South Africa’s poorest would benefit considerably if efforts to formalise informal lending and penalise illegal practices were intensified.
It’s common knowledge that too many South Africans cannot make ends meet and rely on credit for basics like transport, groceries and other essentials.
Finmark Trust data indicates that in 2024, 43% of adults used credit to buy food. The same report found 12 million adults, including those who borrow from informal sources, are in financial distress.
FinMark Trust data from 2022 shows that 90% of adults are financially included, which means they have access to financial products and services appropriate to their needs.
Despite this, many rely on informal services due to barriers such as high fees and lack of documentation, FinMark says.
These informal services include loan sharks (“mashonisas”) who charge much higher interest rates than the formal providers do – 30-50% per month. This means a R500 payday loan could end up incurring up to R250 in interest.
Lower wage workers loan money to pay for food or transport and end up owing much more than they needed to borrow. These are South Africa’s deskless workers. They serve on the frontlines of local businesses. Research shows nearly half of these workers often run out of money before payday and are forced to borrow at extortionate rates.
Typically earning between R6 000 and R12 000 a month, they frequently have no credit history and no collateral. This, combined with their low earnings, makes them invisible to the financial services sector and ripe for exploitation by informal lenders. Addressing this issue requires a multipronged approach, however.
Fintech solutions, such as low-cost mobile banking, offer a pathway to secure, affordable financial access and are becoming more widespread.
Stronger enforcement of credit regulations and targeted consumer education would assist. As mentioned, mashonisas often charge exorbitant interest — up to 50% per month - far exceeding the National Credit Act limits. South Africa’s poorest would benefit considerably if efforts to formalise informal lending and penalise illegal practices were intensified.
Employers could assist by providing their employees with education on financial literacy and giving them sponsored or subsidised access to tools to help them better understand and manage their money. This would deliver social and economic returns for the company and country. Workers who are stressed about money are more likely to miss work, underperform or quit. This means addressing workers’ financial needs can save the business money in lost productivity and hiring costs.
Another approach that employers can consider is earned wage access (EWA), which gives employees access to money they have already earned. EWA isn’t a silver bullet, however. It’s a tactic to help workers manage a bigger problem - wages are not rising with inflation or the cost of living, and people are poorer today than they were five or ten years ago.
The real solution is to provide fair increases. But instead of being able to do that, EWA allows deskless workers to meet unexpected and necessary expenses without diving deeper and deeper into debt or exposing themselves to predatory lenders.
Until we can address the real wage growth issue, we will not be able to get people to a point where they can stop paying high fees for emergency funds, start saving and financially plan for their futures.
