The effects of household indebtedness on multidimensional poverty

Ntsalaze, Lungile (2017-12)

Thesis (PhD)--Stellenbosch University, 2017.


ENGLISH SUMMARY : Global household indebtedness has reached unprecedented levels over the past few decades. The household sector has had to cope with significant losses in income and wealth as well as the burden of debt service since the beginning of the financial crisis. Research focus on this phenomenon, together with its social implications, has grown. This study uses the National Income Dynamics Study (NIDS) data to empirically investigate the effects of household debt on multidimensional poverty. This was achieved through four independent research papers meant to address different angles of the subject. Chapter 2 provides the background to the South African economy and developments in the credit market. Regulation is constantly being examined, especially in the micro-segment of the market, because of rising over-indebtedness, abuse and reckless lending. The theoretical literature in Chapter 3 indicates that there is no consistency in the definition of household overindebtedness. Besides the standard economic theory underpinning the use of debt, behavioural economics field provides other aspects that influence consumer credit decisions. In Chapter 4, the Generalised Additive Model and the Multiple Correspondence Analysis are the main estimation models applied in this study in the context of the Alkire-Foster methodology for multidimensional poverty. Chapter 5 provides a snapshot of the prevalence of over-indebtedness, using various international indicators and the National Credit Regulator (NCR) indicator, and describes which households are over-indebted. A total of eight percent of South African households are overindebted, and 61.4 percent of those households are found in the lowest income category (R0–R2 000), spending more than 45 percent of their household income on debt repayments, which is beyond levels that are considered sustainable. The alarming revelation is that, according to the unsecured debt indicator, 15.2 percent of households are over-indebted, while 11 percent of households are driven below the relative income poverty line after making debt repayments. The racial distribution indicates that households headed by Africans are overrepresented (79%). Most over-indebted households are found amongst those who own their places of residence (78.6%), do not receive government grants (71.7%), are male (53.8%), and have an unemployed household head (53.5%). Chapter 6 examines the presence of thresholds in the debt-poverty nexus at micro level, i.e. the tipping point above which debt is associated with more multidimensional poverty. By applying the Generalised Additive Model (GAM) using regression splines, the study finds the existence of critical tipping points between household debt service-to-income ratio and multidimensional poverty along with other explanatory variables (age, government grants, education and household size). The results show that the tipping point at which debt is associated with improved household welfare is 42.5 percent (level of debt service-to-income). With significant findings, household heads younger than 60 years of age and more children are associated with lower multidimensional poverty. Government grants may suffer from fungibility as they do not seem to be an effective tool for multidimensional poverty eradication. The ideal household size with negative significant correlation to multidimensional poverty is less than four members. Lastly, education proves to be the best instrument by means of which households can escape multidimensional poverty. The social implications of the difficulties brought about by household debt include its effects on deteriorating physical and mental health, relationship difficulties, and breakdown. Significant social costs arise, such as medical treatment and, indirectly, reduction of productivity. Further effects on society include increasing criminal behaviour and children dropping out of school, thereby transferring poverty to succeeding generations. Nonperforming loans increase and in turn lead to reduced credit availability. The overall health of the economy is impacted due to reduced aggregate demand. Chapter 7, the study applies Multiple Correspondence Analysis (MCA) in the context of multidimensional poverty in South Africa to identify statistically valid additional dimensions. The results confirm the argument that financial commitment (over-indebtedness) can be regarded as an important dimension in the South African Multidimensional Poverty Index, because its occurrence constrains households from participating in the activities that are essential in modern society. As such, it is proposed that in addition to health, education, living standard dimensions and economic status, financial commitments should be included in the framework for the South African Multidimensional Poverty analysis. A central contribution of this work is a proposal of a hybrid measure in multidimensional poverty measurement, which recommends a combination of both nonmonetary and monetary indicators, in particular over-indebtedness. Chapter 8 constructs a Multidimensional Poverty Index for South Africa, which incorporates financial commitment (over-indebtedness), and analyses results by race and settlement type. The contribution of different indicators towards the index score is also provided. Following the Alkire-Foster method, the results suggest that poverty rates are underreported when overindebtedness and unemployment are not taken into account. Poverty remains severe amongst Africans and those living in rural areas. Indicators associated with unemployment, adult schooling and over-indebtedness should be prioritised across all population groups in tackling poverty. The overall findings of the study have significant policy implications for the credit industry, poverty analysis practitioners, financial institutions and government. Household debt is useful up to a certain point (42.5%), beyond which it becomes associated with increased multidimensional poverty. It is evident that over-indebtedness forms part of capability limitations and, therefore, government should elicit cross-portfolio policy responses when addressing multidimensional poverty problems.

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