Ferial Haffajee
Consumer organisations this week labelled the government’s proposal to increase the lending limits of loan sharks eightfold as “unconscionable”.
Draft amendments to the usury Act recommend that all loans under R50 000 be excluded from its ambit. The existing limit is R6 000. Consumer organisations and economists have warned that this could lead millions into a debt trap and unleash a tide of loan-sharking and a generation of Mark Thatcher copycats.
Thatcher was recently exposed as operating a loan-sharking business drawing clients mainly from the ranks of the poorly paid South African Police Service.
The development marks a complete shift in government thinking. In 1994, the then minister of trade and industry, Trevor Manuel, promised that the government would abolish the R6 000 exemption which was originally written in 1992 by Louise Tager, who was a member of the Law Review Project.
But lobbying by the R15-billion micro- lending sector and the banking industry’s refusal to touch the low end of the market has meant that the exemption may be increased instead.
Ironically, banks are planning to use the new exemption to enter this end of the market where they will be able to charge far higher interest rates than they currently do. Loan sharks charging interest as high as 1 000% have been reported to industry watchdogs around the country.
The government says it needs to close the “critical loan gap” of amounts under R50 000 to provide credit facilities for small businesses and first-time home-owners.
But the head of the National Consumer Federation, Diane Terblanche, says there is little evidence that loan sharks are lending to small businesses. “There is every indication that these loans are being used for consumption. This money is being used to buy food, pay debts and meet other monthly commitments,” she said.
The federation had hoped instead that the government would crack down on the loan shark industry by declaring practices like the holding of identity documents and bank cards (with pin numbers) as security. “The new proposals are unconscionable. They will see many more people take out bigger loans,” said Terblanche. People are likely to begin borrowing from loan sharks to finance their houses and their children’s education.
It is understood that the regulations were rapidly penned last month at the behest of Deputy Minister of Trade and Industry Phumzile Mlambo-Ngcuka. She has been at the receiving end of ongoing complaints by small businesses which cannot get credit from any of the big banks and are looking to the micro-lending industry for salvation.
“It’s a difficult issue. The banks won’t deal with anything under R50 000,” says Alistair Ruiters of the Department of Trade and Industry. Ruiters says that as the registrar of the usury Act he will be the final arbiter of interest rates which loan sharks can charge and that the rates will be set with consumers and the industry.
He says it is not the government’s intention to deregulate interest rates. Ruiters’s other efforts to clean up the loan shark industry by forcing them to set up a regulatory authority have been applauded, but the increase in the exemption could make the industry too big to be regulated.
The loan shark and micro-lending industry (the clean arm of the sector) is worth about R15-billion annually.
It’s a growing trade, but one which is notoriously difficult to police. The Department of Trade and Industry has only three inspectors who investigate loan sharks, though Ruiters says more resources will be freed by the department to devote to the enforcement of legislation.
The highest interest rates in South Africa’s history, retrenchments and rural poverty mean that the queues outside the doors of loan sharks and machanisas (informal money-lenders) grow longer every day.
Advice offices and consumer organisations around the country report that thousands of people are getting into trouble with interest rate agreements they don’t understand. Many are losing their homes and possessions when interest-on-interest charges become too much for households to bear.
Pensioners’cards, identity documents and bank cards are held as security and, in one case, henchmen with sjamboks have been set upon defaulters who cannot pay up.
Yet the government has done no studies on the implications of increasing the exemption. Says Terblanche: “It needs a social impact study. Any proposed legislation must look at the impact on the ordinary person.”