South African households in deep trouble

South African households are experiencing financial strain, with non-performing loans across the country’s major banks remaining above their long-term averages. 

This is despite a substantial decline in inflation and a steady reduction in interest rates by the Reserve Bank over the past year. 

Increased financial pressure on households may begin to impact South African banks and the wider financial system. 

This is feedback from the Reserve Bank in its first Financial Stability Review of 2025, which stated that there is increased financial stress on households and small businesses. 

In its bi-annual review, the bank analyses various risks to the country’s financial system and how it is working with financial institutions to mitigate their impacts. 

One of the significant risks identified was the increased financial distress seen in households and small businesses in South Africa. 

It said that high levels of debt, job losses, or business interruptions largely cause increased financial distress among these parts of the economy. 

This can, in turn, impact financial stability directly through rising loan defaults and delinquencies, or indirectly by exacerbating the country’s already low economic growth and its reliance on government support. 

A significant indicator of the financial distress experienced by households and small businesses is the number of non-performing loans in the banking sector. 

Rising non-performing loans typically prompt lenders to tighten lending standards, which in turn reduces the supply of credit and limits economic growth. 

An increase in bad debt and non-performing loans also impacts the profitability of banks, forcing them to increase provisions. 

The Reserve Bank said that non-performing loans have increased in the corporate and small business sectors, but have decreased in both the secured and unsecured retail segments. 

However, it said that the ratios for all four of these asset classes remain above their long-term averages. This is illustrated in the graph below. 

Unemployment disaster

A major driver of South Africans experiencing financial distress is the country’s ongoing unemployment crisis, which is worse than it appears. 

Increasingly, university graduates are struggling to find employment as their skills do not match what is demanded by the labour market. 

This growing mismatch has left many university graduates unable to find stable employment after nearly two decades of schooling and higher education. 

In turn, this significantly constrains economic growth as these individuals do not fully participate in economic activity and, in many cases, become reliant on the state for their livelihood. 

The Organisation for Economic Co-operation and Development (OECD) outlined this growing mismatch in its recent economic survey on South Africa. 

It said that the labour market in South Africa is characterised by persistent mismatches between workers’ qualifications, fields of study, and available jobs. 

This highlights a shortage of skilled and semi-skilled workers in the country, which ultimately constrains long-term economic growth. 

Skills shortages persistently due to a lack of quality education, despite the significant progress made in recent decades.

According to the latest data, 45% of men and 46% of women in South Africa between 25 and 64 years old had more than a secondary education. 

In comparison, the average for an OECD country is 79% of men and 81% of women. This emphasises South Africa’s poor educational outcomes. 

The organisation added that this reflects severe inadequacies in technical and vocational education and training programmes.

This is part of a broader issue within South Africa’s higher education sector – the sector’s failure to align its programmes with the skills demanded by the labour market. 

The OECD also called for more teachers and university lecturers with real-world industry experience, as well as a greater use of internships, to better prepare students for the demands of the job market.

In South Africa, there are clear advantages to having higher education, with individuals who have completed high school having a 30% greater chance of employment than those who have not. 

Having a tertiary education gives the average South African a further 25% greater chance of employment. 

The organisation said the supply of graduates is severely constrained by the lack of university infrastructure and the high cost per student in South Africa. 

Public subsidies for low-income students are proportional to tuition fees, creating incentives for universities to set higher fees.