 Behaviour & attitudes towards savings ....................................................................... 5

6.1.1 How does South Africa Compare ................................................................................ 5

6.1.2 Types of savings and motivations to save .................................................................. 6

6.1.3 Culture ........................................................................................................................ 8

6.1.4 Behaviour of young adults .......................................................................................... 9

6.1.5 Financial Literacy ........................................................................................................ 9

6.2 Savings for Retirement ............................................................................................. 10

6.3 Impact of government policies on savings ................................................................ 12

6.4 Impact of financial products on savings .................................................................... 13

6.4.1 Access to savings products ...................................................................................... 13

6.4.2 Collaboration between Government and Private Sector on savings ......................... 14

6.4.3 Other Products Researched ..................................................................................... 14

6.5 Benefits of a strong savings culture .......................................................................... 14

6.5.1 Individuals ................................................................................................................. 14

6.5.2 Banks ........................................................................................................................ 15

6.5.3 Government and Economy ....................................................................................... 15

6.6 Barriers to improving a savings culture ..................................................................... 15

7 Alternative solutions .................................................................................................. 16

7.1 Financial Literacy ...................................................................................................... 16

7.2 Collaboration ............................................................................................................. 17

8 Recommendation and implementation approach ...................................................... 19

8.1 Development of a financial literacy programme ........................................................ 19

8.2 Implementation approach ......................................................................................... 20

8.3 Quantification of benefits of the recommendation ..................................................... 21

9 Implementation plan .................................................................................................. 21

10 Conclusion ................................................................................................................ 22

11 Glossary .................................................................................................................... 23

12 List of References ..................................................................................................... 24

Table of appendices

• Appendix 1 - Further facts on LSMs

• Appendix 2 - Factors that impact on the willingness of people to save –SASI

(2007,Jan.23)

• Appendix 3 - South African’s Attitudes to Savings

• Appendix 4 - The Savings Experience in Other Developing Countries

• Appendix 5 - Teach children to save

• Appendix 6- The proposed restructuring of South Africa’s retirement funding

framework.

• Appendix 7 - The effect of Monetary and Fiscal Policy on savings in SA

• Appendix 8 - Some of the Innovative Products which Encourage Savings

• Appendix 9 - Interviews

• Appendix 10 - Initiatives to improve the savings culture in LSM Groups 1 – 5

• Appendix 11 - Financial analysis of recommended solution

• Appendix 12 – Implementation plan

Table of Figures

• Figure 1 - Factors that impact on the willingness of people to save ...................... 3

• Figure 2 - Savings as a Percentage of GDP .......................................................... 6

• Figure 3 - Savings Activity amongst the poor in South Africa ................................ 7

• Figure 4 - Desired financial knowledge ................................................................ 10

1 Executive summary

South Africa's savings culture relative to other developing countries is viewed as poor,

whilst the propensity to consume remains very high. The lack of a savings culture in South

Africa has been perpetuated by the high banking fee structures, accessibility to formal

savings products, limited financial literacy of consumers, highly bureaucratic processes,

cultural and behavioural elements and the impact of government policies. In the event that

this problem of a low savings culture continues to exist, it could very well threaten South

Africa’s economic growth and development. Adequate savings, which are important for

generation of capital has a direct impact on economic growth and is vital in achieving

macroeconomic stability. The question that remains is how does South Africa improve and

sustain a savings culture that promotes wealth creation & economic growth.

In light of this challenge facing the South African economy, the following research report

has been undertaken in an effort to determine how to improve the current savings culture of

South Africa by focusing on the target population of LSM Groups 1-5. The research

findings revealed that there are various factors that influence the willingness and ability of

people to save. These factors include behaviour and attitudes, culture, motives for saving,

levels of financial literacy, influence of government policies and accessibility to savings

products.

In order to cultivate a sustainable savings culture within the South Africa economy, it is

imperative that key stakeholders such as government and financial institutions embark on a

collaborative approach to create a financial literacy programme that will encourage people

to participate in developing a high savings culture by engaging in behaviour that supports

and promotes savings and investments.

The benefits that will be derived from the creation of a strong savings culture will include

improved financial literacy, reduced exclusive reliance on state pensions, increase in the

banked population, new and innovative financial product offerings, economic growth,

reduced dependency on foreign capital and investment, higher fiscal income, and improved

liquidity in the financial markets.

2 Introduction

In light of the current economic crisis facing the South African economy, one of the major

challenges is the stimulation of a sustainable savings culture that can be applied across all

income groups. South Africa’s savings culture is considered to be very poor with a savings

ratio of 16.9% of GDP (Fin Week, 2009). Through the interviews conducted with various

stakeholders, the syndicate group has established that South Africans of all income groups

do actually save, despite the misconceptions that they don’t. The challenge that remains is

for South Africa’s financial sector to proactively identify and deliver on the needs of all

South Africans so as to encourage a robust savings culture. “Improving the current

savings culture within the target population of LSM 1 Groups 1- 5 in South Africa” is a

research topic that could create a platform for understanding one of the major challenges

facing the South African economy.

By leveraging South Africa’s sophisticated financial system with the intention of improving

its savings culture, the phenomenon of the increasing propensity to spend especially in the

lower income groups can be balanced against an improved savings culture. This document

aims to highlight the effect of individual and institutional factors that either encourage or

dissuade a savings culture, and seeks to provide some recommendations based upon the

study undertaken.

3 Problem statement and description

According to the International Monetary Fund (French, 2005), a country requires at least a

total savings of 20% of Gross Domestic Product (GDP) in order to support real economic

growth of over 3% per annum. Currently, South Africa features at a savings ratio of 16.9%

of GDP (Jooste, 2009), which is expected to continue on a declining trend. The link

between economic growth and the development of a strong savings culture is therefore of

fundamental importance to a developing country such as South Africa.

1 Living Standards Measure (LSM) is a frequently consulted market segmentation model used to delineate

between the different economic groups in South Africa. The economic group defined as LSM 1-5 represents

the largest proportion of the South African population. A more detailed explanation of the LSM concept is

annexed in Appendix 1.

South African Savings Institute (“SASI”) (2007) quote that 67% of the target population are

currently not saving. Of the 33% that are saving, only 5% are saving towards retirement.

Given South Africa's poor savings culture, and propensity for high consumption, it is

imperative that the defined target population starts to engage in behaviour that supports a

high savings culture. A savings culture is influenced by various factors that drive the ability

and willingness of people to save, as illustrated in Figure 1 below and explained further in

Appendix 2.

Figure 1 Factors that impact on the willingness of people to save –SASI (2007, January 23)

These factors as defined by the South African Savings Institute (2007) can be summarised

as:

• Behavioural factors which entail personal circumstances which can either

promote or dissuade savings

• Psychological and Sociological factors which addresses attitudes and personal

preferences

• Institutional factors that revolve around incentives to save, products, and

available financial support

• Demographic factors which include education, income levels and life stage

French (2005) indicates that according to research conducted by the University of Cape

Town for South Africa’s Financial Diaries Project; there is an estimated $900 million of

remittances that moves within the informal economy, which represents 0.3% of SA’s GDP

($283 billion). This includes savings that are tucked under mattresses, sent home by bus or

paid into stokvels. Given the existence of a highly sophisticated financial services sector in

South Africa, there should be a concerted effort to convert the proliferation of

unsophisticated means of savings or transacting for any economic group in South Africa to

formal savings. The research perhaps indicates the extent to which the financial services

sector has not truly tapped into the full savings potential within the South African market.

4 Project Rationale/ Objectives of the Investigation

4.1 Project Aim

The aim of the project is to research and develop a set of recommendations that will

support the creation of an improved savings culture within the target population of LSM

Groups 1 – 5 in South Africa.

4.2 Project Scope

The scope of the project will encompass the investigation of the financial habits of South

African consumers relative to a savings culture and the factors which influence their ability

and willingness to save within the target population of LSM groups 1 – 5.

5 Fact Base Development

The fact base was developed through the investigation and analysis of the following

elements:

• The behaviour and attitudes towards savings by target population

• The role of the financial services sector in stimulating a high savings culture amongst

the target population

• The role of the government in incentivising a savings culture through fiscal and

monetary policies

• Investigating trends and best practices as employed by other developing countries

(Brazil, China, India, Singapore and Thailand).

The research methodology adopted for the purpose of formulating this research paper

included a literature review of the existing body of knowledge available on the topic under

study, interviews with key stakeholders such as the project sponsor, financial institutions,

and economists. The research strategy that was applied included the following:

• Interviews and discussions were conducted with VISA South Africa, Savings Institute

of South Africa, ABSA, Citi Bank, as well as Rabobank and World Granny in the

Netherlands in order to collate information to support the project deliverables.

• A sample of financial services products were considered due either to their relative

success or innovation.

6 Findings & Analysis

This section will investigate current behaviour and attitudes towards savings within the

relevant target group and compare this with other developing countries that have been

more successful in creating a savings culture. It will further compare the intervention and

incentives by the government and financial institutions of these countries to South Africa in

order to investigate and recommend best practices for South Africa.

6.1 Behaviour & attitudes towards savings

6.1.1 How does South Africa Compare

South Africa’s savings culture, when compared to other developing countries such as

China, India, Brazil, Singapore and Thailand, is considered to be very poor. This is

evidenced through the savings ratios attained by these developing countries which range

from approximately 22% to 49.9% of the gross domestic product (GDP), in relation to South

Africa’s savings ratio which is recorded at 16.9% (Jooste, 2009) as per Figure 2 below and

appendix 3.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Savings as a % of GDP

Series1 16.9% 20.0% 22.0% 30.0% 34.8% 49.0% 49.9%

South Africa IM F Target Brazil Thailand India Singapore China

Figure 2 Savings as a Percentage of GDP – (various sources)

According to statistics released by the People’s Bank of China (Xiaochuan, 2009), China’s

savings rate increased from 37.5% in 1998 to 49.9% in 2007 hence resulting in China

having one of the highest per capita savings rates in the world. Brazil on the other hand,

demonstrates low savings ratios of 22% of GDP in comparison to India and China as

illustrated by a research paper prepared by Arcadia Market Commentary (2009). Data

released by the Monetary Authority of Singapore (1997) indicates that Singapore’s gross

national savings increased from -3% in the 1960’s to 49% in the 1990’s and remained fairly

stable thereafter.

