Informal moneylenders in the Limpopo, Gauteng and Eastern Cape provinces of South Africa

Abstract

The article provides a critical analysis of the informal (unregistered) money-lending business and how it has served as a survival strategy for black South Africans. Using data obtained from 657 informal (unregistered) micro-moneylenders in three South African provinces, namely the Eastern Cape, Gauteng and Limpopo, an analysis is undertaken to highlight how the business is organised, conducted and marketed, and how income generated from it. Provincial spatial variations and similarities relating to this economic activity are noted. Finally, the article aims at highlighting of the informal microlenders' responses to affiliation to the Micro Lenders Association and registration with the Micro Finance Regulatory Council.

1. Introduction

Microfinance services across the globe, and more particularly in Third World countries, has experienced explosive growth since the 1980s, as the inhabitants and the financial institutions of developing countries have discovered the potential of microfinance to alleviate poverty among the marginalised population groups, especially the non-whites and females in rural areas, by supporting microenterprise growth (Timberg & Aiyar, 1984; Chipeta & Mkandawire, 1992; Tshaka, 2002). By contrast, in South Africa formal microfinance services stagnated during the apartheid era (between the 1950s and early 1990s) because of the unique history of the country and particularly its financial services that shaped an unaccepted evolution of microfinance services.

It was only in the early 1990s that formal microfinance services emerged in the country. However, with the attainment of a non-racial South Africa in 1994, different strategies were worked out to address the disparities in the provision of financial services. As a consequence of formal microfinance restructuring, the Micro Finance Regulatory Council (MFRC) was established to regulate microfinance in the country. This move led to the booming of the formal microfinance sector in the late 1990s and the beginning of the 21st century (Meagher & Wilkinson, 2002). Since 1994, microfinance services have generated much scholarly interest (Du Plessis, 1997). However, despite these enormous strides in microfinance studies, few evaluations of the unregistered or informal microlending activities of mashonisas (moneylenders, or even ‘loan sharks’) or skoppers (meaning ‘kickers’) have been carried out to date. This is so, even though the microlending business – whether formal or informal – is controversial in South Africa (Eastern Cape Herald, 2000; Sunday Times, 2000; Ilizwi, 2002, 2003).

At present, studies on the unregistered microlenders in South Africa are limited to small, localised samples (Roth, 1999; Rudi, 2000). The results of these two studies cannot be used as a basis for generalisation for the country. Therefore, the present research is regarded as the first comprehensive study in the country on informal (unregistered) moneylenders.

A lack of research on informal moneylenders is surprising, given that the business is widespread among the ‘marginalised blacks’. More importantly, the microlending industry is distorted by the fact that most borrowers fall into the category of the poorest in their communities. Equally significant is the fact that the relaxation of the tight restrictions on the access of individuals to microfinance through both formal and informal services since 1994 has exacerbated the vulnerability of low-income individuals to moneylenders. Indeed, the issue of moneylending has been under scrutiny by the government and the consumer bodies for some time (Damane, 2001).

The key issues that have been raised by the government and the consumer bodies regarding formal and informal microlending are, first, the need to regularise the business that has acquired a negative image due to unscrupulous moneylenders who are charging exorbitant interest rates. Second, there is a need to find solutions for the borrowers who are experiencing a ‘permanent debt trap situation’. The situation is further worsened because of unwillingness on the part of informal microlenders to disclose the needed information. This concurs with Roth's (1999) findings that informal moneylenders do not readily give information.

It is against these issues that the microlending business has generated much scholarly interest in recent years, with Sutcliffe (2001) even showing the spatial variations of microlenders across the South African landscape. The present article investigates the activities of the unregistered microlenders in South Africa, focusing on how the business is organised, conducted and marketed to clients in the selected provinces. Second, it examines the extent to which the business serves as a survival strategy amongst previously marginalised South Africans (mostly blacks). It also explores the informal microlenders' (IMLs) perception of affiliating to the Micro Lenders Association (MLA) and the MFRC.

In pursuance of the above goal, a brief overview is provided of the development of the financial lending market in the country, followed by the institutional organisation of microfinance in South Africa and the legislative framework of the microlending business. The potential of exploring creative literature on informal finance as a resource material for understanding the phenomenon in Third World countries is given consideration. This serves as a basis for the better understanding of mashonisas and skoppers in the country. Thereafter, the responses of the unregistered microlenders to the questionnaire are discussed, together with in-depth unstructured interviews with the related structures and government officials, as well as information from the media and newspapers. Lastly, as mentioned, IMLs' perception of affiliating to the MLA and to the MFRC is considered.

