When inclusive bank lending becomes harmful to consumers

Ronald Rateiwa


Well-functioning financial systems support the functioning of all components of the economy, by facilitating transactions and the flow of resources between deficit and surplus economic units (Mishkin, 2007). A key asset of the South African economy is its well-developed financial systems. However, the regulation of such systems is a complex task, and regulatory failures in financial systems pose large risks for the wider economy. Given these concerns, it is interesting to examine some of the characteristics of the South African financial system, especially as regards consumer indebtedness.

Data obtained from the World Bank Global Development Finance database show that access to financial institutions in South Africa increased from 54% in 2011 to 69% in 2014. This level of access to financial services is far higher than the world average of 50%, which is to our credit. However, associated with this are a number of indebtedness indicators, particularly for households, which are fairly worrying.

One of the ways to check if banks are lending out more that they should is to compare the volume of funds lent out as credit to the volume of funds mobilized as deposits. This measure is also referred to as the intermediation ratio. The intermediation ratio is calculated as credit to the private sector divided by total deposits of commercial banks. A ratio that is more than one (or more than 100%), implies that banks are extending more loans to the economy than the amount of deposits that are being mobilised. However, if the ratio is less than one (or less than 100%), it implies banks are lending out less funds compared to what they are mobilising in the form of deposits.

The intermediation ratio may also reflect a number of other factors at play, including the efficiency of the banks in converting deposits to credit, or the extent to which the financial system is integrated with and able to draw on international markets. However, if the system is lending more than it is collecting in deposits, there is likely to be excessive growth in credit, which in turn requires intervention (or at least deeper investigation) from the regulatory authorities.

An analysis of the intermediation ratio in South Africa in the figure below shows that banks are consistently lending more funds than they can mobilise in the form of deposits. Moreover, the intermediation ratio for South Africa is much higher that the world average and high-income countries, and was the highest in the world between 1992 and 2003. Further analysis of household savings and indebtedness levels is needed to understand the possible drivers and dangers of this phenomenon.

Figure  SEQ Figure * ARABIC 3: Bank credit to deposits ratio expressed as percentage: 1960- 2014

Source: World Bank, 2017.

Household savings vs borrowing

The savings to disposable income (STDI) ratio has declined significantly over the long term, from more than 10% in the 1970s to -0.5% in 2016. A negative STDI implies that households’ disposable income is now less than their expenditure basket, and thus they have to rely on borrowing in order to survive. Conversely, over the same time, the debt service cost to disposable income (DSTI) ratio doubled from around 4% to more than 9%. An increase in the DSTI ratio reflects the increasing debt burden on households. While this may be explained by increasing interest rates, in this case it is also probably attributable to excessive exposure to debt by households.

Figure SEQ Figure * ARABIC 4: Savings to disposable income and the debt service cost to disposable income ratios expressed as a percentage: 1965-2014.

Source: SARB, 2017 

Household debt vs disposable income

Debt is equivalent to more than 75% of household income in South Africa. The debt to income (DTI) ratio for South Africa is far above the threshold level of 50% suggested by the International Monetary Fund (2016). A high level of indebtedness implies that households will have to spend less on consumption in order to service debt. High levels of indebtedness also increases the vulnerability of households and the financial system to income, asset price or interest rate shocks.

Figure  SEQ Figure * ARABIC 5: Debt as a percentage of disposable income (DTI): 1965-2014.

Source: SARB, 2017

All of these indicators suggest that household credit in South Africa has grown rapidly, and has probably reached excessive levels. Whereas the economy has sustained high levels of borrowing for a number of years, there have also been major shocks to the system, such as the collapse of African Bank (which thrived on aggressive unsecured lending). For as long as indebtedness levels remain this high, the potential for more of these events remains.


Knoop, T. A., 2008. Modern Financial Macroeconomics: Panics, Crashes, and Crises. Malden, USA: Blackwell Publishing.

International Monetary Fund, 2016. Article IV consultation for the Republic of Korea, Washington DC

Mishkin, F. S., 2007. The Economics of Money, Banking, and Financial Markets. Boston: Pearson Education.

South African Reserve Bank, 2017. Money and banking bata, Pretoria: South African Reseve Bank.

World Bank, 2017. Global Financial Development Indicators. [Online]
Available at: http://databank.worldbank.org/data/reports.aspx?source=global-financial-development&Type=TABLE&preview=on#
[Accessed 16 May 2017].