analysisBy Saliem Fakir
At first glance the connection between Marikana and African Bank Investments Limited (Abil) may seem tenuous. But there is a connection. "Moneylending" is the unholy connection between Marikana and the position that Abil finds itself in today, revealing the underbelly of a troublesome industry that has become a systemic problem for South Africa.
Even the ratings agencies believe so. They have not just downgraded Capitec, a bank similar to Abil with a huge unsecured lending portfolio, but also the "untouchable" big banks. This despite protests from the South African Reserve Bank (SARB).
The moneylending industry should not only be the subject of systematic review, but also needs to be fundamentally transformed to make way for new forms of banking, which cater to the needs of the poor instead of being an industry that feeds off extortion.
In the case of Marikana, attention should not only be focused on the massacre, but on some of the causal factors that led to the wage strikes. High debt led to higher wage demands, as wages simply did not keep up with the cost of living.
The whole of the platinum belt has become a boomtown for moneylenders. There is not one, but hundreds of moneylenders ranging from licensed to unlicensed operators. So lucrative has moneylending become that even funeral insurance companies and retailers want to cash in on the unsecured credit market.
Mining often sits side-by-side with the growth of an aggressive and relentless industry that is given a legal leg up by our system of garnishee orders. It is not unheard of for mineworkers to have two or three garnishee orders against their salaries, which results in a situation where their "take-home pay" is unable to put food on the table or take care of other basic necessities.
Moneylenders prey on economic desperation and poorly enforced rules where they carry little liability for their irresponsible lending. Many unsecured loans are provided to high-risk borrowers - low to middle income consumers - at close to the interest cap of 32.1%. It is reported that loan sharks charge even higher rates illegally.
In addition to the loan, a borrower has to pay for initiation fees, credit life insurance and other service costs. About 70% of the revenue that moneylenders earn comes from interest charges. The rest comes from other fees and service charges making unsecured loans one of the most expensive forms of borrowing in the market.
This form of financing, which can also be described as predatory lending, continues to support the practices of moneylenders who may be more emboldened now that the Reserve Bank is bailing out Abil.
The SARB is being forced to come to Abil's rescue because our government is one of its larger shareholders through the Government Employment Pension Fund (GEPF). This is what we know so far, but other forms of investment, direct and indirect, may show up higher levels of exposure.
This in itself raises uncomfortable ethical questions about whether a state pension fund should be sullying its hands in the usury business when the general ethos of government policy ought to be directed towards reducing inequality.
The majority of borrowers can ill-afford the burden, but the problem of borrowing is widespread. South Africa's debt to income ratio now sits at around 80% compared to less than 40% in the 1980s. This is only matched by South Africa's poor savings rate; now well below its peers in other emerging economies.
Abil's troubles have only surfaced publicly of late, but they have been known for at least two years. Just before the SARB rescue package, Abil was said to need around R8.5 billion in extra cash injections to meet its obligations to investors and bond holders.
A 2012 study done by the National Credit Regulator (NCR), which overseas this sector, shows ironically that following the 2008 financial crisis when the issuance of mortgage loans to households was tightened in secured lending practices, households and individuals simply switched to the unregulated loan-shark market to meet their debt needs. The NCR study showed that while the secured loan market went down, the market for unsecured loans grew a whopping 49%.
The two banks that have been successful in the mass and middle loan market were Abil and Capitec. At present, there are 21.7 million credit active consumers compared to 19.3 million in 2012. Each year the level of unsecured debt users grows.
The numbers of consumers who have impaired records (accounts that are not in good order) are roughly nine million account holders. Of these credit active consumers, Abil has 2.4 million spread over its R60 billion loan-book.
Abil's problems may have to do with the fact that it had a majority stake in the furniture business, Ellerines, which is presently under business rescue. Ellerines in turn switched from being a pure furniture business to selling credit to its clients. Ellerines is only one example of how the non-banking sector has expanded its profitability through involvement in unsecured lending. There may well be more Abils and Ellerines that we do not know of yet.
While the National Credit Act (NCA) and the NCR are meant to protect consumers from unscrupulous lenders, there is recognition that much more needs to be done to reverse the current trends of unhealthy growth in unsecured loans. The irony is that the passing of the NCA in 2006 was meant to ensure a more stable and regulated environment, but it has not met its promise.
New amendments being proposed to the NCA should fix some of the problems of compliance, lending practices and the terms under which loans are given, but they do beg a fundamental question about the need to review banking and savings systems for low income earners.
In this regard, it is not only important to tightly regulate the sector, it is also important to introduce more affordable banking that is tailored to the needs of the poor and not driven by exuberant commercial objectives.
One of the important first steps that need to be taken is to refocus the purpose of lending from pure consumption to wealth creation orientated goals. Alternative lending models need to be considered to ensure that there are more ethical financial schemes and products on offer from the private sector.
Moreover, the level of debt burden will continue to stay high if there are no improvements to income levels through wage increases. This must take place alongside changes to the regulation of the unsecured lending market.
Brazil's success in freeing many of its poorest citizens from deep poverty came about because of two important interrelated interventions. Firstly, the Brazilian government insisted on increasing the minimum wage and secondly, it made credit available to the poor cheaply.
In the long-term, South Africans, especially the emerging middle class, will have to learn to temper their lifestyle choices and consumption habits if they are to recover from bad debt where economic growth prospects look constrained for now.
But in the case of the poor, their wage share simply has to be improved in order to accommodate basic daily expenses. One of the biggest challenges our country faces is how to deal with household debt in the context of high levels of dependency on individual household earners. It is a widely acknowledged fact that poor black South Africans, our lowest earners, are often the ones supporting extended families due to high levels of unemployment in their communities.
The low-wage crisis is not just endemic to South Africa, even in America, President Barack Obama, despite facing much resistance from defenders of the status quo, is calling for an increase in the minimum wage.
The credit health of South Africans cannot be taken lightly. They influence the development path and economic progress of all South Africans. High debt is not only bad for the economy but the entire social fabric. This together with a low wage climate is a major source of discontent and will lead to more friction in the economy and in our society.
Fakir is an independent writer based in Cape Town.
Read more articles by Saliem Fakir.