2. The development of microlending in South Africa

The policies and practices of the South African government of the apartheid era were instrumental in creating a highly fragmented financial market. During apartheid, financial services could be examined from two different angles.

First, formal financial services were restricted. The relative isolation of the country during the apartheid regime resulted in the development of local financial investments that could only cater for the needs of well-established firms, corporations, organisations and a few privileged individuals. The criteria for access to financial services were based mainly on an individual's socio-economic status and on racial grounds. Hence, people in the upper income brackets and who had climbed the social ladder were the ones who could access financial credit. Moreover, the most favoured racial group with regard to access to financial services was the white sector of the population. As a corollary, banks and other financial institutions did not provide financial loan services to low-end consumers and small businesses during the apartheid era. Their preferences were for major corporations and middle- and high-income category white citizens. Indeed, the most popular financial services that were offered to the bulk of the South African population were small savings accounts and, for the formally employed, direct salary credits to deposit accounts. Under such prevailing conditions employers often found themselves operating as moneylenders by providing loans or advances for their employees. In many instances, those currently referred to as ‘previously disadvantaged South Africans’ were excluded from these types of service.

Second, a strong informal system of credit, ranging from unregistered moneylenders (mashonisas), to stokvels (Amafele), to the rotating savings credit associations (ROSCAs) (Umgalelo or the Gooi-Gooi), existed in parallel to the formal banking system. Contrary to informal financial services in other Third World countries, in South Africa this type of service was not formalised to finance either the start-up small-scale entrepreneurs, or the expansion of small-scale and medium enterprise activities. Instead, it was utilised for daily consumption demands by the African population. To unregistered microlenders, the activity was geared to generate income.

However, a high percentage of the borrowers in the African population often found it difficult to control themselves in this form of moneylending service. In many instances, they found themselves trapped in debt due to a lack of discipline in honouring repayments. Indeed, the amount of debt among Africans increased drastically when financial services' exclusions were relaxed during the post-apartheid era. On the one hand, the overborrowing of money by some clients has hampered numerous South Africans but, on the other hand (although at a very minimum scale), the availability of credit to other clients has served as a platform for the development of small microenterprises. In many instances, they have gone from fragile informal traders to established businesses, and over the long term this group will improve its standard of living.

3. The background to microlending in South Africa

3.1 Organisational framework of the microlending business

Within the framework of the South African economic sector, the microfinance system with its related variables gives an exposition of a peculiar pattern, which displays distortions with regard to how the microfinance sector services operate.

Figure 1 reveals an important issue, namely that the microlending business has created an odd two-tiered market. The first tier comprises firms that are registered and regulated by the MFRC and charge free prices. Moreover, this section of microlenders incurs the cost of registration and the limits imposed by regulations, but continues to suffer competition from the unregistered. The second tier encompasses individuals or groups of people who are not registered and are unregulated, subject only to ‘ineffective’ oversight by the Department of Trade and Industry (DTI) regarding compliance with price regulations, despite the fact that they represent borrowing of R2 million.

Figure 1. Institutional framework of the microlending business in South Africa

3.2 South African legislative framework on the microlending business

The Usury Act of 1968, later ‘formalised’ in 1992, still remains one of the pieces of legislation in the country that directly controls the lending rates. The Act protects individuals from moneylenders who charge excessive rates of interest. This is achieved by placing a ceiling on the rates that may be charged by lenders of personal loans to natural persons. Since 1992, the Usury Act has exempted loans of up to R6 000, excluding overdraft banking accounts and credit card schemes. Following its implementation, this exemption was under threat of repeal, given the unregulated nature of the business that led to negative market perceptions. The formation of the MFRC in 1999 was linked to the relaxation of the Usury Act exemption limit to a loan of up to R10 000. It also stipulated that a loan maturity period should not exceed 36 months. However, the maximum loan that one can receive from an informal moneylender is R50 000 and the interest rate is 21 per cent per annum. The maturity time is flexible (cf. www.paralegaladvice.org.za).

