PROJECT: Improving the current savings culture within the target population of LSM Groups 1-5 in South Africa Coach Desray Clark Sponsor Andre Hattingh, VISA South Africa Syndicate IEDP Group 4 (Insync) Syndicate Members Marietjie Ferreira Nicholas Nkosi Premeshin Naidoo Sagree Padayachee

Table of Contents 1 2 3 4 4.1 4.2 5 6 6.1 Executive summary.....................................................................................................1 Introduction .................................................................................................................2 Problem statement and description.............................................................................2 Project Rationale/ Objectives of the investigation .......................................................4 Project Aim..................................................................................................................4 Project Scope..............................................................................................................4 Fact Base Development ..............................................................................................4 Findings & Analysis .....................................................................................................5 Behaviour & attitudes towards savings .......................................................................5

6.1.1 How does South Africa Compare ................................................................................5 6.1.2 Types of savings and motivations to save ..................................................................6 6.1.3 Culture ........................................................................................................................8 6.1.4 Behaviour of young adults ..........................................................................................9 6.1.5 Financial Literacy ........................................................................................................9 6.2 6.3 6.4 Savings for Retirement .............................................................................................10 Impact of government policies on savings ................................................................12 Impact of financial products on savings ....................................................................13

6.4.1 Access to savings products ......................................................................................13 6.4.2 Collaboration between Government and Private Sector on savings .........................14 6.4.3 Other Products Researched .....................................................................................14 6.5 Benefits of a strong savings culture ..........................................................................14 6.5.1 Individuals .................................................................................................................14 6.5.2 Banks ........................................................................................................................15 6.5.3 Government and Economy .......................................................................................15 6.6 7 7.1 7.2 8 8.1 8.2 8.3 Barriers to improving a savings culture .....................................................................15 Alternative solutions ..................................................................................................16 Financial Literacy ......................................................................................................16 Collaboration .............................................................................................................17 Recommendation and implementation approach ......................................................19 Development of a financial literacy programme ........................................................19 Implementation approach .........................................................................................20 Quantification of benefits of the recommendation .....................................................21

9 10 11 12

Implementation plan..................................................................................................21 Conclusion ................................................................................................................22 Glossary ....................................................................................................................23 List of References .....................................................................................................24

• • • • • • Appendix 7 Appendix 8 Appendix 9 Appendix 10 Appendix 11 Appendix 12 – The effect of Monetary and Fiscal Policy on savings in SA Some of the Innovative Products which Encourage Savings Interviews Initiatives to improve the savings culture in LSM Groups 1 – 5 Financial analysis of recommended solution Implementation plan South African’s Attitudes to Savings The Savings Experience in Other Developing Countries Teach children to save The proposed restructuring of South Africa’s retirement funding Further facts on LSMs Factors that impact on the willingness of people to save –SASI Table of Figures • • • • Figure 1 ...........................Jan...6 Figure 3 ..Savings Activity amongst the poor in South Africa ...............Table of appendices • • Appendix 1 Appendix 2 (2007..Desired financial knowledge ....Factors that impact on the willingness of people to save .....................7 Figure 4 ..Savings as a Percentage of GDP .....................................3 Figure 2 ....................10 ...........................................23) • • • • Appendix 3 Appendix 4 Appendix 5 Appendix 6framework........

Adequate savings. the following research report has been undertaken in an effort to determine how to improve the current savings culture of South Africa by focusing on the target population of LSM Groups 1-5. levels of financial literacy. economic growth. influence of government policies and accessibility to savings products. cultural and behavioural elements and the impact of government policies. new and innovative financial product offerings. In order to cultivate a sustainable savings culture within the South Africa economy. The question that remains is how does South Africa improve and sustain a savings culture that promotes wealth creation & economic growth. The lack of a savings culture in South Africa has been perpetuated by the high banking fee structures. which are important for generation of capital has a direct impact on economic growth and is vital in achieving macroeconomic stability. In light of this challenge facing the South African economy. higher fiscal income. and improved liquidity in the financial markets. it could very well threaten South Africa’s economic growth and development. increase in the banked population. motives for saving.1 Executive summary South Africa's savings culture relative to other developing countries is viewed as poor. The research findings revealed that there are various factors that influence the willingness and ability of people to save. accessibility to formal savings products. limited financial literacy of consumers. highly bureaucratic processes. The benefits that will be derived from the creation of a strong savings culture will include improved financial literacy. Page 1 . whilst the propensity to consume remains very high. reduced exclusive reliance on state pensions. culture. it is imperative that key stakeholders such as government and financial institutions embark on a collaborative approach to create a financial literacy programme that will encourage people to participate in developing a high savings culture by engaging in behaviour that supports and promotes savings and investments. reduced dependency on foreign capital and investment. These factors include behaviour and attitudes. In the event that this problem of a low savings culture continues to exist.

9% of GDP (Jooste. despite the misconceptions that they don’t. Currently. The link between economic growth and the development of a strong savings culture is therefore of fundamental importance to a developing country such as South Africa. 1 “Improving the current Groups 1. The challenge that remains is for South Africa’s financial sector to proactively identify and deliver on the needs of all South Africans so as to encourage a robust savings culture. savings culture within the target population of LSM facing the South African economy. 1 Living Standards Measure (LSM) is a frequently consulted market segmentation model used to delineate between the different economic groups in South Africa. South Africa’s savings culture is considered to be very poor with a savings ratio of 16. and seeks to provide some recommendations based upon the study undertaken.9% of GDP (Fin Week. one of the major challenges is the stimulation of a sustainable savings culture that can be applied across all income groups. 2009). 2005).2 Introduction In light of the current economic crisis facing the South African economy. A more detailed explanation of the LSM concept is annexed in Appendix 1. This document aims to highlight the effect of individual and institutional factors that either encourage or dissuade a savings culture. South Africa features at a savings ratio of 16. a country requires at least a total savings of 20% of Gross Domestic Product (GDP) in order to support real economic growth of over 3% per annum.5 in South Africa” is a research topic that could create a platform for understanding one of the major challenges 3 Problem statement and description According to the International Monetary Fund (French. the syndicate group has established that South Africans of all income groups do actually save. the phenomenon of the increasing propensity to spend especially in the lower income groups can be balanced against an improved savings culture. which is expected to continue on a declining trend. By leveraging South Africa’s sophisticated financial system with the intention of improving its savings culture. Page 2 . 2009). The economic group defined as LSM 1-5 represents the largest proportion of the South African population. Through the interviews conducted with various stakeholders.

A savings culture is influenced by various factors that drive the ability and willingness of people to save. Figure 1 Factors that impact on the willingness of people to save –SASI (2007. and propensity for high consumption. only 5% are saving towards retirement. January 23) These factors as defined by the South African Savings Institute (2007) can be summarised as: • Behavioural factors which entail personal circumstances which can either promote or dissuade savings • Psychological and Sociological factors which addresses attitudes and personal preferences • Institutional factors that revolve around incentives to save. income levels and life stage Page 3 . Of the 33% that are saving.South African Savings Institute (“SASI”) (2007) quote that 67% of the target population are currently not saving. it is imperative that the defined target population starts to engage in behaviour that supports a high savings culture. products. Given South Africa's poor savings culture. and available financial support • Demographic factors which include education. as illustrated in Figure 1 below and explained further in Appendix 2.

2 Project Scope The scope of the project will encompass the investigation of the financial habits of South African consumers relative to a savings culture and the factors which influence their ability and willingness to save within the target population of LSM groups 1 – 5. Singapore and Thailand). there should be a concerted effort to convert the proliferation of unsophisticated means of savings or transacting for any economic group in South Africa to formal savings. This includes savings that are tucked under mattresses.1 Project Rationale/ Objectives of the Investigation Project Aim The aim of the project is to research and develop a set of recommendations that will support the creation of an improved savings culture within the target population of LSM Groups 1 – 5 in South Africa. 5 Fact Base Development The fact base was developed through the investigation and analysis of the following elements: • • The behaviour and attitudes towards savings by target population The role of the financial services sector in stimulating a high savings culture amongst the target population • The role of the government in incentivising a savings culture through fiscal and monetary policies • Investigating trends and best practices as employed by other developing countries (Brazil. Given the existence of a highly sophisticated financial services sector in South Africa. 4. sent home by bus or paid into stokvels. which represents 0. 4 4. China. there is an estimated $900 million of remittances that moves within the informal economy. The research perhaps indicates the extent to which the financial services sector has not truly tapped into the full savings potential within the South African market.French (2005) indicates that according to research conducted by the University of Cape Town for South Africa’s Financial Diaries Project. Page 4 .3% of SA’s GDP ($283 billion). India.

6. Savings Institute of South Africa. The research strategy that was applied included the following: • Interviews and discussions were conducted with VISA South Africa. Singapore and Thailand. is considered to be very poor. Citi Bank. and economists. Brazil. as well as Rabobank and World Granny in the Netherlands in order to collate information to support the project deliverables. in relation to South Africa’s savings ratio which is recorded at 16. Page 5 . 6 Findings & Analysis This section will investigate current behaviour and attitudes towards savings within the relevant target group and compare this with other developing countries that have been more successful in creating a savings culture. • A sample of financial services products were considered due either to their relative success or innovation.The research methodology adopted for the purpose of formulating this research paper included a literature review of the existing body of knowledge available on the topic under study. ABSA.1.1 How does South Africa Compare South Africa’s savings culture.1 Behaviour & attitudes towards savings 6.9% (Jooste. India. interviews with key stakeholders such as the project sponsor.9% of the gross domestic product (GDP). when compared to other developing countries such as China. It will further compare the intervention and incentives by the government and financial institutions of these countries to South Africa in order to investigate and recommend best practices for South Africa. 2009) as per Figure 2 below and appendix 3. financial institutions. This is evidenced through the savings ratios attained by these developing countries which range from approximately 22% to 49.

9% in 2007 hence resulting in China having one of the highest per capita savings rates in the world.9% Figure 2 Savings as a Percentage of GDP – (various sources) According to statistics released by the People’s Bank of China (Xiaochuan.0% 40.2 Types of savings and motivations to save Savings within the household sector is defined by economists as that part of household income which is not consumed with the resulting action that the surplus cash is then invested in a savings vehicle. it is also important to understand the different types and motives that encourage a culture of savings and its impact on the overall savings ratio of the country. it is evident that South Africa does have the potential to significantly improve its current savings ratio by adopting similar measures that have been successfully implemented in these countries. SASI (Jan 2007) indicates that 67% of people in LSM Groups 1 – 5 do not save according to the definition provided. however this statistic reduces to 56% when funeral savings / insurance is included in the definition of savings.0% Thailand 30.0% 25.8% Singapo re 49.5% in 1998 to 49.0% 5.0% 45. China’s savings rate increased from 37.0% China 49.0% 15.0% 30. 2009).0% 10. However. Data released by the Monetary Authority of Singapore (1997) indicates that Singapore’s gross national savings increased from -3% in the 1960’s to 49% in the 1990’s and remained fairly stable thereafter.9% IM F Target 20.0% India 34.0% 35. 6. The conventional Page 6 .Savings as a % of GDP 50.0% 0.1. In evaluating the comparisons tabled above.0% 20.0% B razil 22.0% Series1 So uth A frica 1 6. Brazil on the other hand. demonstrates low savings ratios of 22% of GDP in comparison to India and China as illustrated by a research paper prepared by Arcadia Market Commentary (2009).

