Debt relief a double-edged sword for South Africans living on loans

Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since lawmakers began looking at debt forgiveness in 2016. (Reuters)
Updated 04 November 2019

Debt relief a double-edged sword for South Africans living on loans

  • Third of population rely on loans to survive — FinMark Trust
  • New credit law aims to protect vulnerable with debt relief

JOHANNESBURG: Solani Rivele, a single mother of four, earns about 800 rand ($55) a week but owes 100 times that amount in loans. Millions of South Africans like her rely on credit to feed their families.
Rivele has borrowed around 80,000 rand since losing her job as a security guard due to injury in 2016. Now she owes around 3,500 rand in monthly instalments, more than her monthly income.
“I can’t afford to pay because I’m a single parent, I’m the one who is providing food on the table,” the 44-year-old said in a shopping center on the outskirts of her home township of Alexandra in Johannesburg.
“I can’t sleep.”
The situation of people like Rivele shows both the potential benefits — and unintended consequences — of a new law signed by President Cyril Ramaphosa in August, aimed at protecting vulnerable borrowers.
The National Credit Amendment (NCA) comes as some lenders make healthy profits on loans while many of the country’s poorest people spend huge chunks of their income on repayments. It could see some South Africans have their debts suspended or wiped entirely, and force more responsible lending.
This could be good news for many who, like Rivele, are stuck in debt traps. However, a number of big banks told Reuters that the new rules, and the potential risks entailed for lenders, meant they had or would cut back on lending to those low-income customers who might qualify for relief in future.
“You are asking yourself, do you want to play in that particular market, or do you move away?” said Gerrie Fourie, CEO of Capitec, South Africa’s fifth-largest bank.
This could cause serious difficulties for some families in a country where the unemployment rate is almost 30% amid sluggish economic growth, living costs are rising, and millions of people cannot make ends meet.
Around a third of the population rely on loans for necessities like food, according to financial inclusion organization FinMark Trust.
African Bank, a smaller lender that targets low-income consumers, said it already had and would further reduce its lending to qualifying borrowers in response to the NCA.
Arrie Rautenbach, the retail bank CEO of Absa, told Reuters it would cut back on new lending to the riskiest borrowers among those who qualify for NCA relief, while Jacques Celliers, his counterpart at another of South Africa’s big four lenders FirstRand, said it had already gradually trimmed new lending to the group in anticipation of the law.
Capitec said in August it had, over the past two years, reduced the proportion of borrowers who would qualify for NCA relief in its lending book to less than 5%.
Fourie told Reuters the figure has previously stood at 12-15%, with the reduction mostly driven by a deteriorating economy, but with the upcoming credit law also a factor.
The other two members of South Africa’s big four — Standard Bank and Nedbank — said they were watching how the situation developed.
Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since lawmakers began looking at debt forgiveness in 2016.
It dropped from 3.64 billion rand in the final quarter of 2015 to 2.27 billion rand in the second quarter of this year, data from South Africa’s National Credit Regulator (NCR) shows.
Cas Coovadia, who heads the Banking Association of South Africa, said the law would either raise the cost of credit for some of the most vulnerable borrowers or stop banks lending to them.
This risks some being pushed back into the informal sector, dominated by a large network of illegal loan sharks known as mashonisas, Coovadia, bank executives and some debt counsellors say.
“You don’t want people to end up in the informal sector, that is never good,” said Absa’s Rautenbach. “It’s a very bad unintended outcome.”
This was echoed by Brett van Aswegen, South Africa CEO of payday lender Wonga. He said his company’s research showed mashonisas were already widely used, adding it would be “naive” to think consumers in need of cash would not go there.
Mashonisas like 31-year-old Dani, who operates in and around Northam, a mining town in the northern province of Limpopo, commonly charge interest rates as high as 50%, and sometimes use violence to get their money back, according to debt campaigners.
Dani, who declined to give her surname as she is breaking the law, takes identity documents and bank cards as security, and if clients don’t pay on time, hikes the interest to 100%.
It boosts her business when people can’t go to the bank for loans, she told Reuters.
“If the economy is bad, it is good for me, like if there is a strike at the bank, (customers) have to come to me,” she said.
The NCR, and Clark Gardner, CEO of consumer advice firm Summit Financial Partners, disputed that borrowers would be pushed into the hands of loan sharks and said it would not be a bad thing if they had less access to credit.
Lesiba Mashapa, NCR company secretary, said big lenders granted loan sizes he viewed as excessive.
Gardner provided Reuters with loan agreements from two big banks in 2016 and 2017 respectively, with repayment periods of three and four years, where the cost of credit — interest rate plus charges — was 60% and almost 100%.
Differential Capital, an asset manager, agreed in a report published in August that irresponsible unsecured lending was far from the preserve of mashonisas, with formal providers “preying on financial illiteracy.”
The NCR moved to protect borrowers in the wake of a leap of almost 290% in unsecured lending between 2007 and 2012 following measures to tackle racial discrimination in the credit market.
Differential Capital’s report said two-thirds of the 7.8 million, usually low-income, consumers with unsecured loans spent more than a quarter of their net income on servicing their debt, while around half are in default.
The new law will see the credit regulator take over debt counselling for indebted consumers earning less than 7,500 rand per month — who are largely unable to afford private fees — and with unsecured loans of less than 50,000 rand.
It will allow all or part of their debt to be suspended for up to 24 months and wiped entirely in some circumstances, for instance if they lose their job.
Estimates vary, but the National Treasury projected in October 2017 that up to 20 billion rand ($1.3 billion) of consumer debt could qualify for forgiveness. That’s small in an overall consumer debt stock of 1.9 trillion rand.
Brendan Pearce, chief executive of FinMark Trust, said measures to open up the credit market in South Africa had worked “almost too well.”
He said that while the NCA credit amnesty could provide some short-term relief, it was not a long-term solution because so many people depended on debt to put food on the table.
“I can’t sit here and say we shouldn’t be allowing more credit to consumers who otherwise wouldn’t be able to survive.”
More was needed to tackle the problem, Pearce added, including working to address its roots: the state of South Africa’s economy.


