Loan sharks prey on South Africa’s vulnerable grant recipients – report

Social grant beneficiaries, especially the elderly or single mothers, continue to be targeted by unregistered or informal lenders (commonly called loan sharks, mashonisas or skoppers) who use social grants as security for high-interest loans. And, to add insult to injury, there is no legal regulation of these unscrupulous lenders.

This is according to a new report titled ‘Collaborations to Curb Indebtedness’ that was released recently. It was compiled by Deborah James (London School of Economics and Political Science), Odwa Nweba (Stellenbosch University Law Clinic), Amanda Rinquest (Black Sash) and Kabelo Teme (National Financial Ombud Scheme South Africa – NFOSA).

As the report’s title suggests, the authors wanted to help tackle involuntary indebtedness, especially among welfare grant recipients, by offering training to community leaders, lay advisers and community paralegals and using evaluative workshops to build knowledge collaboratively and discover practical solutions.

The training sessions covered a range of topics, such as:

• An overview of the National Credit Act (NCA)
• Owing money and being in debt; consumer rights
• Debt relief mechanisms
• Legal proceedings related to debt (such as three-year prescription of debts, balloon payments, and cancellation of credit agreements upon full payment)
• Contracting with a creditor
• Managing money
• Credit bureaus and debt removal from credit records
• The role of stokvels or rotating credit associations in saving and borrowing

They partnered with various community-based organisations across all provinces to implement these training sessions.

The rise of mashonisas: How loan sharks exploit the vulnerable

The authors point out that grant recipients, often in dire need of access to credit, cannot borrow money on a fair basis.

“Since they do not qualify for loans from formal lenders, they often have no alternative other than to borrow from informal lenders or mashonisas, who lend money at illegal interest rates (between 30 and 100% per month) and use forms of loan collateral or security such as keeping borrowers’ Sassa or bank cards and IDs for extended periods, even in perpetuity.

“This is especially the case for recipients of child support grants, older persons grants, and disability grants. In extreme cases, informal lenders reduce borrowers to effective captivity, keeping them at a level of basic subsistence by providing them with minimal foodstuffs and paying some debts. In one instance, we had reports of mashonisas taking out life insurance — naming themselves as beneficiaries — on behalf of borrowers but without informing them.”

How paralegals can help grant beneficiaries

To make matters worse, legislation does not provide recourse where grants are utilised as security for mashonisa loans. Nor is much advice on this provided in the Debt, Credit and Consumer Rights handbook for paralegals, the authors say.

“Many people do not know about – or are afraid to reach out to – the ombud or regulators. However, despite the absence of formal regulation, paralegals and advisers in various sites across the country – having a gradually developing sense of what is just and legal – have found ways to mediate between borrowers and lenders.

“We found evidence of community paralegals’ ability to give advice on how to move forward and remedy problems. In some notable cases, paralegals have offered useful advice and enabled clients to find a solution to problems of illegal lending.

“Much of the training related to formal credit and consumer agreements, an area of knowledge they found useful in handling cases.”

The authors say a positive outcome of the training sessions is the sharing of knowledge about certain debt and consumer rights issues. The knowledge gained at the workshops was spread through one-on-one encounters between paralegals and those they advise. It was also disseminated through workshops held by paralegals back in their regions.

“Trainees/participants giving advice to people who are in debt affirmed the usefulness of the practical information offered. They also appreciated learning more about consumer rights and how to deal with unfair demands from creditors or illegal confiscation of furniture and other household goods.”

The way forward

Based on their findings, the authors call for accelerated education and knowledge transfer about consumers’ and grant recipients’ rights, using the media to share examples of adviser or paralegal experiences with the most vulnerable. Community outreach through regular roadshows could also help.

They also emphasise the need for increased funding to ensure government departments fulfil their mandate in rural communities.

“Our training sessions demonstrated a need for financial literacy in rural or under-resourced areas. Financial inclusion means that we also share the knowledge that we have as far and as wide as we can. A lack of visibility by both the National Credit Regulator and NFOSA in these communities has the potential to make consumers more vulnerable to scrupulous credit providers.

“There is also a need for flexible and innovative solutions that are accessible and cost-effective to build on existing practices of mediation and enable community paralegals to use their skills from the training, and to encourage informal lenders to operate within the perimeters of the law and/or register with the NCA.

“Through education and effective engagements with government bodies, informal lenders will be encouraged to operate within the parameters of the law. This would also enable certain money lenders to register their businesses and thereby comply with the regulations stipulated in the NCA.”

The authors add that the National Treasury; the Department of Trade, Industry and Competition; the Department of Social Development; and the Department of Home Affairs should implement an integrated approach, rather than operate in silos.