Informal Lending Report

In 2018, Wonga commissioned research into the extent and characteristics of informal lending in South Africa. The research, conducted by research and analytics consultancy Eighty20, focused on mashonisas, a term often translated as “loan sharks”, and their activities, which are common in townships and informal settlements around the country.

The purpose of the research

The research was prompted by a contraction in the consumer credit market in South Africa, especially the short-term unsecured category, in recent years. This has happened approximately in parallel with the implementation of tighter lending criteria following amendments to the National Credit Act in 2015.

The purpose of the research was to explore what happens to consumers who are not able to access credit from formal providers and the possibility of a link between more restrictive regulation and a growth in informality.

Who are mashonisas?

Mashonisas are defined as neighbourhood money lenders who are not registered with the National Credit Regulator as required by the basic legislation (the National Credit Act of 2005).

Mashonisas are illegal and unregulated which means their operating models are not impacted on by regulations and they incur no compliance costs in terms of the National Credit Act. 

Contrary to the image of mashonisas as a specific segment of the criminal class, interviewees and focus group participants were clear that mashonisas could be all sorts of people, men and women, formally employed and unemployed, across a range of education and of any age.

The study interviewed six mashonisas from a variety of backgrounds, employment histories, and viewpoints.

Why do people use mashonisas?

Why do customers choose mashonisas rather than formal lenders? While borrowers value the convenience and accessibility of community-based lenders, in some cases, borrowers don’t specifically make a choice to use mashonisas but do so because they are barred from the formal credit market.

Mashonisa interviewees and the respondents in the two focus groups were asked what borrowers use the loans for.

They noted that loans are typically used for everyday expenses such as food and transport, for children’s schooling expenses and for unplanned events such as funerals. Focus group participants provided a list of the items they had borrowed for. This included: ”small things like beer sometimes”, “lunch, just pocket money”, “(prepaid) electricity”, “transport money for the kids to get to school”, “my DStv account”, “petrol”, and “cell phone data”. This suggests a pattern of borrowing from mashonisas to manage cash flows between payment cycles. Customers are “making ends meet” in a time of general economic stress. Mashonisas may well best be seen as one of the props that keeps everyday life afloat.

How do mashonisas work?

As social phenomena, mashonisas are not set up to consistently conduct business in a regulatory compliant manner. Mashonisas make their entire profit from interest margins. They do not charge administration fees or pay commissions. The most striking feature of the industry is the high interest rate charged. 

Product offering

Mashonisas offer small, instant cash loans to meet immediate needs, typically only offer the amount requested, and charge no hidden costs, as their "T&Cs" are well-known

Interest rates

Mashonisas consider charging 30% a competitive advantage. Their interest rate does not vary according to the loan amount or type of customer, and can typically be 30% or 50% per loan

Loan size and limits

A mashonisa's loans typically range between R500 and R1000, and limits align with the income of the borrower. Mashonisas monitor trends in their client's borrowing behaviour.

Our conclusions

Mashonisas appear to be more widespread than anticipated and deeply socially rooted. People use mashonisas because they offer quick and easy access to small, short-term loans which enable borrowers to manage their cash flow needs. On the evidence of this study, it does not seem that customers are using mashonisa loans as a substitute for formal credit. They access formal and informal credit for very different reasons and often use both at the same time.

Mashonisas have been around for a long time but it is plausible to suggest that the phenomenon has grown in the last couple of years. However, the study has not managed to demonstrate that stricter affordability regulations have pushed more customers into the informal market any more than it has shown that impaired credit records or a sluggish economy have done so. Those questions still remain to be answered.

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