Special report: South Africa’s unsecured lending crisis

Is there a way out?
This is more than a moral hazard; it presents meaningful socio-economic risks to the country as a whole. Image: Waldo Swiegers, Bloomberg

Earlier this year, Differential Capital released a comprehensive analysis of the South African unsecured lending market in which it argued that despite the well-meaning legislation that had created this industry, it was essentially dysfunctional. Instead of empowering disadvantaged South Africans, as was the intention, it had become largely exploitative.

“We accept the need for financial inclusion,” the report noted. “However, we contest that high-cost loans (specifically short-term loans) are detrimental to this endeavour. Our research shows that predatory lending is almost systemic to the industry, except for the ‘big four’ banks.”

Consumers on the edge

The default rate for consumers who only have unsecured credit is 48%. For those with both unsecured credit and other credit, this rises to 56%.

Around 81% of those with an unsecured loan earn less than R15 000 per month, and 36% earn less than R5 000 per month. In total, borrowers in this segment owe R137 billion, and, on average, are paying 33% of their net income to service this debt.

Perhaps most alarmingly, the total value of unsecured loans outstanding has grown since 2015, while the number of consumers who have a loan has dropped. The result is that the average consumer owes nearly 50% more than they did four years ago.

Source: XDS credit data (accessed through Eighty20 portal), National Credit Regulator Consumer Credit Market Report; Differential Capital estimates

One of the main reasons for this is that lenders are not competing on value, but on loan size. Consumers are simply shopping around for the biggest loan that they can get at the lowest monthly repayment, even if that means extending the loan over many years.

The cost is hardly a consideration. This is reflected in the all-in cost of credit over different terms.

Source: Differential Capital

Unintended consequences

For Naeem Badat, co-founder of Differential Capital, this shows an industry that isn’t working as it was intended. The ideal of financial inclusion is not being met.

“All that’s happening is that consumers are becoming more and more indebted,” he says. “If they were becoming emancipated, you would expect the opposite.”

Underlying this problem is that the majority of loans are taken for ‘unproductive’ purposes. As much as a quarter are taken just to pay off other loans.

For Adrian Saville, professor in economics, finance and strategy at the University of Pretoria’s Gordon Institute of Business Science (Gibs), this is the key failing of the way the industry has developed.

“If this was lending going into education and small business building, South Africa would be awash with well-educated people starting small businesses,” he says. “But we’re not. Instead we’re awash with over-indebted low-income earners buying consumer goods.”

The contradiction

The potential for unsecured lending to facilitate economic development is well appreciated. In many parts of the world, it has allowed those who are excluded from the economy to gain a foothold by giving them some way to access capital.

However, this is not what has happened in South Africa. By encouraging a profit-driven industry, the legislation has led to something entirely different.

Source: Differential Capital Research

“There was a noble desire for financial inclusion, but although the regulations are intentioned in a certain way, they enable something else,” says Badat. “Even if you are trying to enable sustainable lending in South Africa, the framework of this market means that you simply can’t compete.”

The question is how you address this. One school of thought is to seek firmer regulation, but that has two obvious drawbacks.

The first is that more regulation would make unsecured loans more difficult to access, forcing more people to turn to the unregulated mashonisas (loan sharks). The problem is the demand for credit as much as the way that it is met.

The second is that regulation is sometimes impossible to enforce. As Deborah James, a professor of anthropology at the London School of Economics, points out, many borrowers are in rural areas where they have few choices.

Some, especially beneficiaries of government grants, borrow mid-month, at a rate of 50% per month or more, from mashonisas who then arrive on grant payday to collect their repayments.

“Some of these areas are just so far off the beaten track, you just can’t imagine any regulation easily being put in place, or enforced,” she says.

The myth of self-regulation

There is also no prospect of the industry moderating its own behaviour. According to Differential Capital’s analysis, since 1990 one bank in South Africa has failed every two years on average. This is unquestionably a high-risk industry, yet lenders are still eager to operate in this space because of the outsized returns they can earn.

“If I am making a loan of R100 to three people and one of them fails, but in 12 months I can get R150 back from two of them, I’ve got my money back in year one and then we’re into profit,” says Saville.

“If you can put the cost of credit up against non-performing loans and get the former to outweigh the latter, you actually have a viable model for as long as you can keep the bottle spinning.”

It is not enough of a disincentive that the bottle keeps running into obstacles. This is what happened with Saambou, with African Bank, and with The Business Bank, which became Capitec. Yet practices are not improving.

Since the number of borrowers is declining, lenders are increasingly lending to riskier customers.

