SA’s unsecured lending crisis
DANGER SIGNS: DEFAULT RATE FOR CONSUMERS IS 48%
The average consumer owes nearly 50% more than they did four years ago.
Earlier this year, Differential Capital released a comprehensive analysis of the South African unsecured lending market in which it argued that, despite the well-meaning legislation that had created this industry, it was essentially dysfunctional.
Instead of empowering disadvantaged South Africans, as was the intention, it had become largely exploitative.
“We accept the need for financial inclusion,” the report noted. “However, we contest that highcost loans [specifically shortterm loans] are detrimental to this endeavour. Our research shows that predatory lending is almost systemic to the industry, except for the “big four” banks.”
Consumers on the edge
The default rate for consumers who only have unsecured credit is 48%. For those with both unsecured credit and other credit, this rises to 56%.
Around 81% of those with an unsecured loan earn less than R15 000 per month, and 36% earn less than R5 000 per month. In total, borrowers in this segment owe R137 billion, and, on average, are paying 33% of their net income to service this debt.
The total value of unsecured loans outstanding has grown since 2015, while the number of consumers who have a loan has dropped. The result is that the average consumer owes nearly 50% more than four years ago.
One of the main reasons for this is that lenders are not competing on value, but on loan size.
Consumers are simply shopping around for the biggest loan at the lowest monthly repayment, even if that means extending the loan over many years.
The cost is hardly a consideration. This is reflected in the all-in cost of credit over different terms.
Unintended consequences
For Naeem Badat, co-founder of Differential Capital, this shows an industry that isn’t working as intended. The ideal of financial inclusion is not being met.
“Consumers are becoming more and more indebted,” he says. “If they were becoming emancipated, you would expect the opposite.”
Underlying this problem is that the majority of loans are taken for “unproductive” purposes. As much as a quarter are taken just to pay off other loans.
The contradiction
The potential for unsecured lending to facilitate economic development is well appreciated. In many parts of the world, it has allowed those who are excluded from the economy to gain a foothold by accessing capital. However, this is not what has happened in SA. By encouraging a profit-driven industry, the legislation has led to something different. “Even if you are trying to enable sustainable lending in South Africa, the framework of this market means that you simply can’t compete,” says Badat.
Consumers are becoming more indebted
The myth of self-regulation
There is also no prospect of the industry moderating its own behaviour. According to Differential Capital’s analysis, since 1990 one bank in South Africa has failed every two years on average.
This is unquestionably a highrisk industry, yet lenders are still eager to operate in this space because of the outsized returns they can earn.