Indeed, since the Act's exemption was introduced, the four major South African banks, except Standard Bank, have showed little or no interest in entering this section of the market. Standard Bank also subsequently withdrew from its decision to provide microfinance. The main reasons advanced for this decision were the high operating costs; the unwillingness to charge full costs and, consequently, high interest rates because of the concern for the image that could be created of a large bank charging ‘excessive’ rates from its poor clients; and the low loan level at which the Usury Act becomes applicable (Du Plessis, 1997).

However, the MFRC submitted proposals to the DTI relating to the microlending industry, requesting the government to expand the exemptions to allow a broader range of services. The response was that the government, through Khula Enterprise, opened avenues for banks to serve microentrepreneurs. Absa Bank is playing a major role in this aspect. However, unregistered moneylenders still do not have to comply with all the conditions discussed above.

4. Theoretical entry points to study of the IML business

Defining informal economic activity is not easy due to the complexity of the activities that are encompassed by the informal sector. For social scientists, it is a process that is heavily influenced both by the goals and by the expected outcomes of a particular study. Within the political arena, informal economic activity is often linked with tax violation, while different scholars have interpreted informal economic activity in different ways. Castells & Pores (1989) view the informal economy as a process of income generation that is characterised by a central feature, namely that it is unregulated by the institution and the society in a legal and social environment in which similar activities are regulated. For example, there are both registered and unregistered microlenders. This implies that the former are legal while the latter are illegal.

In a similar vein, Seshamani (1990) proposes that the informal economic activity encompasses income-generating activities that are unrecorded in the formal accounts of the country's economy. Informal economic activity, however, can be categorised. For example, Kirsten (1991) offers the following classification: trading and hawking, service and service industry, production and construction and, lastly, immorality activities. Ncube & Sisulu (1991) have categorised the informal economic sector into production and services, credit and financial activities, and trading activities. This study falls into the category of credit and financial activities that are illegal. Indeed, one aspect of credit and financial activities is the money-lending business.

Outside the boundaries of South Africa, more particularly in the developing countries of Asia, Africa and Latin America, a number of studies on illegal informal credit and financial activities have been conducted (Tshaka, 2002). They focus on such issues as savings associations, ROSCAs and moneylenders. Scattered evidence on informal moneylenders was also identified in India (Timberg & Aiyar, 1984), Zambia (Mrak, 1989) and Latin America (Meagher & Wilkinson, 2002). Key aspects extracted from the research on informal moneylenders include the following:

1.	First, the increase of the moneylending business was an indicator of the state of the economy of the country.
2.	Second, the informal moneylenders provided financial assistance to the poorest in their respective countries. In many instances, females in rural areas of developing countries used the facility on a wider scale. Moreover, Mrak (1989) and Roth (1999) argued that the clientele of IMLs was mainly composed of people who were refused loans by formal financial institutions, probably because they did not have the required securities. For example, the security often needed by banks is proof of formal employment, which in many instances is reflected in a payslip. Equally important is that the moneylenders belong either to the middle- or the upper-income groups and, in many instances, especially in the urban areas, they have links with the banks.
3.	Third, there is not much paperwork during the transaction to obtain money, and security is based on trust and also knowing the client.
4.	Fourth, there is a high degree of secrecy surrounding the financial dealings with moneylenders, as formal records (excluding records in a notebook or diary) are rarely kept. It is therefore difficult for relatives or other members of the family to know the amount of the money one has or saves, and for taxes to be paid on interest income.
5.	Fifth, there are low or virtually no costs of administration (Chipeta & Mkandawire, 1992).
6.	Lastly, there are significant differences between urban and rural population groups in terms of the purposes of borrowing the money. For urbanites, money is borrowed exclusively for consumption purposes, while in the rural areas the funds can be used either for consumption or productive purposes, for example, to buy agricultural input (Timberg & Aiyar, 1984).

Nevertheless, there is a diversity of aspects in which the South African microloan market, especially in the period prior to 1994, differed from the microfinance market of other developing countries. Hence, scholars find it difficult to apply lessons from those countries to South Africa. For example, in most developing countries where microfinance services are growing rapidly, the emphasis is on customers who belong to the category of ‘have-nots’ and live below the poverty line. They use the facility to start a business in an attempt to generate income. In many instances, the customers are rural, female, relatively poorly educated and have no alternative sources of obtaining credit. However, the average microfinance borrowers in South Africa belong to the category of the ‘haves’. They are employees and are paid through banks, but have not been able to obtain a loan. With a few exceptions, the money is mainly used for consumption and not to generate an income (Roth, 1999; Rudi, 2000).

