Three students will represent the University of Cape Town Graduate School of Business (UCT GSB) at the University of Oxford’s (UO) global Map the System (MTS) competition from 17 to 20 June 2022.
Following their win at the regional final hosted by the UCT GSB’s Bertha Centre for Social Innovation & Entrepreneurship in early May, the Finclusive team, comprised of development finance master’s students Janine Rutsch, Lauren Fray and Makha Baloyi, will go head to head with teams from 64 universities across the globe.
Since being launched by UO’s Skoll Centre for Social Entrepreneurship in 2015, MTS has attracted students from highly ranked centres of learning, including institutions such as the University of California, Berkley; the National University of Singapore; and UO itself.
The competition is designed to change conversations and approaches in social impact education, challenging participants to think differently about enacting social and environmental change.
For the women of Finclusive, this meant tackling the all-important issue of home ownership in South Africa. The team’s research revolved around the gap in mortgage financing for the “missing middle” and the mechanisms through which this could be addressed.
Championing financial inclusion
Although the name came about through a happy accident, the portmanteau is a perfect fit for the team’s research into financial inclusion and their mutual passion for rethinking how financial mechanisms can be used to drive sustainable economic and social growth.
“Our name actually came about when I misheard something Janine said, but it worked out because it encompassed what our research is about, which is financial inclusion. It’s about the different ways in which certain people in our society have been excluded from financial participation,” Baloyi said.
With home ownership being one of the most powerful ways to promote upward financial mobility and inclusion, choosing a project that focused on strategies that could open this opportunity up for the missing middle was a no-brainer for the team.
“By including the missing middle in the home ownership market, they will get access to more opportunities as well as wealth accumulation and upward mobility.”
“It’s been shown that home ownership equates to improvements with many other social factors, like better healthcare, better education, access to transport and opportunities,” said Fray. “So hopefully by including the missing middle in the home ownership market, they will get access to more opportunities as well as wealth accumulation and upward mobility.”
Adding to this, Baloyi points out that the benefits of greater inclusion are two-fold. “Specifically for previously disadvantaged people who haven’t historically had the opportunity to own large assets, home ownership is one of the first and easiest ways to start on wealth accumulation,” she said.
“Once they’re able to get that, they can unlock being able to save and access to credit. So, the knock-on effects of not just having a home, but owning your own home is what we’re looking at. The long-term outcome of that is that it inevitably improves income equality, but also increases stability and access to opportunities like work and education.
“So, there’s that side, but at its core there’s also simply the need for safety and feeling secure, not just physically, but also knowing that within society you own a home, and you are safe,” Baloyi noted.
Mobilising the missing middle
The team chose to focus specifically on the missing middle due to the massive potential impact that providing access to finance could have based on the sheer number of people who fall into this category in South Africa.
“The missing middle is people who are earning above the minimum wage but aren’t earning much more than R25 000. So, it’s a huge range of people, but the typical person is an older person of colour – usually a woman – who is earning around R18 000 per month,” explained Rutsch.
“When our financial systems liberalised and became accessible to most Africans, what happened was a lot of predatory lending.”
Even though this market makes up about 30% of South African households, or about 7 million people, only 4% of loans originated in 2017 went to the missing middle. This should come as no surprise considering the make-up of the class and the legacy of discrimination built into the system prior to democracy.
“We’ve adopted a mortgage system that was purpose-built for the apartheid era, when the population was small compared to the market. When our financial systems liberalised and became accessible to most Africans, what happened was a lot of predatory lending,” explained Fray.
“So, you had people who didn’t necessarily have financial literacy accessing lots of credit at high interest rates and not being able to make the repayments. Then, when it comes to looking for affordable mortgages, they’re excluded from the system because they have a bad credit history and not enough collateral.”
Levers for change
Although the missing middle saw consistent growth for many years, increasing local and global economic pressures are causing stagnation and even shifts towards lower-income classes. To encourage upward mobility, Finclusive posits, South Africa’s mortgage lending system requires an overhaul.
“We spoke to some researchers in the industry and they found that often in the risk assessment frameworks that banks applied to applications, they would use risk proxies that were inherently racialised,” said Rutsch.
“We’ve suggested public–private partnerships as a lever for change.”
“So, because of those structures and foundations, government hasn’t historically trusted the private sector to pass development funds on to the affordable market and lend more mortgages to them.
“Government will more likely partner with a non-bank mortgage provider because those entities aren’t just serving the traditional market that the bank is serving. Which is why we’ve suggested public–private partnerships as a lever for change.”
Baloyi noted that the potential of these partnerships to make mortgage loans accessible to the missing middle lies in their ability to reduce perceived risk of lending.
“It’s about developing financial instruments and funds that will derisk, or reduce the perceived risk, that’s been placed on this gap market. When that perception changes, it can influence the traditional banks to charge lower interest rates and so provide even greater access,” she said.
In addition to encouraging public–private partnerships, Fray highlights the need for increased transparency, reporting and monitoring. “When we were researching, it was difficult to find information. It seems like everybody is working in silos, each with their own perspective on how this market behaves and there’s no consensus on what an appropriate solution could be.
“With system coordination, reporting and monitoring, there would be a way to see the actual financial behaviour of the missing middle – their financial literacy, what they can afford and what they’re actually doing.”
Catalysing transformative solutions
Speaking on behalf of the Bertha Centre, senior advisor to the centre and judge on the local final’s panel, Fergus Turner, recognises the gravity of Finclusive’s research.
“We are impressed and encouraged by the depth of inquiry undertaken by Finclusive to better understand the systems justice challenge of exclusion and institutionalised racism in the South African mortgage market.
“The Bertha Centre works to convene innovative and entrepreneurial researchers and practitioners to catalyse transformative solutions that create new opportunities for solutions to the systems justice challenges of our time. Finclusive represents this aim and mission with bold integrity.
“We are looking forward to their onward journey to the global finals in Oxford, where we continue to support their work to excel at the finals and bring a Global South perspective to this internationally renowned systems entrepreneurship competition,” he said.
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