The distinction between microlenders or credit banks and loan sharks is continuing to blur, despite efforts by some sectors of the industry to distance themselves from the latter.

Microlenders are supposed to be organisations providing micro loans (traditionally under R5 000) over a relatively short period of time at affordable interest rates, taking into account the high credit risk profile of their clients.

A loan shark or "mashonisa" (no relation to the author), on the other hand, would give the client any amount requested that the loan shark is able to raise, at ridiculously high interest rates. If the client does not pay on time, the effective interest rate escalates.

Microlending pioneers established their shops to provide a similar service, but at moderate interest rates, employing proper risk management techniques, but still offering a valuable service to the underbanked.

To further facilitate the development of the industry, the authorities established a regulatory body, the Micro Finance Regulatory Council (MFRC), which has the mandate to establish regulations to protect consumers from unruly operators.

In theory, the MFRC can impose a fine of up to R25 000 on a lender charged with contravening the body's regulations. But there is a catch. A microlender has to be registered with the MFRC for the council's rules to apply to that lender.

Although there are about 800 lenders registered with the council to date, many of these pay no attention to the regulator's rules. The MFRC does not have enough resources to properly police the industry.

At the heart of the debate on who is a loan shark and which organisation would qualify as a microlender, is the level of interest rates levied by these two "service providers".

Loan shark rates are determined arbitrarily and are often above 100 percent of the principal loan amount. They usually deal with people they know, friends and co-workers, and their primary marketing instrument is word of mouth.

They have no regard for the financial status of their clients or why the borrower needs the money in the first place.

But they are more vulnerable to credit default because their activities are essentially illegal and have no recourse to courts of law. Often they are the law when it comes to collecting repayments.

Credit banks have a more systematic way of determining interest rates. The theory is that many of their clients would not get a loan from a typical bank because of their low income, lack of collateral or bad credit record.

But that picture does not at all resemble the real world of microlending, except for the few listed groups.

The MFRC does not prescribe an interest rate cap for credit banks, so it is entirely up to the banks to decide what they think is a competitive rate given the client's risk profile.

Lenders who are not registered with this council automatically fall under the ambit of the Usury Act.

The Act prescribes, among other things, a 23 percent a year cap on interest charged on loans in respect of amounts exceeding R6 000, and a 25 percent a year cap on loans under R6 000.

African Bank Investment Limited (Abil), the country's largest microlender, says its interest rates vary from client to client, depending on their circumstances. The bank says lower rates are levied if collection methods are more reliable, like direct payroll deductions.

Abil said in such circumstances, it charged about 25 percent to 30 percent interest. But Abil also said there were circumstances where the client's risk level could push the rate to above 50 percent.

Joel Klotnick, the chief executive of Unifer, Abil's chief rival, said competition would drive interests to levels much lower than the present crippling rates.

Unifer said its rates ranged between 14 percent and 33 percent. The group recently launched an education campaign to make its clients more aware of their rights as consumers and to avoid being taken advantage of by what they describe as "cowboys operating as credit banks".

Unifer has set up a customer care centre, which handles about 12 000 calls a day and employs 66 staff members.

There is certainly a growing realisation among the top few credit banks that for the industry to be profitable and sustainable, they would have to build long-term relationships with their customers.

Abil has even gone the extra mile by appointing a director in charge of the company strategy. He said one of his priorities would be to steer the bank towards a "customercentric" approach to lending. But more still needs to be done.

There are three major lenders operating nationally at present, Unifer, Abil and the Thuthukani-Saambou alliance. Analysts said the industry was still consolidating and the smaller players were likely to disappear as a result of mergers and acquisitions.

In the end we are most likely to end up with a scenario not too different from the current state of affairs - that is not more than four major lenders in the country.

Most industry observers agreed the best way to clean up the sector would be through competition rather than regulation.

What many of us cannot understand is why the price of their products - interest rates - is not factored into their marketing strategies. The top three lenders charge relatively low interest rates compared with their competitors, but there is still room for rate cuts.

Many of these microlenders allege that another reason large banks do not lend to low-income earners is because of the perceived high risk in this market.

So if the risk is not there but just perceived, why not transform microlenders into banks with a focus on the low-income earners, charging rates that are comparable to the average rates of the big five banks?

According to the risk-return rule of thumb, where the risk is high, the potential return must also be high.

Microlenders understand the dynamics of their market, they have inculcated brand loyalty among many clients, but the risk premium does not seem to change even when the risk rating dramatically reduces.

If this does not change, in the eyes of their consumers they will always be loan sharks no matter what they call themselves.