Two out of five borrowers cannot repay their loans

SA’s unsecured lending boom has left 40% of borrowers in default and millions of people in a debt trap, according to fund manager Differential Capital.

About 7.8-million of the country’s 60-million population took out altogether R225bn in loans without collateral, mostly for short-term needs such as furniture and urgent family care, the Johannesburg-based company reported.

SA eased controls on unsecured lending in 2007 to boost financial inclusion in one of the world’s most unequal countries.

Amid mounting criticism, the industry battled to improve its reputation even as regulation improved. Instead of helping those most in need, the practice led a consumption-driven debt boom by those least able to pay back loans, according to Differential Capital.

“It is a dysfunctional industry where lenders compete on the largest loan size, not on customer value, preying on financial illiteracy and consumer demand for credit,” its report said.

“Reckless lending is almost systemic in the industry.”

Even with the high number of defaults, the industry stays profitable by charging “extortionate pricing” and rescheduling loans that are in default, according to the Differential Capital report.

President Cyril Ramaphosa signed the National Credit Amendment Bill into law in August, setting the groundwork for overindebted consumers to have payments suspended, in part or in full, for up to 24 months, or even scrapped if their financial situation has been found to have worsened.

The bill applies to customers with gross monthly incomes of no more than R7,500, unsecured debt amounting to R50,000 or have been found by the National Credit Regulator to be critically indebted.

Interest charges, once all associated costs are included, range from an annual rate of 225% for one-month loans to 34% for five-year loans. Twothirds of customers pay more than a quarter of their net income to service their loans, the report said.

Capitec Bank is SA’s biggest unsecured lender. While the country’s big four — Standard Bank, Nedbank, Absa and First National Bank — also offer unsecured loans, their affordability tests are more stringent, it said.

The SA Reserve Bank, which oversees banks, declined to comment.

“The industry has changed enormously over the last couple of years due to regulations,” said Capitec CEO Gerrie Fourie.

“The big players like ourselves have moved out of the lower sector, and the slack has been taken up by the smaller shops. The biggest portion of the market complies.” Although the number of loan defaults is high, it has come down in recent years, Fourie said.

Capitec focuses more on longer-term debt with between 60% and 70% of the money it has lent used for needs such as education, vehicles and establishing businesses, he said.

The mining sector has been hit particularly hard. Two-thirds of the industry’s 450,000 workers have had unsecured loans and spend an average of 48% of their wages paying off debt, Differential said.

In 2012, the extreme indebtedness of miners was seen as one of the root causes of the violent labour unrest that culminated in the massacre of 34 strikers at Marikana.

In 2014, African Bank, the biggest unsecured lender, went bankrupt. In 2018, Net 1 UEPS Technologies was censured for allowing loan repayments to be taken directly out of social grants.

“In SA, financial inclusion through micro-credit has become financial enslavement through debt traps,” Differential said.

“Expensive loans used for consumption purposes create a transfer of wealth from the borrower to the lender — in SA’s case from the poor to the rich.”

IT IS A DYSFUNCTIONAL INDUSTRY ... PREYING ON FINANCIAL ILLITERACY AND CONSUMER DEMANDFOR CREDIT

IN SA, FINANCIAL INCLUSION THROUGH MICRO-CREDIT HAS BECOME FINANCIAL ENSLAVEMENT THROUGH DEBT TRAPS