South Africans are governed in a way that implies they should seek permission rather than assuming that anything that is not violent is allowed. There are so many regulations on what we can do in our everyday lives that before doing something, we are learning to ask permission first. This is most apparent in business and is most acute in the financial services sector, an example being the business of providing credit.
To be a credit provider in South Africa, one is required to register with the National Credit Regulator (NCR), a body created under the National Credit Act. This applies to everyone regardless of how small their business is, even if it’s just an individual offering credit, a micro- lending business or a bank with billions in revenue. When you go to the NCR’s website, it’s not very clear what exactly is required to register as a credit provider, only that it is required. Frequent mention is made of the Act and the regulations. How likely is it that an ordinary pensioner can navigate these requirements?
The requirements themselves are unrealistic. Credit providers are required to submit financial statements that are verified by auditors and to submit compliance reports on a regular basis to the NCR. They are required to determine whether their customers can afford the loan before giving it to them. They are also required to charge regulated interest rates and fees for the loan, as per the regulations.
All of these requirements, and many more, support the existence of the black-market credit industry, the so-called Mashonisas. Mashonisas do not have all these compliance burdens; they can simply respond to the market instead of government requirements. According to one study conducted by Wonga in Khayelitsha in 2018, there were as many as one Mashonisa per 100 households. The more the government restricts the availability of credit through formal/legal means, the more lucrative being a Mashonisa will be.
In addition to the NCR requirements, credit providers have to comply with FICA requirements and register with SARS. SARS registration in particular is a common motivator for staying in the informal sector for many people. If compliance is onerous, then compliance will just become impossible for some people, and black markets will be the result.
The tragedy is that according to the Wonga study, Mashonisas charge much higher interest rates than the regulations allow. Rates of 30-50% are common. This is typically within one month, so we’re talking about annual rates of more than 360-600%. If the government wants to address this, more legislation and regulations are not the answer, Mashonisas need competition from the legal markets, since they only charge such high interest rates in response to the risks they face from lending out unsecured funds to people who can’t get the credit from cheaper, formal options.
These credit providers also have to account for the risks of not having enough information about the credit-worthiness of their customers. If Mashonisas could form their own credit bureaus, they would, and this would allow them to have a common database with information on which clients are better credit risks than others. Better information on credit risk should reduce average interest rates. And finally, the Mashonisas have to take into account for the risk of being unregulated, meaning the client could report them at any time to the government and refuse to pay back the loan.
This often happens, and there are some law firms that advertise to indebted clients that they don’t have to pay back any loans owed to Mashonisas because the creditor cannot take them to court to collect. Which is also why dubious practices like keeping the ID documents and bank cards of clients exist. This is simply an attempt to secure the loan. A small minority of Mashonisas may even go the violent route in an attempt to recover the debt, and this can only compound their legal troubles.
Inflation is on the rampage, fuel prices are on the rise and now there is talk of increasing VAT. It should come as no surprise that with our levels of poverty, more South Africans will need debt to make ends meet. On the one hand, the government has managed to reduce the debt that poor people can access through the formal market via the National Credit Act, but this has not reduced the demand for debt, it has just meant that those people have to go the underground route to borrow the money.
Anyone who has worked in a company in South Africa of say 50 employees or more will know of the existence of the workplace Mashonisa: the guy who lends money to employees in that company. Every large company I have worked at, from an Eskom power station to a Tsogo Sun Casino, has had these individuals, often more than one. The only thing that is accomplished by continuing to regulate credit providers and financial service providers more strictly is that the customers are left with more and more desperate choices.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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