In light of the research conducted by Prinsloo (2002) in “Household debt. it has been established that a culture of dis-saving is prevalent amongst the youth. attitudes and behaviour towards savings. Jan 2007) suggests that there are four types of savings. 2007) Comparisons between South Africa and other developing countries with respect to motives and attitudes to save are included for review in Appendix 3 – “South African’s Attitudes to Savings”.cash-based savings placed in banks and other investment products may not be attractive to individuals on the lower end of the LSM group scale as they tend to place more value on the tangible aspects of savings which manifests itself in the form of investing in housing or education (SASI. e. South African’s motivation for savings can be summarized in Figure 3 as follows: Figure 3 Savings Activity amongst the poor in South Africa (SASI.g. whilst older working adults tend to adopt a savings culture. Savings for a particular objective. In a literary review on savings (Melzer. categorized by the motivation to save: • • • • Precautionary savings to plan for emergencies Target savings which are for a specific purpose. young adults in the early stages of establishing a family and retired individuals in South Africa. The age profile and stage of development of an individual will largely determine their motives.“The Savings Experience in Other Developing Countries”. namely target savings. a deposit for a large purchase Income smoothing savings for irregular future employment or retirement Bequest savings to provide for future generations According to SASI (2007. March 2008). and Appendix 4 . Page 7 . wealth & saving”. can be facilitated through both formal and informal savings instruments. Jan).

2007). 38% of households in the target group have secured some form of funeral/burial insurance or savings cover (FinMark Trust. FinMark Trust (2007) indicates that 42% of those who make use of informal channels of savings also have a formal savings product. FinMark Trust (2007) indicates that only 1% of LSM Groups 1 – 5 make use of endowment type products. creates the platform to understand how culture fundamentally drives the behaviour and attitudes of people to save. although typically for much shorter periods and provides universal access to any member of the community to Page 8 .3 Culture Melzer (Jan 2007) indicates that LSM Groups 1 – 5 are most likely to utilize informal savings instruments.1. Additionally. the redistribution of real income in favour of low income earners. the negative to extremely low returns in real after tax interest rates will adversely affect the household’s preference to save through deposit type instruments (Prinsloo. Stokvels are the informal equivalent of endowments. The social pressures inherent in the cultural and value systems of communities play a pivotal role in shaping individuals motives to save as well as formulating a trusting environment that is conducive to saving and will promote the entrenchment of a sustainable savings culture. Given the AIDS pandemic that persists in South Africa. 6. Melzer (Jan 2007) cites that the Financial Diaries Project revealed that 70% of the target group has utilized stokvels as a savings vehicle. The research clearly indicates that poor households in particular have a tendency to allocate some of their disposable income towards saving for events such as death. 2002). the different types and motives of savings and its impact on stimulating positive savings behaviour. Understanding how South Africa compares to the rest of the world in terms of its attitude towards savings. South East Asian communities have also been observed to demonstrate similar group financial behaviour. with a high propensity to consume.From a macro-economic perspective. economists are inclined to agree that an increase in the real after tax interest rate will undoubtedly impact an individual’s decision to consume or save in the short term. Melzer goes on to indicate that group savings arrangements can act to exert pressure on individuals to conform to savings arrangements as is often found with stokvels and burial societies. increases the proportion of domestic income devoted to consumption and reduces the gross savings rate. In addition.

When benchmarking South Africa to other developing countries. whilst 44% indicate that they try to save regularly. 38% of young adults (across all LSM groups) have savings or transaction accounts. between 2006 and 2007. hence it is valuable that consideration be given to the behaviour of young adults with respect to the subject at hand. Financial literacy therefore becomes key in ensuring a sustainable savings culture. it will most certainly direct the flow of savings from the informal to formal economy thereby improving the savings ratio of the country. Unless a savings culture is instilled in this sub-group. Appendix 5 illustrates an example of an initiative (“Teach Children to Save”) to promote a culture of saving in children. The savings culture of this group is primarily driven by their financial situation. average income levels relative to this sub-group have declined thereby placing savings under tremendous pressure. their poverty will persist into future generations. across all LSM groups) have a greater propensity for debt. it was evident that cultural differences.1. Further to this.4 Behaviour of young adults FinMark Trust (2007) indicates that 46% of LSM Groups 1 – 5 are below 30 years of age and further suggests that young adults (18-29 years. values and household structures are pivotal to shaping the savings behaviour and financial habits of consumers and should not be underestimated when developing a framework to support the stimulation of a savings culture in South Africa. but also influenced by financial awareness and attitudes. If these principles are extrapolated to the formal savings channels and adopted to achieve similar results. FinMark Trust (2008) indicates that 31% of all LSM groups agree that the greatest desire for financial knowledge lies in the use of savings products.5 Financial Literacy Although SA boasts an overall literacy rate of 88%. 6.1. financial literacy remains a challenge in the South African context. Another dimension that should be explored when attempting to implement a sustainable solution is the ability to inculcate a savings culture from generation to generation. 6. especially those who fall in the target group. and are increasingly turning to informal sources of debt like family and friends to fuel their consumption-based lifestyles. Page 9 .establish a savings instrument.

Understanding key financial concepts such as budgeting is key to ensure a sustainable savings culture. 6.Further to this. or specific targets. this is not matched by any marked increase in the percentage of people who have retirement or pension savings product. together with poor circumstances. 2008) Financial literacy holds strategic value in terms of ensuring that people understand the importance and benefit of savings in the long term for events such as retirement. Bearing this in mind. understanding of financial products and general awareness of basic financial knowledge.Desired financial knowledge (FinMark Trust. The lack of financial literacy (as per Figure 4) contributes to the low savings culture. probably makes it difficult for the target group to conceptualize the need to plan for retirement.2 Savings for Retirement FinMark Trust (2007) quotes that although people seem to be more worried about their ability to provide for their own retirement and old age. 26% require knowledge in the selection of the best investment products and 67% of LSM Groups 1 – 5 has no basic knowledge of simple retirement terms. Clearly. Figure 4 . A lack of what should be common understanding. the poorer segment of the population is the less educated and therefore more susceptible to poor financial decision making by not fully appreciating the consequences of their actions. particularly in the area of debt. education. Page 10 . savings for retirement is another key area that needs to be addressed as part of inculcating a savings culture. FinMark Trust (2007) further indicates that key financial terms are generally not understood. Financial literacy is the primary driver in developing a sustainable savings culture into the future and has important implications for financial institutions endeavouring to stimulate individuals to invest in savings products offered.

The aim is to encourage life insurers to design appropriate. this has unintended consequences as there is little motive for long-term savings for retirement. March 2008) In benchmarking South Africa to other emerging market countries. The products will be branded Zimele. (SARB. yet innovative and competitive products for the low-income market. appropriateness. it was found that countries such as Singapore have highly developed pension systems which contribute significantly to a higher savings rate according to the Monetary Authority of Singapore (1997) on the improvement of domestic savings. SASI (2008) reports that 89% of pensioners in this group rely on the SOAG to survive. National Treasury (2004. and very few in this group have other sources of income. which forms the majority of LSM Groups 1 – 5.. The State Old Age Grant (“SOAG”) is the most important source of income for those over sixty years in LSM Groups 1 – 5. Interestingly. due to the non-subsidization of Page 11 .Retirement savings within LSM Groups 1 – 5 is influenced by the immediate needs of these individuals in relation to disposable income which is further hindered by the structure of the state pension system. simplicity and affordability.” This clearly spells out the challenge that exists for poor people in providing adequately for their retirement. The government’s intervention in terms of defining a retirement funding framework (which is currently under revision) that encourages savings will be crucial to establishing a platform for a sustainable savings culture. The remaining 11% rely on family or friends. p. Refer to Appendix 6 for a brief outline of the proposed restructuring of South Africa’s retirement funding framework. the research also indicates that the SOAG (currently at around R940 per month) is higher than the average income for those of working age within LSM Groups 1 – 5. Due to the SOAG being higher than an average income of this LSM group. The basic concepts underlying the products were developed by the LOA and are directed to South Africans earning less than R3 000 per month. The Life Offices’ Association of South Africa (LOA) announced new measures for granting retirement funding access to low-income earners. Financial Stability Review. which indicates that the consumer is purchasing a retirement product that meets the minimum requirements of physical accessibility.17) in reference to the retirement provision further states that: “Coverage in the formal sector is relatively good…even when compared to international levels….the challenge remains to provide an adequate vehicle for retirement for those in the informal sector and/or those only able to make irregular contributions. In China.

and an appreciating currency. 2000).9% of GDP (Jooste. 2005). Although international capital flows can supplement domestic savings. 6. Similarly.3 Impact of government policies on savings A low level of savings would limit a country’s rate of investment and restrain economic growth. In contrast to South Africa. (Sekgobela. providing some explanation for the higher tendency to save. housing and healthcare not being subsidized by the state (Xiaochuan. 2002). High levels of savings are required to facilitate investments. health insurance coverage is very low. housing and healthcare. resulting in a lower propensity to save (Leme. 2004). Salam & Kulsum. Government policies influence the capacity and appetite to save. education and pension have an unintended consequence resulting in little motive for savings. according to a research paper by Salam & Kulsum (2000). 2009. this makes a country more vulnerable to international capital shifts during times of uncertainty. as well as the institutions of the market economy have also ensured Page 12 . both China and India’s high savings culture is influenced by education. education and pension discourages a savings culture. Government policies therefore influence the capacity and appetite to save and warrant a further review. According to the Governor of the SA Reserve Bank. and with lower inflation the real return on investment is higher. Social support for emergencies like healthcare. Social support for emergencies like healthcare. the primary goal of the Bank is the maintenance of price stability which has given rise to a monetary policy framework targeting inflation (Mboweni.pension. This would stimulate savings as the buying power of money remains constant. The experience in Brazil is similar to South Africa whereby the state provides for welfare. Tito Mboweni. it was established that this also increased the incentive for precautionary savings and in turn yielded a higher savings ratio for the country. 2009) is insufficient to support a higher economic growth rate. In India. (Prinsloo. Government would like to raise the savings to GDP ratio to 23% in order to support an average growth rate of 4% or more. which is in contrast with other countries such as India and China. approximately only 10% of India’s population is covered by a retirement benefit scheme. The current savings rate in SA of 16. In Singapore factors such as low inflation. steady growth rates. 2006).

