A recent study into the use of short-term credit in South Africa has found that informal lenders, also known as ‘mashonisas’, play a huge role in the credit market. In fact, conservative estimates put the number of informal lenders in South Africa’s townships and communities at around 40,000, which is approximately 1 for every 100 residents in the communities they serve.
One might assume that the use of mashonisas is so widespread because many borrowers cannot access the formal credit markets. However, that’s not the case. The research by Wonga has found that some borrowers prefer to use mashonisas rather than approaching formal lenders and benefiting from the protection provided by the National Credit Act.
But why? We thought we’d take a look at the service offered by formal and informal lenders to see who comes out on top…
The mashonisa
By definition, the mashonisa is an unregulated lender. That means they do not comply with the terms of the National Credit Act. Although this can lead to unscrupulous practices such as intimidating collection tactics, their services are still extremely popular in informal communities.
Typically, mashonisas provide quick cash loans for amounts that range from R500 to R1,000, although the loans can be as low as R50 and rise up to R5,000. The interest rates on these loans are typically between 30 and 50 percent, and unusually, the interest rate does not vary according to the loan term, loan amount or even the borrower’s track record.
There are some benefits associated with loans from mashonisas. They include:
- Loans can be agreed locally without having to travel
- The money can be in the borrower’s pocket extremely quickly
- The loan is not recorded on the customer’s credit record
- The costs are very easy to understand with no hidden charges or admin fees
- No documentation is required
Clearly, that’s a compelling range of benefits; however, the ease of use and speed of informal loans does come at a cost. The interest rates are high, ID and other documents can be held as security and the collection practices can be humiliating.
Formal lenders
Many of those who use the services of mashonisas are able to access the formal credit market and already have long-term loans in place. However, despite the benefits of a regular loan, many still prefer the unregulated service mashonisas provide. The benefits of formal lenders include:
- They are bound by rules
- Interest rates are generally much lower
- Structured payment arrangements can be put in place
- Collection practices are regulated
Despite the advantages, there are also a number of drawbacks borrowers from South Africa’s townships experience. For example, the fee structures are often much more complicated, which can cause problems when you take the low financial literacy levels of many South Africans into account. The loans can also take a long time to agree, which, given that they are often used to fund immediate expenses, can be problematic.
Borrowers should have the best of both worlds
Clearly, neither the informal nor the formal lenders currently provide a product that meets all of the borrowers’ needs. The onus is on formal lenders to create a product that bridges this gap. Until they do, borrowers in South Africa’s townships will continue to turn to mashonisas for the money they need.
As Brett van Aswegen, CEO of Wonga SA said: “Now we understand why people are using the informal credit market, it does raise questions about how formal lenders could mirror some of the good points that have come through in the study, such as ease of access and a simple costing strategy, to create shared value for consumers.”
