Debt. It can be a formidable opponent, much like a double-edged sword. In the realm of personal finances, it has the power to pave the way for a prosperous future or injure and burden individuals and their loved ones for a lifetime. Just as a skilled swordsman hones their technique, empowering your employees, especially blue-collar workers, to sharpen their proverbial financial swords will help them improve their financial health.
During March, Debt Awareness Week places the spotlight on consumer debt, and its effects, and acts as a catalyst to start the conversation about personal debt. Debt Awareness Week presents a valuable opportunity for employers to engage their employees about responsible financial practices and how to help them escape the debt trap.
Like rivalries in a sword fight, the major factors contributing to high levels of debt in South Africa include historical inequalities, unemployment and low income, easy access to credit, limited financial education, lack of financial literacy and informal lending practices.
Picsa Chief Executive Officer, Thian de Beer, says that specifically in South Africa, debt levels are increasing at an alarming rate, and that raising awareness can help consumers understand the effect of debt on their lives and empower them to make informed financial decisions. In turn, financially literate individuals are less likely to fall victim to predatory lending practices or fraudulent schemes. They can start developing better financial habits such as budgeting, saving, and investing for the future.
Lacking proper armour
Blue-collar workers remain vulnerable to financial predators such as loan sharks and there are myriad dangers to unsecured loans for individuals.
Says de Beer, “Since unsecured loans are not backed by any assets, lenders are forced to charge high interest rates due to the higher risk of the borrower defaulting on the loan, which increases the total cost of borrowing significantly over time, making it difficult for the borrower to repay their debt, which leads to a high risk of default. Because no assets are required to take up unsecured debt, it becomes easier for the borrower to accumulate debt from various sources, leading to overspending and a cycle of debt accumulation if the borrower does not understand how to borrow and budget responsibly.”
“High monthly repayments can take up a large portion of a consumer’s monthly income, leaving less money for essential expenses and making it almost impossible to save or invest for the future. Many lower income households also resort to debt to repay existing debt - creating a vicious debt cycle that is impossible to get out of without external assistance”, de Beer adds.
The double-edged (financial) sword
Just like every sword has two sides, there are primarily two angles for blue-collar workers to consider when it comes to debt.
Explains de Beer, “We need to consider both the ideal and current scenarios. For lower income workers, traditional credit forms are usually difficult to access due to negative credit scores or a lack of available collateral. This is where microfinance lenders and/or payday lenders start playing a big role, whereby they provide small loans, usually without collateral, to lower income individuals who lack access to traditional banking services to cover emergency expenses. Unfortunately, this sometimes comes at a high price - consumers often find themselves trapped in a position where they need to take out a new micro loan to pay off the previous one because they cannot afford the repayment terms. Payday loans and access to earned wages can unfortunately have the same effect.”
“The ideal scenario is that all South Africans should have access to savings and investment opportunities that decrease debt reliance over time.”
“The ideal scenario is that all South Africans should have access to savings and investment opportunities that decrease debt reliance over time.”
Knowledge is power
If your employees are struggling financially, it is proven to influence their performance and productivity at work. Statistics from the 2023 Nedfin Health Monitor revealed that “unmanageable debt is having a significant impact on the mental health of 67% of South Africans who constantly worry about their household debt.”
De Beer agrees with this finding and says, “High debt levels among low-income workers are a big concern, especially if informal lenders become involved. Financial troubles can lead to loss of productivity in the workplace and/or unauthorised absences from work, which in turn can lead to sanctions or worse, retrenchment or dismissal.”
Many people feel overwhelmed by their finances; however, employers can stand in the gap and be a beacon of hope for them, and give them the necessary knowledge and tools to sharpen their financial swords to improve their financial health. This forms part of your organisation’s Corporate Social Investment (CSI), as you are equipping your employees with sound financial advice and showing them that building relationships and caring about their overall well-being is important to the business. Employers can change not only the financial trajectory of the employees in their care, but also impact the financial legacy of their children and extended families.
To this end, de Beer says that some of the financial resources that employers can provide for their employees include financial wellness programs, one-on-one financial counselling, teaching financial literacy, providing access to responsible credit and incentivising saving, all of which can improve employee satisfaction, retention and productivity among your workforce.
Sharpen your weapon
Ask any skilled swordsman how they achieved their success, and they will tell you it's all about mastering the basics i.e. gripping the sword correctly, proper footing, understanding angles of attack and so on. Another key element of success is having a skilled coach working alongside you and guiding you. As an employer, you can be a coach who helps your employees achieve financial success and break free from debt by connecting them to valuable people and resources.
De Beer explains that Picsa is fully committed to combating over-indebtedness in South Africa. “Clients’ financial health is our number one priority, and we pride ourselves in making responsible debt available to qualifying clients. Our lending criteria ensure that credit is only issued to those who can afford it and we apply stricter, additional internal rules beyond the guidelines provided by the NCR to determine affordability. We also follow a savings-first approach with all our clients and nudge them to change their financial habits to build financial stability for themselves and their families. We also try to practically educate our clients throughout our interactions with them to ensure that they fully understand the implications of their financial habits (both good and bad). We’ve also developed our own unique financial rewards program that encourages good financial behaviour. Through this program workers can use debt repayments as a way of building a financial asset for themselves, putting them in a financially stronger position once their debt has been repaid.”
Offense is the best defense
The secret to winning a sword fight is distance, timing, and caution – being close enough to your opponent to strike at the right time and never underestimating your opponent. Help your employees win the fight against debt by closing the knowledge gap, seizing the timely opportunity to tell them openly about personal finance and cautioning them against financial pitfalls. Show them the players in the debt sword fight and teach them that offense is the best defence to get out of debt and enjoy lasting financial success.