South Africa’s Credit Growth Hits Strongest Quarter Since Covid Era

South Africa’s credit participation, muted for years after the pandemic, saw its sharpest expansion in Q2 2025 since Covid-19, as improved economic conditions and cautious lending normalization drove a significant upturn in credit market activity. The developments signal both opportunity and risk in the recovering South African economy, with strong demand for credit accompanied by concerning increases in payment defaults.

The number of outstanding bank and retail loans rose by 3.5% year-on-year, marking the most substantial growth since the pandemic disrupted South Africa’s credit markets. Most of this growth in account volumes stemmed from unsecured loans, which saw a year-on-year growth of 5.8% (associated with a 3.3% increase in outstanding balances), reflecting consumers’ ongoing reliance on credit to bridge cost-of-living gaps.

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Economic Recovery Creates Credit Expansion Opportunity

Since the pandemic’s economic disruption, South Africa’s credit market has been characterized by muted growth as years of economic uncertainty, rising interest rates, and inflation pressure kept lenders in a conservative mindset. The number of credit-active people grew slowly as only consumers with the lowest credit risk continued to qualify for new credit, with many consumers struggling to qualify for new credit against the backdrop of risk-averse lending strategies employed by many lenders in the market.

This conservative approach was exacerbated by increases in the cost of living impacted by not only high inflation and interest rates, but also stagnant salary growth that put consumer affordability under considerable pressure. However, the latest increase in credit accounts suggests that lenders are cautiously easing credit-lending criteria in response to improved economic fundamentals.

Reports by the National Credit Regulator indicate that there continues to be very high demand for credit in the market, suggesting that consumers continue to look to credit as a means to bridge the cost-of-living gap. The TransUnion Q1 2025 Industry Insights Report noted that growth in originations of new credit cards reached 30.7% year-over-year, far outstripping growth for other consumer credit products during the first quarter.

Positive Economic Tailwinds Drive Credit Normalization

Several economic factors encouraged lenders to continue the cautious easing resulting in credit expansion during the second quarter. Most significantly, the rand strengthened significantly as the US dollar experienced its steepest decline in over 50 years, falling to its lowest level since the second quarter of 2022. This currency strength has contributed materially to lower inflation outcomes in South Africa, with US dollar-based petroleum and agricultural products serving as key drivers of local inflation.

Petrol prices fell by nearly 3% quarter-on-quarter, putting money back into consumers’ pockets. Fuel costs and pass-through taxi fares represent a significant portion of monthly budgets for many South Africans, making this decrease meaningful for disposable incomes across economic segments.

The FNB/BER Consumer Confidence Index recovered from its lowest point since the second quarter of 2023, reflecting improved sentiment among South African households. Consumer confidence had been severely impacted by political uncertainty, economic stagnation, and persistent infrastructure challenges, making this recovery particularly significant for credit demand patterns.

With inflation falling to its lowest level since Covid, consumers experienced a slowdown in pressure on their purchasing power, creating space for new financial commitments. Inflation reached 3.0% in June 2025, with core inflation at 2.9%, both at the bottom of the South African Reserve Bank’s target range.

Most importantly for credit markets, the fourth repo rate cut in a year put the prime lending rate at 10.75%, reducing monthly installments on existing secured loans and improving affordability for new borrowers. The South African Reserve Bank has delivered five consecutive rate cuts since September 2024, representing a total reduction of 125 basis points from the 2024 peak of 11.75%.

Credit Balances Surge Across Product Categories

The second quarter of 2025 saw a significant increase in outstanding balances, up to nearly R2.6 trillion, representing a year-on-year increase of nearly 6%. Although this partly stems from an increase in credit accounts, the bulk of this increase was due to a sharp increase in outstanding balances in the higher-end credit products of home loans and credit cards.

Looking at the entire market, credit cards and home-loan balances each expanded by nearly 7% year-on-year. Retail credit expanded even more substantially, indicating that these credit products are leveraged by consumers to cover day-to-day living expenses. The growth in retail credit reflects the ongoing financial pressure facing South African households, despite improvements in key economic indicators.

In the case of home loans, the increase in exposure comes despite a reduction in the volume of credit accounts. This could be indicative of consumers with home loans leveraging the facility to access much-needed cash through additional advances or refinancing arrangements. Home loan originations declined by 10.8% year-on-year in Q1 2025, with even prime consumers pulling back from the housing market due to affordability constraints.