The average term length and average loan size have been growing, but the average credit score of new borrowers has been going down.

“The numbers are scary,” says Zwelakhe Mnguni, chief investment officer at Benguela Global Fund Managers. “There is going to be somebody who hits the wall.”

The bigger picture

When this happens, it could not only entail systemic risks to the financial sector, but also represent a direct cost to the fiscus if government has to step in again to issue a bailout. Unsecured lending in South Africa is therefore more than a moral hazard. It presents meaningful socio-economic risks to the country as a whole.

“The industry has been mired in controversy, and in the press for the wrong reasons,” says Badat. “We’ve seen bank failure after bank failure, which comes at a cost to society. Our estimates are that 85% of government employees have unsecured loans. That is police officers, state-owned enterprise employees, municipal workers – and ultimately it’s the South African taxpayer who is paying for that.”

Differential’s analysis suggests that, on average, every government employee owes R67 000 to unsecured lenders.

It is also the reality that over-indebtedness leads to levels of desperation that can spill over into unrest. The most pertinent example was the Marikana tragedy: numerous studies have found that the miners demanding higher wages were under severe financial strain due to unsecured loans being paid back through automatic deductions from their bank accounts.

An overhaul

South Africa is therefore in an extremely difficult position. Having allowed the unsecured market to develop the way it has, there is now no obvious way out.

What is clear, however, is that the situation cannot be allowed to perpetuate.

“Even if you are in favour of capitalism overall, you should want an environment that is not completely extractive,” says James.

“I almost feel as though we have gone from a system of extracting minerals out of the earth using low paid labour to extracting value directly from these borrowers themselves.”

The solutions, however, have to be creative, because South Africa’s environment means that the demand for credit is not simply going to disappear. The levels of unemployment and income inequality make that impossible.

“If you are a parent looking your child in the eyes knowing that you don’t have money to pay for their studies, your only salvation is probably to take a loan to let that child go and pursue their dreams at university,” says Mnguni.

“People see the lender as someone coming to their relief. They don’t realise that they are being ripped off.”


Any attempt to change the industry must therefore be part of a much broader push to changing the economic reality of the people who seek out these lenders. But it must also involve serious efforts to improve education and influence behaviour.

Read: The SA lender you’ve never heard of with almost no bad debt 

“There are numerous examples of ways in which you can change behaviour quite spectacularly through informal interventions,” says Saville.

“One is Latin American telenovelas [TV soap operas], where women were shown in influential and aspirational positions, and the behaviour of people watching shifted to the shape of these influencers. Other examples include prize-linked savings schemes or the creation of savings groups that make saving aspirational.”

Critically, any practical solution to the unsecured lending problem in South Africa must also provide alternatives.

“There’s no point in saying to people don’t take money from mashonisas, they rip you off and enslave you, if you don’t offer an alternative solution,” Mnguni points out.

That means making some sort of modest finance available to people to allow them to escape from the debt traps they are in. How this is offered and administered would have to be carefully thought out, but it is somewhere that the private sector could work successfully with government to produce results that benefit everybody.

“I don’t think you can hit this with a magic stick and cause it to happen overnight,” says Saville. “This is about behaviours and financial literacy and shifting the system. But something has to be done.”

Listen to TransUnion’s Carmen Williams being interviewed by Nompu Siziba on SAfm Market Update with Moneyweb:




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This lending is horrible, horrible, horrible!!!! This is not capitalism, this greed beyond thinking. Worldwide interest rates will stay very low because of QE money printing, Japan is the best example for being more than 20 years caught in a low interest rate economy.
I do not like government involvement in the free markets too much, but these lenders and retailers (also on this wagon) need more strict laws. Absolute ridiculous, this is nothing else than a new type of slavery.

But the stupid people amongst us are always going to engage in stupid stuff…. Do we blame the lenders for that?

Ah no, do not blame the cocaine dealers, is the users !!! you dumb idiot

There is more than enough competition in the unsecured credit market for risk to be priced at a reasonable level. As for the high all-in rates on short-term loans, these are a result of fixed fees being charged on typically small and short-term loans, and there are genuine costs associated with issuing, say, a one-month, R2000 loan. This is mostly a attempt to shift blame onto the banks for poor education, economic growth and lack of job creation.

It starts with the big banks – you get points and rewards to spend and borrow. This means they get fees and interest.