In evaluating the comparisons tabled above, it is evident that South Africa does have the

potential to significantly improve its current savings ratio by adopting similar measures that

have been successfully implemented in these countries. However, it is also important to

understand the different types and motives that encourage a culture of savings and its

impact on the overall savings ratio of the country.

6.1.2 Types of savings and motivations to save

Savings within the household sector is defined by economists as that part of household

income which is not consumed with the resulting action that the surplus cash is then

invested in a savings vehicle. SASI (Jan 2007) indicates that 67% of people in LSM Groups

1 – 5 do not save according to the definition provided, however this statistic reduces to 56%

when funeral savings / insurance is included in the definition of savings. The conventional

cash-based savings placed in banks and other investment products may not be attractive to

individuals on the lower end of the LSM group scale as they tend to place more value on

the tangible aspects of savings which manifests itself in the form of investing in housing or

education (SASI, March 2008). In a literary review on savings (Melzer, Jan 2007) suggests

that there are four types of savings, categorized by the motivation to save:

• Precautionary savings to plan for emergencies

• Target savings which are for a specific purpose, e.g. a deposit for a large purchase

• Income smoothing savings for irregular future employment or retirement

• Bequest savings to provide for future generations

According to SASI (2007, Jan), South African’s motivation for savings can be summarized

in Figure 3 as follows:

Figure 3 Savings Activity amongst the poor in South Africa (SASI, 2007)

Comparisons between South Africa and other developing countries with respect to motives

and attitudes to save are included for review in Appendix 3 – “South African’s Attitudes to

Savings”, and Appendix 4 - “The Savings Experience in Other Developing Countries”.

The age profile and stage of development of an individual will largely determine their

motives, attitudes and behaviour towards savings. In light of the research conducted by

Prinsloo (2002) in “Household debt, wealth & saving”, it has been established that a culture

of dis-saving is prevalent amongst the youth, young adults in the early stages of

establishing a family and retired individuals in South Africa, whilst older working adults tend

to adopt a savings culture. Savings for a particular objective, namely target savings, can be

facilitated through both formal and informal savings instruments.

From a macro-economic perspective, economists are inclined to agree that an increase in

the real after tax interest rate will undoubtedly impact an individual’s decision to consume or

save in the short term. In addition, the negative to extremely low returns in real after tax

interest rates will adversely affect the household’s preference to save through deposit type

instruments (Prinsloo, 2002). Additionally, the redistribution of real income in favour of low

income earners, with a high propensity to consume, increases the proportion of domestic

income devoted to consumption and reduces the gross savings rate. Understanding how

South Africa compares to the rest of the world in terms of its attitude towards savings, the

different types and motives of savings and its impact on stimulating positive savings

behaviour, creates the platform to understand how culture fundamentally drives the

behaviour and attitudes of people to save.

6.1.3 Culture

Melzer (Jan 2007) indicates that LSM Groups 1 – 5 are most likely to utilize informal

savings instruments. Melzer goes on to indicate that group savings arrangements can act to

exert pressure on individuals to conform to savings arrangements as is often found with

stokvels and burial societies. South East Asian communities have also been observed to

demonstrate similar group financial behaviour. FinMark Trust (2007) indicates that 42% of

those who make use of informal channels of savings also have a formal savings product.

The social pressures inherent in the cultural and value systems of communities play a

pivotal role in shaping individuals motives to save as well as formulating a trusting

environment that is conducive to saving and will promote the entrenchment of a sustainable

savings culture. Melzer (Jan 2007) cites that the Financial Diaries Project revealed that 70%

of the target group has utilized stokvels as a savings vehicle.

Given the AIDS pandemic that persists in South Africa, 38% of households in the target

group have secured some form of funeral/burial insurance or savings cover (FinMark Trust,

2007). The research clearly indicates that poor households in particular have a tendency to

allocate some of their disposable income towards saving for events such as death.

FinMark Trust (2007) indicates that only 1% of LSM Groups 1 – 5 make use of endowment

type products. Stokvels are the informal equivalent of endowments, although typically for

much shorter periods and provides universal access to any member of the community to

establish a savings instrument. If these principles are extrapolated to the formal savings

channels and adopted to achieve similar results, it will most certainly direct the flow of

savings from the informal to formal economy thereby improving the savings ratio of the

country.

When benchmarking South Africa to other developing countries, it was evident that cultural

differences, values and household structures are pivotal to shaping the savings behaviour

and financial habits of consumers and should not be underestimated when developing a

framework to support the stimulation of a savings culture in South Africa. Another

dimension that should be explored when attempting to implement a sustainable solution is

the ability to inculcate a savings culture from generation to generation, hence it is valuable

that consideration be given to the behaviour of young adults with respect to the subject at

hand.

6.1.4 Behaviour of young adults

FinMark Trust (2007) indicates that 46% of LSM Groups 1 – 5 are below 30 years of age

and further suggests that young adults (18-29 years, across all LSM groups) have a greater

propensity for debt, and are increasingly turning to informal sources of debt like family and

friends to fuel their consumption-based lifestyles. Further to this, between 2006 and 2007,

average income levels relative to this sub-group have declined thereby placing savings

under tremendous pressure. 38% of young adults (across all LSM groups) have savings or

transaction accounts, whilst 44% indicate that they try to save regularly. Unless a savings

culture is instilled in this sub-group, their poverty will persist into future generations. The

savings culture of this group is primarily driven by their financial situation, but also

influenced by financial awareness and attitudes. Financial literacy therefore becomes key in

ensuring a sustainable savings culture.

Appendix 5 illustrates an example of an initiative (“Teach Children to Save”) to promote a

culture of saving in children, especially those who fall in the target group.

6.1.5 Financial Literacy

Although SA boasts an overall literacy rate of 88%, financial literacy remains a challenge in

the South African context. FinMark Trust (2008) indicates that 31% of all LSM groups

agree that the greatest desire for financial knowledge lies in the use of savings products.

Further to this, 26% require knowledge in the selection of the best investment products and

67% of LSM Groups 1 – 5 has no basic knowledge of simple retirement terms. A lack of

what should be common understanding, together with poor circumstances, probably makes

it difficult for the target group to conceptualize the need to plan for retirement.

FinMark Trust (2007) further indicates that key financial terms are generally not understood,

particularly in the area of debt, understanding of financial products and general awareness

of basic financial knowledge. Clearly, the poorer segment of the population is the less

educated and therefore more susceptible to poor financial decision making by not fully

appreciating the consequences of their actions. Financial literacy is the primary driver in

developing a sustainable savings culture into the future and has important implications for

financial institutions endeavouring to stimulate individuals to invest in savings products

offered. Understanding key financial concepts such as budgeting is key to ensure a

sustainable savings culture. The lack of financial literacy (as per Figure 4) contributes to the

low savings culture.

Figure 4 - Desired financial knowledge (FinMark Trust, 2008)

Financial literacy holds strategic value in terms of ensuring that people understand the

importance and benefit of savings in the long term for events such as retirement, education,

or specific targets. Bearing this in mind, savings for retirement is another key area that

needs to be addressed as part of inculcating a savings culture.

6.2 Savings for Retirement

FinMark Trust (2007) quotes that although people seem to be more worried about their

ability to provide for their own retirement and old age; this is not matched by any marked

increase in the percentage of people who have retirement or pension savings product.

Retirement savings within LSM Groups 1 – 5 is influenced by the immediate needs of these

individuals in relation to disposable income which is further hindered by the structure of the

state pension system. The State Old Age Grant (“SOAG”) is the most important source of

income for those over sixty years in LSM Groups 1 – 5. SASI (2008) reports that 89% of

pensioners in this group rely on the SOAG to survive. The remaining 11% rely on family or

friends, and very few in this group have other sources of income. Interestingly, the

research also indicates that the SOAG (currently at around R940 per month) is higher than

the average income for those of working age within LSM Groups 1 – 5. Due to the SOAG

being higher than an average income of this LSM group, this has unintended consequences

as there is little motive for long-term savings for retirement.

National Treasury (2004, p.17) in reference to the retirement provision further states that:

“Coverage in the formal sector is relatively good…even when compared to international

levels…..the challenge remains to provide an adequate vehicle for retirement for those in

the informal sector and/or those only able to make irregular contributions.” This clearly

spells out the challenge that exists for poor people in providing adequately for their

retirement. The government’s intervention in terms of defining a retirement funding

framework (which is currently under revision) that encourages savings will be crucial to

establishing a platform for a sustainable savings culture. Refer to Appendix 6 for a brief

outline of the proposed restructuring of South Africa’s retirement funding framework.

The Life Offices’ Association of South Africa (LOA) announced new measures for granting

retirement funding access to low-income earners. The products will be branded Zimele,

which indicates that the consumer is purchasing a retirement product that meets the

minimum requirements of physical accessibility, appropriateness, simplicity and

affordability. The basic concepts underlying the products were developed by the LOA and

are directed to South Africans earning less than R3 000 per month, which forms the

majority of LSM Groups 1 – 5. The aim is to encourage life insurers to design appropriate,

yet innovative and competitive products for the low-income market. (SARB, Financial

Stability Review, March 2008)

In benchmarking South Africa to other emerging market countries, it was found that

countries such as Singapore have highly developed pension systems which contribute

significantly to a higher savings rate according to the Monetary Authority of Singapore

(1997) on the improvement of domestic savings. In China, due to the non-subsidization of

pension, housing and healthcare, it was established that this also increased the incentive

for precautionary savings and in turn yielded a higher savings ratio for the country. In India,

according to a research paper by Salam & Kulsum (2000), approximately only 10% of

India’s population is covered by a retirement benefit scheme. Similarly, health insurance

coverage is very low, providing some explanation for the higher tendency to save.

