Imagine an elderly lady in her late seventies, who lives in a township in South Africa. Her income is very little, some US$120 a month in assistance from the government, and her body is old and sore – she is now too old to work. With no savings to draw upon, and no other sources of income, she struggles to afford medication for her chronic ailments. Two of her three children are unemployed, and her grandchildren are hungry and unable to pay the taxi fare to get to their school. This position isn’t atypical in South Africa. There are hundreds of thousands of older adults in the country (8 percent of the total population). Making matters worse, there is a distinct lack of a formal savings culture in the country. Imagine the impossible financial decisions faced by so many elderly South Africans on a daily basis.
There are various reasons for the shortage of savings in South Africa. One of which is the legacy of structural exclusion along racial lines that the pre-democratic regime left behind. During this time, a large part of the population was denied access to basic services and human rights, let alone access to any meaningful financial services.
As a result, informal structures such as stokvels (communal savings clubs) developed and flourished. These informal savings structures became prevalent during a time when the poor and financially underserved needed to mobilise their financial resources in the absence of a developed financial services offering. However, the fact that these structures have remained and are still widely-used (23 percent of the adult population uses these structures, with deposits amounting to some US$1.38 billion in 2016) raises the question as to why this is the case, when a highly developed and functional formal financial services system operates in the country.
The answer is, in short, i) that the market incumbents do not provide products and services that are necessarily tailored to low-income earners’ needs; and ii) that the current distribution model results in low-income earners often being overlooked. As such, the problem is one of a lack of meaningful access. It is clear that the existing offerings are largely complex, unaffordable and inappropriate for their needs. Individuals in the low-income bracket are faced with such fundamental choices whether to purchase food or fuel for cooking. In these circumstances, considering which of several annuity products has the most favourable fee structure, for example, can be overwhelming.
In addition to informal savings structures, low-income earners have traditionally relied on children and family to support them once they reach an age where they are no longer able to work and earn an income. This has resulted in a cycle that perpetuates people not saving, as younger people who might otherwise save are obliged to provide for their elderly loved ones. This approach might not otherwise be so problematic, but with rising youth unemployment (averaging 52 percent between 2013 and 2016), the ability for older, non-working low-income earners to rely on this support has become increasingly uncertain.
It is not that low-income earners do not recognise the value of saving for their long-term future, but rather that the combination of the lack of meaningful formal solutions and the need for immediate consumption means that people don’t end up saving very much, if at all.
On the other side of the coin, this lack of access to services and products coupled with the real need for an offering that is tailored and targeted to the specific needs of this market creates widespread opportunities for inclusive finance providers in South Africa. And from savings to payments to remittances, an ecosystem revolving around the many millions of people that have historically been disregarded is slowly developing. However, it is still early days. For example, quality retirement savings products designed and distributed specifically for low-income earners lag behind the pace at which other parts of the ecosystem are developing.
Nobuntu (a female African name meaning one who embodies the spirit of community and humanity) is one of few start-ups in South Africa that aim to solve this problem. Nobuntu created a system whereby elderly people like the woman we first described can pool whatever savings they have for investment (these can be as little as US$20), and share in the risks and gains associated with these savings through investment in comparatively low-risk instruments. Nobuntu currently provides a single option in terms of which investment options are available for clients – this is largely driven by the need to not expose participants to disproportionate risk but is something that will progress and change with scale. Created in 2017, Nobuntu is establishing a community – a savings ecosystem where people invest and earn returns on a peer-to-peer basis, creating mutual value for all members – something which is simply unattainable on an individual level.
Contributions from individuals as well as employers on behalf of their employees are pooled and invested, with meaningful returns on money saved repaid to participants over the period of their lives. These repayments are annuity-based payments which are made to participants every month until they pass away. The fund is set-up such that half of the capital contributions made by participants remain in the pool once they pass away, with these amounts being re-distributed to the remaining members (peer-to-peer benefit) on a smoothed-basis over time. The other half is bequeathed to a nominated beneficiary. This ensures that participants receive an increasing annuity payment the longer they live. With Nobuntu, living a long life is something to strive for rather than to fear.
Nobuntu is currently trying to grow its customer base through targeting employers of low-income earners. At this stage, marketing and customer engagement is largely direct-to-consumer coupled with social media. Nobuntu uses digital means to onboard and engage with customers – an interactive chatbot with WhatsApp integration as well as a standalone app (each of which assists with mobile onboarding, client questions, client balances and other product/investment information) underpinned by a dynamic backend platform are all in the development testing phase. As far as next steps, Nobuntu has yet to partner with microfinance or other financial institutions, but this is certainly a promising avenue for greater outreach.
To learn more about Nobuntu, click here.