Financial exclusion fuels the growth of informal borrowing
(17 July 2024, Johannesburg) Amidst rising living costs and an increase in decline rates from formal lenders, many consumers are being forced into accessing high-cost credit from unregulated lenders. This trend highlights the urgent need for more inclusive financial services.
“Due to increased compliance requirements and a reduced appetite for risk among formal credit providers, loan decline rates in the formal lending industry have risen significantly,” says Leonie van Pletzen, Chief Executive Officer of MicroFinance South Africa. “This situation is pushing consumers toward illegal lenders as they seek alternative sources of credit to meet their financial needs.”
“Alarmingly, recent reports from our 1 500 members in the micro-lending industry reflect that the rejection rate from regulated lenders has increased significantly,” shares van Pletzen. “This directly impacts borrowers who are then forced into taking out credit through informal lenders that are under-regulated and do not comply with the National Credit Act.”
Van Pletzen explains that the increase in consumers turning to illegal lenders can be attributed to the fact that fees charged by regulated credit providers have not been reviewed in nearly a decade.
“This stagnation has made it challenging for these regulated businesses to maintain financial sustainability, leading to a decreased appetite for risk,” she explains. “The urgent need for a fee review in the regulated credit sector is evident, as it would enhance the sustainability of these businesses, enable them to serve a broader range of consumers, and protect borrowers from the predatory practices prevalent in the illegal lending market.”
In 2018, short-term lender Wonga published an informal lending report exploring the impact of restrictive regulations on consumers who cannot access credit from formal providers. The report revealed approximately 40 000 informal lenders, known as mashonisas, operating in South Africa at a ratio of 1:100 households in informal settlements. Both mashonisas and borrowers indicate that this practice has grown significantly over the years, and shows no signs of abating.
“Unfortunately, these illegal lenders operate outside the bounds of regulatory oversight, often exploiting borrowers with exorbitant interest rates, hidden fees, and harsh repayment terms,” she explains. “This exploitation not only traps consumers in a cycle of debt but also exacerbates financial exclusion, as borrowers are unable to build a positive credit history or access the protections and benefits offered by regulated institutions.”
“It is important that consumers have access to credit from regulated lending institutions, as this offers them a number of benefits,” explains van Pletzen. “First and foremost, regulated lenders are bound by the National Credit Act, ensuring transparency and fairness in lending practices. This means that borrowers are fully informed about interest rates, fees, and repayment schedules, protecting them from hidden charges and predatory terms often associated with unregulated lenders.”
“Access to regulated credit also enables consumers to improve their credit scores, which is crucial for securing better financial opportunities in the future,” she continues. “Moreover, regulated lenders offer flexible borrowing limits and terms tailored to individual financial situations, providing quick access to cash for unforeseen expenses or the ability to pay for significant purchases over time without falling into unmanageable debt.”
This structured and fair approach not only supports financial stability but also promotes responsible borrowing and long-term economic health for consumers. Ensuring access to credit through regulated institutions is thus essential for safeguarding consumers from exploitation and helping them achieve financial resilience.
“Other factors that we believe are driving the increase in informal lending include convenience, speed, limited or no credit checks,” reports van Pletzen. “Unfortunately, because these informal lenders are unregulated, there’s nothing preventing them from charging hidden fees and often they charge a penalty if a loan is settled early.”
“Typically, these loans are very short-term, a month or less, and can range from as little as R50 to R5,000 or more,” explains van Pletzen. “Because they are unregulated, the trustworthiness of a mashonisa is always a gamble, as they set their own fees and interest rates.”
“It is very important that the micro-lending industry is regulated and priced correctly, so that people can gain access to credit in a legal format where there are rights, obligations, and protections,” states van Pletzen. “Creating awareness of the pitfalls of informal lending will curb the trend of people being forced to go to mashonisas, and ultimately prevent them from being caught in a debt trap.”
“Taking a loan from credit providers registered with the NCR and members of MFSA is crucial for ensuring consumer protection and financial stability, as they adhere to strict guidelines designed to safeguard borrowers' rights,” concludes van Pletzen.
“Additionally, engaging registered credit providers can help individuals build and improve their credit scores, opening up further opportunities for financial growth and stability in the future.”
Ends
About MicroFinance South Africa
MicroFinance South Africa is the largest microfinancing association in South Africa that represents over 1 500 registered and legal microfinance credit providers, and service providers to the industry. Over the past 27 years, it has remained focused on its vision to ensure a sustainable microfinancing industry and has continued to expand its footprint, presence and impact.
MicroFinance South Africa is a community of individuals and organisations that are dedicated to enhancing consumer confidence in micro-finance by ensuring professional, legal, and ethical conduct. The MFSA has established a Code of Good Practice as a voluntary standard to which its members have agreed to adhere.
For further information contact:
Claire Watt | Ntokozo Kalako
The Friday Street Club
Tel: 082 490 3796 | 067 610 6879
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