A recent report by the South African-based payday loan provider Wonga has revealed the extent to which informal lenders in South Africa, known as ‘mashonisas’, have gained a foothold in the short-term loan market. They are filling a void left by formal lenders by giving working-class South Africans (who may struggle to obtain credit via more mainstream channels due to factors like a low credit score) access to short-term loans.
Although they are often portrayed as intimidating loan sharks, many locals believe that mashonisas provide an important service to the local community. But, what role do mashonisas play in South Africa’s townships, who are these mysterious lenders, and why do many borrowers choose to use the services they provide?
Introducing the mashonisa
A mashonisa is defined as anyone who lends money to people in their local communities but is not registered with the National Credit Regulator. Based on conservative estimates, there could be as many as 40,000 mashonisas operating in South Africa, and they can be anyone, from a bus driver to local hotel employees and even a door-to-door Avon salesperson. The characteristics that bind them is an entrepreneurial spirit and having a little bit of money to spare.
What services do mashonisas provide?
Mashonisas provide short-term loans with terms of less than a month to borrowers who need help managing their monthly cash flows. The loans are typically used to pay for food, transport, mobile phone airtime and prepaid electricity bills and are usually for amounts that range between R50 and R5 000.
Surprisingly, the research shows that this service is not used instead of formal credit from regulated lenders. Instead, many borrowers use informal loans alongside formal products. That suggests the loans are not necessarily the last resort for many people but are instead a product with certain benefits that they value, such as speed, convenience and ease of access.
How big is the mashonisa market?
One of the biggest surprises revealed by the research was the estimated size of the informal lending market. Because of the low loan amounts, the total market is quite small when measured in Rands. A count in the Western Cape township of Khayelitsha discovered there were approximately 1,350 mashonisas in operation, serving approximately 135,000 households. This demonstrates how widespread the practice is.
Anecdotal evidence from interviews with mashonisas suggests the practice increasingly grows as the cost of living in South Africa rises. The sheer scale of this practice would make it virtually impossible to regulate. These lending practices are now woven into the social fabric of South Africa’s townships.
Mashonisas vs. formal lenders
In many cases, rather than being forced to use an informal lender, the report suggests that many locals prefer to use mashonisas. This is because mashonisas offer several distinct advantages that the formal credit market cannot match.
For example, borrowers value the accessibility and convenience of informal loans. Also, the interest rate on the loan does not vary depending on the borrower or the loan amount, so borrowers know exactly how much they’ll have to repay. Borrowers are also able to access very small loan amounts which may not be available from formal lenders.
However, there are inevitably downsides when dealing with lenders who operate outside of the National Credit Act. At 30-50 per cent, the interest rates charged by mashonisas are high. In some instances, they take personal items and documents to act as collateral for the loan, and these items can be seized if repayments are not made on time.
The inherent risks of using an unregulated lender
The short term loan industry is no stranger to controversy. It’s a relatively new financial product that rose to prominence in 2007, with Wonga launching the first digital platform for this type of credit. When short term loans were first introduced, there was no formal regulation in place for the lenders. How could there be, considering nobody had ever dealt with a product like this before?
However, it didn’t take long for the speed and convenience of the product to gain momentum and begin serving credit to thousands of customers. The problem here was a ticking time bomb; too many customers were gaining access to credit that they really could not pay back with the additional interest charged. This led to what is now commonly known as a ‘debt spiral’, where desperate consumers will acquire whatever short term credit they can to keep their head above water for the short term, regardless of how it compounds their debt problem to an even worse state in the long run.
These issues led to massive, worldwide reforms to the short term credit industry. Each country has their version of this. In South Africa, reputable companies are registered with the National Credit Regulator. You can search any company on their index to see if they are registered. Being on the NCR register means you are legally subscribed to adhere to many specific conditions designed to help protect consumers. This includes stringent ‘eligibility checks’ on customers to ensure that credit is not given to those who cannot repay the debt. There are also restrictions on total loan amounts, the total amount of interest charged and the maximum duration of loans.
Therein lies the danger of an unregulated lender – they don’t subscribe to any of these conditions to ensure the safety of the customer. Borrowers are at the mercy of the lender and the terms they set. They have no legal protection, and as life dictates, some people are more understanding and forgiving than others. However, people rarely become ‘community lenders’ for the good of the community – they’re in it to make money. People who seek credit must always remember this.
Finding the balance
Given the popularity of mashonisas, with research suggesting that up to 80 per cent of South Africans have used their services, it is clear that mashonisas are here to stay as they continue to fulfil a community need. However, rather than trying to suppress or ignore their existence, there needs to be a way of encouraging the relationship between informal and formal lenders to bring them into the regulatory space. That way, consumers can benefit from the convenience of an informal loan while reducing the risks they’re exposed to.
