A new report from short-term lender, Wonga, finds that non-registered credit lenders, or ‘loan sharks’ appear to be more widespread than previously thought, with as many as 40,000 operating in South Africa at a ratio of 1:100 for every household in informal settlements.
The report found that the average value of a loan ranges from between R500 – R1,000, while interest on a loan ranges from between 30% – 50%. Very few loans exceed R5,000, the report found.
It further found that people use ‘mashonisas’ (an person or company that provides informal loans to consumers) because they offer quick and easy access to small, short-term loans, despite not having any legal protection.
The report comes on the back of a sharp incline in the percentage of credit users in South Africa – from 57% of the adult population being active credit users in 2008 to 69% in 2017 (NCR 2008-2017).
The fact that the loan is structured so simply, is a draw-card for the use of mashonisas, Wonga said, as apposed to perceived hidden fees attached to legal financial services firms.
Wonga stressed that mashonisas are illegal and unregulated which means their operating models are not impacted on by regulations and they incur no compliance costs in terms of the National Credit Act.
And while the report – conducted from research in Khayelitsha – confirmed the high cost of credit and tough collection practices, it found that many are “not the monsters that media make them out to be” and that people who use mashonisas often use them because they find them easier and more convenient to use than the formal credit market.
“There is no clear demographic that identifies a mashonisa – they aren’t all big scary men. They are ordinary people from the community who have some cash available and see this as a viable form of employment. Start up cash can be as little as a few hundred rand, but are typically payouts from a retrenchment settlement or provident fund,” said Brett van Aswegen, CEO of Wonga SA.
The report also illustrated a known but often ignored fact about mashonisas – that they are a socially embedded phenomenon that is widely accepted as part of the social fabric.
It found that loan sharks are also informally organised, often meeting to discuss their lending practices, and those with poor credit records. They will often work together when collecting. “They act almost like a credit bureau,” van Aswegen said.
Loan sharks are open to negotiating, often rolling over a loan, incurring a new charge of interest. IDs or bank cards are taken as security, while assets are seized when payment isn’t made. However, intimidation and shame is often used to ensure payment is made, the report found.
It also highlighted a power dynamic when it comes to lending from loan sharks, including shaming customers. “I cannot be seen to be weak, because weak mashonisas do not survive,” noted van Aswegen of the attitude within the system.
Van Aswegen stressed that despite the power dynamic, there is no animosity towards mashonisas – they perform a function in an in informal environment. They service a need in the market for people who need access to money.
Anecdotal evidence from both mashonisas and borrowers suggest the practice has grown significantly in recent years and is not likely to disappear. The phenomenon is by definition regulation-proof and is almost certainly ineradicable.
“Some (mashonisas) said they had more customers today than they did previously due to increased cost of living,” it said.
“It is clear that informal lending is embedded in the social fabric of communities in which they operate. It would be naïve to think that they can be regulated like the formal market. The sheer scale of mashonisas would make this virtually impossible and I don’t believe customers would want mashonisas threatened as they depend on them on a monthly basis to get by,” said van Aswegen.