Media Release from Altron Fintech

Altron Fintech Household Financial Resilience Index (AFHRI) launched

1. AFHRI provides critical insight into the financial state of households by assessing the state of micro-lending from the perspective of the ability of borrowers to repay loans
2. Shows average South African households are better able to incur and manage debt than before the COVID-19 pandemic began, a trend likely to continue into 2022

Johannesburg, 25 August 2021: -- Altron Fintech, a division of JSE-listed Altron, today launched a new quarterly index aimed at gauging the level of financial resilience amongst South African households, and their ability to service loans.

The index, called the Altron Fintech Household Financial Resilience Index (AFHRI), was created in partnership with Dr Roelof Botha, economic advisor to the Optimum Investment Group. 

Dr Botha, said: “The results of the first AFHRI, released today, shows that the average household is better able to incur and manage debt than before the COVID-19 pandemic began, and that the long-term upward trend in the index is likely to continue in 2021 and 2022.”

The AFHRI is one of two indices developed by Altron Fintech.  A second index, developed by economist Keith Lockwood from the Gordon Institute of Business Science (GIBS), will be launched in September, and unpacks the economic impact of short-term credit in South Africa.

Johan Gellatly, Altron Fintech Managing Director, said: “These indices have been developed with a key purpose of providing the market with critical insights on the level of resilience of those who apply for credit, and those that provide it.  They have specific relevance to the provision and state of micro-credit, an important segment of the overall credit market, and often the only option for individuals and small businesses.”

“The AFHRI is premised on the fact that income is ultimately required to repay debt. Without income of some kind, individuals are not able to qualify for loans that allow for expanded access to the full range of goods and services that comprise private consumption expenditure, as well as the funding of working capital required to sustain or expand small and micro businesses.

“In an attempt to provide clear and quantitative guidance on the disposition of South African households, on average, to engage in viable borrowing activities, it was decided to design a composite index that portrays their financial resilience.  Despite the devastating impact of the pandemic and lockdown restrictions on the economy, the results of the AFHRI demonstrate that household income has rebounded, and that borrowers are able to repay loans,” said Gellatly.

Altron FinTech provides secure payment and collection technology to the financial services industry.

SUMMARY OF INDEX FINDINGS BY DR ROELOF BOTHA

25 August 2021

Recovery of the financial resilience of households
Dr Roelof Botha, economic advisor to the Optimum Investment Group         

Key finding:
The upshot of the Q1 2021 reading of the Altron/FinTech HRI is that the average household in South Africa enjoyed a more advantageous disposition towards incurring and managing debt than before the pandemic and that the long-term upward trend in the index is likely to continue.

Background to the Altron/FinTech Household Resilience Index (AFHRI)
In contrast to the generally negative perception of micro-finance in South Africa, this industry is held in high esteem in most of the developing world. Short-term loans and unsecured credit by micro-finance institutions (MFIs) have played a significant role in combating a key element of global inequality, namely the ability of individuals to expedite expenditure on consumption goods, including food, and also to assist with the financing of working capital for small and micro enterprises (SMEs).

Proof of the important economic role of MFIs has been provided by an econometric modelling exercise conducted in 2019 by Prof Ilse Botha from the University of Johannesburg. The study indicated that, between the 1st quarter of 2015 and the 3rd quarter of 2018, South Africa’s GDP would have been R191-billion lower in the absence of credit provided by MFIs.

In South Africa, reports related to household debt are characterised by a lack of objectivity, particularly with regard to the short-term lending industry. Any increase in default values or default ratios regularly feature prominently in the media, but when they decline, hardly any reporting on such trends occurs.
In recognition of the need for data that provides more clarity on the financial disposition of households, in general, and their ability to cope with debt, in particular, Altron/FinTech commissioned renowned economist Dr Roelof Botha to assist in designing a composite household resilience index (AFHRI).

This index is comprised of 20 different indicators, weighted according to the demand side of the short-term lending industry and calculated on a quarterly basis, with the first quarter of 2014 as the base period (equalling an index value of 100).