All banks should only have rewards programs for people that save. Give a point for every R5 added to a savings account and 1 point for every R100 spent. See what happens then

This article tries to prove that individuals are not responsible for their own behaviour, that they are not accountable. The article definitely proves that most are not trustworthy, because more than 50% of borrowers are in arrears. The author says that most South Africans are not sophisticated enough to manage their personal finances. This brings us to the next logical question – if these unsophisticated individuals are too irresponsible and unaccountable to be trusted with the management of their personal finances, how can they at the same time be sophisticated and responsible enough to manage our finances when they determine economic policy through the voting process?

If the state of the economy is merely a reflection of the mindset of the average voter, then it is clear that the bankruptcy of most SOE’s and municipalities, as well as the over-indebtedness of the state, reflects the financial position of the average voter.

If the article is right when it states that predatory lending is to blame for the high levels of personal debt, then it follows logically that predatory voting must be the cause of the high levels of the national debt. If a person falls victim to a loan-shark, he can also fall victim to a politician.

I wish we can solve this dire financial situation most voters find themselves in, because that same solution will also solve the dire financial situation the country finds itself in. A loan that is not repaid is in fact a charitable donation. The ANC has created a nation that is dependent on charitable donations.

Great comment. It also goes further than financial irresponsibility and voting irresponsibility. It also goes to family planning irresponsibility. Much of the issues at Marikana were caused by the miners having more than one family and multiple children to support. No amount of even low-cost credit is going to solve the problem of one person having to support two wives and many children. SA’s economy isn’t large enough for the number of people it has to provide work for.

After the Marikana incident most of the mines decided not to accept dept deductions from salaries any more as it was found that it’s not “the pay is to little” but actually the dept deductions that are too much.

Hear hear! These are supposedly adults who choose to borrow money. Nobody forces them to borrow the money and a lot of the money is borrowed to fund a lifestyle.

Well said. Your valid comment adds an new perspective to this argument.

You could say this is the Dunning-Kruger effect in action (look it up kerels!)?

No, we are not allowed to say that because you yourself complained that we use that concept “ad nauseum”. It is quite interesting to see you using it now.

Dunning-Kruger effect confirmed.

Wasn’t apartheid put in place to protect against this.

yeah, worked out great for you right

This would be well said if it took into consideration the financial literacy of individuals who are the targets of these predatory lending practices. You are clearly smart enough to decipher a good credit opportunity … It would be unethical for you to use your superior prowess on this topic to trap individuals who are not as aware as you into situations you avoid. That is partly what this article brings across @sensei. Surely you can agree with that.

Your point is only valid if you make it applicable to the right to vote. That is my message. If you fail to recognise the validity of this argument then you are negating your own statement.

My farm staff went and borrowed a month ahead of their pay from these loan sharks. gave up their ID and card. I used to see the lenders at the ATM’s getting their money out. Some even had a guy with a shotgun scaring people away.

I eventually paid off the loans at 30% interest a month cancelled cards, got nes ID’s. They were sweating blood, but government and the banks do nothing. The banks don’t want to process loans to the illiterate.

I wonder why….. Would u loan out some of yr pension to these folk? Considering more than half of them are too irresponsible to even make payments back..

No amount of legislation can save this industry or its victims . It’s about education. Understanding compound
interest is a start . Ignorance and sheer stupidity at the end of the day are not illegal . Even Eskom doesn’t understand this maths !

Illiteracy is not stupidity Andrew. Teach the man next to you as opposed to knocking him down as an idiot for not ever having been taught what you have.

there is a special place in hell for pedophiles and predatory lenders. The board and shareholders of Capitec should take note.

Look at it from a market perspective, not a social perspective. Price is a messenger between parties in a transaction. Unsecured borrowers use the price of high interest-rates to “suck” credit from unwilling lenders. Borrowers use high interest-rates to bribe lenders to part with their cash. These same borrowers have access to mainstream banks but they are unable to extract the loan from these banks. So, the borrower goes to the loanshark who can be bribed with a high rate of interest.

If the microlender is unwilling to part with his cash, the borrower will have no alternative but to increase the price that he is willing to pay for a loan. He will go to the shebeen where the cost of credit is 100% per week.

In essence, a loan agreement is the exchange of the time preference of money.
What moral high ground do we have to decide for other people wat their time preference of money should be, and what they should pay for this preference?


Sure but that applies in world of sane, honest and moral equal parties. When on the one side you have financially challenged borrowers and profit driven bankers on the other, you don’t have a fair relationship. If you want to get really worked up, go through the “contract” and T&C on behalf of a poor worker of yours – which you tend to have to do when faced with a garnishee order issued by a magistrate Knowing as they certainly do who is likely on the other side, I have nothing but utter contempt for the people that draft these agreements.

Capitec started life a small town loan shark. They have urbanised since

Dear Sensei

Two wrongs don’t make a right!