New-to-Credit Market Shows Robust Growth

The quarter saw an influx of first-time borrowers, with nearly 740,000 new-to-credit individuals entering the market, representing a 4.8% quarter-on-quarter increase. This equated to growth in their total loan balances of 8.3% over the last quarter, with retail and unsecured debt remaining the most common entry points into the credit market.

The expansion in new-to-credit consumers reflects both improved economic conditions and lenders’ willingness to extend access to previously underserved market segments. TransUnion data shows that 35% of new credit card originations in Q1 2023 came from new-to-card consumers, though this represents a decline from pre-pandemic levels of 44.3% in Q1 2019.

The trend toward financial inclusion has been supported by advances in credit scoring and alternative data sources, allowing lenders to better assess risk among previously excluded populations. However, the concentration of new borrowers in unsecured products also raises questions about debt sustainability and future payment performance.

Concerning Rise in Payment Delinquencies

Despite the positive growth trends, concerning undercurrents suggest not all borrowers are managing their debt effectively. Total overdue balances increased to nearly R215 billion, equating to a R22 billion annual increase. This amount represents 8.3% of the total outstanding debt, indicating significant stress within the credit system.

More troubling, overdue balances grew twice as fast as total balances compared to the previous year, with overdue loan balances maintaining double-digit year-on-year growth for two consecutive quarters. This pattern suggests that while credit access has improved, debt serviceability has deteriorated for a significant portion of borrowers.

The quarter also saw the first growth in the number of loans in default (337,000) since early 2023, suggesting that the credit expansion may be outpacing some consumers’ ability to service their debt. This development is particularly concerning given the improved economic conditions that should theoretically support better payment performance.

Non-bank personal loans recorded the highest delinquency rate since Q2 2021, with 41.3% of borrowers three months or more in arrears during Q1 2025. This represents a 520 basis point year-on-year increase and highlights the vulnerability of higher-risk lending segments.

Credit Stress Spans All Income Segments

According to Andrew Fulton, director at Eighty20, “Nearly three-quarters of overdue debt is concentrated among the three wealthiest Eighty20 consumer segments: the Middle Class Workers, Heavy Hitters, and Comfortable Retirees. These segments typically qualify for high-end credit products with high monthly payments.”

This distribution suggests that credit stress spans all economic levels, indicating that even higher-income households are feeling financial pressure despite lower inflation and four interest-rate cuts over the past year. The concentration of defaults among higher-income borrowers challenges assumptions about risk distribution and suggests that affordability pressures extend beyond traditional low-income segments.

The pattern reflects broader structural challenges in the South African economy, including persistently low GDP growth expected at around 1% for 2025. This growth rate cannot keep pace with population growth or create sufficient employment opportunities to support household income growth across all segments.

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Banking Sector Performance and Strategy

South Africa’s major banks have shown resilience during this credit expansion phase, with steady growth in lending (5.4%) and deposit-taking (8.7%) providing the foundation to support earnings growth in 2024. Supported by larger balance sheets and increased customer numbers, core banking revenues saw good growth during the period under review.

The banking sector has benefited from improved credit trends, particularly in retail lending portfolios, which translated to lower credit impairments and supported overall earnings growth during the early phases of the credit recovery. However, the recent upturn in delinquencies may pressure this positive trend in coming quarters.

Financial institutions have adopted cautious approaches to risk management, with lenders offering smaller average loan amounts and limits on new revolving products. This conservative stance reflects lessons learned from previous credit cycles and recognition of ongoing economic uncertainties.

Product-Specific Market Dynamics

The credit card market has shown particular strength, with average account balances increasing by 7.1% year-on-year in Q1 2025. Despite this growth, lenders’ default concerns may have been eased by the 20-basis-point decrease in account-level delinquencies over the same period, standing at 12.3% in Q1 2025.

Vehicle loans continue to show encouraging signs of growth, with origination volumes increasing by 11.6% year-on-year in Q1 2025, though this growth has been constrained by significant increases in vehicle prices and high interest rates affecting affordability in new and used car markets.

The retail credit sector, including clothing accounts and store cards, has shown strong growth as clothing account originations increased by 11.2% year-on-year in Q3 2023. Given that clothing accounts are typically opened by borrowers in below-prime risk tiers, this highlights increased lender confidence in extending credit to riskier consumers.

