Unsecured lending is the key to many South Africans’ journeys to economic stability and relative affluence.
This is according to the Aspirations Report, based on in-depth research involving 8 000 participants in five income groups conducted by the University of Cape Town’s Unilever Institute of Strategic Marketing. The research found that South Africans are heavily reliant on “good” unsecured borrowing to achieve their aims.
“Asked what was holding them back from reaching their aspirations, strugglers say lack of jobs, lack of assets [to] give them access to secured credit, ‘black tax’ and lack of access to quality education,” said the institute’s director, John Simpson.
“Informal forms of finance such as borrowing from family and unsecured credit are used to fund things that provide a bridge into the middle class, such as education, making home improvements in order to rent out rooms, buying a car, which provides mobility, access to more job opportunities and the ability to generate income, starting a small business from home, getting off the grid to become self-sustaining, and playing asset catch-up, including paying a deposit on a low-cost house.”
Martin Neethling, a contributor to the research and a business science lecturer at UCT, said unsecured lending filled a vital gap in the economy.
“I would say that unsecured debt has had a bad rap,” he said. “The unsecured debt market has addressed something that the institutional banks have ignored. We simply wouldn’t see people moving forward if it wasn’t for unsecured loans giving people that push forward.”
A few years ago, the unsecured lending market was growing at a rapid pace, increasing by about 20% a year. It was led by the likes of African Bank and Capitec Bank, with a huge market of smaller lenders.
But, in the wake of the Marikana tragedy in 2012, abuse of the system began to make headlines, with almost 13% of employees in the mining sector found to have garnishee orders against them.
The collapse of African Bank and the treasury’s increasing scrutiny of the industry led to formal lenders tightening up their policies substantially and easing the pressure on consumers.
Capitec announced in September last year that it would reduce interest rates on longer-term unsecured loans from 28% to about 20% over the next five years.
But supply and demand still drives the informal market, with an estimated 50 000 unregistered credit providers sometimes charging four or five times the legal amount of interest on loans.
The report found that borrowing interest-free from trusted sources such as friends and family is the first port of call for most South Africans.
In these cases, “people borrow relatively small sums of money for relatively short periods of time”, said Neethling.
People also take short-term loans from local spaza shops. “It’s interest-free, and it’s based on a relationship of mutual trust. There’s almost no bad debt,” he said.
“Once you get past that, you get into a slightly murkier area, such as loan sharks and payday loans,” he said. “That’s where the terms are very punitive, and the loan is almost always issued under desperate circumstances.”
Nevertheless, even these kinds of loans have their place.
One research respondent said: “I took a loan from a loan shark to buy material for our business. We’re paying him every month … I think we will finish paying him his interest next year.”
According to Neethling, there needs to be “a counternarrative around why good unsecured lending isn’t being seen for what it is, which is very much an enabler”.
As another respondent said: “You need debt to help you to take opportunities that arrive or they pass you by.”