South Africa’s unsecured lending boom has left 40 percent of borrowers in default and millions of people in a debt trap, according to fund manager Differential Capital. The group said about 7.8 million of the country’s 60 million residents have taken out a combined R225 billion of loans without collateral, mostly for short-term needs such as furniture and urgent family care.
South Africa eased controls on unsecured lending in 2007 to boost financial inclusion. Faced with growing criticism, the industry has battled to improve its reputation even as regulation has improved.
Instead of helping those most in need, the practice has led a consumption-driven debt boom by those least able to pay back loans, according to Differential.
“It is a dysfunctional industry where lenders compete on the largest loan size, not on customer value, preying on financial illiteracy and consumer demand for credit,” the report said. “Reckless lending is almost systemic in the industry.” The report said even with the high number of defaults, the industry stayed profitable by charging “extortionate pricing” and rescheduling loans that were in default.
President Cyril Ramaphosa in August signed the National Credit Amendment Act into law, setting the ground work for over-indebted consumers to have payments suspended, in part or full, for as long as 24 months, or even scrapped if their financial situation has been found to have worsened.
The law applies to customers who earn a gross monthly income of no more than R7 500, have unsecured debt amounting to R50 000, or who have been found to be critically indebted by the National Credit Regulator. Interest charges, once all associated costs such as initiation fee are included, range from an annual rate of as much as 225 percent for one-month loans to 34percent for five-year loans.
Two-thirds of customers pay more than a quarter of their net income to service their loans, the report said.
Capitec is South Africa’s biggest unsecured lender. While the big four - Standard Bank, Nedbank, Absa and FNB - also offer unsecured loans, their affordability tests are more stringent, it said. The South African Reserve Bank declined to comment.
“The industry has changed enormously over the last couple of years due to regulations,” said Capitec chief executive Gerrie Fourie. “The big players like ourselves have moved out of the lower sector.”
Although the number of loan defaults is high, it has come down in recent years, Fourie said. Capitec focuses more on longer-term debt with between 60 and 70 percent of the money it has lent out used for needs such as education, vehicles and establishing businesses, he said.
House building and improvements in townships and rural areas can be attributed to unsecured lending as title deeds are not available, he said.
The mining sector has been particularly hard hit. Two-thirds of the industry’s 450 000 workers have had unsecured loans and spend an average of 48 percent of their wages paying off debt, Differential said.
In 2014, African Bank, the biggest unsecured lender, went bankrupt.
Last year, Net 1 UEPS Technologies was censured for allowing loan repayments to be taken directly out of welfare checks.