Give the poor some credit

As the cabinet considers asking Parliament to grant a new amnesty to people with bad credit records of under R10 000, the SA Communist Party wants “loan sharks” to be “stopped” from lending at extortionate interest rates. Blaming bad loans for deaths of Lonmin employees at Marikana last year, the SACP is also cross with banks for giving “unsecured loans”. But imposing more restrictions on credit for the poor might be exactly the wrong thing to do.

Under the National Credit Act, usury law and related regulation, formal financial institutions are already chary of lending to the poor. They can’t deal with people or small businesses without collateral, and low interest rates coupled with ceilings on what can be charged for high-risk lending mean that there are anyway small margins to be had, with large administrative burdens. The poorer of the country’s “banked” population are thus shut out from formal credit, contributing through their banking deposits to supplying this to the well-off instead.

This unintended consequence of “protecting” the poor comes as household debt to disposable income is at 80% (progressively up from 42% in 1980). In that last year, savings to household disposable incomes was 11%, dropping to -0,1% by 2011. But for those who can get it, credit is cheap. The average prime overdraft rate in 2011 was a 9%, a 30-year low. Yet half of all credit consumers, about 9 million people, are behind in repayments.

Shut out from formal regulated credit, the poor often turn to borrowing from savings associations (“stokvels”, “gooi-goois” and the like) and especially “Mashonisas”, the so-called loan sharks known by this Zulu term that means “to sink”. This has credit-providers selling money at high interest rates with short repayment periods (sometimes enforced through agreed access to the borrower’s bank accounts) and working outside formal law.

Legislation excludes smaller loans from usury limits but we’ve always been worried about this. The Samaritans of Lagash outlawed usury 5 000 years ago; the ancient Chinese imposed stringent interest rate controls; Rome’s Emperor Diocletian ordered the death penalty for usurers in 300 AD; the Catholics banned it for church members in 900 AD; and Islam won’t allow it even today (a profit-sharing way of paying for debt is used instead).

But a European Renaissance without credit couldn’t happen and Jews became foremost in providing credit services, saving civilisation but attracting the hate of borrowers, Christians and others, a hatred finding ultimate expression in the barbarism of 1933 to 1945.

Our own first loan shark was Maria de la Queillerie, wife of first Cape commander Jan van Riebeeck, and lender of first resort to the nascent colony’s struggling “free burghers”. We’ve tried to control Mashonisa’s ever since.

This approach is understandable, but futile and counter-productive, argues the Law Review Project. It suggests we open credit to the poor through greater freedom to trade in money, rather than “protections” that lock them out of financial services.

Specifically, it wants credit limits repealed, exemptions from having to register as a bank to lenders to small businesses, and general freeing of the market for unsecured loans. This won’t please comfy banks or nervy politicians, but it might break barriers to people in poverty, starting with little on the ladders of entrepreneurship.    

          Paul Pereira (published in The Citizen, 12 March 2013).