The contradictions in unsecured lending

It’s not just a South African conundrum.

CAPE TOWN – Unsecured lending is a controversial topic in South Africa. It sits in a very uncomfortable place where there is clearly both demand and need for it, but at the same time it has caused some serious social problems.

Deborah James, Professor of Anthropology at the London School of Economics has studied the contradictory dynamics in this industry at some length. She recently released a book on the topic, titled ‘Money from Nothing: indebtedness and aspiration in South Africa’.

As the book points out, extending access to credit is seen as a critical part of ‘banking the unbanked’ in this country. It was one way of opening opportunities for the majority of South Africans who had simply not been able to access any kind of formal credit in the past, or were subjected to ‘credit apartheid’.

The problem, however, is that unsecured lending has been rife with abuse. The questionable, unethical and often blatantly illegal practices used by many lenders have given the industry the reputation of being one that simply scavenges off the poor.

This had led many people to ask whether the disadvantages of unsecured lending haven’t outstripped the benefits. And it is a question that James believes is very difficult to answer.

“The extension of credit itself has been almost invaluable,” she says. “Many forms of transformation including upward mobility couldn’t have happened without it. It hasn’t been the extension of credit itself, but the way it has been granted, particularly in the period before it was regulated, that has been problematic.”

Her research identified many different forms and levels of abuse by lenders, and the terrible indebtedness of many borrowers. For example, the link between over indebtedness and the labour unrest on the platinum belt that led to the Marikana tragedy is well documented.

James however also saw how access to credit has allowed people to build homes, start businesses and educate their children.

So if the extension of credit itself is not the problem, does that mean we need to re-examine that model of how micro-lending has been practised? Has the problem been that lenders have been profit-making enterprises, which means there is too much incentive to lend recklessly?

“I know that there are various other models that have been explored elsewhere, and those have come about because of similar abuses,” James says. “For example in Britain, because of Wonga.com, all sorts of initiatives have been undertaken by the likes of the Church of England and new forms of lending organisations that are not primarily oriented by profit.”

However, how much of a market would there be if unsecured lenders were forced to operate on this basis? There are organisations in South Africa that do follow not-for-profit models, but would there be enough funding available to make this the standard practice?

“Obviously the question of how much money there is available to those initiatives is part of the issue,” James says. “I don’t know how many examples we have of people who lend money other than for profit, so the establishment of new models is challenging.”

Those offering micro-credit to aid development, along the lines of the Grameen Bank in Bangladesh, aren’t free from criticism either. Even where profit is not the main motive of their operations, there are social issues in play.

“Quite a lot of people have written about these micro-credit extenders and pointed out that, in a sense, they too can be quite injurious,” James says. “While they don’t mark up massive rates of interest, their collateral is social. You often have women placed under duress by other members of the group if they fail to make repayments. It’s not a perfect model either, so it’s hard to know what the solution really is.”

James also believes that it is important to understand that the relationship between lenders and borrowers is not as clear cut as many perceive it to be.

“Part of the reason why these issues are hard to tackle is because so many people have an interest in the system continuing as it does,” she says. “I’ve shown, for example, how not every borrower is a victim. Some are lenders are well. It might be easy to say you have the nasty financial institutions on the one hand and the poor victims on the other, but many people are implicated in both roles.”

What is certain, however, is that this is not a uniquely South African issue. Many countries, both in the emerging and developed world, are struggling with how best to negotiate the huge, and growing, demand for credit.

“There are similar things going on in so many different places,” says James. “Everyone wants more money than they actually have, and people are no longer satisfied to sit in a certain social stratum. They have started to think of themselves as middle class, no matter how poor they might be. You don’t want to deny people that and tell them not to have aspirations, which is why it’s such a conundrum.”

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It remains best practice to live within ones means. They many cases where people are so poor that they have to borrow to pay school fees, the school should be prepared to except parents’ labour (fixing and maintaining buildings for instance) in the place of school fees.
Promote a culture of saving, especially in SA. The new tax-free savings accounts is a good start – SARS must do much more. Do away with unsecured lending, it’s an evil and creator of great poverty in the long term.

The business of unsecured lending is far superior to slavery for the borrower works for the lender and is owned by the lender, but thanks to life-insurance, the lender doesn’t have to worry about keeping the slave alive or healthy.
People enslave themselves willingly and it is much cheaper and profitable for the owner of slaves to own them through lending than outright as slaves. Some people are just pleading to be enslaved.

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