Social support for emergencies like healthcare, education and pension have an unintended

consequence resulting in little motive for savings, which is in contrast with other countries

such as India and China. Government policies therefore influence the capacity and appetite

to save and warrant a further review.

6.3 Impact of government policies on savings

A low level of savings would limit a country’s rate of investment and restrain economic

growth. High levels of savings are required to facilitate investments. Although international

capital flows can supplement domestic savings, this makes a country more vulnerable to

international capital shifts during times of uncertainty. (Prinsloo, 2002). The current savings

rate in SA of 16.9% of GDP (Jooste, 2009) is insufficient to support a higher economic

growth rate. Government would like to raise the savings to GDP ratio to 23% in order to

support an average growth rate of 4% or more. (Sekgobela, 2004).

Government policies influence the capacity and appetite to save. Social support for

emergencies like healthcare, education and pension discourages a savings culture. In

contrast to South Africa, both China and India’s high savings culture is influenced by

education, housing and healthcare not being subsidized by the state (Xiaochuan, 2009;

Salam & Kulsum, 2000). The experience in Brazil is similar to South Africa whereby the

state provides for welfare, resulting in a lower propensity to save (Leme, 2006).

According to the Governor of the SA Reserve Bank, Tito Mboweni, the primary goal of the

Bank is the maintenance of price stability which has given rise to a monetary policy

framework targeting inflation (Mboweni, 2005). This would stimulate savings as the buying

power of money remains constant, and with lower inflation the real return on investment is

higher. In Singapore factors such as low inflation, steady growth rates, and an

appreciating currency, as well as the institutions of the market economy have also ensured

that the returns from savings are preserved and channeled to their most productive use

(Monetary Authority of Singapore, 1997).

Thailand has introduced macro-economic policies in order to promote and encourage

domestic savings to bridge the gap between savings and required investment. This will

promote economic growth and simultaneously stimulate a savings culture. Thailand has

reduced personal income taxes in an effort to increase disposable income; however at the

same time has increased consumption based taxes to dissuade spending (Ministry of

Finance: Thailand, 2009). In South Africa, personal tax rates have declined over time,

whilst VAT has remained at 14% and the additional disposable income has not necessarily

been saved. The challenge here would be to establish incentives to ensure that additional

disposable income generated through tax relief are actually saved through formal savings

instruments. A further consideration is the challenge of financial institutions to ensure that

financial products remain simple, easily accessible and cost-effective to allow for a

significant penetration within the LSM Group 1 – 5. Appendix 7 gives a detailed review of

the effect of the Monetary and Fiscal Policies on savings in South Africa.

6.4 Impact of financial products on savings

The basic bank account provides both access and flexibility to save. FinMark Trust (2008)

indicates that 50% (up from 35% in 2006) of the target group utilise bank accounts. This

should provide a basic savings vehicle for those who desire to save with the flexibility that is

provided by being able to accumulate savings as is convenient, and to access those

savings when required without any restrictive conditions. In addition, the basic account

provides a base for accessing other bank savings products. South Africa has undoubtedly

significant challenges in terms of accessibility to savings products especially when

attempting to penetrate the LSM group under consideration.

6.4.1 Access to savings products

Access to savings products can be broadly defined to include physical proximity to a

financial service provider, design and structure of the financial product itself, the

attractiveness of the product’s costs and potential returns. Access & affordability is

therefore an important consideration for LSM Groups 1 – 5 in formal savings. A minimum

monthly savings contribution or minimum initial amount may be out of reach of the poor,

essentially excluding them from formal savings products. Important to note is that the

greater majority of LSM Groups 1-5 are based in remote locations and accessibility to

banking and savings products are limited. Financial institutions need to investigate the

opportunities that are available to bridge the proximity gap. This also presents an

opportunity between government and the private sector to engage in more collaborative

initiatives similar to that of the creation of the Mzansi account, in an effort to extend the

footprint of financial institutions to reach the target markets located in remote locations.

6.4.2 Collaboration between Government and Private Sector on savings

“It is acknowledged that South Africa does not have a savings culture. Initiatives such as

the Mzansi account therefore serve as crucial building platforms from which a culture of

savings can be launched. It would be perverse to expect ordinary citizens to save when

they are denied access to a basic savings account.” (Nene, 2009).

Government and the financial services industry worked in collaboration on the Financial

Services Charter (“FSC”) to transform the industry. Prior to the introduction of the FSC

initiative, South Africa's financial system did not provide financial services to disadvantaged

people or people in the lower income groups. The financial inclusion facilitated by Mzansi

accounts made a positive contribution towards the economic development of the country for

people who had previously been excluded from the main-stream banking. To date, 6 million

accounts have been opened (Semono, 2009). This once again reiterates the potential to

improve the savings culture through developing more innovative and cost effective product

offering that will prove lucrative to the target markets that remain largely untapped.

6.4.3 Other Products Researched

Innovative products which have been relatively successful both in SA and abroad have

been reviewed. These include: FNB’s Million-a-Month Account, Capitec’s Global One

Banking Facility, Wizzit mobile banking, Singapore’s POS Bank, and Bank of America’s

“Keep the Change”. Refer to Appendix 8 for more details and analyses of these.

6.5 Benefits of a strong savings culture

6.5.1 Individuals

The benefits that will be realised from the creation of a strong savings culture for the

consumer will include improved financial literacy, personal financial stability, greater

financial independence, the reduced exclusive reliance on state pensions, and the creation

of opportunities to increase entrepreneurship through ensuring that entrepreneurs have the

capital to initiate small businesses.

6.5.2 Banks

Some of the benefits for the banking institutions will be an increase in the banked

population, improved profitability, increased liquidity, new and innovative product ranges

and reduced cost of capital.

In South Africa total bank deposits represent as much as 80% of total net interest income of

the local banks, and retail deposits account for the majority of this income. According to

statistics revealed by DataMonitor (2008), retail deposits account for 15% of banks’ total

funding. These deposits are more profitable, less volatile, and cost banks a lot less than

wholesale deposits. Retail deposits provide the benefit of long term funding to banks which

are also at much lower spreads than what corporates demand (Potgieter, 2009). The

business case for banks to attract retail deposits is therefore quite apparent.

6.5.3 Government and Economy

On a macro-economic level, the benefits that will be derived from stimulating a savings

culture in South Africa will comprise economic growth, reduced dependency on foreign

capital and investment, higher fiscal income, and improved liquidity in the financial markets.

Further benefits will include less reliance of the population on social grants and government

pensions, wealth creation and economic stimulation in the country, as well as the ability of

government to build resilience and stability during economic downturns.

6.6 Barriers to improving a savings culture

SASI (2008) identify other hurdles to long-term savings in addition to those already

mentioned. Short-sightedness results in individuals having a preference for present

consumption rather than providing for the future. Affordability is clearly an issue in the

target group, in addition to competing claims on any disposable income. Alternative

savings mechanisms (not included in any cash based definition) provides for security in old

age by investing in housing or providing for their children’s education. Long term

investment products also do not meet the needs of poor people. Most do not allow for

contributions that offer flexibility with varying income levels over time, and they also do not

allow access to significant parts of the accumulated savings in the event of an emergency.

Access to financial services including the physical proximity of banks, the charges involved

as well as the poor returns on basic bank accounts can act as barriers for potential savers.

Perhaps the biggest deterrent is that many poor people simply do not even have a basic

bank account. LSM Groups 1 – 5 account for 57% of the adult population and of these, only

44% have basic banking accounts. (FinMark Trust, 2008). Whilst there has been a lot of

innovation in as far as coming up with new products, these are only geared towards

increasing transactional volumes and not geared towards stimulating a savings culture.

Whilst the Mzansi account initiative has been hugely successful in bringing the unbanked

into the mainstream banking, the challenge still remains in financial institutions to convert

this into real sustainable savings through innovative products that are easy to understand,

offer an incentive to save and ultimately encourage a savings culture.

7 Alternative solutions

Behavioural change is complex and only occurs gradually over time, which will influence the

timeframe for measuring the success of implementing any of the alternative solutions

proposed. A long term requirement for a sustainable savings culture would therefore be a

shift in mindset of South African citizens and the value attached to savings products and its

importance in ensuring the sustainability of the South African economy. To support the

findings and analysis detailed in this research report, the possible solutions that have been

identified which will contribute to the stimulation of a savings culture amongst LSM Groups

1 – 5 are as follows:

7.1 Financial Literacy

The research has highlighted the problem of poor financial literacy. FinMark Trust (2008)

indicates that 67% of LSM Groups 1 – 5 have no basic knowledge of simple retirement

terms. The question then is how one instills a savings behavioural shift when the affected

groups do not understand the underlying basic financial concepts. Financial literacy

initiatives are already recognised as important and initiatives such as Operation Hope,

Teach Children to Save and others do seek to address the problem. However, these

initiatives are often done on a standalone basis and the proposed solution is therefore one

of a comprehensive programme, coordinated by all stakeholders, and on a sustained and

directed basis to ensure that adults and children benefit from basic financial literacy. This

will ensure that people become aware of the impact of financial decisions as well as the

importance of savings.

A basic SWOT analysis highlights the feasibility of a collaborative approach to this national

problem of low (and decreasing savings).

Strengths

• Targeted programmes to those who will

benefit most

• Coordinated effort by all stakeholders will

ensure sustainability and success

• Story telling as a medium can be powerful

in rural areas, and will ensure that the

messages are spread

• Community based structures like schools,

churches, village gatherings are easily

accessible to communicate the message

Weaknesses

• The stakeholders need to agree to work

together to strategise a financial literacy

programme – this will take time

• Clearly defined and measurable milestones

and outcomes need to be agreed upon by

all parties

• Stakeholders need to overcome firmly

entrenched silos in terms of thinking,

behaviour and actions

• People may treat the initiatives with

suspicion – trust needs to be established.

Opportunities

• Communicate to people through channels

which they can relate to

• Although financial literacy is the objective,

the education campaigns will provide vital

life skills.

• People will be aware of the impact of

financial decisions, and reduce the

likelihood of being sucked into spiraling

debt.

