Wednesday, 10 April 2013

Economic ‘liberation’ at a high price

Piet Naude Naudé profile
Piet Naudé
By Piet Naudé

THERE is a core of truth in the slogan, "No political liberation without economic liberation". A vote in a free and fair election that does not affect material conditions and deliver opportunities over the long term to improve socioeconomic positions is an empty vote. The choice between freedom and hunger is a tough one.

But does "economic liberation" always bring actual freedom?

After reading various reports, it is clear it has become a monthly nightmare for just below 10-million South Africans to survive amid high levels of debt repayment. The average age of heavily indebted people fell from 41 years in 2008 to 34 years in 2012. It shows that people get into trouble at a much younger age, with South Africans at this point having, on average, 13 debt agreements.

There are two aggravating factors. People get into debt and then borrow from A to pay B, steering themselves into a debt spiral from which it is difficult to escape. And much of this debt is embedded in unsecured loans with high interest rates. In the last quarter of 2012, South Africans had to spend R75.80 of every R100 of disposable income on debt repayment.

There are many important practical steps one can cite to alleviate the problem: credit providers are — despite tougher legislation — just too eager to give people loans and to take advantage of ill-informed customers. And by "ill-informed" I do not refer to low earners, but to many quite well-educated people, earning a high income but who are not financially literate enough to make good decisions. (I cannot understand why a basic financial course is not compulsory for all school leavers and is not included as a compulsory exit module at university.)

Banks and other lenders take this gap. They are quick to tell you how they can help you and how you just have to take that well-deserved holiday or build a swimming pool by taking their cash. Financial institutions and lenders are private enterprises and their primary purpose is not to help you manage your finances, but to extract from you whatever they can at the highest possible interest rate. Profit maximisation is their real aim.

So they show you the attractive monthly payment but they do not always take the time to tell you they have stretched the term of repayment to the longest possible duration and at the highest interest. Most customers do not understand the game of negotiating these things and end up paying far too much.

My friend’s daughter is a qualified professional. She is in the market for a recent-model car. Last month she phoned me in excitement. She had found a Polo for R3,000 a month — "exactly what I budgeted for". A few questions revealed the other facts: they lend her the money over 72 months at an interest rate of 14.5% and have included a "mechanical guarantee" of R6,500 and on-road charges of R4,500 in the loan amount.

Needless to say, I had to dent her enthusiasm. She did buy a Polo, at 9.5% over 60 months. She dropped the so-called guarantee (having faith in German engineering) and paid cash for the on-road charges. She pays a little more than R3,000 a month, but I reminded her to add in the insurance, and that she will in fact pay far less in the end.

The point is that the salespeople are chasing deals and budget targets. They are not into financial education. So the letters and e-mails with fantastic deals and cash loans all have fine print that bites us in the end.

But the real problem is not financial.

The social roots of debt are in a society that gained political freedom but has in a short space of time created a spirit of material entitlement. If one links this to the so-called "now generation" of instant gratification, and considers that we now value what people have and not who they are, the picture becomes clearer: debt is but the outward sign of an inward emptiness.

The pain is also not only financial. Especially our young African people pay a higher price — that of negating the social coherence that in the first place brought them where they are. If your car, clothes, furniture, rent and holidays eat up your income, nothing remains "to send home".

So you are not only endangering your own future. You are also — by turning selfish while thinking how smart you are — denting the hopes of those who rely on you for economic liberation.

• Naudé is the former head of the business school and currently deputy vice-chancellor: academic at the Nelson Mandela Metro University in Port Elizabeth. He writes in his personal capacity. This article is to inform and educate, not to advise.

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