5. Research methodology

This research followed a two-pronged approach, both qualitative (a literature study) and quantitative (the analysis of the survey results). The research data for this study were gathered from four sources:

1.	Literature on the informal financial sector was reviewed, with an emphasis on both formal and informal moneylenders, nationally and internationally.
2.	A newspaper clipping file was established to monitor public debates on the issue of micro-moneylenders.
3.	Open-ended interviews were held with the officials of the DTI as well as the senior researcher for the MLA.
4.	Most of the data used in the study were drawn from the sample survey of informal moneylenders in the Eastern Cape, Gauteng and Limpopo in October–December 2001. The main source of information was the questionnaires that had mainly been completed by the fieldworkers during face-to-face interviews with 657 IMLs. Moreover, a few of the IMLs preferred to complete the questionnaire during their own time and these were then collected at a later stage. This latter method posed some problems because in some cases questions that were left unanswered.

Given the nature of the survey population (most of them did not want it to be known that they were involved in the business) and the geographical spread of the areas (Eastern Cape, Limpopo and Gauteng) to be included in the research, local fieldworkers who were familiar with the areas were engaged to assist in the interviews. They were accepted and known by the communities and, to a certain extent, knew some of the unregistered microlenders of their respective areas. For example, in the Eastern Cape only fieldworkers from the region participated in the research. Without this selection strategy it would be difficult, if not impossible, to come up with fruitful results. Quota sampling, which is a non-probability sampling method, was used in this study. However, it is only through random sampling that sampling errors can be measured, and using probability theory, one is able to establish the representative nature of the sample drawn (Wegner, 1993).

Pension payout points, periodic marketplaces, bus termini, government/semi-government departments, homes, factories, spaza shops and shebeens (sellers of liquor) were targeted. Data collection included urban and rural areas, in particular, in Limpopo and Eastern Cape. Nevertheless, the urban areas received the lion's share, as microlending is more pronounced in these areas. Out of the total sample of 657 informal lenders, two respondents who claimed (and were confirmed) to be members of the MFRC were removed from the study. An additional 55 also claimed to be registered with the MFRC, but no record could be found of their registration, hence they were included in the sample. All these respondents were in Gauteng. The data were captured and analysed using MS Excel.

6. Data analysis and interpretation of results

6.1 Informal microlenders' information

6.1.1 Development and organisation of the business

Responses from the 657 unregistered microlenders revealed that, in the selected provinces, evidence of people who were engaged in informal microfinance emerged as early as the 1980s, and progressed gradually in Gauteng and Limpopo until 1994. The South African apartheid laws, which imposed tight restrictions on informal trading, might have played a major role in shaping this pattern in Gauteng and Northern Province. This concurs with Rogerson's (1992:162) finding on informal activities in South Africa: ‘The development in the apartheid South African city was marked by successful policies directed at suppressing informal activities whenever and wherever they surfaced.’

In contrast, in the Eastern Cape, there was a significant spread of informal financing prior to 1994, as 42 out of the 200 moneylenders in the province were already engaged in the business by then. However, tight restrictions on informal trading were relaxed in the Eastern Cape in the 1980s, and more particularly in the homelands. In support of informal sector activities in the former Transkei, the former Minister of Commerce and Tourism told the Transkei Parliament on 27 June 1983 that licensing regulations would have to be adjusted to cater for the informal sector. He added: ‘We must not nip them in the bud as our slogan of self-help, self-reliance and self-development caters for them specifically’ (Daily Despatch, 1983:2). This, in turn, contributed to the moderate spread of unregistered microlenders in the region prior to 1994.

In all three provinces, the geographical spread of informal moneylenders ‘boomed’ in the mid-1990s. The results of the survey revealed that the typical informal moneylender has been in the business for six years. It therefore would be reasonable to suggest that the business gained momentum in 1996 and was affected by the new South African government's policy, more particularly the DTI, which encouraged the informal sector and small microenterprises.

The results also revealed that the business is not formally organised, as 587 (89 per cent) of the unregistered microlenders surveyed indicated. However, 46 (7,3 per cent) indicated that they were operating closed corporations, while only eight (1,2 per cent) claimed proprietary status. The remaining 16 (2,5 per cent) did not respond to the question. With regard to how the microfinance business is organised there are variations among the three provinces (Figure 2). The organisation of the business in the Eastern Cape shows a homogeneous pattern whereas in the other provinces it reflects diversity.

