An ever-growing number of South African residents are eager to access credit to cover the costs of expensive items upfront or to manage financial gaps until their payday arrives. Interestingly, and somewhat alarmingly, a significantly large proportion of the local population relies on local mashonisas, also known as ‘loan sharks’ in other parts of the world, to fulfill their borrowing needs. The usage of these informal credit providers has surged even more since the onset of the Covid pandemic. Loan sharks are at their most active in townships but are readily accessible across the whole of South Africa.
Recent reports into the illegal lending industry have shed light on the dominant presence of informal lenders in South Africa’s credit market. Many working-class individuals find formal regulated lenders less accessible, pushing them towards using loan sharks as their only option for credit. In urgent need of cash, locals often turn to mashonisas for immediate assistance without the barriers that exist for regulated lenders.
While some may question why mashonisas are favored despite their intimidating reputation, many locals view them differently. Reports from users reveal they are often perceived as friendly, convenient, and easily accessible, playing an essential community role. Unlike formal lenders, loan sharks offer fixed interest rates throughout the loan duration, making it straightforward for borrowers to understand their repayment obligations. The absence of a lengthy application process and credit checks also contributes to their appeal.
However, this unregulated practice carries significant risks. Since mashonisas are not registered with the National Credit Regulator, there are few protections in place for customers. The estimated forty thousand mashonisas operating in South Africa can be anyone, from local shop owners to taxi drivers, and there is no legal recourse if borrowers cannot repay the loan. There have been harrowing news stories about Chinese nationals operating as illegal lenders then seizing victim’s personal documents and bank cards as collateral.
High and unregulated interest rates, sometimes reaching 50% of the loan amount, add to the financial burden. Loan sharks may even take personal belongings as collateral or threaten violent reprisal for non-payments, compounding the risk for borrowers.
The proliferation of unregulated credit providers has contributed to increasing debt and financial problems across South Africa as a whole. Desperate individuals seeking quick credit may find themselves trapped in a cycle of borrowing to cover previous debts, leading to further financial distress.
To address this issue, experts strongly advise opting for regulated providers when seeking short-term loans. Checking the National Credit Regulator’s website can help verify if a company is regulated, providing borrowers with legal protections and responsible lending practices. Unlike mashonisas, regulated lenders conduct eligibility checks and review credit files to ensure borrowers can afford the loan.
While the popularity of mashonisas remains high, it is hoped that in the future, they will operate as regulated members of the Credit Act. This would enable them to continue serving their communities while adhering to proper lending practices.