Thailand has introduced macro-economic policies in order to promote and encourage domestic savings to bridge the gap between savings and required investment. easily accessible and cost-effective to allow for a significant penetration within the LSM Group 1 – 5. This should provide a basic savings vehicle for those who desire to save with the flexibility that is provided by being able to accumulate savings as is convenient. The challenge here would be to establish incentives to ensure that additional disposable income generated through tax relief are actually saved through formal savings instruments.that the returns from savings are preserved and channeled to their most productive use (Monetary Authority of Singapore. A further consideration is the challenge of financial institutions to ensure that financial products remain simple. 6. whilst VAT has remained at 14% and the additional disposable income has not necessarily been saved. and to access those savings when required without any restrictive conditions. Access & affordability is therefore an important consideration for LSM Groups 1 – 5 in formal savings. A minimum monthly savings contribution or minimum initial amount may be out of reach of the poor. This will promote economic growth and simultaneously stimulate a savings culture. In addition. 2009). the basic account provides a base for accessing other bank savings products. the attractiveness of the product’s costs and potential returns. Appendix 7 gives a detailed review of the effect of the Monetary and Fiscal Policies on savings in South Africa. however at the same time has increased consumption based taxes to dissuade spending (Ministry of Finance: Thailand. Thailand has reduced personal income taxes in an effort to increase disposable income. FinMark Trust (2008) indicates that 50% (up from 35% in 2006) of the target group utilise bank accounts.4. 6. design and structure of the financial product itself. Important to note is that the greater majority of LSM Groups 1-5 are based in remote locations and accessibility to Page 13 . personal tax rates have declined over time. South Africa has undoubtedly significant challenges in terms of accessibility to savings products especially when attempting to penetrate the LSM group under consideration.4 Impact of financial products on savings The basic bank account provides both access and flexibility to save. essentially excluding them from formal savings products. In South Africa.1 Access to savings products Access to savings products can be broadly defined to include physical proximity to a financial service provider. 1997).

South Africa's financial system did not provide financial services to disadvantaged people or people in the lower income groups. 6. This once again reiterates the potential to improve the savings culture through developing more innovative and cost effective product offering that will prove lucrative to the target markets that remain largely untapped. Initiatives such as the Mzansi account therefore serve as crucial building platforms from which a culture of savings can be launched. 6. 2009).5 Benefits of a strong savings culture 6. Refer to Appendix 8 for more details and analyses of these. greater financial independence. and Bank of America’s “Keep the Change”. in an effort to extend the footprint of financial institutions to reach the target markets located in remote locations. These include: FNB’s Million-a-Month Account.1 Individuals The benefits that will be realised from the creation of a strong savings culture for the consumer will include improved financial literacy. and the creation Page 14 . This also presents an opportunity between government and the private sector to engage in more collaborative initiatives similar to that of the creation of the Mzansi account. Capitec’s Global One Banking Facility. 2009). Singapore’s POS Bank. the reduced exclusive reliance on state pensions. 6 million accounts have been opened (Semono. Prior to the introduction of the FSC initiative.4.2 Collaboration between Government and Private Sector on savings “It is acknowledged that South Africa does not have a savings culture. Government and the financial services industry worked in collaboration on the Financial Services Charter (“FSC”) to transform the industry.4. The financial inclusion facilitated by Mzansi accounts made a positive contribution towards the economic development of the country for people who had previously been excluded from the main-stream banking. It would be perverse to expect ordinary citizens to save when they are denied access to a basic savings account. To date.” (Nene.banking and savings products are limited.5. Wizzit mobile banking.3 Other Products Researched Innovative products which have been relatively successful both in SA and abroad have been reviewed. personal financial stability. Financial institutions need to investigate the opportunities that are available to bridge the proximity gap. 6.

In South Africa total bank deposits represent as much as 80% of total net interest income of the local banks. and they also do not allow access to significant parts of the accumulated savings in the event of an emergency. and improved liquidity in the financial markets. Further benefits will include less reliance of the population on social grants and government pensions.5. less volatile. increased liquidity.of opportunities to increase entrepreneurship through ensuring that entrepreneurs have the capital to initiate small businesses. in addition to competing claims on any disposable income. 6. and retail deposits account for the majority of this income.2 Banks Some of the benefits for the banking institutions will be an increase in the banked population. consumption rather than providing for the future. wealth creation and economic stimulation in the country. the benefits that will be derived from stimulating a savings culture in South Africa will comprise economic growth. as well as the ability of government to build resilience and stability during economic downturns. Affordability is clearly an issue in the target group.3 Government and Economy On a macro-economic level.6 Barriers to improving a savings culture Short-sightedness results in individuals having a preference for present Alternative Long term SASI (2008) identify other hurdles to long-term savings in addition to those already mentioned. retail deposits account for 15% of banks’ total funding. These deposits are more profitable. and cost banks a lot less than wholesale deposits. 6.5. savings mechanisms (not included in any cash based definition) provides for security in old investment products also do not meet the needs of poor people. 2009). age by investing in housing or providing for their children’s education. According to statistics revealed by DataMonitor (2008). new and innovative product ranges and reduced cost of capital. higher fiscal income. improved profitability. The business case for banks to attract retail deposits is therefore quite apparent. 6. Most do not allow for contributions that offer flexibility with varying income levels over time. Page 15 . Retail deposits provide the benefit of long term funding to banks which are also at much lower spreads than what corporates demand (Potgieter. reduced dependency on foreign capital and investment.

the charges involved as well as the poor returns on basic bank accounts can act as barriers for potential savers. (FinMark Trust. which will influence the timeframe for measuring the success of implementing any of the alternative solutions proposed. FinMark Trust (2008) indicates that 67% of LSM Groups 1 – 5 have no basic knowledge of simple retirement terms. To support the findings and analysis detailed in this research report. 7 Alternative solutions Behavioural change is complex and only occurs gradually over time. The question then is how one instills a savings behavioural shift when the affected groups do not understand the underlying basic financial concepts. Page 16 . Whilst there has been a lot of innovation in as far as coming up with new products. the challenge still remains in financial institutions to convert this into real sustainable savings through innovative products that are easy to understand. LSM Groups 1 – 5 account for 57% of the adult population and of these. offer an incentive to save and ultimately encourage a savings culture. initiatives are often done on a standalone basis and the proposed solution is therefore one of a comprehensive programme. Teach Children to Save and others do seek to address the problem. these initiatives are already recognised as important and initiatives such as Operation Hope. the possible solutions that have been identified which will contribute to the stimulation of a savings culture amongst LSM Groups 1 – 5 are as follows: 7. only 44% have basic banking accounts. A long term requirement for a sustainable savings culture would therefore be a shift in mindset of South African citizens and the value attached to savings products and its importance in ensuring the sustainability of the South African economy.1 Financial Literacy The research has highlighted the problem of poor financial literacy. 2008). Financial literacy However. and on a sustained and directed basis to ensure that adults and children benefit from basic financial literacy. Perhaps the biggest deterrent is that many poor people simply do not even have a basic bank account. This will ensure that people become aware of the impact of financial decisions as well as the importance of savings.Access to financial services including the physical proximity of banks. these are only geared towards increasing transactional volumes and not geared towards stimulating a savings culture. Whilst the Mzansi account initiative has been hugely successful in bringing the unbanked into the mainstream banking. coordinated by all stakeholders.

Appendix 10 lists some financial literacy initiatives which can be embarked upon as part of a sustained and coordinated programme. Opportunities • Communicate to people through channels which they can relate to • Although financial literacy is the objective. the syndicate group has considered and listed a number of potential initiatives which institutions and government can sponsor as per Appendix 10. Lasting behavioural change only occurs with sustained effort on the part of the stakeholders and the commitment of the people to change how they think and feel about the issue. Nonetheless. village gatherings are easily accessible to communicate the message • • • Weaknesses • The stakeholders need to agree to work together to strategise a financial literacy programme – this will take time Clearly defined and measurable milestones and outcomes need to be agreed upon by all parties Stakeholders need to overcome firmly entrenched silos in terms of thinking. and will ensure that the messages are spread • Community based structures like schools. • A sustained and coordinated programme will require financial and human resources.2 Collaboration Creating the behavioural change required to improve the savings culture cannot be achieved with only once-off initiatives.A basic SWOT analysis highlights the feasibility of a collaborative approach to this national problem of low (and decreasing savings). no matter how successful those initiatives may prove to be in the short term. Strengths • Targeted programmes to those who will benefit most • Coordinated effort by all stakeholders will ensure sustainability and success • Story telling as a medium can be powerful in rural areas. • Truly create a platform for self empowerment through the extension of knowledge. Threats • Lack of will and commitment by all stakeholders • Bureaucratic and policy barriers that prevent the stakeholders engaging with each other with trust • Lack of interest and drive by the stakeholders may lead to the initiative fizzling out. behaviour and actions People may treat the initiatives with suspicion – trust needs to be established. 7. Stakeholders will need to work together to allocate the necessary. • People will be aware of the impact of financial decisions. and reduce the likelihood of being sucked into spiraling debt. A strong theme that has emerged from the research is that initiatives required to foster the Page 17 . the education campaigns will provide vital life skills. churches.

however it is believed that the body can also assume a greater coordinating. The collaborative effort can consider the problem of a poor savings culture as a multidimensional issue requiring a consistent and concerted effort by all stakeholders. government or other stakeholders – it has to be a collaborative effort. Efforts. It is proposed that the stakeholders formulate a working group to understand. Page 18 . It is for this reason that Collaboration is proposed as an alternative solution to improving the savings culture. resources and interests can then be aligned to develop initiatives that are consistent and sustainable. Strengths • • Ensures commitment of all stakeholders Takes away the current silo-based approach in trying to fix a multidimensional problem • Macroeconomic benefits will extend to the society in general • Ensure coordinated effort by all stakeholders • • Weaknesses • Rules of engagement needs to be established between the stakeholders – this will take time Clearly defined and measurable milestones and outcomes need to be agreed upon by all parties Stakeholders need to overcome firmly entrenched silos in terms of thinking. the cultural shift will be self propagating – China and Japan are cited as examples of what can be achieved with a greater savings culture • South Africa will develop additional characteristics to prevent the economy from facing economic downturns as is being experienced predominantly in the western world Threats • Lack of will and commitment by all stakeholders • Bureaucratic and policy barriers that prevent the stakeholders engaging with each other with trust • Self-interest – institutional profits may have to be compromised for macroeconomic benefits.cultural shift to instill a stronger savings culture cannot be undertaken in isolation by financial institutions. The South African Savings Institute (“SASI”) has already taken the lead in facilitating research and trying to influence policy. behaviour and actions Opportunities • Poor people do save to some extent – these can be brought into the formal system • Once achieved. leading and perhaps oversight function to drive the cultural change that is required. and address the problem in a holistic manner. A basic SWOT analysis highlights the feasibility of a collaborative approach to this national problem of low (and decreasing savings).