Figure 2. Variations in the organisation of unregistered microlenders in Limpopo, Eastern Cape and Gauteng, 2001

6.1.2 Place of business

In all three provinces, the IMLs generally did not conduct their lending from a fixed place of business outside the home. A total of 395 (72,2 per cent) out of the 657 respondents indicated that their home was also their place of business. This suggests that the microlending business is characterised by shades of secrecy, as it would be difficult for the DTI to locate the informal moneylenders. Moreover, unlike other informal activities such as shebeens, spaza shops and phone shops, mashonisas and skoppers do not advertise to attract customers. Only 17 per cent claimed to conduct business outside of their home and, quite surprisingly, they stated that they lent money to their clients at their places of work. The fact that a substantial number of moneylenders can operate at their places of work reflects a decline in work ethics, with a possibility of low productivity. Some 5,8 per cent of the respondents did not respond to the question.

6.1.3 Investment capital

Almost 55 per cent of the respondents claimed to have used their personal savings as a source of capital to start the business. In addition, 21,2 per cent indicated that they used their retrenchment packages to start the moneylending business. A substantial number of the respondents had such retrenchment packages, due to the post-1994 economic restructuring and consequent privatisation of industries, as well as ‘right-sizing’ of government and semi-government employees. The loss of such activities, however, tended to be matched by a shift to a more service-driven economy, which, in turn, gave rise to ‘shadow business’.

Some 19,6 per cent of the respondents claimed that they initially borrowed from family and friends (without interest). However, borrowing interest-free money from a relative or friend can only be explained by the concept of ‘Ubuntu’ in an African culture. Moreover, 14,7 per cent of the respondents indicated that they obtained a loan to start the business, and 7,3 per cent did not respond to the question. Some 17,6 per cent of unregistered microlenders indicated that they used multiple sources of investment capital.

The responses of the IMLs reflected that the average initial investment in the informal moneylending business was R13 235, while the median was R4 000. However, the average initial investment reflects significant spatial variations, with Gauteng IMLs injecting a great deal of capital (R36 498) to start the business, whereas those in Limpopo and the Eastern Cape injected R7 957 and R6 839 respectively. This pattern is associated with the uneven development of South Africa. Fair (1982:63) describes the situation in the country as follows: ‘Within South Africa one finds pockets of developed regions within vast areas of poverty.’ Gauteng falls into the former category, while the remaining provinces belong to the latter category.

6.1.4 Income generated by micro-moneylenders from the microlending business

Over half (55,4 per cent) of the responding IMLs claimed that moneylending was not their only source of income. Most unregistered microlenders are engaged in the business to supplement their low incomes. Some 29,4 per cent of the respondents indicated that this was their only source of income, whereas 15,2 per cent did not respond to the question. However, spatial variations occur in terms of moneylending being IMLs only source of income. For example, in Gauteng, out of the 122 IMLs who responded to the question, 61 claimed that it was their only source of income. This group of IMLs comprises those who had injected a lot of money in the business. In the Eastern Cape and Limpopo, the informal moneylending business is used predominantly to obtain an additional income.

6.1.5 Marketing the business

The study indicated that the marketing strategies for microlending businesses were diverse. Referrals from existing clients (74 per cent) were the most widely used strategy, while paid marketing agents were least used (8,9 per cent). Moreover, visits to places of work (28,6 per cent) and talking to people in gatherings (30 per cent) were moderately used. Given that referrals are a popular strategy in marketing, this is an indication that the business is based on loyalty or trust. Hence, the term ihlahla emerged among the Xhosa-speaking people, which means a branch and the introducer is regarded as a tree. The introducers are able to testify to the creditworthiness of the new client, their association with him or her, as well as his or her honesty. In the event that such a person fails to honour his or her payments within the agreed time span, the introducers take the responsibility either by reminding the new debtor or paying the moneylender. They pay because they are the guarantors and therefore have an obligation to settle the amount owed by the debtor whom they have introduced. Because the introducer bears the consequences of the borrower's dishonesty, it serves to eliminate defaulters.

The discussion now shifts towards analysing the information about the business in terms of income generated, loan amounts, loan maturity, collection procedures, competition in the business, and bad debts.