• Truly create a platform for self

empowerment through the extension of

knowledge.

Threats

• Lack of will and commitment by all

stakeholders

• Bureaucratic and policy barriers that

prevent the stakeholders engaging with

each other with trust

• Lack of interest and drive by the

stakeholders may lead to the initiative

fizzling out.

• A sustained and coordinated programme

will require financial and human resources.

Stakeholders will need to work together to

allocate the necessary.

Appendix 10 lists some financial literacy initiatives which can be embarked upon as part of

a sustained and coordinated programme.

7.2 Collaboration

Creating the behavioural change required to improve the savings culture cannot be

achieved with only once-off initiatives, no matter how successful those initiatives may prove

to be in the short term. Lasting behavioural change only occurs with sustained effort on the

part of the stakeholders and the commitment of the people to change how they think and

feel about the issue. Nonetheless, the syndicate group has considered and listed a number

of potential initiatives which institutions and government can sponsor as per Appendix 10.

A strong theme that has emerged from the research is that initiatives required to foster the

cultural shift to instill a stronger savings culture cannot be undertaken in isolation by

financial institutions, government or other stakeholders – it has to be a collaborative effort.

It is for this reason that Collaboration is proposed as an alternative solution to improving

the savings culture.

The collaborative effort can consider the problem of a poor savings culture as a

multidimensional issue requiring a consistent and concerted effort by all stakeholders. It is

proposed that the stakeholders formulate a working group to understand, and address the

problem in a holistic manner. Efforts, resources and interests can then be aligned to

develop initiatives that are consistent and sustainable. The South African Savings Institute

(“SASI”) has already taken the lead in facilitating research and trying to influence policy,

however it is believed that the body can also assume a greater coordinating, leading and

perhaps oversight function to drive the cultural change that is required.

A basic SWOT analysis highlights the feasibility of a collaborative approach to this national

problem of low (and decreasing savings).

Strengths

• Ensures commitment of all stakeholders

• Takes away the current silo-based

approach in trying to fix a multidimensional

problem

• Macroeconomic benefits will extend to the

society in general

• Ensure coordinated effort by all

stakeholders

Weaknesses

• Rules of engagement needs to be

established between the stakeholders –

this will take time

• Clearly defined and measurable milestones

and outcomes need to be agreed upon by

all parties

• Stakeholders need to overcome firmly

entrenched silos in terms of thinking,

behaviour and actions

Opportunities

• Poor people do save to some extent –

these can be brought into the formal

system

• Once achieved, the cultural shift will be self

propagating – China and Japan are cited

as examples of what can be achieved with

a greater savings culture

• South Africa will develop additional

characteristics to prevent the economy from

facing economic downturns as is being

experienced predominantly in the western

world

Threats

• Lack of will and commitment by all

stakeholders

• Bureaucratic and policy barriers that

prevent the stakeholders engaging with

each other with trust

• Self-interest – institutional profits may have

to be compromised for macroeconomic

benefits.

It is argued that the financial institutions, government, and the various other role players

need to act in unison to effect a lasting cultural shift. The relative success of the Mzansi

initiative can be cited as an example of where collaboration can yield great success,

although with Mzansi, government coercion also played a role. The macroeconomic

benefits of a stronger savings culture will extend to all the participants involved in a

collaborative effort, notwithstanding the substantial benefits to society itself.

Financial literacy programmes, innovative products, new delivery channels and a host of

other silo-based initiatives will not yield a sustainable cultural shift to change the savings

behaviour of the target group. Success will come from these initiatives being well

coordinated, consistent and complimentary of each other. In addition, a collaborative effort

will serve to illustrate to the target group the element of trust between the parties, a concept

which has been cited in various research papers as a factor which prevents the target group

from engaging in formal savings.

8 Recommendation and implementation approach

In reviewing the alternative solutions researched in terms of the financial implications,

practicality to implement, overall impact on the savings ratio, benefits and limitations, the

opinion is that the optimal solution would be the combination of the two alternative solutions

presented above. The syndicate recommends the implementation of a collaborative

financial literacy programme that has the potential to substantially influence the

behaviour and attitudes of people to save.

Through the collaboration of government, financial institutions, and other key stakeholders,

a well coordinated and sustained financial literacy programme should be developed to

educate the target LSM Groups 1 - 5 with the intention to create awareness, understanding

and an incentive for people to appreciate the need to save.

8.1 Development of a collaborative financial literacy programme

In order to develop a collaborative financial literacy programme that will influence the

savings attitudes of people, it is important that the deliverables of the project are clearly

defined and an in-depth feasibility study is undertaken to support the findings and

recommendations of the project. Once the feasibility study has been conducted and the

results prove positive, a project team should be established to implement the recommended

solution. One of the key actions that will be required to successfully deliver on the expected

outcomes of this project will be the review of the proposed recommendation or concept by

the stakeholders, namely Government, financial institutions, non-governmental institutions,

Savings Institute of South Africa, VISA South Africa and the FinMark Trust.

This will create a platform to invite suggestions, recommendations and comments from

these key stakeholders in formulating a financial literacy programme to support the

stimulation of a savings culture. Once the stakeholder engagement has transpired, and the

relevant approvals and buy-ins have been obtained, the project team can proceed to design

and develop a collaborative financial literacy programme focused on encouraging the

appropriate financial behaviour that will support the attainment of an improved savings

culture.

In investigating the options and mediums available to deliver this financial literacy

programme, it was found that initiatives such as industrial theatre, school curricula,

television and radio advertisements, marketing campaigns by financial institutions, savings

programmes by government and financial institutions could be packaged into a

collaborative financial literacy programme that is simple, easy to understand and accessible

to the target population. The packaging, design and development of this programme would

require the collaborative effort of all key stakeholders to ensure a successful penetration of

the LSM Groups 1-5.

8.2 Implementation approach

Following the confirmation of approval to proceed with the implementation of this financial

literacy programme, a “train the trainer” programme will be launched to all facilitators that

will be involved in delivering the final product to ensure that they are adequately trained and

understand the outcomes desired. A pilot programme would then need to be initiated to test

the original assumptions of this recommendation and identify any possible shortcomings,

which would require corrective action prior to the rollout of the programme on a larger scale.

The findings of the pilot programme can then be utilised to improve the collaborative

financial literacy programme being rolled out, and all stakeholders would need to ensure

active participation in the process. Thereafter, the financial literacy programme can be

officially launched and the results measured at defined intervals in order to determine the

success.

In adopting this recommendation, the collaborative financial literacy programme will be

targeted at LSM Groups 1-5, the greater majority of which transact in the informal economy.

This will therefore assist in creating a greater awareness of the financial options available to

them as well as develop trust in the formal savings channels. If successfully implemented,

this will ultimately result in the channeling of informal savings into more formalised savings

mechanisms and availing these funds to the formal economy, thereby improving the overall

savings ratio.

To further substantiate the feasibility of this recommendation, a financial analysis has been

documented and enclosed in Appendix 11 to illustrate the impact of implementing this

solution on the conversion of informal savings to formal savings products.

8.3 Quantification of benefits of the recommendation

Based on the calculations documented in Appendix 11, there is currently only 50% of the

adult population within LSM Groups 1-5 that are banked. Should the unbanked 50% open

savings accounts as a result of the implemented recommendation and awareness created,

at least R1, 419,757,800 of the total informal savings pool could move from the informal

system into the formal channels of savings. As mentioned earlier in the report there is an

estimated $900 million (French, 2005) that is moving around in the informal sector. Using

an exchange rate of R8.5 to the dollar, the equivalent rand value of remittances that are

floating around in the informal sector is equal to R7, 650,000,000. In the event of the

recommended solution being implemented, South Africa would successfully be able to

transfer at a minimum R1, 419,757,800 from the informal to formal savings channels

thereby improving the overall savings ratio and simultaneously improving liquidity. This

change would result in 19% of the total remittances in the informal sector being transferred

to the formal economy.

9 Implementation plan

The proposed implementation plan is included in Appendix 12 for further evaluation to guide

the execution of this recommendation. The creation and stimulation of a savings culture is a

long term deliverable, therefore Appendix 9 includes a range of initiatives that could further

supplement the final recommendation in the effort to improve the overall savings ratio in

South Africa.

10 Conclusion

In analysing the facts presented throughout this project report, it is evident that improving

the savings culture of South Africa is by no means an easy challenge to embrace

considering the various factors that both drive and impede the fostering of a sustainable

savings culture. Whilst this may initially seem to be a long term goal, there are a range of

short term initiatives that could be undertaken to bridge the gap between the present and

desired state in terms of achieving a higher savings ratio. As a result of evaluating the

research undertaken and identifying the various alternative solutions available, it was found

that improving the savings behaviour of the target population would require a collaborative

financial literacy programme. This would ensure a tangible impact to the improvement of

the savings ratio of South Africa.

The recommendation proposed may result in an increase of 19% of remittances transferring

from the informal to the formal sector, as well as an increase in the current savings to GDP

ratio from 16.9% to 17.1% in the short term. In the longer term, through sustaining the

implementation of the proposed recommendation, the 17.1% savings ratio should increase

further. This will ensure that a foundation to build a sound savings culture is inculcated from

generation to generation and will prove pivotal in developing a sustainable savings culture.

11 Glossary

Dis-saving The behaviour of spending funds from existing savings

Financial Services Charter (“FSC”)

The empowerment Charter adopted by the South African financial services industry to promote transformation in the industry

LSM Groups Refer Appendix 1 for further info

SASI South African Savings Institute – A non-governmental organisation supported by the financial services industry to promote savings in South Africa

Stokvel Informal community based group savings

State Old Age Grant (“SOAG”)

Also referred to as the old age pension, the SOAG is a grant provided by the state for those at retirement age. The SOAG is subject to a means test which determines the grant amount that the state will pay depending on one’s other sources of income together with any amounts that have been saved.