a collaborative effort will serve to illustrate to the target group the element of trust between the parties.It is argued that the financial institutions. consistent and complimentary of each other.1 Development of a collaborative financial literacy programme In order to develop a collaborative financial literacy programme that will influence the savings attitudes of people. The macroeconomic benefits of a stronger savings culture will extend to all the participants involved in a collaborative effort. government coercion also played a role. although with Mzansi. In addition. the opinion is that the optimal solution would be the combination of the two alternative solutions presented above. 8. new delivery channels and a host of other silo-based initiatives will not yield a sustainable cultural shift to change the savings behaviour of the target group.5 with the intention to create awareness. 8 Recommendation and implementation approach In reviewing the alternative solutions researched in terms of the financial implications. Financial literacy programmes. practicality to implement. a project team should be established to implement the recommended Page 19 . notwithstanding the substantial benefits to society itself. Through the collaboration of government. and other key stakeholders. understanding and an incentive for people to appreciate the need to save. and the various other role players need to act in unison to effect a lasting cultural shift. The syndicate recommends the implementation of a collaborative financial literacy programme that has the potential to substantially influence the behaviour and attitudes of people to save. a well coordinated and sustained financial literacy programme should be developed to educate the target LSM Groups 1 . overall impact on the savings ratio. The relative success of the Mzansi initiative can be cited as an example of where collaboration can yield great success. Once the feasibility study has been conducted and the results prove positive. a concept which has been cited in various research papers as a factor which prevents the target group from engaging in formal savings. government. innovative products. financial institutions. benefits and limitations. Success will come from these initiatives being well coordinated. it is important that the deliverables of the project are clearly defined and an in-depth feasibility study is undertaken to support the findings and recommendations of the project.

recommendations and comments from these key stakeholders in formulating a financial literacy programme to support the stimulation of a savings culture. Page 20 . design and development of this programme would require the collaborative effort of all key stakeholders to ensure a successful penetration of the LSM Groups 1-5. namely Government. and the relevant approvals and buy-ins have been obtained. the project team can proceed to design and develop a collaborative financial literacy programme focused on encouraging the appropriate financial behaviour that will support the attainment of an improved savings culture. 8.2 Implementation approach Following the confirmation of approval to proceed with the implementation of this financial literacy programme. In investigating the options and mediums available to deliver this financial literacy programme. Savings Institute of South Africa. VISA South Africa and the FinMark Trust. television and radio advertisements. marketing campaigns by financial institutions. A pilot programme would then need to be initiated to test the original assumptions of this recommendation and identify any possible shortcomings.solution. it was found that initiatives such as industrial theatre. which would require corrective action prior to the rollout of the programme on a larger scale. The findings of the pilot programme can then be utilised to improve the collaborative financial literacy programme being rolled out. Thereafter. non-governmental institutions. One of the key actions that will be required to successfully deliver on the expected outcomes of this project will be the review of the proposed recommendation or concept by the stakeholders. the financial literacy programme can be officially launched and the results measured at defined intervals in order to determine the success. Once the stakeholder engagement has transpired. a “train the trainer” programme will be launched to all facilitators that will be involved in delivering the final product to ensure that they are adequately trained and understand the outcomes desired. and all stakeholders would need to ensure active participation in the process. This will create a platform to invite suggestions. savings programmes by government and financial institutions could be packaged into a collaborative financial literacy programme that is simple. financial institutions. school curricula. The packaging. easy to understand and accessible to the target population.

Page 21 .757.5 to the dollar. therefore Appendix 9 includes a range of initiatives that could further supplement the final recommendation in the effort to improve the overall savings ratio in South Africa. thereby improving the overall savings ratio. 8. a financial analysis has been documented and enclosed in Appendix 11 to illustrate the impact of implementing this solution on the conversion of informal savings to formal savings products. As mentioned earlier in the report there is an estimated $900 million (French. The creation and stimulation of a savings culture is a long term deliverable. 419. This change would result in 19% of the total remittances in the informal sector being transferred to the formal economy. Should the unbanked 50% open savings accounts as a result of the implemented recommendation and awareness created.3 Quantification of benefits of the recommendation Based on the calculations documented in Appendix 11.000. the equivalent rand value of remittances that are floating around in the informal sector is equal to R7. 419.In adopting this recommendation. the collaborative financial literacy programme will be targeted at LSM Groups 1-5. Using an exchange rate of R8. the greater majority of which transact in the informal economy.800 from the informal to formal savings channels thereby improving the overall savings ratio and simultaneously improving liquidity. South Africa would successfully be able to transfer at a minimum R1. In the event of the recommended solution being implemented.800 of the total informal savings pool could move from the informal system into the formal channels of savings. this will ultimately result in the channeling of informal savings into more formalised savings mechanisms and availing these funds to the formal economy. at least R1. This will therefore assist in creating a greater awareness of the financial options available to them as well as develop trust in the formal savings channels. 9 Implementation plan The proposed implementation plan is included in Appendix 12 for further evaluation to guide the execution of this recommendation. there is currently only 50% of the adult population within LSM Groups 1-5 that are banked. If successfully implemented. 2005) that is moving around in the informal sector. 650.000.757. To further substantiate the feasibility of this recommendation.

The recommendation proposed may result in an increase of 19% of remittances transferring from the informal to the formal sector.10 Conclusion In analysing the facts presented throughout this project report. as well as an increase in the current savings to GDP ratio from 16. the 17. This will ensure that a foundation to build a sound savings culture is inculcated from generation to generation and will prove pivotal in developing a sustainable savings culture. it is evident that improving the savings culture of South Africa is by no means an easy challenge to embrace considering the various factors that both drive and impede the fostering of a sustainable savings culture. Whilst this may initially seem to be a long term goal. it was found that improving the savings behaviour of the target population would require a collaborative financial literacy programme. As a result of evaluating the research undertaken and identifying the various alternative solutions available.1% savings ratio should increase further. In the longer term.1% in the short term. Page 22 . This would ensure a tangible impact to the improvement of the savings ratio of South Africa. through sustaining the implementation of the proposed recommendation. there are a range of short term initiatives that could be undertaken to bridge the gap between the present and desired state in terms of achieving a higher savings ratio.9% to 17.

The SOAG is subject to a means test which determines the grant amount that the state will pay depending on one’s other sources of income together with any amounts that have been saved. Page 23 .11 Glossary Dis-saving Financial Services Charter (“FSC”) LSM Groups SASI Stokvel State Old Age Grant (“SOAG”) The behaviour of spending funds from existing savings The empowerment Charter adopted by the South African financial services industry to promote transformation in the industry Refer Appendix 1 for further info South African Savings Institute – A non-governmental organisation supported by the financial services industry to promote savings in South Africa Informal community based group savings Also referred to as the old age pension. the SOAG is a grant provided by the state for those at retirement age.

March 2009.bjreview. Johannesburg. Johannesburg Branch. ( (2009. “Brazil: O pais do fututo – Economic scenarios for the next 15 years. http://www. (2006. March). (April 2009).”Reducing Savings Ratio. January 20) May).Finscope South Africa 2008. (22 April 2009) Deutsche Bank Research.pdf (15 April 2009) FinMark Trust (2007. April 29).” http://www. “Dragon or giant panda? What China means for Brazil. Citibank. CDE.dbresearch. China Daily. (15 May 2009). “Policy insights No 35 – Couture.”Long term outlook of BRIC’s remains positive” http://www.finscope. DataMonitor.” Survey Highlights including FSM Model .pdf Business Times. “Save and you could win R1m”. www. South Africa accelerating growth in tough times. “Build sound financial habits List of References • Arcadia Market Commentary. Johannesburg. C. Number 1. Accessed 17 April 2009. (2009. C. May).bdo.finscope. J & Morrisson. FinMark South Africa 2007. December). (2009. Clayton. Mail and Guardian.” Survey Highlights including FSM Model . de Laiglesia. Capitec brochure.”.” www.” me=News&ResourceId=2&ResourceName=Industry%20News&IssueId=109 (24 April 2009) Capitec Bank (2009): “Global One Banking Facility”. (2007).org/dev/insights. (2008.oecd.php?tid=1652 (23 April 2009) BDO Spencer Steward. (2006.wallstraits. Family Ties & The Saving Hand. Teach Children to Save South Africa 2008. Back to Banking: Capturing Retail Deposits.pdf (24 April 2009) Deutsche Bank Research.” www. April).co.” (16 April 2009) • • • • • • • • • • • • • • Page 24 . (2008). (2005. May).za. :Creating a savings culture in South Africa now more critical than ever. “Roundtable.” http://www.htm (23 April 2009) Citibank. “South Africans Shun the Piggy Bank”.za (15 April 2009) FinMark Trust. Reference Code: DMFS2281.”http://www. February). Press (2008. London. November 11).cn/G20 Summit/2009-03/27/content_188081.