If we can see that the borrowers are having problems with their financial management, we shouldn’t be adding more fuel to the fire (as these lenders do by extending credit to these individuals) and further aggravating the societal problems.

What we are not addressing is the “elephant in the room” which is the inherently corrupt interest, fiat-money based monetary system which informs the current economic paradigm.

Money cannot grow in and by itself and phantomly be created out of thin air. Money should be seen as a means of attaining an economic end rather than an economic end in itself.

It’s morally pugnacious the concept of devouring the purchasing power of the “wealth” in peoples’ hands through the manipulation/expansion of the money supply by the debt-based monetary and banking system. This is theft in plain sight!

It should be through our sincere and diligent efforts of intellectual, physical application etc that we should be seeking to manage our wealth so that we can achieve sound economic outcomes rather than accumulating wealth unjustly by ripping the masses off through debauchery of the money supply.

We need to return back to a sound monetary paradigm that is based on gold, silver and other appropriate commodities to preserve the wealth of people as well as the integrity of the pricing mechanism of goods and services in the economy.

We need to return back to a truly free market system, that is based not just on sound money but also sound and just economic principals including the rejection of interest and usury based transactions.

It is this change together with a revitalization of the moral fabric of society that will help lift ourselves up from the deeply tragic morass that we currently find ourselves in.

Intuitive and Johan, on a social and humane level I agree 100% with your statements. I lend to my workers at zero interest and I support them financially in various ways. I agree that we should act with compassion and understanding.

My grievance is basically that the ANC insults and discourages all types of paternalistic behaviour by employers. They insult us while at the same time they ask for our financial contributions.

In a democratic society people should be held accountable. They should pay for their mistakes and they should have private ownership of the proceeds of their efforts. If we agree that some people are immature and unaccountable, then we can act to protect them against themselves, but it is usually those very same people who burn your car, school and library in their quest for free stuff.

Thanks for clarifying Sensei!

The benevolence you extend to your workers is very inspirational!

I endorse the gripes that you have with the current governmental paradigm.

I think the underlying issue is the so-called democratic system in appointing the leader of a land or community, and this is the case across the World where this model is applied. It doesn’t make sense for the masses of ignorant to be deciding on who attains power – this approach it’s irrational and unsustainable, i.e. bound to fail because more often to not it results in the blind leading the blind. Rather, it should be a collective of informed, enlightened, experienced and morally sound/ethically above-board individuals who should be getting together as a collective to appoint a suitable leader of a community or society that ensures the best interests (in particular over the long term) of all are served. Leadership appointments should be subject to “selection” rather than “election”.

prize-linked savings schemes have been tried (FNB Million a Month Account) but they were ruled to contravene the National Lotteries Act.

This is a discussion that’s been had many times, and still people fail to realise, that in a failing economy and regular rise in expenses, you still need to provide for your family….
If someone can answer me on how to do this without debt, on a 7000 a month salary then I, m all ears…
Keep in mind rent, food, clothes, medical, transport, internet(school) lights, water, insurance(life/car), school fees, after care, repairs(car/home)…

Explain to me what is the logic behind taking out a loan when next month (and probably for several years) you will have even less than R7000 to spend because of the loan repayment. It seems people can not or will not think ahead. Long ago I read a very good advice in a book: remember there is always somebody who has less money than you and still manages to survive. It might have been from the book The richest man in Babylon.

Imagine been so privileged that you can’t imagine financial desperation. You can’t even conceive of such a thing! Totally out of touch with reality.

Lower taxes – but then there will be less gravy for the elites running the country into the ground.

I say this with respect and empathy- credit is not income and cannot be used to finance living expenses. Credit can only be used to finance an activity that will generate an amount in excess of the interest on the loan. When a person uses credit to finance daily expenses, he is stealing from his own future consumption. He moves his future consumptiom to the present. He is making sure that his future will be worse than the present. He sells his future to the lender. This phenomenon is called “time preference”. Interest is a tool that moves future consumption from the borrower to the lender. This process is democratic and voluntary. Locals have a high time preference and they demonstrate this through borrowing, stealing, corruption and extortion. Locals have been stealing from their own future for 25 years now. The present is the future they have plundered.

“Those who understand compound interest earn it. Those who don’t, pay it”.

As Barry Roux would say: I put it to you that, if you only earn R7000 per month, procreation should be the very last thing you do. Why would you want to cause suffering for yourself and your offspring if you know you can’t feed or support them and yourself?

