Courtney C. Lipsey “Financial inclusion” has hit the news across South Africa in the wake of an investigation into how social grant recipients are distributed. The evidence is mounting that points to the company that is in the middle of the controversy is Cash Paymaster Services (CPS), as well as its ancillary companies that target grantees in order to “cross sell” other financial products.
The company has repeatedly denied any illegal activity, and one of its biggest investors, Allan Gray, claims that there is no evidence of wrongdoing. Been proved in court. Both have also invoked the notion that CPS is providing “financial inclusion” – a term that has been the subject of some snark in the last few decades.
“Financial inclusion” typically refers to the provision of formal financial services like insurance, loans, and banking for those who previously had no access to these. The benefits that financial inclusion has for a long time been a source of hope for policymakers.
However, in a place such as South Africa, which has a fairly poor record for the protection of data and consumers as well as a history that has been characterized as “cowboy capitalism,” that could easily mean “capture.” There’s plenty of evidence that shows poor people’s savings and earnings are considered to be an acceptable target for plunder by greedy commercial interests.
Salaries and wages have been treated in this manner for quite a while. However, the transfer of direct deposits into banks creates new possibilities to be exploited through a myriad of unauthorized deductions. These include funeral policies, micro-loans, mobile phone airtime, and pre-paid electricity, to mention a few. The capability to “cross-sell” to social grant recipients is arguably the main benefit for corporations such as CPS.
In practice, financial inclusion
Access to suitable and cost-effective credit and savings instruments is a worthy development goal. However, at the same time, in South Africa as elsewhere, it’s the practice itself that is often a problem.
The manner in which CPS has utilized the grant distribution agreement to increase its financial ancillary offerings is an example.
CPS claims it acted legally, and an earlier hearing before the consumer tribunal found it not guilty of any infractions. However, evidence is mounting that suggests the various subsidiaries of the parent company have benefited from their position to sell different financial products for grant recipients. These practices are facilitated by the CPS’s monopoly over the information of more than 11 million recipients of social grants as well as its access to the safe monthly transfers of welfare funds to grantees’ accounts. The revenues of these transactions outstrip the amount the federal government pays CPS for the distribution of the grants.
Although certain practices might not be technically illegal, however, they still pose ethical issues.
The poor and financial expropriation
More and more, “financial inclusion” is an unintentional slang term to disguise the reality of what Professor of Economics Costas Lapavitsas calls “financial expropriation.” He defines it as the exploitation of value, not from workers and productive activities, but instead from the world of redistribution and circulation. Households and individuals are increasingly used as a source of income to the system of finance independent of their status or position in the role of “workers.”
CPS’s actions are just one of the many cases in the realm of “financial expropriation” in South Africa. As a prelude to the current crisis, two of the country’s biggest insurance companies (Sanlam and Lion of Africa) sought to directly deduct funeral expenses from social grants that were paid to children who were minors. After the state put the moratorium on deductions, corporations filed an appeal before the Constitutional Court, but the state won.
Financial service regulation blues
Abuses and snares in this field are difficult to regulate, and attempts to control them have frequently failed or made matters more difficult. For instance, South Africa liberalized its credit market in the 1990s, removing the cap on interest rates for small loans. This meant that low-income people were enticed into formalized credit arrangements, which led to the micro-loan sector increasing in size.
Within a decade, there was evidence of an increase in debt along with reckless extensions of credit. Between the beginning of 1990 and the close in the early decade of decade 2000, the debt-to-income ratio in the United States climbed to 86.4 percent.
These issues, along with others, caused legislation changes and the 2007 adoption of the National Credit Act (NCA). The NCA lowered interest rates. However, the credit industry was quick to respond by concealing the costs (and profits) in ancillary fees and expenses. One of them, the frequently mis-sold credit life insurance, has, over a decade later, come under the aegis of more stringent regulation.
However, financial regulators trapped in a constant game of cat-and-mouse that has powerful interests in commercial bent on making money off the poor at all costs are often ineffective.
In a recent instance, an alliance comprised of lawyers representing public interests, charities, and groups, along with private sector debt counselors – not regulatory bodies challenged the violations. The case was about contesting the use of “garnishee orders” to collect loans directly from banks’ accounts. The case led to a Constitutional Court judgment that ruled that the most shady practices used by creditors to extract payment were stifled.
In the same way, a similar case was also brought before the Constitutional Court by not-for-profit organizations and the state. The court granted CPS another year to oversee the distribution to social grant recipients. However, it will do this under strict supervision to stop previous dodgy methods.
This result promises to curb the most harmful abuses that social grant recipients perpetuate. However, the strong vested commercial interest in the system, patchy enforcement and regulation, and a skewed enthusiasm to promote “financial inclusion” suggest that this may not be the last.
