Loan sharks feasting on the poorest by charging interest of 50% to 112%
Cape Town - Social grant beneficiaries continue to be targeted by illegal loan sharks and other money lenders who engage in “reckless lending” by charging excessive interest rates on low-risk loans, according to a new report.
The report, “Social Grants: Challenging Reckless Lending in South Africa”, by the Black Sash and London School of Economics shows that interest rates charged by loan sharks range between 50% and 112% of the principal loan amount.
In many instances, those providing the funds are, in fact, contracted by the SA Social Security Agency (Sassa) to provide the mechanisms for grant payments, but others are illegal loan sharks.
The report said that while the 2018 introduction of a new SA Post Office (Sapo) bank account called the special disbursement account (SDA) had gone a long way towards ending the worst abuses of unlawful, illegal and immoral deductions from grant recipients’ accounts, it had not fully addressed or resolved the issue.
“As of March 2019, just under 1million, or 9.5% of all grant recipients still use their EasyPay accounts, which allows for automatic debit orders. Around 19.5% of grant recipients have other bank accounts with commercial banks, some of which also allow for automatic debit orders,” said the report.
“Many microlenders and payday lenders force grant recipients to open accounts with EasyPay or one of the other banks in order to continue borrowing money as usual. As for the 71% of grant recipients with Sapo/SDA accounts, many still borrow from mashonisas (money lenders) in cash.”
Policy change recommendations in the report include: a ban on all lending by third parties who are contracted by Sassa to assist in the payment of social grants, the creation of a fund to provide free debt counselling with contributions from lenders and finding ways of tackling the biggest mashonisas, particularly those who use violence and retain the bank cards of grant recipients.
DA Western Cape spokesperson on Social Development Gillion Bosman said he was considering the introduction of legislation that would put a ban on lending by third parties already contracted by Sassa.
“In the Western Cape, the report focused particularly on the previously disadvantaged areas of Khayelitsha and Delft, where in some cases lenders use child grants as collateral for loans despite this being an illegal practice,” said Bosman.
“Such loan sharks are undoubtedly taking advantage of their access to grant beneficiary personal details, and subsequently exploit the financial burdens of those already reliant on state welfare.”
ANC spokesperson on social development Gladys Bakubaku-Vos said the report exposed an illegal practice that had continued unabated for a long time.
“The reality is that the majority of families rely on social grants to put food on the table. In many cases, the fund is not enough to sustain these families. This has made them vulnerable to these cruel financial lenders,” said Bakubaku-Vos.
EFF MPL Melikhaya Xego said the problem was that there were too many loan sharks in the province, and the country as a whole.
“This is due to the red tape faced by people who want to enter the microlending business. Government must remove this red tape. The lenders would then be regulated by the National Credit Regulator,” said Xego.
According to Deon Nobrega, managing director of fintech company Paymenow, loan sharks don’t just target social grant beneficiaries.
“Some employees may be tempted to take out a payday loan against their next salary cheque. These can help in emergencies, but can also leave borrowers indebted for years,” said Nobrega.
“Yes, families can eat, but these loans are often rolled over, accruing high levels of interest each month.”
In a recent statement, Sassa spokesperson Paseka Letsatsi said the unregistered loan shark business was a huge societal issue.
“Sassa’s anti-fraud strategy has been continuously tested over the years by these criminals. Successful arrests have continuously been made and the justice system always comes to the party, securing significant convictions.”
During a webinar on the impact of the pandemic on the vulnerable, Professor Francie Lund, who was chairperson of the 1995 Committee on Child and Family Support that developed South Africa’s child support grant, said: “A long and hard conversation about a basic income grant is looming for South Africa. It's a conversation ridden with vested political and corporate interests."