Regional and Continental Strategy Impact

The expansion of South Africa’s credit market occurs within a broader context of the major banks’ continental strategies. The centrality of Sub-Saharan Africa to overall bank strategy remains important, with banks seeking to capture significant financial services opportunities among young, mobile, and digitally savvy African populations in high-growth markets.

This regional focus provides South African banks with diversification opportunities that can offset domestic market volatility and support long-term growth strategies. However, the success of these continental strategies depends partly on the stability and growth of the home market, making domestic credit market health particularly important.

Monetary Policy and Credit Market Outlook

The South African Reserve Bank’s shift toward a more accommodative policy stance creates a supportive environment for continued credit expansion. Governor Lesetja Kganyago emphasized the bank’s opportunity to “lock in low inflation and clear the way for sustainably lower interest rates.”

With the SARB now appearing to target 3% inflation rather than the traditional midpoint of 4.5%, the outlook for interest rates has become even more positive for credit markets. This shift could support further credit expansion, though it also raises questions about debt sustainability if growth outpaces income improvements.

Market expectations suggest further rate cuts are likely, potentially taking rates below 6% if inflation remains contained. This environment would support continued credit demand, though lenders will need to balance growth opportunities with risk management imperatives.

Economic Growth and Structural Challenges

Despite the credit market recovery, South Africa continues to face persistently low growth that constrains the economy’s ability to support sustainable credit expansion. With many analysts anticipating just 1% GDP growth for 2025, South Africa cannot keep up with peer countries or its own population growth.

The country desperately needs economic reforms to set itself on a path of sustainable economic growth. Structural challenges including energy supply constraints, logistics infrastructure deficiencies, and regulatory uncertainties continue to limit economic potential and, by extension, households’ capacity to service increasing debt loads.

These structural constraints suggest that while short-term credit growth may continue, long-term sustainability will depend on broader economic reforms that can support income growth and economic opportunity creation across all segments of society.

Risk Management and Industry Response

The credit industry’s response to current conditions reflects lessons learned from previous cycles. Lenders are employing more sophisticated risk assessment tools and maintaining conservative underwriting standards even as they expand access. Advanced analytics and propensity models are being used to identify potential borrowers who are new to products while managing portfolio risk.

The concentration of payment stress among higher-income borrowers suggests that traditional risk assessment models may need refinement to account for changing economic realities. As one analyst noted, “Finding and funding resilient consumers becomes even more crucial during challenging economic periods when looking to maintain a healthy portfolio delinquency ratio.”

Financial institutions are also focusing on building longer-term customer relationships rather than simply volume growth. This approach recognizes that sustainable credit market expansion requires borrowers who can successfully manage debt over extended periods rather than those who may quickly become overextended.

Future Outlook and Strategic Considerations

Looking ahead, South Africa’s credit market faces both opportunities and challenges. The positive economic tailwinds that supported Q2 2025 growth may continue, particularly if inflation remains contained and interest rates continue to decline. The rand’s strength against the US dollar provides ongoing support for lower inflation and improved consumer purchasing power.

However, the rise in delinquencies across all income segments suggests that credit expansion may need to be more carefully managed to prevent systematic stress. The concentration of payment difficulties among higher-income borrowers indicates that economic pressures are more broadly distributed than traditional models suggest.

The success of continued credit expansion will largely depend on the South African economy’s ability to generate sustainable growth that supports income improvements across all segments. Without this underlying economic strength, credit growth may prove unsustainable and could contribute to future financial system stress.

Conclusion

South Africa’s Q2 2025 credit expansion represents both a positive development and a cautionary tale. While the 3.5% growth in outstanding loans marks the strongest performance since the Covid era and suggests economic recovery, the accompanying rise in delinquencies indicates that not all borrowers are benefiting equally from improved conditions.

The concentration of payment stress among higher-income segments challenges traditional assumptions about credit risk distribution and suggests that South Africa’s economic challenges are more pervasive than commonly understood. As lenders continue to cautiously expand access to credit, the sustainability of this growth will depend critically on broader economic reforms that can support sustainable income growth across all segments of society.

The next few quarters will be crucial in determining whether current trends represent the beginning of a sustained credit market recovery or a temporary expansion that may require more careful management to prevent systematic stress. The banking sector’s continued focus on risk management and sustainable lending practices will be essential in navigating this critical period.

South Africa’s major banks are expected to report Q2 2025 results in the coming weeks, providing additional insights into the sustainability of current credit growth trends and their impact on financial sector profitability and stability.

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By: Montel Kamau

Serrari Financial Analyst

4th September, 2025