Loan sharks, or so-called ‘mashonisas’, have long been a problem in South Africa, offering unregulated loans with high interest rates to those who are unable to access credit by regular means. Now a new report by online loans provider Wonga has looked more closely into the extent of the loan shark problem and the issues they are causing.
The Wonga Informal Lending Report has revealed that non-registered credit lenders are more of a widespread problem than previously thought. It found that there could be as many as 40,000 loan sharks operating in South Africa, which is approximately 1 for every 100 households in informal settlements.
The report found that the average loan was for relatively small amounts of between R500 and R1,000, while the most someone could typically borrow was around R5,000. The interest charged on the loans ranged from 30-50 percent.
The credit problem in South Africa
While mashonisas clearly present a problem, it is the misuse of credit in South Africa that is a real cause for concern in the wider economy. The number of credit users in the country has grown by 12 percent since 2008, up from 57 percent to 69 percent, with a proportion of that credit completely unsustainable.
During 2017, household indebtedness as a share of disposable income, which is seen as a metric of financial stress, continued the downward trajectory it has been on since 2007. One of the enduring problems is the value of long overdue credit and store cards debts, with the value of debt in deep arrears (over 120 days) now heading towards the R18 billion mark.
The growing reliance on loan sharks is exacerbating this credit problem by giving South African communities access to credit from unregulated sources that many are simply unable to repay.
Mashonisas are not always ‘big scary men’
While the reliance on unregulated loan sharks is clearly indicative of a wider problem, the report did highlight that South African loan sharks are not always as destructive an influence as some might think. In fact, they are often valued members of the community from all walks of life who simply have a surplus of cash available and see lending as a viable form of employment.
With financial literacy levels typically low in South African communities, it seems many people prefer to borrow from unregulated rather than regulated lenders as they find the service they provide easier to access and more convenient. Mashonisas also offer much more simplistic pricing structures, with no admin fees or hidden charges and interest rates that remain constant regardless of the loan amount or term.
Intimidation and shame can be used
While that might paint a rosy picture of the way loan sharks work, the report also shed some light on the less savoury behaviours associated with unregulated lenders. For example, lenders will often roll over loans and add a new charge of interest, take IDs and bank cards as security and seize assets if repayments cannot be made. Intimidation and shame are also commonly used to ensure loan repayments are made.
However, despite the drawbacks, Brett van Aswegen, CEO of Wonga SA, said: “It would be naïve to think that mashonisas 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”.
With that said, potentially there could be some way the formal and informal lenders could come together to make sure the demand for quick, short-term loans is met but in a safer and cheaper way.