This article is just an extension of the ANC and Africa culture that nobody is accountable for their own actions and somebody else-here the banks or usually apartheid- are to blame for Escom,bad economy poverty looting etc- intraed of focusing on the cause which is the ANC looting and culture of entitlement. Sensei as usual is correct. But ANC does not want to revert to sensible common sense policies. It will costs them votes.

Well the way into that mess was having too many kids…
Making kids is a decision.

Sensei hits the nail on the head, as usual. Unfortunately there is still no pill for stupidity. Many years ago I went into a business to help people to sort out their financial lives. To my cost I learned that 90% do not want help, they want someone else to take responsibility. Sensei is right, our government is a reflection of our voters and their irresponsibility is a reflection of poor education by our incapable government. A viscous circle of continuous disaster. Beware of idealism, altruism and socialism. It is not by accident that there is a saying – no good deed goes unpunished!

They can always wait for the next government programme to write off their debt, etc. The government takes away consequences from poor decisions and so the people never learn.

The biggest problem with a democratic dispensation is the fact that under this system, it is impossible to protect the average voter against his ignorance. Stupidity and ignorance has a price. The difference between the prime rate and the rate of interest we pay on the unsecured loan is the actual measure of our ignorance. It seems as if this is quite high for some people.

There is a simple solution though. If we implement a system that adds weighting to our votes so that some votes count more than others, and we weigh the vote positively according to taxes paid, and negatively on the interest rates paid by the individual, we can build a winning nation.

Maybe make votes freely tradeable.

(Isn’t politics about buying votes anyway ? typically on credit, usually non-performing credit).

U mean the smart people get to tell the stupid people how to behave….. My God…. U may just have the winning formula to life.

I don’t know what’s the big conundrum here. The unsecured lending market developed this way as there are a lot of financially ignorant people out there, who incidentally choose the government. The loans are used mainly for consumption. The interest rates are high simply because the risk of the borrowers defaulting is high. If the lending scheme was that profitable, more would muscle in and drive interest rates down- its called the free market. Implicit in this article is the begged question: how can we give these borrowers a better deal? the answer is one cannot. If you cap the interest rates, the lenders will simply not lend to the most risky. The lower the cap, the more borrowers who don’t get their loans. The regime can legislate interest rates but cannot legislate that lenders lend.

“South Africa is therefore in an extremely difficult position. Having allowed the unsecured market to develop the way it has, there is now no obvious way out”.
Another example of failures which have no obvious way out, others spring to mind are, Unemployment, Water, Roads, Power, Health, Education, Policing, and general lawlessness …

There is yet another angle to this debate of course. Who really benefited from this boom in unsecured credit? The money did go somewhere, it did not disappear when the borrower received it. He used that credit to buy clothes, alcohol, groceries and airtime. The listed companies that sold this merchandise to the borrower benefited from the credit boom. The credit boom drove a boom in consumer spending, which pushed up the share prices of Mr Price, Shoprite, Vodacom, MTN, Clicks, Woolworths and Pick and Pay. The credit-driven consumer spending caused the values of portfolios at the PIC to rise. These government employees who are now defaulting on their unsecured debt supported the asset values of their pension funds. They won 3 times, the first time when they bought stuff with the credit they received, the second time when they see the value of their pension funds, and the third time when they default on the loan.

This is the beauty of free-market capitalism, everybody wins, and the self-pitying losers actually won three times.

The only way you can consider this a win, win situation is if the country has hipper inflation.

Why is PnP pushing people to use its credit card to buy food with???

Because there is literally no other way to use more expensive cards to buy food with.

Just amazing how Capitec had a default rate of approximate 5.7% in 2018 with R47billion unsecured credit book? Outlier or fraud? Perhaps Viceroy report – deserves relook? Directors – when a company shoots the lights out in a distressed sector, beware. Don’t claim ignorance.

What, in your expert opinion, should the default rate of a well managed debtor portfolio be?

Moan if it is high, moan if it is low.

The government in their wisdom had lots to say about the poor excluded from the credit markets. They should rather have spent some time educating people about savings. Not that the government knows how to do that.

Sweeping statements like ” we have seen bank failure after bank failure ” from Badat completely discredits his research to my mind. That is headline seaking rubbish. The only bank failures in SA over the past two decades have African Bank, VBS and some tiny bank in Transkei. The last two failures had nothing to do with unsecured credit and all with blatant theft.

Saville hits the nail on the head, the problem is not so much with the credit being extended but that it is not being extended to fund growth assets or education. To my mind this is more an indictment of our education system than anything else. Personal accountability should also come into play. Maybe borrowers should pass a basic financial literacy test before being allowed credit…

Saambou. Regal. But one every two years ?

End of comments.



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