finscope.buanews. Leme. Johannesburg. March). SA needs more financial education. “Improving the allocation of domestic savings for economic development: Case study for Thailand. “Monetary policy and sustainable economic growth”. Mahlangu. “Seven lessons from the past three years”. www.” “South Africans must start saving”.newamerica. Budget Speech to Parliament. (June. Press Release. ( (18 April 2009).F. P.• • • • • FinMark Trust (2008). ( M. (2007. Quarterly Melzer. “Wizzit strategy works”. (2009. “Banking Comes to the People. J. I. Cape Town. Gieve. I. [Unpublished paper prepared for Eighty20]. Johannesburg.pdf (12 April 2009) Manuel. 9 November 2005. 2005). [Presentation to South African Savings Institute]. S.” http://www2. Jooste. L. (2008) “Challenges of Inflation Targeting for Emerging Market economies: The South African Case”. January) Access to savings in LSMs 1-5. paper prepared for the South African Reserve Bank Conference On Challenges for Monetary Policy-makers in Emerging Markets. (2005). “Unleashing investment by encouraging African savings. p. M.73 Kahn. Mail and Guardian. Kirsten. Fisher-French. “The number of people banked in South Africa has increased by 20% . M. [Unpublished paper prepared for Eighty20].saiia. (1 April 2009).org/library/Enc/ FinMark Trust (2008).but use of products remains limited”.”The B in BRICs:Unlocking Brazil’s Growth Potential. Ministry Of Finance: Thailand. Cape Town.php?=eafrica.html (24 April 2009) Laubscher. Paper delivered at World Bank Conference: Brookings Institute. L.T. French. Fin Week.pdf . February 19). May 14). (2006. “Motives For Saving”. S. R. (1989). (2009. 29 to 31 October 2008. April). Mboweni. December).banxico. ( April 2009) • • • • • • • • • • • • • Page 25 . (31 March 2009). September 24).gov.” http://www. Meyer. www. “Savings: What’s culture got to do with it?” Kotlikoff. October) Township markets: A high level review of survey data. (2009. May 30) Policy Initiatives to expand financial outreach in South Africa. July 31) How to get SA to save. Address to The Bureau for Economic Research Conference on Growing the South African Economy. T. July 27).econlib. A Picture of the Financial Services Industry 2008”. Melzer. Press Release. (2006. http://www.goldmansachs. http://www. (2007. (2007. Cape Town. T. speech delivered at the London School of Economics.

www.oecd. OECD. N. The savings behaviour of the SA http://www.reservebank. S. [Report prepared by Genesis Analytics].”.za/ (18 April 2009). March 14) Old age saving among low-income South Africans.People’s Bank Of China.” http://www. “China – Surfers Paradise! And Bankers Dream. Worthington. (30 March 2009).banxico. Semono. March). Johannesburg. February 2). (2008. “Household debt. National Treasury: Republic of South Africa ( Estimate of National revenue. [Presentation prepared by Eighty20]. Pretoria. Quarterly Bulletin. Retirement Fund Reform – A Discussion Paper.”Improving the allocation of domestic savings for economic development : Case study for Singapore. W. Salam.EconomicOutlook. February).pdf (23 April 2009) National Treasury: Republic of South Africa (2009. ( (23 April 2009) • • • • • • • • • • • • • • • • • Page 26 . February 11).nsf/LADV/15CC7CD0C5D234BB42256C8 400461664/$File/ART122002. U. South African Savings Institute (SASI) & FinMark Trust. (2002. Paper prepared for the South African Reserve Bank. March). February). (2007. Johannesburg. (23 April 2009) Sekgobela. Pretoria. January 23) The savings market for the poor. South African Savings Institute (SASI) & FinMark Trust.qut.buanews. Pretoria.pdf (24 April 2009) Prinsloo. “On Savings Ratio . http://www. UBS Investment Research. South African Reserve Bank (“SARB”).un. (2009. Liabilities – The Biggest Asset. December). May 29). “Savings behaviour in India: An empirical study”. (2009. http://unpan1. (2004. http://www. National Treasury. A & Kulsum. “Interim Economic Outlook”. Z. Saving for stability. Mail & Estimate of National (2009. (2008. wealth and saving.W.• Monetary Authority of Singapore. (2009. April 02) “Six million using Mzansi accounts”. Republic of South Africa ( l. S.bus. J.” http://www. South African Advertising Research Foundation’s (SAARF). (2000). March 2009.pbc. (2009. No 251.saarf. P. February 11). (2009. Pretoria.”. March). April).” http://www. (15 April 2009) Potgieter. Financial Stability Review. April). South African Reserve Bank (SARB) Pretoria.pbfeam2008. Prinsloo. December). (23 April 2009) Xiaochuan. Johannesburg. “Living standards measure. (2008.

2 people in a LSM Groups 1 . SASI (2008) quote that the 2006 General Household Survey indicates that LSM group1 . This represents 74% of all households in South Africa. and the majority (70%) live outside of the established metropolitan areas.69.8 members. It divides the population into 10 LSM groups. Melzer (2007) adds that marketers often use LSM as a basis to segment the market.2. and instead groups people according to their living standards using criteria such as degree of urbanisation and ownership of cars and major appliances. 10 (highest) to 1 (lowest).Further facts on LSM South African Advertising Research Forum (SAARF) (2009) describes the Living Standard Measure (LSM) as: The South African Advertising Research Foundation’s LSM has become the most widely used marketing research tool in Southern Africa.5 household survive on a meagre average monthly income of R1029. The average LSM Groups 1 . It cuts across race and other outmoded techniques of categorising people.3m households.5 is comprised of around 20m adults in 8. Page 27 . Just over half are female (54%). about the same as the national average.5 household is R1029.69. The LSM algorithm is based on ownership of various durables.5 household has 3. The average monthly income derived from employment for a LSM Groups 1 . availability of services as well as location (all else being constant rural dwellers are in lower LSM’s than urban counterparts). with an average dependency ratio of 1. The SAARF LSM is a unique means of segmenting the South African market.Appendix 1 . This implies that an average of 2.

In addition. • Psychological and Sociological: Attitudes and personal preferences will determine whether people are more inclined to consume today. These drivers are impacted upon by four key factors: • Behavioural: People’s personal circumstances either can either promote or dissuade savings. any financial insecurity may actually support the case for an individual to save rather than spend. 2007) Figure 1. sourced from SASI (2007) summarises four factors which impact on savings. The financial services industry’s providing of suitable Page 28 .Appendix 2 .Factors that impact on the willingness of people to save (SASI. as well as the availability of support grants will drive the motivation to save. The level of savings is driven by people’s willingness as well as their ability to save. Fiscal and monetary policies. • Institutional: This refers to both the roles of government and the financial services industry in terms of either supporting or dissuading savings. or defer consumption by saving any disposal income. It depends on both their financial goals as well as financial commitments which may either support or impede upon their ability to save.

the propagation of financial literacy is an important element for which all stakeholders need to take responsibility.products and services will also determine if the appropriate savings vehicles are available to those who wish to formally save. In addition. the ability to save is driven by the excess income over the cost of living for the individual. • Demographic: Education levels determine the understanding of the need to save as well as the savings instruments available. in addition to the fact that older people should be more concerned about accumulating a sufficient nest egg for retirement. Younger people starting out will typically have higher debt levels. generally higher education levels precede higher income levels which are more conducive to additional disposable income available for savings. whilst those who are older and who have paid off debt on their assets will have higher disposable income available for savings. In addition. Page 29 . life stage will also play a role in the ability and willingness to save. In addition. One expects that across all income levels.

Interestingly. 2008) FinMark (May 2007) indicates that attitudinal and knowledge barriers inhibit a tendency to save more than the financial ability to do so. It is interesting to observe that FinMark (2008) highlights the differences in people’s attitudes to savings by both race and economic segment. and especially amongst whites and Asians. Groups 1 – 5.Appendix 3 – South Africa’s Attitude to Savings The general principle of savings is generally understood by people across all LSMs. Page 30 . 2008) believing that small amounts saved will eventually add up to something meaningful. The pro-savings attitudes are more prevalent in LSM Groups 7 – 10. • South Africans are not trusting when it comes to financial matters. 11% of Black people (the bulk of LSM Groups 1 – 5) indicate that they save through informal means. indicating a lack of knowledge of how formal savings would work. investments cite not having a job as the primary reason. Whites and Asians who dominated the formal investment products virtually do not support any informal savings schemes. A number of points are cited to support this argument: • A small proportion of people understand how interest rates work. primarily stokvels. investment and retirement products by Black people which happens to be the bulk of LSM Whites and Asians have the highest proportion of savings in formal 50% of people who do not have any savings or investment and retirement products. peer pressure to save and trust. 51% of the general population does not believe they will have enough saved for their retirement. • Although recognizing the need to save. and rely on their own expertise despite the fact that analysis indicates a lack of financial astuteness. Of the 28% of all South Africans that had some sort of retirement or savings product in 2008. and 14% indicate no money available. This suggests a lack of understanding of both how to save for retirement and how much need to be saved. lack of financial literacy as well as very low disposable incomes available for savings. This is demonstrated by 69% of people (FinMark. one can infer that only a small proportion of these were from the LSM Groups 1 – 5 given the access issues. (FinMark. Reasons for this are the community orientation of stokvels. This is further demonstrated by the low take-up of savings.

The usage of debt for consumption expenditure is also a growing phenomenon. Page 31 . Time preference for consumption is also something that will influence a person’s willingness to save. South Africa has until a few years back been a country of double-digit inflation rates.61% of LSM Groups 1 – 5 trust their own knowledge and experience – this despite generally lower levels of education and financial expertise. and indicate a preference for lower risk investments at lower yield. Debt servicing together with a need to consume generally consequently places pressure on any disposable income available for savings. and an increasingly consumerist society has resulted in a higher propensity to spend rather than save. It therefore made sense to purchase whatever was wanted before it got too expensive – immediate consumption at the expense of saving. The lower inflation rate of late has not done much to change the behaviour. • South Africans are also generally risk averse.

Page 32 . increased internal and foreign competition. The reasons for savings in China in order of importance are education. 2009). higher savings in India post independence are attributed to a more liberalized environment. tradition. Upon closer investigation of Singapore’s savings rate. favourable demographics. foreign direct investment. income levels. prudent fiscal policies. stable macroeconomic environment with low inflation rates. inadequate social security system & stage of economic development. culture & family structures. efficiency of the financial system and financial liberalisation. 2009) According to the Indian Economic Journal (Salam & Kulsum. accommodation & emergencies. it was identified that the high savings rates achieved is attributed to the high income growth. The low savings rate in India prior to Independence were as a result of the negative saving rate of government due to poor performance of government non-statutory corporations. pension. 1997) In Thailand savings rates thereafter have declined from 34. expansion of commercial banks across the country and range of instruments provided by government to encourage small savings. (Ministry of Finance: Thailand. (Xiaochuan. (Monetary Authority of Singapore. growth in consumerism and reliance on borrowed funds against owned funds. 2000). rising purchases of goods and services by government.Appendix 4 – The savings experience in other developing countries In China. forced pension contributions. The consumption behaviour saw major shifts with the average propensity to consume increasing rapidly from 1993-1998 and the corresponding propensity to save declining.3% to 30% of GDP as a result of falling income and stagnant economic activities. the impact of China’s one child policy. movement of population from rural to urban areas. increasing employment and wage bills of government. consumers spend 25% of their income on savings and some of the factors that reinforce the propensity of Chinese consumers to save include the demographics & age profile of the population.

