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January – June 2018

The link between excessive debt and multidimensional poverty can be broken

  • Lungile Ntsalaze and Prof Sylvanus Ikhide
  • MAY 2018
  • Tags Insights, Finance
12 minutes to read


Article written by Lungile Ntsalaze and Prof Sylvanus Ikhide

Historically disadvantaged households used to be virtually debt free because, in general, they did not have access to credit. This changed in the early 1990s when financial liberalisation led to financial deregulation. However, at the time, credit legislation consisted of limited regulations and acts which did not address the credit market’s holistic dynamics.

A debate on household debt ensued between policy makers and culminated in the promulgation of the National Credit Act (No 34 of 2005). This was when the National Credit Regulator started to monitor consumer debt and the social repercussions of excessive debt.

Tremendous growth in debt has been recorded since, and currently household debt (as a percentage of disposable income) is reported at 77,8% (up from 51,0% in 1993), reaching an all-time high of 88,8% in the first quarter of 2008.

In addition, the National Credit Regulator reported that there was a consumer credit growth of 55% from the last quarter of 2007 to September 2015. In monetary value, it means that the total outstanding gross amount in the debtors’ book of consumer credit was R1,63 trillion at the end of September 2015.

During the same period the number of consumer credit applications increased to 5,8 million with the total credit value granted settling at R123,93 billion. With the consistent growth in debt, households have an increasing battle to stick to and honour their obligations. In fact, these statistics sketch a dark picture:

  • 46,1% of consumers are within their terms
  • 11,6% are one to two months in arrears
  • 21,6% are three and more months in arrears
  • The balance is at risk of facing court proceedings and judgements

South Africa’s map of poverty
Going back to the mid-90s, and particularly to the post-apartheid era, South Africa to a large extent succeeded in reducing poverty, both in monetary terms and in multidimensional forms of deprivation.

To gain insight into this theorem, it is important to understand what multidimensional deprivation refers to. The concept of multidimensional poverty uses different dimensions of deprivation based on basic capabilities to determine poverty levels. Using the Global Multidimensional Poverty Index, it was found that 10,7% of South Africans were multidimensionally poor in 2008. This statistic dropped to 9% in 2010.

In 2010, Statistics South Africa adopted this index and further developed it to include unemployment as a measure of economic activity in households. The results of the South African Multidimensional Poverty Index indicated that 17,9% of households in South Africa were poor in 2001, dropping to 8% in 2011.

The use of multiple poverty measures led to divergent views about the scale of variations in the poverty headcount, but the declining poverty trend is indisputable. Households living below the upper-bound poverty line declined substantially from 42,2% in 2006 to 32,9% in 2011 (with 94,2 % being black South Africans).

Historically disadvantaged households used to be virtually debt free.

How is household poverty determined?
Household poverty is determined by a host of factors, such as the household inhabitants’ numbers and ages, education levels, ethnicity, gender, marital status, economic activity, household income, government grants, housing tenure, settlement type (urban or rural) and location (regional or provincial).

Poverty facts in South Africa

  • There is a contradiction in respect of age in studies – some research shows that so-called older households are financially better off, while other findings indicate that households with mature ‘heads’ have a positive correlation with poverty.
  • Education levels seem to be the strongest predictor of poverty – most studies found a correlation between household heads with limited education and a high incidence of poverty, which declines as education levels rise.
  • Households headed up by women tend to have a greater susceptibility to poverty.
  • Marital status tends to raise household income.
  • An employed head of a household reduces the poverty risk.
  • Being employed in the agricultural sector or dependence on grants are poverty indicators.
  • Homeownership is associated with welfare.
  • There is strong evidence that larger households lead to higher probabilities of poverty, particularly when there is growth in the number of children per household.
  • There is a bigger concentration of poverty in rural areas as opposed to urban areas.
  • Poor households’ access to credit has a direct link to poverty.

The research approach
This study relied, among others, on the most recent data of the National Income Dynamics Study which was conducted in 2012. The National Income Dynamics Study is a nationally representative household panel survey which contains comprehensive households’ information on income, expenditure, health, the labour market and demographics. December 2012 was used as the base period, with 5 458 households making up the population of this survey.

The non-linear relationship between explanatory variables and multidimensional poverty was the focus of this investigation. A generalised additive model using a spline regression model on the National Income Dynamics Study data was used to establish threshold effects of the explanatory variables on multidimensional poverty.

The total outstanding gross amount in the debtors’ book of consumer credit was R1,63 trillion at the end of September 2015.

The findings
The findings of the investigation can be summed up as follows:

  • The tipping point at which debt is associated with improved household welfare is 42,5% (the level of debt in correlation to income).
  • Household heads younger than 60 and with multiple children in the household are associated with lower multidimensional poverty.
  • The ideal household size with a negative correlation to multidimensional poverty is fewer than four members.
  • Government grants do not seem to be an effective tool to eradicate multidimensional poverty.
  • Education is the best solution for households to escape multidimensional poverty.

Conclusions and implications
The empirical findings indicate that there is a debt threshold in the debt versus poverty nexus, and that household debt plays a crucial role in determining multidimensional poverty levels.

It is important to know that an appropriate level of debt will improve the welfare of households, but as soon as the 42,5% threshold is exceeded, it culminates in increased multidimensional poverty. Debt obligations without a healthy correlation with household income create households that are vulnerable to, for instance, unexpected changes in household income and interest rates. Households could therefore become victims of the so-called double penalty of multidimensional poverty and over-indebtedness. Being in such a position predetermines damning consequences, such as financial exclusion and the vicious long-term cycle of children living in poverty owing to the debt incurred by their parents.

Historically disadvantaged households used to be virtually debt free.

Ways of alleviating multidimensional poverty

  • If households participate in money management courses, it will help them with budgeting and other financial skills which could promote responsible borrowing behaviour and protect them from slipping into debt traps.
  • Households with excessive debt must act quickly and decisively to address their precarious situation.
  • Policymakers must strike a balance between increasing household credit access and the corresponding increased threats to financial stability.
  • A coordinated effort to promote the role of savings is essential while monitoring households with debt-service-to-income levels exceeding 42,5%.
  • Government must seriously review the retirement and old age support policies and encourage younger generations to save for retirement.

The alleviation of multidimensional poverty is therefore the joint responsibility of individuals, households, policy makers as well as government.

  • Original article: Ntsalaze, L. & Ikhide, S. 2017. The threshold effects of household indebtedness on multidimensional poverty. International Journal of Social Economics, 44(11), 1471-1488.
  • Link to original article:

Lungile Ntsalaze undertakes research at the Department of Financial Intelligence at the University of South Africa.
Prof Sylvanus Ikhide lectures at the University of Stellenbosch Business School. His research interests include economic development perspectives in Africa, public sector finance and microfinance.

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