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19 Sep 2009 06:00
Micro-lenders insist that they are only lending money that customers can afford to repay, yet how can a woman with a monthly take-home pay of roughly R8 000 have debt repayments of R6186 a month, of which R4819 (60%) goes to two of South Africa’s largest micro-lenders—Real People Investment Holdings and African Bank?
Profile of a debt trap
This particular client has a history of struggling to manage her debts. MsK (name withheld) has six judgments against her for a total of R26 000.
Since 2006, when the National Credit Act (NCA) was introduced, she has taken on a further R48 850 in short-term debt—95% with micro-lenders.
In 2007 MsK borrowed R15 000 from Real People to settle her outstanding debts with Capitec and Absa. The interest rates from Real People were preferable to the existing debt, so the consolidation made sense, but it was not long before she fell behind on her payments.
In May 2008 she took out a R6 000 loan and, although this was a 12-month loan, in December 2008 Real People issued a further two loans, R7 000 (12months) and R2 500 (sixmonths), part of which was used to settle previous loans, providing her with an extra R4 200 credit.
As the new loan did not incur any initiation fees and, as interest rates had fallen, she benefited from the transaction. But Ms K was in arrears on her new loans by the second month.
While borrowing from Real People, MsK went to African Bank, which provided her with a R7 000 loan in September 2008. In December 2008 she received a further loan of R4 500.
By February 2009 MsK missed her first loan payment, and by this stage was falling behind on all her loans. Yet despite this obvious debt problem, three months later, in May 2009, African Bank gave her a further loan of R6 000 and a credit card for R2 500.
At the time of issuing these loans MsK was behind on payments on all her loans and had R48 774 of debt, with repayments of R5166 or 65% of her take-home salary.
Capitec and John Craig issued further credit in May and June. Combined with the new African Bank loans, MsK now spends 76% of her salary on debt repayments.
Although the lenders have told the Mail & Guardian that the loans were based on affordability, the debt rehabilitation company she contacted in desperation says it will be virtually impossible for her ever to get out of this debt trap. It is unlikely that a court will allow her to declare herself insolvent, as she has limited assets.
For all the promise of the NCA, you cannot be protected against yourself. The Act has not stopped micro-lenders from lending to over-indebted people.
This is clearly a woman in dire financial straits who will do anything to access further loans. According to African Bank, it refused her request for a further loan in July.
But desperate people find ways around the system. Both lenders told the M&G that MsK understated her monthly expenses when applying for her loans. She also applied for loans from both lenders on the same day in December so that they could not gauge the full extent of her debt through her credit record.
But this does not explain why African Bank, Capitec and John Craig issued her further loans when her credit record and bank statements would have clearly shown that she could not afford to take on more debt.
In response to questions, African Bank said the further loans were granted because her payment profile suggested she had overcome a cash flow obstacle and with the new credit, her total debt to net income ratio was 72% (this is in line with the national average).
“On the basis of positive historic payment behaviour and recognising the overcoming of the cash-flow obstacle, further credit was granted”.
In its response the bank did not mention MsK’s debt-servicing costs as a percentage of income. In light of MsK’s issues being raised, African Bank has subsequently requested that the client contact its consumer advocacy office to assist her.
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