South African Savings Institute (SASI). 2008 on 25 July. The target for TCTS 2008 was to reach 90 schools and 10000 learners. Some volunteers described their experience in imparting saving skills to learners as a “second calling”. from executives to junior staff. rallying motto “Ligotjwa lisase manzi” (Zulu idiom . This target was exceeded with a national outreach of 228 schools and 50857 learners. was adopted as the TCTS motto. TCTS Day. A total of 9 banks and 10 financial institutions participated. now known as Savings shape a stick while still moist). Citibank has been part of the program since 2000 and over 54. saw volunteer bankers and financial sector professionals exchange balance sheets and corporate desks for the classroom to deliver a one-hour savings lesson to Grades 4 to 7 countrywide. promote volunteerism. where Citibank had over 10% of its staff volunteering on the day. The volunteers.Appendix 5 . create awareness about the value of money and the importance of savings. promote financial literacy and assist learners to appreciate the power of choice. TCTS has been adopted as an annual program of The Banking Association South Africa and SASI. The Program is an initiative that was introduced to South Africa by Citibank through its participation in a similar program in America. TCTS covers the basic concepts of saving: reasons to save. TCTS allows for collaboration in the banking industry consumer education space which is positioned as competitive. The founding partners for TCTS are The Banking Association South Africa. TCTS objectives are to foster a culture of savings. SASI’s Savings Month. heeded the call to be “teachers for the day”. Page 33 . The overall goal of TCTS is to teach children to save. Citibank and Operation Hope.Teach Children to Save South Africa 2008 Teach Children to Save South Africa (“TCTS”) is a national savings campaign rolled out in South Africa in July 2008. ABAEF. budgeting to save – understanding difference between a need and a want and where to save.000 learners have benefited from the program in the US.

According to National Treasury (2004). which is the likely route that South Africa will follow: • • Pillar One is a public benefit programme similar to the SOAG Pillar Two is a mandatory participation programme for those who are employed in the formal sector • Pillar Three is voluntary savings managed by the individual.Proposed Restructuring of South Africa’s retirement funding framework The South African retirement funding framework is set for reform. the World Bank has proposed a three Pillar system.Appendix 6 . and discussions between the stakeholders are ongoing. Page 34 .

Appendix 7 - The effect of Monetary and Fiscal Policy on savings in SA Current Market Conditions During the past year Global During the past year global financial markets have witnessed the collapse of renowned financial institutions and have experienced an increasing systemic risk on the largest scale since the Great Depression era. Various organisations foresee huge further potential aggregate losses and write downs relating to loans and securities globally. The uncertainty and the bigger-than-expected losses that have already occurred have caused exceptional volatility in global financial markets and have resulted in a reduction in risk appetite especially towards emerging-market economies. This global financial turmoil has impacted severely on real economic activity in both the industrialised and developing countries, and declining economic and business sentiment and weak consumer demand have resulted in a sharp slowdown in global economic growth. The South African banking sector has been relatively insulated from these financial market uncertainties. Nevertheless, greater vigilance has been required in supervising and regulating the domestic banking sector and payment and settlement system. Monetary Policy The Monetary Policy can be defined as measures taken to influence the quantity of money or the rate of interest with a view to achieve Stable prices, full employment and economic growth. The Monetary Policy in South Africa is conducted by the SA Reserve bank. Instruments used by the Reserve Bank to affect the Monetary Policy Today the emphasis is more on market orientated policy measures which encourage financial institutions to take certain actions on a voluntary basis. A good example of such a policy instrument is the repo rate established by the repurchase tender system of the Reserve bank. The Repo rate is the cost of credit by the Reserve bank to the banking Sector. Another instrument is the open market policy which consists of the sale or purchase of domestic financial assets (Treasury Bills and Government securities) by the Reserve bank in order to influence the interest rates and money supply.
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The South African Reserve’s Bank Primary Goal At the outset it is important to understand the primary goal of the Reserve Bank. This we believe is critical in our quest to enhance the awareness of what the Bank can and should do during this particularly challenging economic times to support the growth of savings in South Africa. The primary goal of the Bank in the South African economic system is the achievement and maintenance of price stability. Although it is possible to pursue price stability using alternative approaches, the current monetary policy framework is inflation targeting. Sound monetary policy in the Bank’s view, provides a stable platform for sustainable economic and employment growth (Mboweni, 2005). Fiscal Policy Every government spends money and levies taxes to finance its expenditure. The government must regularly budget how much to spend what to spend it on and how to finance its expenditure. It must therefore have a policy in respect of the level of government spending and taxation. This is called the Fiscal Policy. The main instrument of the fiscal policy is the budget, presented annually by the minister of finance to Parliament. In the budget the minister outlines government spending plans for the financial year from 1 April the current year to 30 March the following year, and how it’s financed through taxes and loans. The main tools for implementing the fiscal Policy are regulation, taxes and Government Spending. The size and composition of government spending and the way in which it is financed ( included the types and levels of taxes) can have a significant impact on important macro economic variables, such as aggregate production, income and employment and the price level, as well as the distribution of income. These effects have to be taken into account when the budget is prepared. The Fiscal policy also has to be coordinated with the monetary policy that is why there is a close liaison between national treasury, who is responsible for the execution of the fiscal policy and the SA Reserve Bank. The Principals Guiding the National Budget The 2009 Fiscal budget speech, Finance Minister Trevor Manuel advised that in framing the budget they have been guided by five principals: • Protecting The Poor
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• • •

Sustaining Employment Growth and expanding training opportunities Building Economic Capacity and Promoting Investment Addressing the barriers to competitiveness which limit the equitable sharing of opportunities.

Debt levels must be kept under control so we do not create future burdens for ourselves. (Manuel, 2009)

Bank and other providers of savings accounts SA financial system remained sound and the overall confidence remained high. The banks are well capitalised and profitable with adequate profitable and capital adequacy levels. The banking sector remained concentrated and the market share of the big 4 banks remained high 84% in Dec 2006 and 85, 1% in Dec 2007. Of concern is the high annual growth rate of nonperforming loans. The average ROE of the big four remained stagnant at around 18%. (SARB, Financial Stability Review, March 2009) The Banks Amendment Act No. 20 of 2007 was promulgated and came into effect 1 January 2008. The current legal framework gives effect to current international standards and best practices relating to bank supervision and regulation and in particular the new capital framework as envisioned in Basil 2. During 2009 the financial services industry will be subjected to an assessment to be conducted by the IMF and World Bank. This will further improve the confidence of consumers in the South African banks. Consumers should thus feel confident that their money is relatively safe in the bank. (SARB, March 2009) Public finances have become significantly more pro-poor Since 1996, the public finances have undergone significant changes. Spending has grown strongly in social services – which include education, health and social development – and household services such as housing, water, sanitation, electrification and related infrastructure. In 2006, more than 50 per cent of public spending on education, health, social assistance and housing went to the poorest 40 per cent of the population. (SARB, March 2009).Total spending per person on these services has increased from R1 643 in 1995 to R2 788 in 2006. Spending per capita on the poorest 20 per cent of the population was R4 079 in 2006. (SARB, March 2009)

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To the extent that banking crises have proven historically to take quite long to resolve fully. the fact that many of the policy steps that have been announced to combat the crisis have been implemented speedily and on a coordinated basis between countries is a positive force in shaping the global outlook. Page 38 .Conclusion The depth and duration of the current global recession and the eventual full impact on South Africa will be determined by the extent to which success is achieved with the wide range of monetary and fiscal policy steps that have been announced by policymakers worldwide in recent months. the current synchronised global recession could prove to endure somewhat longer than expected. However. The domestic slowdown in the third quarter of 2008 followed by the first output growth contraction in ten years clearly indicate that South Africa’s real economy has not been spared by the global financial crisis.

The education of consumers on these savings instruments is critical to the success of establishing and sustaining a viable savings culture. FNB positioned the introduction of the account such that the chance to win R1 million each month was a way of incentivising a culture of saving in South Africa. This account offers customers an option of having a savings account on either flexible or fixed saving options. which essentially gives a customer an opportunity to earn higher interest on their daily balance whilst at the same time paying lower transaction costs.Appendix 8 – Some of the Innovative Products which Encourage Savings Million-a-Month Account – FNB First National Bank's Million-A-Month account afforded FNB customers an opportunity to win R1 million every month for every R100 invested. Global One Banking Facility – Capitec Capitec Bank offers a three-in-one product which gives customers access to a range of transacting. Financial institutions need to actively market these formal savings instruments so as to attract individuals to invest and ultimately contribute to attaining a relatively high savings culture. This once again begs the question – just how serious are we as a nation to save in order to foster a higher economic growth that produces more jobs. Page 39 . The key difference of the fixed term savings plan is that there is no minimum amount required to open a Global One Banking Facility. less reliance on the state and therefore have more money available to spend on much needed services such as health and education. The key advantage of the Global One Banking Facility is a daily savings and transaction account in one. saving and lending options. The question also has to be asked in terms of the government’s role in stimulating such a culture which could have been demonstrated by supporting/being co-defendants in the case between Lotto and FNB. they sadly are few in between and this particular one is even no longer in existence. This caters for general savings as well as targeted savings. Whilst products such as Million-a-Month Account proved to be a huge success. This product proved highly successful during its inception and further highlighted the need for a lucrative incentive scheme that would incentivise individuals to save.

the number of active Wizzit accounts is more than 60% compared with MTN Banking's 20%. (Fischer-French. Singapore – POSBank An important institutional setup within the Singapore economy is the POSBank which has played a pivotal role in promoting savings in the country. which combines the transaction. Singapore has adopted a wide array of instruments which are well regulated and induce consumers to transfer their cash savings to financial institutions instead of utilizing other informal savings Page 40 . savings and lending options into one product.about 300 000.With the exception of one product – Capitec’s Global One Banking Facility. processes and basic financial principles. The challenge however for Capitec is to attract other clients from other banks and market this product better as none of the other banks offer such a similar product. Through the adoption of a combination of modern technology. 2008). a strategy that underlies Wizzit's mobile banking success. This undoubtedly needs to be accompanied by a series of continuous financial literacy initiatives to supplement the savings products created to support this task. Wizzit Bank Wizzit is a virtual bank that utilises mobile phone technology as a medium to facilitate access to basic financial products. The model used by Wizzit is to gainfully employ facilitating sales agents known as Wizzkids to go directly to unbanked potential customers and to sign them up. none of the other products that we looked at combined the idea of a savings as well as a transmission account. Although MTN Banking and Wizzit have a similar number of account holders . As cited in the research paper on the Improvement of Domestic Savings by the Monetary Authority of Singapore (1997) this setup was aimed at the mobilization of domestic savings and the promotion of savings through adopting lower transaction costs and tax exemptions on deposits. The Wizzkids are usually part of the community and provide ongoing support to customers. South Africa can extend their reach to consumers and offer convenient and simple savings products that will generate interest from individuals and mobilise them to participate in creating a sustainable savings platform that will contribute to a higher savings culture. Rabo Bank (Netherlands) has demonstrated successfully through its interest acquired in Zanaco Bank (Zambia) that rural communities can be banked through modern technology.

