Indebtedness and aspiration: A credit journey to higher status or ruin?
Aspirations of upward mobility, poor credit regulation and unscrupulous credit providers have contributed to millions of South Africans becoming critically indebted. When the latest amendments to the National Credit Act were published in August 2019, the issue once again received significant media coverage. In a chapter of the HSRC’s latest book in its State of the Nation series, Poverty and Inequality: Diagnosis, Prognosis and Responses , Prof Deborah James of the London School of Economics looks at some of the factors that drive people to over-indebtedness. This article is based on the chapter, with additional reporting by Antoinette Oosthuizen.
The recently published National Credit Amendment Act 7 of 2019 allows for some of the poorest over-indebted South Africans’ repayments to be suspended or their debt entirely written off. Details of how this will be implemented are still being worked out, but many have opposed the changes, including the banking industry, clothing retailers and the DA. They claim South Africa’s lowest income earners might be left out in the cold with few credit providers willing to risk lending them money. In addition, as Prof Deborah James points out, the amendments will likely have no impact on those who borrow from ‘loan sharks’, or mashonisas.
- The National Credit Amendment Act 7 of 2019 was published in the Government Gazette on 19 August 2019
- The relief applies to those who earn R7500 or less per month with R50 000 unsecured debt, and those who are critically indebted.
- The process may involve suspending debt repayments or extinguishing the entire amount, but, if the debt is written off, the person will not be allowed to apply for credit for a period of up to 12 months.
Many consumers start their credit journey through clothing purchases, said Michael Lawrence, executive director of the National Clothing Retail Federation of South Africa, during public hearings on the bill in 2013. Being provided credit by retailers is a “constructive” way to start this journey, he said in a comment to Netwerk24 in August 2019. How would consumers prove their credit-worthiness without having had access to such credit? The industry had hoped for further consultation.
But what is the reality of this ‘credit journey’? Over the last 25 years, there have been countless reports of desperate consumers resigning their jobs to avoid debt repayment instalments obliterating their salaries. The associated psychological and social stress, and feelings of hopelessness have even driven some to suicide. Overcoming a racist legacy
South Africa’s debt landscape is particularly difficult to reform, writes James. After the first democratic elections in 1994, various aspects of apartheid were abolished, coinciding with a massive rise in expectations and considerable state spending on salaries and social grants. South Africans embraced a sudden credit supply, boosted when the government repealed the terms of the Usury Act which previously capped the interest rate.
- The ceiling placed on lending rates by the Usury Act of 1968 protected borrowers from excessive charges. It also excluded many people from getting credit because the transaction cost per rand lent was just too high to make lending small amounts to low-income earners profitable for banks, writes Prof Andrie Schoombie of Stellenbosch University’s Department of Economics in South African banks and the unbanked: Progress and prospects (2004).
- In 1992, the Minister of Trade and Industry exempted certain moneylending transactions not exceeding
- R6 000 (later R10 000) from the provisions of the Usury Act. The informal micro-lending industry mushroomed.
- The National Credit Act (No. 34 of 2005) repealed the Usury Act.
The global emphasis on consumerism, lifestyle and the status of having access to material goods and services led to many who may have previously been content with a lower social position now desiring equality. Access to credit allowed them lifestyles from which they were previously excluded. But, as James writes, Clara Han calls this a “loaned life” in Life in debt: Times of care and violence in neoliberal Chile. While borrowing actualised dreams and soothed family relations, creditors eventually knocked on their doors.
Pouncing on the money In the 1990s, a rising black middle class entered the South African civil service. Many of the former public servants used their redundancy packages to build a new micro-lending industry. They extended credit to those replacing them, often charging excessive interest rates. The informal micro-lending sector expanded, with loan sharks, or mashonisas(isiZulu), confiscating ATM cards outside factory gates on payday, and some charging interest of 50% per month. In the formal financial sector, borrowers were seduced by housing loans, store cards for clothing, vehicle finance and the purchase of household items on instalments.