6.2 Business information

An important yardstick for measuring whether the informal moneylending business generates income for the IMLs in South Africa was achieved through a critical analysis of the loan transactions made by IMLs. These include: the total number of annual loans, loan amounts, maturity dates, interest charged, collection procedures, competition, and debts.

6.2.1 Loan statistics

With regard to the loan statistics that were based on the information gathered from October to November 2001, evidence from Table 1 suggests that nearly half (49,2 per cent) of the respondents had between one and 100 loan transactions per year. Only 93 (14,3 per cent) IMLs made between 101 and 250 transactions per year. Some 72 (10,9 per cent) IMLs made between 251 and 500 transactions per year, and 61 (9,3 per cent) between 501 to 1 000 transactions. Indeed, a reasonable number of IMLs (77) made more than 1 000 loans per annum. This pattern is common in Gauteng, where most moneylenders are engaged in the business on a full-time basis.

Table 1. Number of loans per annum made by IMLs in Gauteng, Limpopo and the Eastern Cape, 2001

Number of loans	Number of IMLs	Percentage
1 to 100	323	49,2
101 to 250	93	14,2
250 to 500	72	10,9
500 to 1 000	61	9,3
>1 000	77	11,7

Significantly, with regard to the annual performance of the loans, spatial variations were evident among the three selected provinces (Figure 3).

Figure 3. Spatial variation in annual loans in the Eastern Cape, Gauteng and the Northern Province, 2001

Those in the Eastern Cape generally made between 1 and 250 transactions, while their counterparts in Gauteng made loans in excess of 500 cases per annum. The IMLs in Limpopo occupy the intermediate position in terms of frequency of transactions. Arguably, the microfinance business is booming in Gauteng, while it is moderate in Limpopo and occupies the third position in the Eastern Cape. This pattern confirms that most IMLs in Gauteng are in the business full time and have injected a large amount of capital into it. For example, the highest amount that was used to start a microcredit business by a Gauteng IML was R500 000, whereas in the Eastern Cape the highest capital injection was R60 000 and in Limpopo, R180 000.

The higher level of economic development and greater employment opportunities in Gauteng seem to have influenced the greater magnitude of the informal moneylending business there. The IML business in the Eastern Cape has not developed to the same magnitude and extent as in Gauteng, given the high rate of unemployment in this province. In the 1990s, its employment rate ranked eighth out of South Africa's nine provinces (SSA, 1996).

6.2.2 Loan maturity and the range of the amounts

In general, the maturity of loans was weighted towards the short term, as reflected in Table 2. However, few customers (106) could afford to make their loan repayments within a week, whereas most were able to make their repayment within a month. There were also a substantial number of clients (307) who could drag repayments of their loans to over three months despite the high interest rates that the IMLs were charging. Arguably, the latter category of clients usually find themselves being ‘hooked’ or becoming victims of the system, because in many instances they find it difficult, if not impossible, to repay their loans.

Table 2. Loan maturity and loan amounts in Gauteng, Limpopo and the Eastern Cape, 2001

Loan maturity	Count	Mode	Loan amount	Count	Mode
1 week	106	10%	<R100	222	10%
2 weeks to one month	437	100%	R100–R250	433	20%
1–3 months	409	20%	R250–R500	448	30%
>3 months	307	30%	>R500	384	30%

Note: Each database record should equal 100 per cent across the relevant fields. However, as there were different numbers for each field, the average for each field was based on different counts and therefore the total averages did not yield 100 per cent as expected. Thus, the tables using this method display the count as the number of responses in the field and the mode as the most frequently occurring value.

In all provinces, repayments were made mainly within two weeks and three months, and most of the loans were below R500. Nevertheless, a fair proportion of Gauteng borrowers can drag the repayment of their loans to over three months. The average monthly interest was 30 per cent, but when annualised, the results of the study set it at 202,6 per cent. The average annual interest is therefore excessively high. Indeed, the interest rates charged by some IMLs (more particularly, the 50 per cent interest rate per month) are regarded by the public as usurious; hence, the term amacala (meaning half) emerged among the Xhosa-speaking people. It reflects the borrowers' discontent at the exorbitant interest charged.

