Many people will think they already know the answer to that question, but recent research has suggested that loan sharks could play an important part in the financial lives of many South Africans.
For most of us, loan sharks, also known as ‘mashonisas’, conjure up images of burly men banging on doors and intimidate people into handing over money they do not have. However, recent research by Wonga South Africa has found that the reality of this type of lender does not always match the stereotype.
What did the study find?
The landmark study, which looked exclusively at the role of the mashonisa in South African society, found that in many cases, these unregulated lenders were valued members of the local community who saw it as a viable form of employment. It also revealed that mashonisas were far more widespread than originally thought, with an estimated 40,000 in operation across the informal communities of South Africa.
However, perhaps most surprising of all was the fact that many people do not borrow from mashonisas through desperation or an inability to access the formal credit market. Instead, many choose to use the services of the community mashonisa in preference to formal lenders, usually due to the convenience, ease of use and speed with which the money can be in their hands.
What type of service do mashonisas provide?
Most of South Africa’s informal and unregulated lenders offer loans of between R100 and R5,000 at typical interest rates of 30-50 percent, regardless of the loan amount. Although this is clearly very expensive, there are no admin fees or hidden charges attached to the loans, although an additional interest charge can be applied if payments are missed.
What that means is even people with low levels of financial literacy, which is a big problem in many South African communities, can understand exactly how much the loan will cost and when repayments need to be made. In some cases, loans from formal finance companies can lack that level of transparency.
Apart from the high rates of interest, there are other downsides to the service provided by mashonisas. Although they are not always the criminals they are assumed to be, they can use intimidating tactics and even shame borrowers who fail to make their payments on time. Yet despite that, in many communities, mashonisas occupy a recognised place in society.
Are mashonisas here to stay?
At the moment, the success of the mashonisa is the result of the inability of many formal lenders to provide simple and low-cost loans borrowers can access quickly. Many borrowers use the service of mashonisas to complement existing borrowing from formal sources, so they are clearly able to access the credit they need from other means.
However, when it comes to unexpected costs, unless the South African financial sector can design products that suit the needs of low-income communities, the mashonisas will continue to reign supreme.
Have you ever used the service provided by a ‘mashonisa’? If so, what was the experience like? Please share your thoughts in the comments below.