What matters more for South African households’ debt repayment difficulties?

ABSTRACT

While the increased access to consumer credit has helped many families improve their welfare, the rising repayment burdens upon a background of chronically low saving rates have generated concerns that South African families are becoming ever more financially fragile and less able to meet their consumer debt repayment obligations. Using data from the Cape Area Panel Study, this article investigates whether consumer debt repayment problems are better explained by excessive spending which leaves households financially overstretched or by negative income shocks. The results indicate that households are significantly more likely to be delinquent on their financial obligations when they suffer negative events beyond their control rather than due to the size of the expenditure burden. This suggests that consumer repayment problems are likely to endure even when consumers borrow within their means. Thus, regulatory efforts to improve mechanisms for debt relief might be more meaningful than restrictions on lending.

KEYWORDS:

• Consumer debt
• delinquency
• excessive spending
• shock

Acknowledgements

This is a revised version of Chapter Five of the author’s PhD thesis ‘The Dynamics of Consumer Credit and Household Indebtedness in South Africa’ submitted in November 2014 to the Doctoral Degree Board of the University of Cape Town. Greater detail on the study may be found in Ssebagala (2015). The author’s thesis was completed under the direction of Professor Jeremy Seekings (Department of Sociology, University of Cape Town). The author is grateful to Professor Jeremy Seekings, Professor Nicoli Nattrass, Professor David Lincoln, the participants of the CSSR weekly seminars and the anonymous referees for their comments and guidance.

Disclosure statement

No potential conflict of interest was reported by the author.

ORCiD

Ralph A Ssebagala http://orcid.org/0000-0001-8200-5910

Notes

1 Available online: http://ncr.org.za/index.php?option=com_content&view=article&id=42 Accessed 20 September 2014.

2 The alternative theory (often used in reference to housing debt) is the ‘Equity theory’, which postulates that rational borrowers compare the financial costs and returns of their mortgage positions in deciding whether to continue or terminate mortgage payments.

Additional information

Funding

The author’s PhD was partially funded by grants to the CSSR and the UCT postgraduate funding office.