To make matters worse, if borrowers cannot afford to pay their debt, they have to service the interest that month and failing that, they will find it very difficult to manage their loan or will even be subjected to being humiliated (e.g. beaten or shouted at, or have their identity document repossessed) by the skoppers, as reflected by Mrs V's case in Motherwell, Port Elizabeth (Ilizwi, 2002):

According to Mrs ‘V’ (a 71-year-old money borrower), she borrowed an amount of R400 in April 2002 from Mr ‘G’ (a 54-year-old moneylender) and they agreed that Mrs V would repay the amount in instalments of R200 per month. Mrs V started to pay her monthly instalments in May 2002 and carried on until September 2002, when she realised that she had paid enough. By that time, she had paid R1 000. Mrs V allegedly refused to pay the instalment and apparently lied to the skopper (Mr G) that she did not get her pension that day. To dodge the skopper, Mrs V decided to change her pension pay point the following month, but Mr G tracked her and found the old lady at another pension pay point at NU2 Motherwell in Port Elizabeth. He caught her red-handed. He then grabbed her and took her ID, her electricity card and all her pension money for that month.

6.2.3 Collection procedures

As reflected in the breakdown below, the predominant collection procedure was to visit the borrower at his or her residence (53,4 per cent). The second most common method (47,2 per cent) used was to visit the borrower at his or her place of work. This reflects a situation in which a large number of transactions are being done at places of business, such as schools, government offices and industrial centres. Astonishingly, a fair percentage of the moneylenders (31,8 per cent) keep the borrowers' ATM cards despite the fact that this practice is illegal. The use of a collection agency (10,2 per cent) and keeping of collateral (15,4 per cent) seemed not to be popular collection procedures.

6.2.4 Competition among IMLs

In line with other informal businesses, there is freedom of entry into the informal lending business. This often leads to congestion of traders competing for the same clients. In this study, the majority of IMLs indicated that they were aware of their competitors. Thus, 33 per cent of the IMLs indicated that they had between one and five competitors; 27,1 per cent reported having between six and ten competitors; 20,5 per cent had 11–25 competitors, while 17,5 per cent had more than 25 competitors. These percentages indicate that the microcredit business, on a localised basis, is very competitive. However, it is important to note that the data on competition may be flawed due to the incidence of double counting, as some of the respondents may have been double counting each other. Double counting was most likely to occur in the urban areas, and not so much in rural areas, where people know each other.

6.2.5 Bad debts incurred by IMLs

Although no standard definition of the term ‘bad debt’ was provided in the questionnaire, the majority of the IMLs (60,3 per cent) admitted that there were borrowers who did not honour their loan repayment. Debts are usually kept to a minimum by moneylenders who market their businesses using referrals. The guarantor usually takes the responsibility of making sure that the loan is paid. On the other hand, bad debts are often incurred if the moneylenders market the business through paid agents and keep the ATM card of the borrower as security. In the latter case, borrowers may even embark on unscrupulous actions to avoid repayment of their loans, e.g. cancelling the old ATM cards and getting new ones. A summary of the overall position with regard to bad debt in the three provinces is given below. There were no significant provincial variations in this regard.

1.	Average number of clients with bad debts = 10 clients
2.	Average bad debt (amount of money) = R5 619
3.	Average bad debt (median) = R2 500

7. Perception of imls of the mla and the MFRC

IMLs' responses about their acquaintance with the MLA indicated that 76 per cent of them were not aware of the association's existence. However, after the interviewers had briefed them using a well-designed brochure of the MLA, their reactions to the prospective benefits derived from membership were recorded. The respondents stated that they would join the association:

1.	If membership was affordable, with the mode given as R50 per month (33,3 per cent of IMLs)
2.	If it could provide them with some form of formal education that could assist them in becoming profitable microlenders (42 per cent)
3.	If it could provide them with access to finance (44,1 per cent)
4.	If it could provide accounting services (35,6 per cent) and also help them to source new clients(41,7 per cent)

Taking into consideration the responses of the IMLs on the issue of affiliating to the MLA and the benefits they would derive from membership, it is clear that a reasonably large percentage showed an interest in joining the association. However, in spite of all the lucrative benefits that the MLA offered, the majority of IMLs were happy to work independently.

With regard to the MFRC (Figure 4), 78,8 per cent of the interviewed IMLs confirmed that they did not know of the council. This implies that they were all operating outside the ambit of government legislation. However, spatial provincial variations were noticeable regarding their knowledge of the MFRC. Most IMLs in the Eastern Cape (93 per cent) did not know the MFRC while 54 per cent of the Gauteng IMLs did. The unregistered microlenders in Limpopo occupied the intermediate position. Finally, it is important to note that most IMLs did not want to provide their contact details for fear that they may become liable to taxation.

