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Loan sharks and the curse of poverty
Poor consumers with no access to formal credit rely on loan sharks to feed their families and end up in a never-ending debt spiral.
There are also rogue moneylenders who may effect illegal deductions from Sassa social grants recipients to recoup owed funds Image: iStock
You will find at least one loan shark in every poor community in South Africa, where they prey on people who have no access to banks and other forms of credit but need a few hundred rand to put food on the table.
They charge high interest rates and get away with it because they are not registered and therefore not regulated. Credit providers who are registered as lenders with the National Credit Regulator are not allowed to charge more than the repo rate plus 21%. The current repo rate is 8.25%.
When Sassa pensioners did not get their pensions on time two weeks ago, guess who they turned to for money to buy food and pay for necessities such as food and medication? Loan sharks. The untenable hold loan sharks have over low-income consumers was seen last month when a mother in Butterworth killed herself and her children.
After this incident, Gift of the Givers’ Eastern Cape co-ordinator, Corene Conradie, told The Citizen loan sharks are an issue in rural communities, especially among the elderly. They keep consumers’ IDs, Sassa cards and bank cards to ensure they can draw any money as soon as it is paid in.
The repayments often consist of the whole amount deposited, leaving the consumer without money to live on. The consumer then has to borrow more money for food and necessities and so the evil cycle of debt continues.
These loan sharks do not only charge excessive interest rates, but also often use extreme and unregulated collection procedures, such as assaulting, intimidating or threatening consumers if they are unable to pay back the money on time.
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Loan sharks increasing poverty
This is not a problem that will go away. Neil Roets, CEO of Debt Rescue, says if this is not dealt with, the country faces the very real possibility of an increase in poverty, as consumers become trapped in debt spirals.
“This will also affect them emotionally and physically as they are faced with increased stress, leading to ill health. A major concern is there might be physical risks if these individuals try to enforce the recovery of their repayments through threats,” he warns.
There are no statistics available on the number of loan sharks in the country or how much consumers owe them. However, Roets says this unregulated practice is believed to be very prevalent.
He adds, the volume of this predatory loan problem is so great that legal mechanisms should be strengthened to hold criminal loan sharks accountable for their activities and provide recourse to borrowers.
“Many individuals in lower-income communities in South Africa face financial instability and may lack access to traditional banking services. This high demand for short-term loans often makes these communities vulnerable to loan sharks.”
ALSO READ: Limpopo loan shark arrested for seizing social grant cards
Some loan sharks caught
There are regular updates in the media about the police and the Hawks arresting people who are unregistered moneylenders, but it is not enough. Roets says government and various non-governmental organisations try to address this issue, through implementing regulations to curb predatory lending practices and providing financial education to vulnerable communities.
“However, the problem remains deeply rooted in many areas. It is critically important that consumers are aware that borrowing from unregistered individuals places them at immense risk, as they then have no recourse in terms of the legislation that regulates registered credit providers.”
He says consumer financial literacy is critical.
“We must look at ensuring frequent educational information around various topics involving personal finances is easily accessible to assist poor consumers with their decision making when they are searching for any topic, especially when they are over-indebted.”
The National Credit Regulator’s Credit Bureau Monitor for March 2023 shows there are 27,07 million credit active consumers with 90,44 million accounts in South Africa.
However, this does not include loans from unregistered moneylenders.
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What happens when formal credit applications are rejected
The regulator’s latest Consumer Credit Market Report for the first quarter of 2023 shows the number of credit agreements concluded decreased 13.04%, while the number of rejected credit applications increased from 68.73% to 70.07%.
When consumers’ applications for legitimate credit are rejected, guess who they turn to? Loan sharks –who do not ask too many questions or carry out the required affordability assessment prescribed in terms of the National Credit Act.
According to a research report conducted on behalf of the Black Sash, “Social grants: Challenging Reckless Lending in South Africa”, released in September 2020, many “formal” lenders do not abide by the National Credit Act and charge high rates of interest commonly associated with mashonisas and loan sharks.
Many “informal” lenders or mashonisas engage in a range of lending practices from familiar, relationally based lending on relatively favourable terms to exploitative lending on abusive terms.
According to the report even cash or debit microlenders registered with the regulator engage in illegal practices with social grant recipients, while some claim to be registered.
Using a loan from one loan shark to pay off another
The researchers noted the trouble with these kinds of loans was consumers had no independent record from their bank with the amount they received as an initial loan and this made accounting for the loan and the repayments very difficult.
These lenders also failed carry out adequate affordability assessments, provided limited loan documentation, charged unlawfully high interest, made illegal deductions and failed to observe cooling-off” periods.
The researchers interviewed many grant recipients who were trapped in cycles of debt, using a loan from one lender to pay off another. The end result, in many cases, was the very social grant meant to provide support for vulnerable people was eaten up in high interest rates, fraudulent repayments and bank charges.
They concluded that better systems of debt regulation, advice and relief were urgently required. Present financial and legal systems favoured the creditors, they said.