Extrapolating this to the South African economy and specifically to LSM Groups 1-5.Keep the change This innovative product offered by the Bank of America offers customers an opportunity to save without “sacrificing” anything in the process. each time they purchase something (such as groceries. it will most certainly prove beneficial and practical to implement. they match 5% of the savings up to a maximum of $250 a year. etcetera) using a debit card. Similarly South Africa is strategically positioned to implement a similar initiative through utilising the infrastructure of the local postal services to offer remote communities formal mechanisms to transact and save thereby bridging the gap between formal and informal savings currently experienced. Bank of America matches the first three months’ savings with the same amount. the purchase is rounded up to the nearest dollar amount. On annual basis. Page 41 . This easy to implement savings mechanism has the benefit of yielding returns without the individual having to save intentionally. a meal at a restaurant. In addition to this. When customers enroll for this programme. The additional amount is then transferred to a savings account. The challenge of course would be to ensure active participation by retailers and financial institutions in order for any tangible benefits to be derived. Once again the collaboration of the government and financial institutions in implementing such an initiative is imperative to ensure success and an entrenchment of a savings culture amongst LSM Groups 1.5.mechanisms. USA .

Appendix 9 – Interviews Interview conducted with Project Sponsor – VISA South Africa Meeting Purpose Interview with key stakeholders at VISA South Africa to discuss the IEDP Project – Stimulating a savings culture amongst LSM Groups 1-5 in South Africa Venue Date & Time Attendees Present Attendees Name Andre Hattingh Marinda De Lange Gill Buchanan Nick Essame Marietjie Ferreira Sagree Padayachee Nicholas Nkosi Item No 97 Central Avenue. Houghton. Question What are some of the challenges that you have identified as constraints to savings in South Africa? Answer Some of the constraints/challenges facing financial institutions in terms of stimulating a savings culture include: • • Consumers lack of trust in financial institutions High bank charges on savings instruments Page 42 . Johannesburg 02 April 2009 – 09:30 am – 10:30 am Entity VISA South Africa VISA South Africa VISA South Africa VISA South Africa IEDP Syndicate Group 4 IEDP Syndicate Group 4 IEDP Syndicate Group 4 Abbreviation AH MDL GB NE MF SP NN Discussion Notes support the stimulation of a savings culture in South Africa? Question What financial literacy programmes has VISA been involved in that would Answer VISA South Africa has embarked on a series of road shows and campaigns that is aimed at educating specific target populations such as scholars on the financial aspects of banking. It is also aimed at improving the financial literacy of the target population so as to ensure a more financial wiser generation. The road shows are utilized as a tool to educate the masses on the banking products available and the various savings instruments at individual’s disposals.

etc) • • • • Answer Savings for retirement (pension income) Reviewing the tax implications on savings instruments Financial literacy of the youth and other target populations Review of banking fees and incentives for people to save Question How reliant are pensioners on the state pension system? There are 12 million pensioners hat rely on the state social security benefits Page 43 . +/. Question What can be done to improve the savings ratio in South Africa? Answer Some of the potential savings opportunities can be investigated by focusing on the following areas: • Informal savings instruments that can be converted to formal savings (e. The debt to income ratio is 78 – 84% and is positive for South Africa when compared to other countries. This can be accessed via the FinScope website.34 million of the population out of 47 million are currently banked Question What are some of the sources that we could utilize in guiding our research topic? Answer The FinScope research which provides an array of statistics on the financial habits of people in South Africa can be utilized as good base to inform your research topic.g. Question Who should our target population be? Answer Those individuals that are currently not saving through formal financing products or not saving altogether. The youth could be a good target market if we had to look at long term sustainability of the savings culture. The Falconer report could also prove to be a useful source in terms of the project deliverables and will provide more insight into some of the key areas of investigation to be undertaken by the team. Question How does the personal gearing ratios of South Africa compare to other developing countries? Answer The personal gearing ratios of South Africa in comparison to other countries are much better. The budget speech delivered by Trevor Manuel also addressed the issue of the savings ratio which should be reviewed. Stokvels.• • Answer Bringing the element of banking to the unbanked especially in rural areas Behavioural change with consumers Question How many people are banked at present in South Africa? Approximately 60 – 70 % of the population. lottery schemes.

whilst there are only 5. Question What other products in the market can be researched that supports the stimulation of a savings culture Answer Community banking by Standard Bank should be reviewed as it could offer some insight on savings instruments available. There is much reliance being placed on the government social grants which creates additional pressure on the system and reduces the savings ratio of individuals. Question What programmes are being administered in the Netherlands that we could investigate during our trip to Rotterdam? Answer The AFLATOUN programme implementable recommendations? Answer The following aspects should also be investigated during the scope of the project Page 44 Question Are there any other issues that can be investigated to enable us to derive . Question What countries could we benchmark South Africa against in terms of best practices on stimulating a saving culture? Answer Brazil would be a comparable country to South Africa that could be investigated. This is a form of budgeting and could be utilized as a savings tool. however the challenge with implementing a similar concept in South Africa is that there are legislative constraints. Singapore is also another platform that could be researched especially the tax that is paid on children up until 18 or 21 and this is utilized for specific elements such as education. The concept employed by the Bank of Spain in terms of penetration of the Brazilian market would be worthwhile case study to explore. Momentums insurance product that is underwritten by ABSA bank for annuity savings with a compound growth can be researched. The forced savings model in the UK for ABI National whereby payments for purchases are rounded off and the excess funds are kept in a savings account for a year and matched by the banking institution should be reviewed. The fee structure that Capitec bank currently employs could also be investigated as it has proven successful in acquiring a greater market share. It is a good example of a savings model that has been instituted through government policy which has had a positive bearing on the savings ratio of Singapore.5 million registered tax payers as per statistics from Stats SA. etc. Kenya can also be explored in terms of the mobile phone outlets concept whereby phone devices are utilized to deposit cash into accounts.

namely: • • • • • The implications of the NCA on the savings culture Deposits on home loans – will youths be able to afford this going forward? The impact on SMME’s especially with regards to Collateral Investigate the transmissions account as a vehicle for saving Moving from cash to electronic payment methods and the savings attached thereto • Review of how the basket is constituted to score individuals in terms of LSM groups Page 45 .

Second interview 2 with Project Sponsor Meeting Details Meeting Purpose Interview with key stakeholders at VISA South Africa to discuss the IEDP Project – Stimulating a savings culture amongst LSM Groups 1-5 in South Africa Venue Date & Time Attendees Present Attendees Name Andre Hattingh Marinda De Lange Premeshin Naidoo Nick Essame Marietjie Ferreira Nicholas Nkosi Teleconference Visa out of London 11 May 2009 – 14:00 am – 15:00 am Entity VISA South Africa VISA South Africa IEDP Syndicate Group 4 VISA South Africa IEDP Syndicate Group 4 IEDP Syndicate Group 4 Abbreviation AH MDL PN NE MF NN Interview with Visa Sponsor of IEDP Group 4 by Dated 11th May 2009 by Marietjie. You (VISA) recommended we also investigate Brazil as a country and it seems that there is not as much info available. Miranda and Nick out of London. . how and by when) Andre will get this information for us before Saturday if possible What are your insights into savings culture in SA LSM Groups 1-5? Page 46 . Premeshin and Nick. can you possibly share your info with us ( Who. Discussion around the structure of Project: Miranda recommended that we include in the project proposal the motivation for our targeted group to save (refer to project proposal). Visa was represented by Andre.

Miranda will also sent us a presentation on the Gates Foundation who has done some research in how to stimulate savings in general. Miranda will send a presentation on the feedback of this project.Andre . They invest more informally in stokvels etc as they do not trust banks. Education Visa has been on Road shows to communities.Previous research with this target group has been very difficult in view of them not trusting others with their personal banking information. Bank of America is for example is incentives savings through matching of savings through the usage of debit card – the amount is rounded off and the difference goes towards a savings account to which they then match for cent for the first 3 months. schools and businesses in the Rural and Urban areas in a project that they did in partnership with the DTI and Banks. What is your role and what have you done/intend to do in order to facilitate a savings culture This target group is more comfortable to save in stokvels and other informal vehicles as there is a perception that they are not welcome in banks and that many disappears out of their accounts (bank Charges) Products Visa has focused more on getting cash out of the system. What products have you seen around the world that are very innovative and successful that could work well in SA Keep the change product. Andre will send us a presentation on this. which in itself would generate savings. This is supporting the creation of a savings culture. They (Visa) are busy establishing networks with retailers in order to allow payments into accounts and withdrawals on behalf of Visa to reach the rural and urban areas. Brazil is making use of similar methods to reach the people in Urban and rural areas in order to get the unbanked banked. Andre advised that In US and USA banks are rounding off payments to Dollars and Pounds and whilst they are paying their merchants up to the cent Page 47 . Visa is focusing on spending only cash that you have by making use of debit cards to pay for goods. At these Road shows. they would educate on financial literacy and share the benefits of savings to households.

Whilst Gross Savings in SA is positive. financial markets. Also keep it simple and ignore informal savings Third interview with Citi Economist – Jean-Francois Metier 14 April 2009 by Premeshin Naidoo In a discussion with Mr. Net Savings follows the trend of other Anglo Saxon countries and is negative. the following key points were indicated with regards to savings in SA. products. or what have we left out. the difference is paid into a savings account of the card holder and the card holder is allowed to with draw once on an annual basis from this account. Stocks.value. Miranda recommended that we interview Capitec Bank as they have been very successful in this market. the Citibank South Africa economist. etc and as all is important one cannot exclude any Any other feedback and guidance toward proposal structure. Higher consumption (less savings). JF Metier. life insurance etc. Nick has also previously mentioned that cell phone companies are now making use of cell phones for people to save and transact. one needs to differentiate between Gross Savings (includes investments in fixed income markets. • On a macro scale. Wizzit bank How would you define savings? Nick defined it as the reserve of funds to be called upon in need and to have the ability to fund a crisis instead of borrowings like: • • • • • Medical expenses Old age Unemployment Burials Christmas What should we limit our project to ito products? Miranda recommended exclusion of stokvels as mentioned earlier. recommendations.) and Net Savings (Difference between Income and Consumption). wealth effects (property values) and Page 48 . André felt that people invest in different vehicles like: Jewellery. Art.