Figure 4. Informal moneylenders' awareness of the MFRC in the various provinces, 2001

8. Synthesis, conclusions and way forward

8.1 Synthesis

Within the context of informal finance, the informal or unregistered microlending sector is an important section of the ‘unbanked’ part of the South African population. It provides a valuable financial service to a section of the population that is unable to utilise the formal banking system. Banks often refer to this group as ‘high-risk clientele’. Before 1994, the informal microlending business in South Africa showed limited growth due to the tight restrictions the apartheid government imposed on the growth of the informal sector. It was only after 1994, more particularly in 1996, that the informal moneylending business began to mushroom across South Africa. Ironically, the expansion of informal microlending is essentially a reflection of inadequate incomes in an economic environment of escalating poverty levels and workers' retrenchments. To the majority of the South African informal moneylenders, the business is primarily a struggle for sheer survival rather than growth in the informal economy.

In most instances, the informal microlending business is conducted from home or at places of work. To raise capital, unregistered microlenders have used a diversity of sources, including personal savings, retrenchment packages, borrowing from friends or relatives (with no interest charged), loans from the bank (with interest charged), while some have used multiple resources. The initial average investment varies from province to province, with Gauteng taking the lead, followed by Limpopo and the Eastern Cape. In order to market the business, lenders use various strategies: referrals from existing clients; talking to people in public; visiting people at their places of work; and using paid agents.

Although unregistered microlenders incur some debt in their business, the majority are not running at a loss. This is partly due to the high interest rates they charge; the short–term nature of their loans (normally less than three months); and the fact that the cornerstone of lending is based on trust. A diversity of collection procedures is used in the business: visiting the clients at home or at work; keeping the ATM card or collateral; and using a collection agency. The study has also revealed that the business is quite competitive. Moreover, IMLs are positive about the MLA but are happy to work independently despite the lucrative benefits that the association has to offer to its membership.

8.2 Important lessons derived from the study

In conclusion, this study has brought to light new aspects in post-apartheid economic geography, including the following:

1.	The demise of apartheid governance has resulted in the economic restructuring of the country and has had a remarkable impact on financial services. The economic innovations have led to cost-cutting strategies in production in the interest of efficiency gains. In many instances, this has included subcontracting of services and thus an erosion phase to the employees.
2.	The implementation of cost–effective public administration has resulted in the ‘downsizing’ or ‘rightsizing’ of public sector employment, and this has led to massive retrenchment of workers. Most retrenched workers often move into the shadow economy, including informal microlending business.
3.	In South Africa, unregistered microlending in many instances is a mere survival strategy.
4.	The accommodative attitude of the DTI towards informal sector activities and the fact that it could not keep pace in creating employment opportunities for its citizens have led to the ‘mushrooming’ of IMLs.
5.	The increasing global integration and competition have also influenced the growth of the informal sector. To increase global competitiveness, investors often shift production to countries that have low labour costs or they adjust their employment practices to more informal arrangements, and this has resulted in limited regular employment opportunities. Hence, many South Africans who wish to supplement their regular income have turned to the informal economy, of which microlending business is a subset.

It would, therefore, be reasonable to suggest that people or the government should view the microlending business from a global perspective and also be sensitive towards it, as it is an indication of the country's stage of economic development as well as the change in financial climate. When South Africa has passed through the economic transition stage, a different picture is expected to emerge regarding the informal sector. What South Africa needs to do now, is to channel microlending into productive ends, as is done in other developing countries. For example, it can be used to start small businesses. The initial steps that could make this move possible are to incorporate business into the broader framework of South Africa's financial planning.

8.3 Future research

One of the key issues that this research aimed at ‘unbundling’ was to estimate the number of IMLs per ten thousand of the population, and then to portray the results using a geographical information system. However, this was not possible due to the nature of the survey, as the sample was not random. Despite the shortfall, however, the study does put forward a strong argument for the informal microlending business in South Africa. The study suggests the need for further research on the role of the government in general, and that of the DTI in particular, in regularising and supporting the microlending business. It also pinpoints the need for future research on the issue of informal moneylending business in this country. For example, the second leg of the research could be directed towards education of the consumers in using microfinance services.