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Appendix 1 - Further facts on LSM

South African Advertising Research Forum (SAARF) (2009) describes the Living Standard

Measure (LSM) as:

The South African Advertising Research Foundation’s LSM has become the

most widely used marketing research tool in Southern Africa. It divides the

population into 10 LSM groups, 10 (highest) to 1 (lowest). The SAARF LSM is a

unique means of segmenting the South African market. It cuts across race and

other outmoded techniques of categorising people, and instead groups people

according to their living standards using criteria such as degree of urbanisation

and ownership of cars and major appliances.

Melzer (2007) adds that marketers often use LSM as a basis to segment the market. The

LSM algorithm is based on ownership of various durables, availability of services as well as

location (all else being constant rural dwellers are in lower LSM’s than urban counterparts).

SASI (2008) quote that the 2006 General Household Survey indicates that LSM group1 - 5

is comprised of around 20m adults in 8.3m households. This represents 74% of all

households in South Africa. Just over half are female (54%), and the majority (70%) live

outside of the established metropolitan areas. The average LSM Groups 1 - 5 household

has 3.8 members, about the same as the national average. The average monthly income

derived from employment for a LSM Groups 1 - 5 household is R1029.69, with an average

dependency ratio of 1.2. This implies that an average of 2.2 people in a LSM Groups 1 - 5

household survive on a meagre average monthly income of R1029.69.

Appendix 2 - Factors that impact on the willingness of people to save (SASI, 2007)

Figure 1, sourced from SASI (2007) summarises four factors which impact on savings. The

level of savings is driven by people’s willingness as well as their ability to save. These

drivers are impacted upon by four key factors:

• Behavioural: People’s personal circumstances either can either promote or

dissuade savings. It depends on both their financial goals as well as financial

commitments which may either support or impede upon their ability to save.

• Psychological and Sociological: Attitudes and personal preferences will

determine whether people are more inclined to consume today, or defer

consumption by saving any disposal income. In addition, any financial insecurity

may actually support the case for an individual to save rather than spend.

• Institutional: This refers to both the roles of government and the financial

services industry in terms of either supporting or dissuading savings. Fiscal and

monetary policies, as well as the availability of support grants will drive the

motivation to save. The financial services industry’s providing of suitable

products and services will also determine if the appropriate savings vehicles are

available to those who wish to formally save. In addition, the propagation of

financial literacy is an important element for which all stakeholders need to take

responsibility.

• Demographic: Education levels determine the understanding of the need to save

as well as the savings instruments available. In addition, generally higher

education levels precede higher income levels which are more conducive to

additional disposable income available for savings. One expects that across all

income levels, the ability to save is driven by the excess income over the cost of

living for the individual. In addition, life stage will also play a role in the ability and

willingness to save. Younger people starting out will typically have higher debt

levels, whilst those who are older and who have paid off debt on their assets will

have higher disposable income available for savings, in addition to the fact that

older people should be more concerned about accumulating a sufficient nest egg

for retirement.

Appendix 3 – South Africa’s Attitude to Savings

The general principle of savings is generally understood by people across all LSMs. This is

demonstrated by 69% of people (FinMark, 2008) believing that small amounts saved will

eventually add up to something meaningful. It is interesting to observe that FinMark (2008)

highlights the differences in people’s attitudes to savings by both race and economic

segment. The pro-savings attitudes are more prevalent in LSM Groups 7 – 10, and

especially amongst whites and Asians.

Of the 28% of all South Africans that had some sort of retirement or savings product in

2008, one can infer that only a small proportion of these were from the LSM Groups 1 – 5

given the access issues, lack of financial literacy as well as very low disposable incomes

available for savings. This is further demonstrated by the low take-up of savings,

investment and retirement products by Black people which happens to be the bulk of LSM

Groups 1 – 5. Whites and Asians have the highest proportion of savings in formal

investment and retirement products. 50% of people who do not have any savings or

investments cite not having a job as the primary reason, and 14% indicate no money

available. Interestingly, 11% of Black people (the bulk of LSM Groups 1 – 5) indicate that

they save through informal means, primarily stokvels. Reasons for this are the community

orientation of stokvels, peer pressure to save and trust. Whites and Asians who dominated

the formal investment products virtually do not support any informal savings schemes.

(FinMark, 2008)

FinMark (May 2007) indicates that attitudinal and knowledge barriers inhibit a tendency to

save more than the financial ability to do so. A number of points are cited to support this

argument:

• A small proportion of people understand how interest rates work, indicating a lack of

knowledge of how formal savings would work.

• Although recognizing the need to save, 51% of the general population does not

believe they will have enough saved for their retirement. This suggests a lack of

understanding of both how to save for retirement and how much need to be saved.

• South Africans are not trusting when it comes to financial matters, and rely on their

own expertise despite the fact that analysis indicates a lack of financial astuteness.

61% of LSM Groups 1 – 5 trust their own knowledge and experience – this despite

generally lower levels of education and financial expertise.

• South Africans are also generally risk averse, and indicate a preference for lower

risk investments at lower yield.

Time preference for consumption is also something that will influence a person’s willingness

to save. South Africa has until a few years back been a country of double-digit inflation

rates. It therefore made sense to purchase whatever was wanted before it got too

expensive – immediate consumption at the expense of saving. The lower inflation rate of

late has not done much to change the behaviour, and an increasingly consumerist society

has resulted in a higher propensity to spend rather than save. The usage of debt for

consumption expenditure is also a growing phenomenon. Debt servicing together with a

need to consume generally consequently places pressure on any disposable income

available for savings.

Appendix 4 – The savings experience in other developing countries

In China, consumers spend 25% of their income on savings and some of the factors that

reinforce the propensity of Chinese consumers to save include the demographics & age

profile of the population, movement of population from rural to urban areas, the impact of

China’s one child policy, income levels, tradition, culture & family structures, inadequate

social security system & stage of economic development. The reasons for savings in China

in order of importance are education, pension, accommodation & emergencies. (Xiaochuan,

2009)

According to the Indian Economic Journal (Salam & Kulsum, 2000), higher savings in India

post independence are attributed to a more liberalized environment, increased internal and

foreign competition, foreign direct investment, expansion of commercial banks across the

country and range of instruments provided by government to encourage small savings. The

low savings rate in India prior to Independence were as a result of the negative saving rate

of government due to poor performance of government non-statutory corporations,

increasing employment and wage bills of government, rising purchases of goods and

services by government, growth in consumerism and reliance on borrowed funds against

owned funds.

Upon closer investigation of Singapore’s savings rate, it was identified that the high savings

rates achieved is attributed to the high income growth, favourable demographics, prudent

fiscal policies, stable macroeconomic environment with low inflation rates, forced pension

contributions, efficiency of the financial system and financial liberalisation. (Monetary

Authority of Singapore, 1997)

In Thailand savings rates thereafter have declined from 34.3% to 30% of GDP as a result of

falling income and stagnant economic activities. The consumption behaviour saw major

shifts with the average propensity to consume increasing rapidly from 1993-1998 and the

corresponding propensity to save declining. (Ministry of Finance: Thailand, 2009).

Appendix 5 - Teach Children to Save South Africa 2008

Teach Children to Save South Africa (“TCTS”) is a national savings campaign rolled out in

South Africa in July 2008, now known as Savings Month. The founding partners for TCTS

are The Banking Association South Africa, South African Savings Institute (SASI), ABAEF,

Citibank and Operation Hope. TCTS has been adopted as an annual program of The

Banking Association South Africa and SASI.

The Program is an initiative that was introduced to South Africa by Citibank through its

participation in a similar program in America. Citibank has been part of the program since

2000 and over 54,000 learners have benefited from the program in the US.

The overall goal of TCTS is to teach children to save. TCTS objectives are to foster a

culture of savings, promote volunteerism, create awareness about the value of money and

the importance of savings, promote financial literacy and assist learners to appreciate the

power of choice. TCTS covers the basic concepts of saving: reasons to save, budgeting to

save – understanding difference between a need and a want and where to save.

TCTS Day, 2008 on 25 July, saw volunteer bankers and financial sector professionals

exchange balance sheets and corporate desks for the classroom to deliver a one-hour

savings lesson to Grades 4 to 7 countrywide. The volunteers, from executives to junior staff,

heeded the call to be “teachers for the day”. TCTS allows for collaboration in the banking

industry consumer education space which is positioned as competitive. The target for TCTS

2008 was to reach 90 schools and 10000 learners. This target was exceeded with a

national outreach of 228 schools and 50857 learners. A total of 9 banks and 10 financial

institutions participated, where Citibank had over 10% of its staff volunteering on the day.

SASI’s Savings Month, rallying motto “Ligotjwa lisase manzi” (Zulu idiom - best shape a

stick while still moist), was adopted as the TCTS motto. Some volunteers described their

experience in imparting saving skills to learners as a “second calling”.

Appendix 6 - Proposed Restructuring of South Africa’s retirement funding framework

The South African retirement funding framework is set for reform, and discussions between

the stakeholders are ongoing. According to National Treasury (2004), the World Bank has

proposed a three Pillar system, which is the likely route that South Africa will follow:

• Pillar One is a public benefit programme similar to the SOAG

• Pillar Two is a mandatory participation programme for those who are employed in

the formal sector

• Pillar Three is voluntary savings managed by the individual.

Appendix 7 - The effect of Monetary and Fiscal Policy on savings in SA

Current Market Conditions

During the past year Global During the past year global financial markets have witnessed

the collapse of renowned financial institutions and have experienced an increasing systemic

risk on the largest scale since the Great Depression era. Various organisations foresee

huge further potential aggregate losses and write downs relating to loans and securities

globally. The uncertainty and the bigger-than-expected losses that have already occurred

have caused exceptional volatility in global financial markets and have resulted in a

reduction in risk appetite especially towards emerging-market economies.

This global financial turmoil has impacted severely on real economic activity in both the

industrialised and developing countries, and declining economic and business sentiment

and weak consumer demand have resulted in a sharp slowdown in global economic growth.

The South African banking sector has been relatively insulated from these financial market

uncertainties. Nevertheless, greater vigilance has been required in supervising and

regulating the domestic banking sector and payment and settlement system.