The main advantage of composite index methodology is that it allows multi-dimensional issues (often contradicting each other) to be summarised in a single benchmark. It also facilitates the use of reciprocals of individual indicators where these inherently do not support the particular causality required. With the exception of two indicators (household expenditure & short-term insurance premiums paid), the other 17 indicators all have a bearing on income received from various sources or the basis for future income receipts (such as financial or tangible assets). Directly and indirectly, these income sources include salaries, wages, dividends, capital gains, rentals, interest and profits.
Figure 1 depicts the trend in the AFHRI from its base period (equal to 100) in the first quarter of 2014 to the first quarter of 2021. The seasonal peaks experienced for several of the key individual indicators comprising the index are eliminated via a four-quarter average trend.
 
AFHRI trend line recovers fully from pandemic

It is fairly apparent from figure 1 that a sharp downturn occurred during the 2nd quarter of 2020, when the worst of the Covid-19 lockdown regulations were in place. Due to a remarkably swift recovery of most key economic sectors since the 3rd quarter of 2020, the AFHRI trend line has returned to a positive growth trajectory.

A V-shaped recovery has been evident in a number of other key economic indicators, especially GDP, retail trade sales and the Reserve Bank’s composite leading business cycle indicator.
The latter indicator reached an all-time record high during the first quarter of the year (see figure 2), whilst the GDP recorded in the 4th quarter of 2020 matched the figure of a year earlier (in real terms).

Decline in household debt/income ratio
Two of the reasons for the AFHRI having outperformed the country’s GDP trend are related to the structural decline in household debt as a percentage of household income and also the decrease in the ratio of household debt costs to household income (see figure 3).

The latter two indicators are included in the index in terms of their reciprocal values, in order to synchronise their trends with those of the other indicators (where a positive change improves the financial resilience of households).

Swift recovery of labour remuneration
Total salaries and wages have staged a swift recovery from the negative effect of the lockdown regulations, a trend that is likely to continue into the 2nd quarter of 2021. In contrast to a decline in private sector employment, jobs in the public sector have continued to increase, which has also exerted a positive impact on the AFHRI. These trends are depicted by figures 4 and 5.

Employment and labour remuneration are of overriding importance in any assessment of the financial disposition of households and these indicators comprise almost half of the total weighting of the AFHRI. Remuneration per worker also returned to growth mode since the fourth quarter of 2020.

Sound recovery of asset prices
In recognition of the fact that many households earn income from other sources than labour remuneration, The AFHRI also includes indicators related to investment income and rental income. The total value of unit trust assets and the FNB House Price Index have been utilised as proxies for these indicators.

Figure 6 illustrates the strong recovery and growth of unit trust assets, which generate higher dividends and enhance the ability of prospective borrowers to secure sufficient collateral. Figure 7 illustrates the sharp increase in the value of surrenders of long-term insurance policies, which has assisted the cash flow of many such policy holders, although this practice is best avoided.

Credit impairments increase
One of the few indicators that has bucked the upward trend of the AFHRI since the 3rd quarter of 2020 is the value of credit impairments by the banking sector, as illustrated by figure 8. The other indicators that have exerted a negative effect on the index over the past year are:
·      Credit extension to households (calculated as a reciprocal)
·      The ratio of salaries to GDP
·      Household consumption expenditure
·      The ratio of household income to debt
·      Private sector employment
Table 2 summarises the performance of the different indicators comprising the AFHRI since the base period (2014) and also year-on-year. These trends confirm both the recovery of the index and the return to growth mode.

The upshot of the Q1 2021 reading of the Altron/FinTech HRI is that the average household in South Africa enjoyed a more advantageous disposition towards incurring and managing debt than before the pandemic and that the long-term upward trend in the index is likely to continue.
Ends/

Media contacts:
Dani Cohen - 082 897 0443 / dani@prologconsulting.co.za
Sandra Sowray - 079 167 6863 / sandra@prologconsulting.co.za

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