Credit for the Poor: Empirical Studies from South Africa

Credit is central to modern theories of economic development. Credit, along with savings, allows households to cope better with income that fluctuates over time. This is particularly important in rual areas, because of the insecurity and irregularity of a gricultural income. On a bigger scale, it is now believed that one of the key elements in achieving economic growth is encouraging investment. And efficient investment requires well-functioning credit markets. South Africa is a good place to look at pe rsonal credit markets, for several reasons. Development in sub-Saharan Africa has fallen behind that of other poor regions of the world, and so deserves our particular attention. Within the region, South Africa tends to have the best data availability, es pecially at the individual/household level. This is in part due to the government institutions inherited from the Apartheid state, including a good statistics office. Also, the South African Old Age Pension is a welfare benefit unique in the developing wo rld for its scale and reach. It is also of great interest to development from a scientific point of view, because it represents a source of income which does not rely on individual characteristics or behaviour (exogenous income). Standard economic theory predicts that income security should matter for whether a household can obtain credit: Secure income should increase creditworthiness more than insecure income. To test this, it is possible to compare households which receive a secure income such as the Old Age Pension, with households that do not. By using methods that carefully control for other characteristics, it should be possible to something about whether income security does indeed matter for household credit. This may have policy implications: To improve poor households’ ability to cope with income fluctuations, regularly paid cash benefits may be more effective than conditional, irregular or one-off transfers.