Less than four months ago, there was a boom in the lending market which rippled across South Africa: unsecured loans all over the country left 40% of the borrowers in default. While unsecured loans are a means of financing their livelihoods, it is also a slippery slope of debt if one does not know how to manage their finances properly. That is how millions of people found themselves drowning in debt; there are 60 million residents in South Africa, and 7.8 million of them took out combined loans of 225 billion Rand, which is approximately $15 billion. These loans were taken without collateral or contracts, and according to a Johannesburg firm, are often for short-term needs such as food and furnishings.
The unsecured lending landscape spiralled out of control due to a bill passed in 2007 to ease up on them, in an attempt to boost the nation’s economy and help increase financial inclusion. It has ended up hurting the very people it set out to help. In 2012, the severity of indebted citizens was one of the leading reasons why there was violent labour unrest that resulted in 34 dead in Marikana. Back in 2014, the biggest unsecured lender, African Bank Investments Ltd., filed for bankruptcy. In 2018, Net 1 UEPS Technologies Inc. was censured for taking loan repayments out of welfare checks.
Yet the lending industry continues to thrive. Businessmen with questionable morals have set up loan sharks to profit from this market of reckless lending. On a whole, two-thirds of the clients of these money lenders spend at least a quarter of their annual net income just to service their loans. That’s inclusive of all interest charges and miscellaneous fees that can rack up to 225% for short-term loans and 34% for loans surpassing five years.
While lenders often lend help to those who need it in times of financial crisis, this dysfunctional industry largely capitalizes on the nation’s financially illiterate and stays profitable by charging exorbitant amounts, which has been leading the country deeper into debt. This has, in effect, caused the president, Cyril Ramaphosa, to sign a bill in August for over-indebted consumers to suspend their debts, either in part or in full, with the possibility of permanency, depending on their financial situation.
If their financial situation worsens, they will be eligible to suspend their debts indefinitely. This bill is applicable for those who earn a gross income of less than R7,500 per month and simultaneously hold a debt which amounts to R50,000 or more or are found to be critically indebted by the National Credit Regulator.
Banks are attempting to lock down on loans to those who are unable to process repayment. Individuals are not the only ones taking out unsecured loans. Due to the lack of title deeds and regulations in place, construction projects often utilise unsecured loans to get the funding they require.
According to Bloomberg, the mining sector in South Africa has suffered the most with two-thirds of the industry’s workers spending over 48% of their wages solely on repayment.
“In South Africa, financial inclusion through micro-credit has become financial enslavement through debt traps,” according to a differentiated asset management company, “Expensive loans used for consumption purposes and create a transfer of wealth from the borrower to the lender—in South Africa’s case from the poor to the rich.”
