Addressing the Loan Shark Issue
Despite having a well regulated loan market place and the number of financial institutions, it is sad to see the number of people who resort to using a loan shark but this is not just a South African problem. Many other countries struggle to deal with the shark side of the financial services industry. Even in the developed world, illegal shark lenders still operate and make the lives of their victims miserable.
What is a Loan Shark?
Many South Africans confuse loan sharks with microfinance companies as they both offer small loans over short terms. If you look more closely you will see that they are completely different.
Firstly, loan sharks are not regulated because they do not register themselves as financial institutions. This means they are not authorised in law to lend you money. This also means that they will use other illegal business practices if they need to. Any person lending money without a permit is a loan shark.
Because they are unregistered and not licensed it is impossible for the authorities to keep an eye on their business practices and the ways they operate. This means they are free to exploit you in a variety of ways that often include:
- Making clients pay exorbitant interest rates; often as high as 60 percent a month on very short term loans. Additional fees can often be added completely at the whim of the lender.
- Holding legal documents such as national ID as a security on loans
- Threatening violence in order to force payment
When a borrower has no loan agreement, it hard for the authorities to deal with loan sharks. Even when they receive complaints from a borrower. This is why loan sharks will refuse to supply paperwork to support the loan agreement. On the rare chance that they provide an agreement they will almost certainly keep it themselves.
Other Places to Get Loans
Once you know how risky it is to deal with a loan shark, what do you do? What alternatives are there, especially if you can’t get credit from the mainstream banks and loan providers. Apart from family and friends, you could consider taking a loan from a microfinance provider. Unlike loan sharks they will loan to you but at reasonable rates and without the red tape that banks in South Africa are known for. There are a number of types of microfinance companies to deal with including:
- Micro lenders – only lending to low income earners who often have debt problems or are first time borrowers without credit histories
- Gateway Home Loans – earners on middle income who have poor credit
- Savings and Credit Cooperatives – found in many workplaces, run by the workers who contribute savings regularly to be loaned out as needed
- Village Financial Service Cooperative – acting as go between between villagers and commercial lending banks
- The Stokvels – informal groups of people who pools funds to be made available to those in need
- Small Enterprise Foundations – loan to the poor to fund money making activities
- Find Find – funded by USAID and giving access to start up funds if you have a new business idea.