Vuyo Maqhina* has just been turned down for a micro-loan. He takes home about R240 of his monthly salary after deductions for an earlier loan and a furniture hire-purchase account.
“You have too many loans … How are you going to pay us?” the micro-lender asked him. By 10am on Monday dozens of people like Maqhina queue outside the four micro-lenders on Cape Town’s Adderley Street. “I need the money to pay all these accounts,” Maqhina said. “I’m disappointed.”
Maqhina is fairly typical of the 400 people who walk through the doors of the You & Your Money debt advice centre in Wynberg, Cape Town, every year. Under the slogan “Debt Sucks!” the NGO has provided debt counselling free of charge since July 2002.
It runs life-skills training with groups ranging from high school pupils to staff of large companies. It also trains community workers as “debt activists” and has actively lobbied for consumer-friendly legislation, such as the Consumer Credit Bill.
Trainer Pheziwe Fongoqa works with four groups of Khayelitsha residents living with HIV, who receive disability grants. It can cost R100 to borrow R50. “Interest costs more to poor people,” Fongoqa said. “They are living at the mercy of the moneylenders. On pension day the moneylenders are at the pay point. It’s a black market. People are afraid to complain. These people are their neighbours.”
South Africa’s total consumer credit industry — from mortgages to hire purchase and retail credit — is worth about R362-billion a year. But it is estimated that about 60% of South Africans fall outside this sector, reinforcing what President Thabo Mbeki calls the divide between the first and second economies.
The cost of credit varies from minus 2% below prime for mortgages secured against provident funds, to 50% to 100% for hire-purchase agreements, which dominate working class consumer spending. In extreme cases 30% interest is payable each month on loans, effectively amounting to 360% a year, according to research by the Department of Trade and Industry.
Many who arrive at the You & Your Money debt advice centre are in the middle of a debt crisis triggered by unforeseen circumstances such as the death of a breadwinner, job loss or hospital bills following an accident. Suddenly the instalments on furniture and appliances, credit cards or micro-loans are no longer affordable.
“By admitting they are not in control of their finances, they feel ashamed,” says centre director Audrey Everson.
Many people are not aware that they are entitled to have their hire-purchase agreement explained in a language they understand. “You can see the horror on their faces when you explain the interest charges and costs,” says Everson. “They sign and just pay and pay. ”
Consumers are also not aware that they should check that a micro-lender is registered with the Micro Finance Regulatory Council (MFRC) and insist on a copy of the loan contract.
The NGO teaches basic budgeting, assists in drafting repayment plans and liaises with creditors to avoid legal proceedings — the costs of serving summonses are all added to the overall debt. If necessary, clients are referred to pro bono lawyers. “We are here to support and advise, to educate people on debt,” says Everson.
The Consumer Credit Bill aims to entrench this kind of support and advice by establishing a countrywide system of debt counsellors.
The Bill includes a ban on retail stores marketing themselves by sending pre-approved credit notices to potential consumers, as well as making provision for a seven-day cooling-off period for micro-loans (currently many offer approval within 30 minutes).
It also provides for consumers to be given binding, written quotes by micro-lenders to allow them to shop around for cheaper interest rates.
The Bill proposes an affordability assessment, which will require micro- lenders to ensure they lend money only to those who can afford repayments. If they do not compy, legal recourse against defaulters won’t be possible.
Micro-finance is worth an estimated R17-billion of the R362-billion credit industry. Unregistered, informal loan sharks account for just less than R2-billion of this amount. Many of those are tiny operations — a recent MFRC study in the Eastern Cape found the number of clients ranged between 30 to 50 and amounts loaned averaged R100. In recent years the council has tightened up on unscrupulous loan sharks, referring 173 for criminal prosecution.
While the government has repeatedly drawn attention to declining interest rates and the significant drop in public debt, saving levels remain a headache and perennial budget concern. As a percentage of the gross domestic product, household savings have declined by almost 6% over the past 20 years. They stand at 0,5%, compared with debt of 54,8%.
At the debt advice centre the work continues. “The ideal would be that people are debt-free, but it’s not an ideal world. The important thing is to limit your debt and know your rights,” says Everson. “Getting out of debt is a long-term process.”
* Not his real name