When you read the words, “South Africa has a major financial literacy problem,” what’s the first thing that comes to mind? Is it the approximately 30 million citizens living below the poverty line? Or is it the 40% of South African adults who go into debt to buy groceries every month? Or do you think that it’s a far more pervasive problem that affects South Africans of all income and education levels?
If you chose the third option, you’re probably closest to the truth. According to the results of a survey by the Sector Conduct Authority (FSCA) in partnership with the Human Sciences Research Council (HSRC), just 51% of South Africans are financially literate.
This lack of financial literacy doesn’t just impact obvious areas such as spending habits, loans, investments, and debt management either. It extends even further and can impact businesses’ ability to maximise revenue generation and minimise costs, with international money transfers being one of the clearest examples.
The impact of SA’s poor financial literacy
Before taking a more in-depth look at how a lack of financial literacy can impact businesses, it’s worth getting a sense of its impact on South Africa as a whole.
Take debt, for instance. According to the Reserve Bank, the ratio of household debt to nominal disposable income in the country hit 62.4% in 2023, up from 62% in 2022. What that means is that for every R100 a household brings in as income after tax, R62.40 goes to servicing debt. Such high levels of household debt make it difficult for people to put aside anything for savings and investments. This can quickly become overwhelming, particularly in the event of a job loss or financial emergency. Now, there are good reasons to take on debt (such as buying a house or growing a business), but such high levels are entirely unsustainable.
It should hardly be surprising then that South Africa has one of the lowest savings rates in the world, with household savings estimated to be 0.13% of Gross Domestic Product in 2022. Nor, unfortunately, should it come as a shock to learn that just six percent of working South Africans will be able to retire comfortably.
A combination of financial desperation and poor financial literacy can be especially dangerous, resulting in bad long-term planning and decision-making. A prime example of this is the number of working people who cash in their savings when changing jobs. According to 10X Investment’s Retirement Reality Report, as many as 56% of South Africans engage in this practice.
Business-based financial literacy is crucial, too
Of course, the country’s low levels of financial literacy don’t just affect individuals and households either, as it can impact businesses too. While most business owners quickly get their heads around things like cash flow and profitability (those who don’t understand tend not to last very long), there are other, more subtle areas where a lack of financial literacy impacts businesses. It may, for instance, impact a business’s ability to find the right insurer or to negotiate with suppliers. It can also lead to poor decision-making, overspending, and debt mismanagement. And even if a business gets all of those things right, there’s still a good chance that certain players in the financial space are costing it money it shouldn’t have to spend.
One of the most egregious examples of this is international money transfers. With even small businesses able to buy internationally, and service businesses looking to expand beyond South African borders, a growing number of local businesses have to engage in these kinds of transactions.
Most will likely turn to their banks for their international money transfer needs. That’s understandable. If a company uses a bank for all of its other transactions, why wouldn’t it do the same for international money transfers?
In truth, that’s seldom a good idea. Banks are rarely transparent with their pricing. Sure, they might list all the standard fees associated with a transaction, but they won’t disclose to customers that there’s a fee called “the spread” on each transaction.
Simply put, the spread is the difference between the rate at which a bank buys a currency and the rate at which it sells that currency to its customers. So, let’s say you’re sending R1 000 000 to the US. If the spot rate is R18 to $1, the bank might charge you R18.36 to $1 and pocket the 36c for each dollar, which equates to 2% of the transaction value. While this doesn’t seem significant at a first glance, it means the bank is charging you R20 000 in addition to their admin or processing fees. This spread is often hidden in the exchange rate, so wouldn’t be obvious to most customers, and results in businesses paying tens of thousands of rands more on a transaction than they should.
A lack of financial literacy around international money transfers can have other impacts too. It can, for instance, mean that customers don’t know when they’re getting poor customer service or when costly delays on a transaction could be easily resolved.
Embrace education
While there are few quick fixes to building financial literacy, one way of avoiding all of these pitfalls is to work with financial service providers which value transparency and understand the importance of playing an educational role for their customers. Those providers will treat customers fairly and openly, pricing their products transparently. That, in turn, gives those customers’ businesses the best possible chance at long-term success.