Beware of Loan Sharks
January 6, 2015
Considering the host of small loan companies and financial institutions in South Africa it is alarming the number of South Africans who resort to the services of loan sharks.
But South Africa is not alone in this regard.
Many other developing countries are wrestling with the menace of illegal lenders. Even in the developed world, loan sharks still have their victims.
What are Loan Sharks?
Many people in South Africa mistake loan sharks for microfinance companies as they both offer small loans but they are two completely different entities.
Loan sharks are not registered financial institutions and are not authorised by law to lend money. Like in most other countries, you must have a permit to be able to lend money in South Africa. Any person lending money without this permit qualifies as an illegal lender, which loan sharks are.
Being unregistered and unlicensed, the government is unable to keep tabs on the activities of loan sharks. They thus engage in exploitative practices such as:
- Forcing their clients to pay exorbitant interest rates; sometimes as high as 60% per month on very short term loans. Additional fees are charged arbitrarily.
- Confiscating legal documents such as national ID as a means of security on loans.
- Using violence or the threat of violence to extract payment.
With borrowers having no evidence of an agreement with the loan shark in the form of documents, it is usually difficult for the authorities to intervene in when the above abuses take place. This is why such illegal lenders insist on keeping the loan agreement, if it is drawn up at all.
Other Loan Sources
Now that we’ve established how risky dealing with loan sharks is, you may be asking what alternatives are there for credit for people who cannot satisfy the notoriously harsh conditions of commercial banks.
Besides borrowing from friends and family, you can consider taking a loan with a microfinance company.
Unlike loan sharks, they will lend you the sum you need at reasonable rates and without the red tape banks are known for. Here are the kinds of microfinance companies available to South Africans:
- Micro Lenders: These only lend to low income earners, especially those with debt problems and first time borrowers.
- Gateway Home Loans: Middle income earners who have a poor credit rating can get help here.
- Savings and Credit Cooperatives: Mostly found in workplaces when workmates contribute funds monthly and members can borrow money whenever they need it at very low interest rates.
- Village Financial Service Cooperative: These act as a go-between between villagers and commercial banks.
- The Stokvels: An informal group where people pool funds and any contributor with a need can borrow.
- Small Enterprise Foundations (SEF): Provides loans for the poor for income-generating activities.
- FinFind: Funded by USAID, it works more or less like SEF. If you have a great, well-defined business idea they can lend you up to R250,000 to get started. The plan is for every major South African city to have one.
All info was correct at time of publishing