Loan sharks have been part of the credit landscape for hundreds of years, but while we all know that ‘neighbourhood lenders’ are out there, very few of us know the true scale of the informal lending market in South Africa.
However, a newly commissioned report by the regulated online credit provider Wonga has shed some light on the lenders who operate beyond the reach of regulators and create debt traps for many working-class South Africans.
The level of informal lending in South Africa
The report issued by Wonga and compiled by the research firm Eighty20 found that there are as many as 40,000 loan sharks, also known as mashonisas, operating throughout the townships of South Africa. That’s one lender for every 100 people living in South Africa’s informal communities.
Typically, the loans they provide are small, ranging from R500 to R1,000, but with interest rates of 40% and more, that initial loan amount rises quickly when repayments are missed. Although the interest rates are high, the loans provide a vital financial lifeline for many South Africans who do not use the banking system and cannot access credit by other means.
The report also shows that the picture many of us have of loan sharks, as being intimidating men in dark offices, is not necessarily the case. The study found that the informal lenders are often ordinary members of their local communities who work in post offices, hotels and even as bus drivers.
What damage can informal lending cause?
Although the study identified the vital role informal lenders play in poor communities by giving people quick access to small, short-term loans, it also acknowledged the potential problems unregulated credit can cause.
Those who are unable to repay the initial debt along with the 30% or 40% interest can all too quickly find themselves caught in a debt trap. The lenders can use intimidation, threats of violence and even visits to a borrower’s workplace to force the repayment.
What recourse do borrowers have?
If you want to lend money and charge interest in South Africa, you must be a registered credit provider. If you are not registered as a credit provider, any agreement will be declared illegal by the courts and the provider will not be able to take action against the borrower.
As a borrower, if you are being overcharged by an informal lender then you should complain to the National Credit Regulator (NCR). And anyone who is being threatened by a loan shark should report it to the police immediately.
Have you ever borrowed money from South Africa’s informal lenders? Is it something you’d do again? Please share your thoughts in the comments below.