A Jordan startup delivers eco-friendly alternative to dry cleaning

Updated 05 December 2019

A Jordan startup delivers eco-friendly alternative to dry cleaning

  • Products used by WashyWash are non-carcinogenic and environmentally neutral
  • Amman-based laundry service aims to relocate to a larger facility in mid-2020

AMMAN: A persistent sinus problem prompted a Jordanian entrepreneur to launch an eco-friendly dry-cleaning service that could help end the widespread use of a dangerous chemical.

“Dry cleaning” is somewhat of a misnomer because it is not really dry. It is true that no water is involved in the process, but the main cleaning agent is perchloroethylene (PERC), a chemical that experts consider likely to cause cancer, as well as brain and nervous system damage.

Kamel Almani, 33, knew little of these dangers when he began suffering from sinus irritation while working as regional sales director at Eon Aligner, a medical equipment startup he co-founded.

The problem would disappear when he went on vacation, so he assumed it was stress related.

However, when Mazen Darwish, a chemical engineer, revealed he wanted to start an eco-laundry and warned about toxic chemicals used in conventional dry cleaning, Almani had an epiphany.

“He began to tell me how PERC affects the respiratory system, and I suddenly realized that it was the suits I wore for work — and which I would get dry cleaned — that were the cause of my sinus problems,” said Almani, co-founder of Amman-based WashyWash.

“That was the eureka moment. We immediately wanted to launch the business.”

WashyWash began operations in early 2018 with five staff, including the three co-founders: Almani, Darwish and Kayed Qunibi. The business now has 19 employees and became cash flow-positive in July this year.

“We’re very happy to achieve that in under two years,” Almani said.

The service uses EcoClean products that are certified as toxin-free, are biodegradable and cause no air, water or soil pollution.

Customers place orders through an app built in-house by the company’s technology team.

WashyWash collects customers’ dirty clothes, and cleans, irons and returns them. Services range from the standard wash-and-fold to specialized dry cleaning for garments and cleaning of carpets, curtains, duvets and leather goods.

“For wet cleaning, we use environmentally friendly detergents that are biodegradable, so the wastewater doesn’t contain any toxic chemicals,” Almani said.

For dry cleaning, WashyWash uses a modified hydrocarbon manufactured by Germany’s Seitz, whose product is non-carcinogenic and environmentally neutral.

A specialized company collects the waste and disposes of it safely.

The company has big ambitions, planning to expand its domestic operations and go international. Its Amman site can process about 1,000 items daily, but WashyWash will relocate to larger premises in mid-2020, which should treble its capacity.

“We’ve built a front-end app, a back-end system and a driver app along with a full facility management system. We plan to franchise that and have received interest from many countries,” Almani said.

“People visiting Amman used our service, loved it, and wanted an opportunity to launch in their countries.”

WashyWash has received financial backing from angel investors and is targeting major European cities initially.

“An eco-friendly, on-demand dry-cleaning app isn’t available worldwide, so good markets might be London, Paris or Frankfurt,” Almani said.

 

• The Middle East Exchange is one of the Mohammed bin Rashid Al-Maktoum Global Initiatives that was launched to reflect the vision of the UAE prime minister and ruler of Dubai in the field of humanitarian
and global development, to explore the possibility of changing the status of the Arab region. The initiative offers the press a series of articles on issues affecting Arab societies.