Urban black working-class people were especially vulnerable to unsustainable borrowing levels. Many took out loans from numerous informal lenders and retailers, rather than banks, becoming over-committed. Income growth could not keep up with the rate of credit consumption. The borrowing at high interest rates eventually exacerbated their poverty. A 2018 report commissioned by Wonga Finance SA (Pty) Ltd estimated that South Africa had at least one mashonisa per 100 households in low-income areas.
The National Credit Amendment Act 7 of 2019 has probably put the “sharks” in a “jovial mood” wrote Dean Macpherson, the DA Shadow Minister for Trade and Industry in the Daily Maverick. Responding to its signing into law, he warned that banks will decrease their exposure to low-income earners and the mashonisas will benefit by providing them with informal credit.
A sense of social obligation
Those hardest hit by indebtedness are not only the poorest in society but rather the so-called “new middle class”, writes James. Ironically, it is their credit-worthiness – their access to collateral such as salaries and social grants – that makes them vulnerable to exploitative lenders. Often, social obligation pressures borrowers into obtaining credit, sometimes repeatedly, she says. In addition to embracing and displaying a lifestyle of upward mobility, many receive requests for financial support from poorer families and friends. Others borrow to fulfil cultural expectations related to lobola (bridewealth) payments and large ceremonies. James quotes the example of a rural-based casual labourer who received debt counselling at the University of Pretoria Law Clinic in 2008. Pressurised by his mother, he borrowed R5000 to pay lobola for the mother of his three children. In addition, he owed Jet R6000 for children’s clothing and another R5600 for DVD players that he’d bought for two households. Finally, he borrowed money from SA Loans, at a massive interest rate, to repay those debts. After paying his debt instalments every month, he did not have enough money to live on.
The debt counsellor pointed out to creditors that they were reckless to have extended him credit in the first place, and in contravention of the National Credit Act that had come into effect the previous year. She convinced them to write off some of his debts. Many others did not have access to publically funded debt counselling or became entrapped by informal microlenders operating illegally. To escape this ‘enslavement’, they resigned their jobs, switched bank accounts or cashed in their pensions. Some employers paid wages in cash to protect workers against creditors getting their hands on the money.
Regulating credit providers
A class action court case in the Western Cape High Court (2015) and the Constitutional Court (2016) ruled against many of the practices that enslaved people to exorbitant levels of debt. One of the applicants, whose net income was R2260, was granted a loan of R6280 to be repaid in monthly instalments of R1574. Another earned an income of R1221 and was granted a loan to be repaid in instalments of R513 per month. “These were quite obviously reckless loans and unsurprisingly the applicants defaulted on their repayments,” the judge said.
The height of the ‘journey’
In 1994, the ratio of household debt to income in South Africa was just under 55%, rising to a record high of 86.4% in 2008. According to the South African Reserve Bank’s Quarterly Bulletin published in June 2019, the ratio was 72.5% in the first quarter of 2019. The cost of servicing debt as a percentage of nominal disposable income was at 9.3%. Can regulation alone contain South Africans’ borrowing? Or does the answer lie in a deeper understanding of South Africa’s unique debt landscape, which, according to James, includes the way that commodification and mutuality (relationships of obligation, duty and care) interweave in society?
Many young South Africans have resorted to avoiding the types of mutuality that forced them to borrow money. James cites the example of a young woman who avoided lobola obligations to in-laws and expensive marriage ceremonies by remaining unmarried. She was a young member of the new middle class, but her parents still lived in an informal settlement. By opting out of mutuality in this way, people like this woman truly “become middle class” in a classic sense by focusing on their immediate family only and repudiating obligations to others, writes James.
Contact: Prof Deborah James of the London School of Economics
Antoinette Oosthuizen, HSRC science writer
- To apply for credit
- To be protected against discrimination in the granting of credit
- To be informed why credit has not been granted, should you ask
- To receive a free copy of your credit agreement
- To receive a credit agreement in plain and simple language
- To have your personal and financial information treated as confidential
- To understand all fees, costs, interest rates, the total instalment and any other details
- To say no to increases on your credit limit
- To decide whether or not you want to be informed about products or services via telephone, SMS, mail or e-mail campaigns
- To apply for debt counselling should you be overwhelmed by debt