Article: Anneke Kamfer from Ideas
Image: microlenders ahead

Basically, microlenders operate in the same way banks do. They get people to invest with them and pay them interest, while lending out that money to people who ask for loans and charging interest on those loans. But there are definate differences between banks and microlenders.

How do they differ from banks?

Firstly, most banks will not grant loans without security, while microlenders grant loans (of any amount up to R6 000) without it. Secondly, banks have a ceiling on the amount of interest they can charge, which is stipulated in the Usury Act. Microlenders can charge any interest rate they like because of an exemption in the Usury Act. This exemption was intended to give small enterprises access to credit because banks are too nervous to touch them. But instead of providing credit to small-business start-ups, the result was an explosion in borrowing by ordinary consumers.

What has gone wrong?

The microlending industry gained its foothold by being the only way that poor people could get access to credit and it has flourished – some estimate its annual turnover to be around R25 billion. Yet, until recently, there was no attempt to regulate or control it and many illegal practices continued unhindered.

For example, borrowers were given blank forms to sign, only to discover, when the forms were completed, that they had signed over access to their bank accounts, allowing deductions from their salaries before these had even been deposited. Some microlenders took possession of ATM cards and ID books. Interest rates of 30 to 40 per cent per month were standard – calculated as yearly interest (the way banks do), and translating to an annual rate of more than 2 000 per cent!

What's the outlook?

In an attempt to clean up the industry and to make debtors aware of their rights, the Micro Finance Regulatory Council (MFRC) was established in June 1999. All microlenders that operate in terms of the Usury Act Exemption are required to register with the MFRC and comply with its rules. But these rules still allow them to charge interest up to 10 times the prime lending rate (14 per cent at time of going to press).

The MFRC believes that microlenders can provide a legitimate service because they provide credit to a sector of the population that is not served by banks. But enforcing the regulations is proving to be a tough call for the organisation. The bulk of moneylenders failed to register with the council before the legal deadline. According to research done by the Black Sash, there are only two Usury Act inspectors in the country and they have not brought anyone to court since 1992.

So it’s pretty much business as usual in the microfinance industry – and many people are caught in its debt trap. Research by Professor Piet du Plessis of the University of Stellenbosch showed that about 70 per cent of people who borrowed from microlenders were taking out new loans to pay off the old ones. This is how people end up in the situation that was recently reported in Prince Albert, where people were losing their houses because of debts that started out as a R58 loan to buy fruit and vegetables.

But what if I have no option?

If you have a financial emergency that you cannot solve in any other way, at least be sure that the microlender you approach meets the following requirements:

• It displays its MFRC registration certificate.
• It gives you detailed information about the amount to be paid, the interest charges and a monthly instalment and repayment period before you are asked to sign anything.
• It does not ask you to sign blank contracts or to hand over ATM cards or your ID document.
• It will cancel the loan if you change your mind within three days of signing the contract.