Monetary Policy

The Monetary Policy can be defined as measures taken to influence the quantity of money

or the rate of interest with a view to achieve Stable prices, full employment and economic

growth. The Monetary Policy in South Africa is conducted by the SA Reserve bank.

Instruments used by the Reserve Bank to affect the Monetary Policy

Today the emphasis is more on market orientated policy measures which encourage

financial institutions to take certain actions on a voluntary basis. A good example of such a

policy instrument is the repo rate established by the repurchase tender system of the

Reserve bank. The Repo rate is the cost of credit by the Reserve bank to the banking

Sector.

Another instrument is the open market policy which consists of the sale or purchase of

domestic financial assets (Treasury Bills and Government securities) by the Reserve bank

in order to influence the interest rates and money supply.

The South African Reserve’s Bank Primary Goal

At the outset it is important to understand the primary goal of the Reserve Bank. This we

believe is critical in our quest to enhance the awareness of what the Bank can and should

do during this particularly challenging economic times to support the growth of savings in

South Africa. The primary goal of the Bank in the South African economic system is the

achievement and maintenance of price stability. Although it is possible to pursue price

stability using alternative approaches, the current monetary policy framework is inflation

targeting. Sound monetary policy in the Bank’s view, provides a stable platform for

sustainable economic and employment growth (Mboweni, 2005).

Fiscal Policy

Every government spends money and levies taxes to finance its expenditure. The

government must regularly budget how much to spend what to spend it on and how to

finance its expenditure. It must therefore have a policy in respect of the level of government

spending and taxation. This is called the Fiscal Policy. The main instrument of the fiscal

policy is the budget, presented annually by the minister of finance to Parliament. In the

budget the minister outlines government spending plans for the financial year from 1 April

the current year to 30 March the following year, and how it’s financed through taxes and

loans. The main tools for implementing the fiscal Policy are regulation, taxes and

Government Spending.

The size and composition of government spending and the way in which it is financed (

included the types and levels of taxes) can have a significant impact on important macro

economic variables, such as aggregate production, income and employment and the price

level, as well as the distribution of income. These effects have to be taken into account

when the budget is prepared. The Fiscal policy also has to be coordinated with the

monetary policy that is why there is a close liaison between national treasury, who is

responsible for the execution of the fiscal policy and the SA Reserve Bank.

The Principals Guiding the National Budget

The 2009 Fiscal budget speech, Finance Minister Trevor Manuel advised that in framing the

budget they have been guided by five principals:

• Protecting The Poor

• Sustaining Employment Growth and expanding training opportunities

• Building Economic Capacity and Promoting Investment

• Addressing the barriers to competitiveness which limit the equitable sharing of

opportunities.

• Debt levels must be kept under control so we do not create future burdens for

ourselves. (Manuel, 2009)

Bank and other providers of savings accounts

SA financial system remained sound and the overall confidence remained high. The banks

are well capitalised and profitable with adequate profitable and capital adequacy levels. The

banking sector remained concentrated and the market share of the big 4 banks remained

high 84% in Dec 2006 and 85, 1% in Dec 2007. Of concern is the high annual growth rate

of nonperforming loans. The average ROE of the big four remained stagnant at around

18%. (SARB, Financial Stability Review, March 2009)

The Banks Amendment Act No. 20 of 2007 was promulgated and came into effect 1

January 2008. The current legal framework gives effect to current international standards

and best practices relating to bank supervision and regulation and in particular the new

capital framework as envisioned in Basil 2. During 2009 the financial services industry will

be subjected to an assessment to be conducted by the IMF and World Bank. This will

further improve the confidence of consumers in the South African banks. Consumers should

thus feel confident that their money is relatively safe in the bank. (SARB, March 2009)

Public finances have become significantly more pro-poor

Since 1996, the public finances have undergone significant changes. Spending has grown

strongly in social services – which include education, health and social development – and

household services such as housing, water, sanitation, electrification and related

infrastructure. In 2006, more than 50 per cent of public spending on education, health,

social assistance and housing went to the poorest 40 per cent of the population. (SARB,

March 2009).Total spending per person on these services has increased from R1 643 in

1995 to R2 788 in 2006. Spending per capita on the poorest 20 per cent of the population

was R4 079 in 2006. (SARB, March 2009)

Conclusion

The depth and duration of the current global recession and the eventual full impact on

South Africa will be determined by the extent to which success is achieved with the wide

range of monetary and fiscal policy steps that have been announced by policymakers

worldwide in recent months. To the extent that banking crises have proven historically to

take quite long to resolve fully, the current synchronised global recession could prove to

endure somewhat longer than expected. However, the fact that many of the policy steps

that have been announced to combat the crisis have been implemented speedily and on a

coordinated basis between countries is a positive force in shaping the global outlook.

The domestic slowdown in the third quarter of 2008 followed by the first output growth

contraction in ten years clearly indicate that South Africa’s real economy has not been

spared by the global financial crisis.

Appendix 8 – Some of the Innovative Products which Encourage Savings

Million-a-Month Account – FNB

First National Bank's Million-A-Month account afforded FNB customers an opportunity to

win R1 million every month for every R100 invested. FNB positioned the introduction of the

account such that the chance to win R1 million each month was a way of incentivising a

culture of saving in South Africa. This product proved highly successful during its inception

and further highlighted the need for a lucrative incentive scheme that would incentivise

individuals to save.

Whilst products such as Million-a-Month Account proved to be a huge success, they sadly

are few in between and this particular one is even no longer in existence. This once again

begs the question – just how serious are we as a nation to save in order to foster a higher

economic growth that produces more jobs, less reliance on the state and therefore have

more money available to spend on much needed services such as health and education.

The question also has to be asked in terms of the government’s role in stimulating such a

culture which could have been demonstrated by supporting/being co-defendants in the case

between Lotto and FNB.

Global One Banking Facility – Capitec

Capitec Bank offers a three-in-one product which gives customers access to a range of

transacting, saving and lending options. The key advantage of the Global One Banking

Facility is a daily savings and transaction account in one, which essentially gives a

customer an opportunity to earn higher interest on their daily balance whilst at the same

time paying lower transaction costs.

This account offers customers an option of having a savings account on either flexible or

fixed saving options. This caters for general savings as well as targeted savings. The key

difference of the fixed term savings plan is that there is no minimum amount required to

open a Global One Banking Facility. The education of consumers on these savings

instruments is critical to the success of establishing and sustaining a viable savings culture.

Financial institutions need to actively market these formal savings instruments so as to

attract individuals to invest and ultimately contribute to attaining a relatively high savings

culture.

With the exception of one product – Capitec’s Global One Banking Facility, which combines

the transaction, savings and lending options into one product, none of the other products

that we looked at combined the idea of a savings as well as a transmission account. The

challenge however for Capitec is to attract other clients from other banks and market this

product better as none of the other banks offer such a similar product.

Wizzit Bank

Wizzit is a virtual bank that utilises mobile phone technology as a medium to facilitate

access to basic financial products. The model used by Wizzit is to gainfully employ

facilitating sales agents known as Wizzkids to go directly to unbanked potential customers

and to sign them up. The Wizzkids are usually part of the community and provide ongoing

support to customers, a strategy that underlies Wizzit's mobile banking success. Although

MTN Banking and Wizzit have a similar number of account holders - about 300 000, the

number of active Wizzit accounts is more than 60% compared with MTN Banking's 20%.

(Fischer-French, 2008).

Through the adoption of a combination of modern technology, processes and basic financial

principles, South Africa can extend their reach to consumers and offer convenient and

simple savings products that will generate interest from individuals and mobilise them to

participate in creating a sustainable savings platform that will contribute to a higher savings

culture. This undoubtedly needs to be accompanied by a series of continuous financial

literacy initiatives to supplement the savings products created to support this task.

Rabo Bank (Netherlands) has demonstrated successfully through its interest acquired in

Zanaco Bank (Zambia) that rural communities can be banked through modern technology.

Singapore – POSBank

An important institutional setup within the Singapore economy is the POSBank which has

played a pivotal role in promoting savings in the country. As cited in the research paper on

the Improvement of Domestic Savings by the Monetary Authority of Singapore (1997) this

setup was aimed at the mobilization of domestic savings and the promotion of savings

through adopting lower transaction costs and tax exemptions on deposits. Singapore has

adopted a wide array of instruments which are well regulated and induce consumers to

transfer their cash savings to financial institutions instead of utilizing other informal savings

mechanisms. Similarly South Africa is strategically positioned to implement a similar

initiative through utilising the infrastructure of the local postal services to offer remote

communities formal mechanisms to transact and save thereby bridging the gap between

formal and informal savings currently experienced. Once again the collaboration of the

government and financial institutions in implementing such an initiative is imperative to

ensure success and an entrenchment of a savings culture amongst LSM Groups 1- 5.

USA - Keep the change

This innovative product offered by the Bank of America offers customers an opportunity to

save without “sacrificing” anything in the process. When customers enroll for this

programme, each time they purchase something (such as groceries, a meal at a restaurant,

etcetera) using a debit card, the purchase is rounded up to the nearest dollar amount. The

additional amount is then transferred to a savings account. In addition to this, Bank of

America matches the first three months’ savings with the same amount. On annual basis,

they match 5% of the savings up to a maximum of $250 a year. This easy to implement

savings mechanism has the benefit of yielding returns without the individual having to save

intentionally. Extrapolating this to the South African economy and specifically to LSM

Groups 1-5, it will most certainly prove beneficial and practical to implement. The challenge

of course would be to ensure active participation by retailers and financial institutions in

order for any tangible benefits to be derived.

Appendix 9 – Interviews

Interview conducted with Project Sponsor – VISA South Africa

Attendees Present

Attendees Name Entity Abbreviation

Andre Hattingh VISA South Africa AH

Marinda De Lange VISA South Africa MDL

Gill Buchanan VISA South Africa GB

Nick Essame VISA South Africa NE

Marietjie Ferreira IEDP Syndicate Group 4 MF

Sagree Padayachee IEDP Syndicate Group 4 SP

Nicholas Nkosi IEDP Syndicate Group 4 NN

Item No Discussion Notes

Question What financial literacy programmes has VISA been involved in that would

support the stimulation of a savings culture in South Africa?

