Journal of Economics and Behavioral Studies (ISSN: 2220-6140) Vol. 10, No. 6, pp. 240-250, December 2018 240 Characteristics of Credit Instruments Issued by Stokvels in South Africa Lindiwe Ngcobo, Joseph Chisasa University of South Africa, Pretoria, South Africa Lngcobo@unisa.ac.za Abstract: Access to formal credit and other financial instruments remains a challenge for the majority of households in South Africa. The objective of this study was, therefore, to determine the characteristics of credit instruments issued by stokvels to households in South Africa. Prior studies have generally focused on mobilization of savings through stokvels while none has paid particular attention to the credit supply function of stokvels. This study attempts to fill this gap by using a self-administered research questionnaire on a sample of 386 respondents. Members of stokvels were surveyed from the cities of Pretoria and Johannesburg in the Gauteng province of South Africa. Data was analysed using descriptive statistics, exploratory factor and correlation analyses. Results show that stokvels issue short-term loans from less than 3 to 6 months. Interest rates are high ranging from 25% to 35% and are charged monthly. Loan sizes are small with approximately two-thirds of the respondents receiving loans above R500 while the remaining third received less than R500. Finally, all loans are secured by the borrower’s identification document or bank card and personal identification number. The results of this study have policy implications for financial institutions in South Africa. Keywords: Credit, Savings, Stokvel, Households, South Africa, Exclusion 1. Introduction South Africa still remains one of the countries in the world with the highest income inequality (World Bank Report, 2006). Almost half of the population continues to live under the poverty datum line (Adelzadeh, 2006). During apartheid rule, black South Africans were excluded from utilising most aspects of the formal financial and banking sector. The state severely restricted Africans’ access to formal credit. Moreover, the restriction on private ownership of council-owned homes, low wages and few opportunities for formal entrepreneurship added to the severe restriction of formal credit. The state erected numerous barriers to black home ownership, to accessing finance and to operating licensed business. It is no surprise that there developed a strong demand in urban townships for access to consumer credit. The 2011 census reported that South Africa has about 56 million people consisting of Africans (76,4%), Whites (9,1%), Coloured (8,9%), Asian (2,5%) and Other (0,5%). South Africa has eleven official languages, different cultures and religion. The economy of South Africa is the second largest in Africa after Nigeria. According to Statistics South Africa (2017), South Africa experienced a decrease of 0.7% in GDP during the first quarter of 2017, following a 0.3% contraction in the fourth quarter of 2016. The unemployment rate in South Africa increased to 27.7 percent in the first quarter of 2017 compared to 26.5 percent in the previous period. What is evident from these summary statistics is that innovative solutions are required to avert a further deterioration of the economy, stimulate saving and investment at all levels of society. Previous studies have generally focused on mobilisation of savings through stokvels while none have paid particular attention to the credit supply function of stokvels in reducing financial exclusion among households. In South Africa, many households are poor and remain financially excluded, especially from the formal credit market. Financial exclusion is a process where an organisation lacks or is denied access to affordable, appropriate financial products and services, with the result that their ability to participate fully in social and economic activities are reduced, financial hardship is increased and poverty is exacerbated (Burkett and Sheehan, 2009). Financial exclusion negatively affects the economic development of the country (de Cock, et al., 2005). Recent empirical findings show that stokvels are community-based savings schemes aimed at improving the lives of poor household’s and alleviating unemployment (Floro and Seguino, 2002:1). Moreover, literature shows that South Africa has a very low saving rate (Moyagabo, 2015). Savings are meant to be used in future by unemployed and poor households in times of need. Helms (2006) opined that even though poor and unemployed households are willing to save, they are confronted by multiple demands on their low incomes and lack access to banking services such as deposits. Many adult black African who are poor and unemployed, despite having formal banking accounts, save solely by becoming members of stokvels.