'Financial inclusion' has hit the headlines in South Africa following scandals over the distribution of social grants. Suggestions that Cash Paymaster Services (CPS), the controversial company at the center of the storm, and its affiliates are targeting grant recipients to 'cross-sell' other financial products Evidence is mounting.
The company has consistently denied any wrongdoing, and one of its major investors, Alan Gray, maintains that no wrongdoing has been formally proven. Importantly, both cite the idea that CPS is enabling “financial inclusion.” This term has been used with a fair amount of abuse over the past few decades.
“Financial inclusion” typically involves providing formal financial services such as banking, loans, and insurance to previously underserved poor people. The virtues of financial inclusion have long been espoused by policymakers.
But a country like South Africa, with a relatively poor record of consumer and data protection and a tradition of “cowboy capitalism”, could easily require more than just “capture”. There is much evidence that the incomes and bank accounts of the poor are seen as easy prey for plunder by greedy commercial interests.
Wages and salaries have long been treated this way. However, paying subsidies directly into bank accounts opens up new frontiers of exploitation through a variety of improper deductions. This includes payments for funeral insurance premiums, small loans, mobile phone airtime, and prepaid electricity bills, to name a few. This ability to “cross-sell” to recipients of social grants was probably a real boon for corporate interests such as his CPS.
Financial inclusion in action
Providing access to adequate and cost-effective savings and credit instruments is a laudable development goal. But in South Africa, as elsewhere, actual practices are often at issue.
A case in point is how CPS used grant sharing agreements to expand supplemental financial provision.
CPS maintains that it has acted lawfully and, in fact, was cleared of wrongdoing by a previous consumer tribunal hearing. However, there is growing evidence that various subsidiaries of the parent company are using their positions to sell various financial products to grant recipients. These practices are made possible by CPS's exclusive control over the data of his 11 million social grant recipients and privileged access to welfare payments that are securely transferred to grant recipients' accounts each month. It has become. The profits from these sales exceed the fees CPS receives from the government for distributing the subsidies.
Even if some of their actions weren't technically illegal, they were still ethically questionable.
Financial expropriation and the poor
The term “financial inclusion” is increasingly used as a cozy-sounding term that masks what economics professor Kostas Lapavitsas calls “financial dispossession.” He describes this as extracting value from the realm of circulation and redistribution rather than from employees or production processes. Individuals and households increasingly play a role as a source of profit for the financial system, completely independent of their status or role as “workers.”
The CPS's actions are one of many cases of “monetary expropriation” in South Africa. In a precursor to the current crisis, two of South Africa's largest insurance companies (Sanlam and Lion of Africa) attempted to deduct funeral costs directly from social grants paid to minor children. When the state imposed a moratorium on deductions, business interests appealed to the Constitutional Court, which the state ultimately won.
Financial services regulation blues
Overreach and abuse in this area is difficult to control, and attempts to do so are often ineffective or make matters worse. For example, South Africa liberalized its credit market in the 1990s and removed interest rate caps on small loans. As a result, the microloan industry grew rapidly as the poor were drawn into formal credit relationships.
Within a decade, evidence of skyrocketing debt and reckless credit extension emerged. From the early 1990s to the end of the first decade of the 2000s, the country's debt-to-income ratio rose to 86.4%.
These concerns led to, among other things, new legislation and the implementation of the National Credit Act (NCA) of 2007. Although this law lowered interest rates, the credit industry quickly responded by disguising the costs (and profits) as various ancillary costs and expenses. One of these, credit life insurance, is now subject to stricter regulation a decade later.
But financial services regulators often prove powerless, caught up in a never-ending game of cat and mouse with powerful commercial interests seeking to profit from the poor at all costs.
In recent cases, a coalition of public interest lawyers, charities and private sector debt counselors, rather than regulators, challenged abusive practices. The lawsuit alleges the abuse of garnishment orders, which collect debts directly from bank accounts. The case resulted in a Constitutional Court ruling that outlawed some of the worst practices used by creditors to extract payments.
Similarly, CPS cases were brought in the Constitutional Court by non-profit organizations against the state. The court gave CPS a further 12 months to make the social grant payments. However, this is done under strict supervision aimed at curbing previous dangerous behavior.
This is an outcome that promises to alleviate the worst excesses perpetuated by social grant recipients. But powerful commercial interests, patchy regulation and enforcement, and uncritical enthusiasm for “financial inclusion” suggest they may not be the last.