Answer VISA South Africa has embarked on a series of road shows and campaigns that

is aimed at educating specific target populations such as scholars on the

financial aspects of banking. The road shows are utilized as a tool to educate the

masses on the banking products available and the various savings instruments

at individual’s disposals. It is also aimed at improving the financial literacy of the

target population so as to ensure a more financial wiser generation.

Question What are some of the challenges that you have identified as constraints to

savings in South Africa?

Answer Some of the constraints/challenges facing financial institutions in terms of

stimulating a savings culture include:

• Consumers lack of trust in financial institutions

• High bank charges on savings instruments

Meeting Purpose Interview with key stakeholders at VISA South Africa to discuss the IEDP

Project – Stimulating a savings culture amongst LSM Groups 1-5 in South

Africa

Venue 97 Central Avenue, Houghton, Johannesburg

Date & Time 02 April 2009 – 09:30 am – 10:30 am

• Bringing the element of banking to the unbanked especially in rural areas

• Behavioural change with consumers

Question How many people are banked at present in South Africa?

Answer Approximately 60 – 70 % of the population. +/- 34 million of the population out of

47 million are currently banked

Question What are some of the sources that we could utilize in guiding our research

topic?

Answer The FinScope research which provides an array of statistics on the financial

habits of people in South Africa can be utilized as good base to inform your

research topic. This can be accessed via the FinScope website. The budget

speech delivered by Trevor Manuel also addressed the issue of the savings ratio

which should be reviewed. The Falconer report could also prove to be a useful

source in terms of the project deliverables and will provide more insight into

some of the key areas of investigation to be undertaken by the team.

Question How does the personal gearing ratios of South Africa compare to other

developing countries?

Answer The personal gearing ratios of South Africa in comparison to other countries are

much better. The debt to income ratio is 78 – 84% and is positive for South Africa

when compared to other countries.

Question Who should our target population be?

Answer Those individuals that are currently not saving through formal financing products

or not saving altogether. The youth could be a good target market if we had to

look at long term sustainability of the savings culture.

Question What can be done to improve the savings ratio in South Africa?

Answer Some of the potential savings opportunities can be investigated by focusing on

the following areas:

• Informal savings instruments that can be converted to formal savings (e.g.

Stokvels, lottery schemes, etc)

• Savings for retirement (pension income)

• Reviewing the tax implications on savings instruments

• Financial literacy of the youth and other target populations

• Review of banking fees and incentives for people to save

Question How reliant are pensioners on the state pension system?

Answer There are 12 million pensioners hat rely on the state social security benefits

whilst there are only 5.5 million registered tax payers as per statistics from Stats

SA. There is much reliance being placed on the government social grants which

creates additional pressure on the system and reduces the savings ratio of

individuals.

Question What other products in the market can be researched that supports the

stimulation of a savings culture

Answer Community banking by Standard Bank should be reviewed as it could offer some

insight on savings instruments available. The fee structure that Capitec bank

currently employs could also be investigated as it has proven successful in

acquiring a greater market share. Momentums insurance product that is

underwritten by ABSA bank for annuity savings with a compound growth can be

researched.

Question What countries could we benchmark South Africa against in terms of best

practices on stimulating a saving culture?

Answer Brazil would be a comparable country to South Africa that could be investigated.

The concept employed by the Bank of Spain in terms of penetration of the

Brazilian market would be worthwhile case study to explore. The forced savings

model in the UK for ABI National whereby payments for purchases are rounded

off and the excess funds are kept in a savings account for a year and matched

by the banking institution should be reviewed. Singapore is also another platform

that could be researched especially the tax that is paid on children up until 18 or

21 and this is utilized for specific elements such as education, etc. It is a good

example of a savings model that has been instituted through government policy

which has had a positive bearing on the savings ratio of Singapore. Kenya can

also be explored in terms of the mobile phone outlets concept whereby phone

devices are utilized to deposit cash into accounts; however the challenge with

implementing a similar concept in South Africa is that there are legislative

constraints. This is a form of budgeting and could be utilized as a savings tool.

Question What programmes are being administered in the Netherlands that we could

investigate during our trip to Rotterdam?

Answer The AFLATOUN programme

Question Are there any other issues that can be investigated to enable us to derive

implementable recommendations?

Answer The following aspects should also be investigated during the scope of the project

namely:

• The implications of the NCA on the savings culture

• Deposits on home loans – will youths be able to afford this going forward?

• The impact on SMME’s especially with regards to Collateral

• Investigate the transmissions account as a vehicle for saving

• Moving from cash to electronic payment methods and the savings

attached thereto

• Review of how the basket is constituted to score individuals in terms of

LSM groups

Second interview 2 with Project Sponsor

Meeting Details

Attendees Present

Attendees Name Entity Abbreviation

Andre Hattingh VISA South Africa AH

Marinda De Lange VISA South Africa MDL

Premeshin Naidoo IEDP Syndicate Group 4 PN

Nick Essame VISA South Africa NE

Marietjie Ferreira IEDP Syndicate Group 4 MF

Nicholas Nkosi IEDP Syndicate Group 4 NN

Interview with Visa Sponsor of IEDP Group 4 by Dated 11th May 2009 by Marietjie,

Premeshin and Nick. Visa was represented by Andre, Miranda and Nick out of London.

.

Discussion around the structure of Project:

Miranda recommended that we include in the project proposal the motivation for our

targeted group to save (refer to project proposal).

You (VISA) recommended we also investigate Brazil as a country and it seems

that there is not as much info available, can you possibly share your info with us

( Who, how and by when)

Andre will get this information for us before Saturday if possible

What are your insights into savings culture in SA LSM Groups 1-5?

Meeting Purpose Interview with key stakeholders at VISA South Africa to discuss the IEDP

Project – Stimulating a savings culture amongst LSM Groups 1-5 in South

Africa

Venue Teleconference Visa out of London

Date & Time 11 May 2009 – 14:00 am – 15:00 am

Andre - Previous research with this target group has been very difficult in view of them not

trusting others with their personal banking information. They invest more informally in

stokvels etc as they do not trust banks.

What is your role and what have you done/intend to do in order to facilitate a

savings culture

This target group is more comfortable to save in stokvels and other informal vehicles as

there is a perception that they are not welcome in banks and that many disappears out of

their accounts (bank Charges)

Products

Visa has focused more on getting cash out of the system, which in itself would

generate savings. Visa is focusing on spending only cash that you have by making

use of debit cards to pay for goods. They (Visa) are busy establishing networks with

retailers in order to allow payments into accounts and withdrawals on behalf of Visa

to reach the rural and urban areas. Brazil is making use of similar methods to reach

the people in Urban and rural areas in order to get the unbanked banked. Bank of

America is for example is incentives savings through matching of savings through

the usage of debit card – the amount is rounded off and the difference goes towards

a savings account to which they then match for cent for the first 3 months. This is

supporting the creation of a savings culture. Andre will send us a presentation on

this.

Education

Visa has been on Road shows to communities, schools and businesses in the Rural

and Urban areas in a project that they did in partnership with the DTI and Banks. At

these Road shows, they would educate on financial literacy and share the benefits of

savings to households. Miranda will send a presentation on the feedback of this

project. Miranda will also sent us a presentation on the Gates Foundation who has

done some research in how to stimulate savings in general.

What products have you seen around the world that are very innovative and

successful that could work well in SA

Keep the change product. Andre advised that In US and USA banks are rounding off

payments to Dollars and Pounds and whilst they are paying their merchants up to the cent

value, the difference is paid into a savings account of the card holder and the card holder is

allowed to with draw once on an annual basis from this account. Nick has also previously

mentioned that cell phone companies are now making use of cell phones for people to

save and transact. Wizzit bank

How would you define savings?

Nick defined it as the reserve of funds to be called upon in need and to have the ability to

fund a crisis instead of borrowings like:

• Medical expenses

• Old age

• Unemployment

• Burials

• Christmas

What should we limit our project to ito products?

Miranda recommended exclusion of stokvels as mentioned earlier. André felt that people

invest in different vehicles like: Jewellery, Art, Stocks, etc and as all is important one

cannot exclude any

Any other feedback and guidance toward proposal structure, products,

recommendations, or what have we left out.

Miranda recommended that we interview Capitec Bank as they have been very successful

in this market. Also keep it simple and ignore informal savings

Third interview with Citi Economist – Jean-Francois Metier

14 April 2009 by Premeshin Naidoo

In a discussion with Mr. JF Metier, the Citibank South Africa economist, the following key

points were indicated with regards to savings in SA.

• On a macro scale, one needs to differentiate between Gross Savings (includes

investments in fixed income markets, financial markets, life insurance etc.) and Net

Savings (Difference between Income and Consumption). Whilst Gross Savings in SA

is positive, Net Savings follows the trend of other Anglo Saxon countries and is

negative. Higher consumption (less savings), wealth effects (property values) and

cultural factors are a few reasons why people are consuming more than they

currently earn in income – higher debt levels result.

• In western countries, a major motivation for saving is for retirement, and generally is

through a social security scheme, but also includes individual wealth accrual.

• Higher savings levels will decrease the need for foreign capital

• Time preferences plays an important role in the individual’s decision to save or

spend, i.e. save for the future and delay consumption, or borrow now and consume.

One needs to consider the inflation effects and one’s expectations of future

affordability

• Monetary policy – inflation targeting – results in positive real interest rates which

should encourage savings

• Fiscal (tax) incentives to save – this was tried in the 80’s and 90’s in some western

countries with mix success. Cultural effects drove the behaviour instead.

• Fiscal (tax) incentives can take two forms. One is to provide a tax break on capital

gain, and dividend or interest income on any savings – this benefits mainly wealthier

people. The second is a tax deduction allowed on savings into a particular

investment vehicle, for example, a retirement annuity is funded pre-tax. This will

generally benefit those who conduct their employment and savings in the formal

sector.

• SA has a young population. Life stage plays an important role in ability to save. As

one approaches middle age, consumption should reduce with increased savings for

retirement.