As one approaches middle age. • Efforts need to be directed to primarily address the low household savings rates. This will generally benefit those who conduct their employment and savings in the formal sector. One is to provide a tax break on capital gain. for example. save for the future and delay consumption.cultural factors are a few reasons why people are consuming more than they currently earn in income – higher debt levels result. • In western countries. One needs to consider the inflation effects and one’s expectations of future affordability • Monetary policy – inflation targeting – results in positive real interest rates which should encourage savings • Fiscal (tax) incentives to save – this was tried in the 80’s and 90’s in some western countries with mix success. • SA has a young population. • In the corporate sector. • Fiscal (tax) incentives can take two forms. The second is a tax deduction allowed on savings into a particular investment vehicle. consumption should reduce with increased savings for retirement. and generally is through a social security scheme. and dividend or interest income on any savings – this benefits mainly wealthier people. Page 49 . a retirement annuity is funded pre-tax. generally low gearing in the past but this has changed.e. They should further use their branches for education and reach out to stimulate the savings behaviour. or borrow now and consume. • • Structural change in employment levels needed in SA to encourage savings Banking industry needs to tailor products to encourage savings. i. rather than to accumulate debt with high interest charges. a major motivation for saving is for retirement. People need to understand that it makes more sense to save then buy. Investment is now funded by both own cash saved and debt raised. but also includes individual wealth accrual. Life stage plays an important role in ability to save. • Savings is only one aspect of financial education but is probably most important. Cultural effects drove the behaviour instead. • • Higher savings levels will decrease the need for foreign capital Time preferences plays an important role in the individual’s decision to save or spend.

The formulae Household income – Spending = Savings clearly indicates that if you spend more you save less.5% of their taxable income in RAs and 15% in pension funds will get this portion tax free. Lower interest makes savings less attractive for potential savers. What is your view on the current Fiscal Policy of National treasury? South Africans tax rate has historically been high. Although dividends are tax free. as taking inflation into account and the after tax interest.5%.Interview with Ian Marsberg . The current declining interest rate the Reserve Bank is purposefully trying to stimulate the economy by getting people to spend more.Senior Economist – ABSA Capital 4 May 2009 by Marietjie Ferreira What is your view on the current Monetary Policy of the Reserve Bank? As a result of SA being in a recession the Reserve bank is currently moving our interest rates downwards. but this is not enough to stimulate our economy. it does not encourage savings for the wealthier groups. their money is losing value. most of them would rather spend it. Only by June 2010 will interest rates start moving up again. Over the last few years we have been given some tax relief from both a personal tax as well as corporate tax basis. Only the first R21000 of Interest is free for individuals under the age of 65 and R30 000 for individuals over the age of 65. Individuals that invest up to 7. Our government is currently spending on infrastructure. this strategy is intended to and will encourage individuals to spend and discourage savings and as such it has a disastrous effect for the current household savings. This would thus encourage individuals to invest in these type investments in order to be able to become financially independent at Page 50 . What is your view on the future movements of interest rates in the next 6 to 12 months? Interest rates will continue to decline with lowest being a repro rate of 7% and a prime rate of 10. Whilst this will be an incentive for the lower LSM groups. What are the tax breaks in your opinion that will encourage savings? It is not a definite that if the SA National Treasury reduces the tax rates of individuals that they will save it. The SA National Treasury does however incentives savings in Retirement Annuities (RAs) and Pension funds.

it could encourage people to spend less How long do you think this recession will last? SA is integrated in the global economy and as such any shocks globally will negatively impact our economy. Our Economic recovery will not be before the second half of 2009. Page 51 . No Capital gains tax is due on an individual’s primary home up to the sale value of R3.000.retirement age. 000. This again will encourage individuals to invest in property. Should the SA National treasury increase the VAT of 14% on luxury goods. And if the SA economy recovers I do not expect a miraculous recovery.

• Take advantage of rural village gatherings. convenience and incentivisation criteria. accessibility.Appendix 10 . • • Financial literacy programmes for adults who are not included in the formal sector. workplaces. A suggested initiative can be corporate programmes on factory floors – industrial theatre type shows to carry across the message. convenience and incentivisation.Initiatives to improve the savings culture in LSM Groups 1 – 5 Financial Literacy Implementation of financial literacy programmes to educate the target group on the impact of financial decisions and the importance of savings as follows: • In secondary & tertiary institutions as part of the core curriculum titled “money matters” • Financial institutions to embark on extensive road shows and client interactions to promote financial literacy on possible savings products and the benefits to customers • Government departments like Education should assist in the design and rollout of these programmes to ensure successful implementation. • Take advantage of strong oral traditions in rural areas (knowledge is passed through generations through storytelling) to communicate the message through travelling road shows which tell a story to illustrate the message. • Retirement savings can be also be enhanced by providing a product that meets accessibility. • Employers within the formal sector should create initiatives to educate their personnel on financial matters and the benefits of savings. affordability. affordability. with the Page 52 . Institutional Financial institutions have a duty to instill confidence and trust to ensure that consumers feel secure to invest in the formal banking sector. Account for life – account opened when a birth certificate is issued • Commercial banks can introduce more innovative products like Wizzit to address. schools and churches as opportunities at which to present shows. Shows for television and radio which are both entertaining and relevant to deliver the core message. lectures and other media to communicate the message in a format which the audience can identify with and relate to.

as research suggests that females are most likely to consider long term savings. This in turn will be beneficial to the government in terms of reducing Page 53 . • Involve the corporate sector and other institutions in designing and implementing suitable mechanisms to attract the lower end earners to participate in savings instruments.b • Awareness and marketing campaigns should be targeted at females. (SASI. • Both government and financial institutions need to collaborate to ensure that there is a cultural shift in so far as savings is concerned within the target population. • Collaboration between financial institutions and retailers where customers can use them to deposit money as opposed to going to branches. 2008)19. (SASI.incentivisation part being subsidised by government to stimulate a savings culture for the poor. In addition. • Reduce the barriers to entry to ensure broader access to products. Government Government in consultation with financial institutions should establish possible mandatory impositions on additional income generated through tax relief whereby a certain percentage is actually invested in a savings instrument thereby potentially increasing the savings ratio of the country. 2008) • Financial institutions need to create lucrative savings products that will generate interest from lower income earners to save. as well as those investing in informal savings channels to transfer their savings to more formalised mechanisms. For example. For example minimum deposits to open savings accounts. Government could force banks through regulation to offer a higher return and lower charges for this particular LSM group on savings accounts similar to the Mzansi initiative. there also need to raise awareness and education for the target group Given the experience in other emerging markets. by implementing potential subsidisations or even higher interest rate benefits. free health care and free education has the potential to improve a savings culture. reduced government provisions of pensions. (SASI. Engage with Insurance Companies to broaden and extend the Zimele initiative. 2008) • Consider distributing formal products like unit trusts through informal channels like community leaders and stokvels.

who ultimately subsidises this program. whilst simultaneously benefiting the tax payers. the government should consider looking at easy to use. Introduction of mandatory savings programmes for retirement. This is currently a requirement for certain investment banking type products in certain products.assistance on social grants. Review regulatory and legislative policies that hinder the stimulation of a savings culture. and use this standard as the benchmark level of literacy for which all South Africans can aspire to. education. and for the structuring of financial literacy programmes. This can be achieved by ensuring that a portion of the proceeds from BBBEE transactions are placed into long term savings vehicles for the beneficiaries. Leverage off the Broad-Based Black Economic Empowerment initiatives to link wealth creation and economic redistribution with the instilling of a savings culture. Page 54 . etc Through the Post Office or a national savings bank. housing. The underlying principle is that it will prevent people from becoming overly indebted by products which they do not understand. Create a national standard for financial literacy. This can then be taken a step further to link the sale of certain credit products to the potential buyer’s level of financial literacy. by issuing a tax relief of which the excess funds generated can then be utilised to save with the effect of increasing the savings ratio of the country as a whole. customer friendly product offerings that encourage savings over a longer term through offering higher interest rates as an incentive.

557.55 R 97.00 R 1.147.11 R 239.00 (4) Weighted Average Income R 47. Enclosed below are the steps that were followed in deriving the final result of this analysis which evidences the fact that the recommendation solution will ultimately prove beneficial: 1.The total adult population of all LSM Groups was verified through the same report and was utilised to calculate the ratio of the adult population of LSM 1-5 relative to the total adult population.732.000 4.000 16. Step 2 .168. Step 1 .The weighted average income was then calculated by applying the following formula: Weighted Average Income = Average Personal Income (3) / Total adult population LSM 1-5 X % of Adult Population per LSM group (2) Page 55 .32 R 350.00 R 848. 4.39% 8.73% 9.000 3.58% (3) Average Personal Income R 723.Appendix 11 . (1) LSM Group Adult Population (2) % of SA's Adult Population 1 2 3 4 5 Total Adult Population (LSM 1-5) Total Adult Population 1. 2.00 R 788. Step 4 .000 2.000 31.43% 14.062.27 3.00 R 579.000 4. Step 3 -The average personal income per LSM group was also acquired from the FinScope 2008 report as detailed in column 4.Financial analysis of recommended solution The following financial analysis will demonstrate the positive return that the implementation of the solution will have on improving the savings ratio in South Africa.953.56% 15.The adult population per LSM Group 1-5 was extracted from the FinScope 2008 report as detailed in column 2 of the table below.303.843.32 R 879.47% 51.96 R 144.000 2.

600 Assuming that 100% of the target group save 20% of their income Increase in savings rate Increase in bank deposits (assuming that the unbanked 50% also open accounts) Total remittances(savings) in the informal economy % of savings transferred from informal to formal economy R 1.818.600.000 Number Of Adult Population 10.073.000 19% R 2.405.500.5 who are banked Percentage of LSM 1 . 839.800 R 7.In analysing the research findings. the following data was duly evidenced and referenced in the report and forms the basis of this calculation and as follows: Measurement Category Percentage of LSM 1 .5 who save: Percentage of LSM 1 .510 8.600 0.5 who do not save at all: Percentage of LSM 1 . it was assumed that the total adult population in LSM Groups 1-5 would save at least 20% of their income which would be equivalent to R2.000 x 20% x R 879.839.419.515. 839.650.000.500 In endeavouring to calculate the return on investment in terms of implementing the suggested recommendation.490 5. This was calculated as follows: Total adult population (LSM Groups 1-5) x Assumed savings % x Sum of the weighted average income across LSM Groups 1-5 = 16.90% R 2.515.27 = R2.328.12% Page 56 .500 8.147.5 who are unbanked Ideal savings ratio as a% of GDP Current savings ratio SA GDP in ZAR % 67% 33% 50% 50% 20% 16.073.515.757.000.

Appendix 12 – Implementation plan Page 1 .

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