• Structural change in employment levels needed in SA to encourage savings

• Banking industry needs to tailor products to encourage savings. They should further

use their branches for education and reach out to stimulate the savings behaviour.

• Savings is only one aspect of financial education but is probably most important.

People need to understand that it makes more sense to save then buy, rather than to

accumulate debt with high interest charges.

• In the corporate sector, generally low gearing in the past but this has changed.

Investment is now funded by both own cash saved and debt raised.

• Efforts need to be directed to primarily address the low household savings rates.

Interview with Ian Marsberg - Senior Economist – ABSA Capital

4 May 2009 by Marietjie Ferreira

What is your view on the current Monetary Policy of the Reserve Bank?

As a result of SA being in a recession the Reserve bank is currently moving our interest

rates downwards, this strategy is intended to and will encourage individuals to spend and

discourage savings and as such it has a disastrous effect for the current household savings.

The current declining interest rate the Reserve Bank is purposefully trying to stimulate the

economy by getting people to spend more. The formulae Household income – Spending =

Savings clearly indicates that if you spend more you save less. Lower interest makes

savings less attractive for potential savers.

What is your view on the future movements of interest rates in the next 6 to 12

months?

Interest rates will continue to decline with lowest being a repro rate of 7% and a prime rate

of 10.5%. Only by June 2010 will interest rates start moving up again.

What is your view on the current Fiscal Policy of National treasury?

South Africans tax rate has historically been high. Over the last few years we have been

given some tax relief from both a personal tax as well as corporate tax basis. Our

government is currently spending on infrastructure, but this is not enough to stimulate our

economy.

What are the tax breaks in your opinion that will encourage savings?

It is not a definite that if the SA National Treasury reduces the tax rates of individuals that

they will save it, most of them would rather spend it. Although dividends are tax free, Only

the first R21000 of Interest is free for individuals under the age of 65 and R30 000 for

individuals over the age of 65. Whilst this will be an incentive for the lower LSM groups, it

does not encourage savings for the wealthier groups, as taking inflation into account and

the after tax interest, their money is losing value.

The SA National Treasury does however incentives savings in Retirement Annuities (RAs)

and Pension funds. Individuals that invest up to 7.5% of their taxable income in RAs and

15% in pension funds will get this portion tax free. This would thus encourage individuals to

invest in these type investments in order to be able to become financially independent at

retirement age. No Capital gains tax is due on an individual’s primary home up to the sale

value of

R3, 000,000. This again will encourage individuals to invest in property. Should the SA

National treasury increase the VAT of 14% on luxury goods, it could encourage people to

spend less

How long do you think this recession will last?

SA is integrated in the global economy and as such any shocks globally will negatively

impact our economy. Our Economic recovery will not be before the second half of 2009.

And if the SA economy recovers I do not expect a miraculous recovery.

Appendix 10 - Initiatives to improve the savings culture in LSM Groups 1 – 5

Financial Literacy

Implementation of financial literacy programmes to educate the target group on the

impact of financial decisions and the importance of savings as follows:

• In secondary & tertiary institutions as part of the core curriculum titled “money

matters”

• Financial institutions to embark on extensive road shows and client interactions to

promote financial literacy on possible savings products and the benefits to customers

• Government departments like Education should assist in the design and rollout of

these programmes to ensure successful implementation.

• Employers within the formal sector should create initiatives to educate their

personnel on financial matters and the benefits of savings. A suggested initiative

can be corporate programmes on factory floors – industrial theatre type shows to

carry across the message.

• Financial literacy programmes for adults who are not included in the formal sector.

• Shows for television and radio which are both entertaining and relevant to deliver the

core message.

• Take advantage of strong oral traditions in rural areas (knowledge is passed through

generations through storytelling) to communicate the message through travelling

road shows which tell a story to illustrate the message.

• Take advantage of rural village gatherings, workplaces, schools and churches as

opportunities at which to present shows, lectures and other media to communicate

the message in a format which the audience can identify with and relate to.

Institutional

� Financial institutions have a duty to instill confidence and trust to ensure that

consumers feel secure to invest in the formal banking sector.

� Account for life – account opened when a birth certificate is issued

• Commercial banks can introduce more innovative products like Wizzit to address,

accessibility, affordability, convenience and incentivisation.

• Retirement savings can be also be enhanced by providing a product that meets

accessibility, affordability, convenience and incentivisation criteria, with the

incentivisation part being subsidised by government to stimulate a savings culture for

the poor. (SASI, 2008)

• Consider distributing formal products like unit trusts through informal channels like

community leaders and stokvels. (SASI, 2008)19.b

• Awareness and marketing campaigns should be targeted at females, as research

suggests that females are most likely to consider long term savings. (SASI, 2008)

• Financial institutions need to create lucrative savings products that will generate

interest from lower income earners to save, as well as those investing in informal

savings channels to transfer their savings to more formalised mechanisms.

• Both government and financial institutions need to collaborate to ensure that there is

a cultural shift in so far as savings is concerned within the target population. For

example, by implementing potential subsidisations or even higher interest rate

benefits.

• Involve the corporate sector and other institutions in designing and implementing

suitable mechanisms to attract the lower end earners to participate in savings

instruments.

• Reduce the barriers to entry to ensure broader access to products. For example

minimum deposits to open savings accounts.

• Collaboration between financial institutions and retailers where customers can use

them to deposit money as opposed to going to branches.

Government

� Government in consultation with financial institutions should establish possible

mandatory impositions on additional income generated through tax relief whereby a

certain percentage is actually invested in a savings instrument thereby potentially

increasing the savings ratio of the country.

� Government could force banks through regulation to offer a higher return and lower

charges for this particular LSM group on savings accounts similar to the Mzansi

initiative.

� Engage with Insurance Companies to broaden and extend the Zimele initiative. In

addition, there also need to raise awareness and education for the target group

Given the experience in other emerging markets, reduced government provisions of

pensions, free health care and free education has the potential to improve a savings

culture. This in turn will be beneficial to the government in terms of reducing

assistance on social grants, whilst simultaneously benefiting the tax payers, who

ultimately subsidises this program, by issuing a tax relief of which the excess funds

generated can then be utilised to save with the effect of increasing the savings ratio

of the country as a whole.

� Review regulatory and legislative policies that hinder the stimulation of a savings

culture.

� Introduction of mandatory savings programmes for retirement, education, housing,

etc

� Through the Post Office or a national savings bank, the government should consider

looking at easy to use, customer friendly product offerings that encourage savings

over a longer term through offering higher interest rates as an incentive.

� Leverage off the Broad-Based Black Economic Empowerment initiatives to link

wealth creation and economic redistribution with the instilling of a savings culture.

This can be achieved by ensuring that a portion of the proceeds from BBBEE

transactions are placed into long term savings vehicles for the beneficiaries.

� Create a national standard for financial literacy, and use this standard as the

benchmark level of literacy for which all South Africans can aspire to, and for the

structuring of financial literacy programmes. This can then be taken a step further to

link the sale of certain credit products to the potential buyer’s level of financial

literacy. This is currently a requirement for certain investment banking type products

in certain products. The underlying principle is that it will prevent people from

becoming overly indebted by products which they do not understand.

Appendix 11 - Financial analysis of recommended solution

The following financial analysis will demonstrate the positive return that the implementation

of the solution will have on improving the savings ratio in South Africa. Enclosed below are

the steps that were followed in deriving the final result of this analysis which evidences the

fact that the recommendation solution will ultimately prove beneficial:

1. Step 1 - The adult population per LSM Group 1-5 was extracted from the FinScope 2008 report as detailed in column 2 of the table below.

2. Step 2 - The total adult population of all LSM Groups was verified through the same report and was utilised to calculate the ratio of the adult population of LSM 1-5 relative to the total adult population.

LSM Group

(1)

Adult

Population

(2)

% of SA's

Adult

Population

(3)

Average

Personal

Income

(4)

Weighted

Average

Income

1 1,062,000 3.39% R 723.00 R 47.55

2 2,732,000 8.73% R 579.00 R 97.96

3 2,953,000 9.43% R 788.00 R 144.11

4 4,557,000 14.56% R 848.00 R 239.32

5 4,843,000 15.47% R 1,168.00 R 350.32

Total Adult Population

(LSM 1-5) 16,147,000 51.58% R 879.27

Total Adult Population 31,303,000

3. Step 3 -The average personal income per LSM group was also acquired from the FinScope 2008 report as detailed in column 4.

4. Step 4 - The weighted average income was then calculated by applying the following formula:

Weighted Average Income = Average Personal Income (3) / Total adult population LSM 1-5

X % of Adult Population per LSM group (2)

In analysing the research findings, the following data was duly evidenced and referenced in

the report and forms the basis of this calculation and as follows:

Measurement Category % Number Of Adult

Population

Percentage of LSM 1 - 5 who do not save at all: 67% 10,818,490

Percentage of LSM 1 - 5 who save: 33% 5,328,510

Percentage of LSM 1 - 5 who are banked 50% 8,073,500

Percentage of LSM 1 - 5 who are unbanked 50% 8,073,500

Ideal savings ratio as a% of GDP 20%

Current savings ratio 16.90%

SA GDP in ZAR R 2,405,500,000,000

In endeavouring to calculate the return on investment in terms of implementing the

suggested recommendation, it was assumed that the total adult population in LSM Groups

1-5 would save at least 20% of their income which would be equivalent to R2, 839,515,600.

This was calculated as follows:

Total adult population (LSM Groups 1-5) x Assumed savings % x Sum of the weighted

average income across LSM Groups 1-5

= 16,147,000 x 20% x R 879.27

= R2, 839,515,600

Assuming that 100% of the target group save 20% of their income R 2,839,515,600

Increase in savings rate 0.12%

Increase in bank deposits (assuming that the unbanked 50% also

open accounts) R 1,419,757,800

Total remittances(savings) in the informal economy R 7,650,000,000

% of savings transferred from informal to formal economy 19%

Appendix 12 – Implementation plan

Group 4 Bankseta Iedp Alp Final

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