Since late 2021, the cost of credit in SA has surged significantly, with the prime lending rate having risen by 475 basis points (bps) since November 2021 to reach 11.75%. This represents a 200bps increase on the rate just before the Covid-19 crisis began.

Because of the stringent lending requirements, consumers find themselves borrowing from loan sharks, facing substantial risks — such as exorbitant interest rates exceeding 50%.

The policy rates of the SA Reserve Bank from 2013 to 2022 mirrored the economic challenges faced by the country. Initially, rates were raised to counter inflation and stabilise the rand. However, in 2020, amid the economic repercussions of Covid-19, rates were lowered to unprecedented levels to bolster economic growth. By 2022, with the economy showing signs of recovery and inflationary pressures reappearing, the central bank began to raise rates once again.

MicroFinance SA CEO Leonie van Pletzen said: “Typically, these loans are very short term, a month or less, and can range from as little as R50 to R5,000 or more ... because they are unregulated, the trustworthiness of a mashonisa is always a gamble, as they set their own fees and interest rates.”

MicroFinance reports that recent updates from 1,500 members in the micro-lending sector indicate a rise in rejection rates by regulated lenders. This leads to consumers seeking credit from unregulated, informal lenders that do not adhere to the National Credit Act.

Van Pletzen said: “Due to increased compliance requirements and a reduced appetite for risk among formal credit providers, loan decline rates in the formal lending industry have risen significantly.”

Van Pletzen suggested that the rise in consumers resorting to illegal lenders is because the fees charged by regulated credit providers have remained unchanged for almost 10 years.

“This stagnation has made it challenging for these regulated businesses to maintain financial sustainability, leading to a decreased appetite for risk,” Van Pletzen said.

Cash-strapped consumers are set for relief later in 2024, according to Standard Bank and Nedbank, which expect the central bank to start cutting interest rates from September.

“The urgent need for a fee review in the regulated credit sector is evident, as it would enhance the sustainability of these businesses, enable them to serve a broader range of consumers and protect borrowers from the predatory practices prevalent in the illegal lending market.”

Standard Bank data released on Wednesday indicates that SA’s challenging economic environment has deterred many consumers from establishing emergency savings.

The data shows that over half (52%) of entry-level private banking clients have saved less than one month’s salary in readily available cash reserves. This lack of savings means they may resort to debt in emergencies like job losses or urgent medical expenses, which undermines their ability to accumulate wealth over time.

The bank compared the readily available (accessible within 24 hours) savings of prestige clients (those who earn between R25,000 and R58,000 a month) and entry-level private banking clients with their monthly salaries and fixed expenses.

Among prestige clients, nearly 29% did not have any emergency savings they could access.

“The data shows that the ability to build adequate cash saving for use in an emergency is not only dependent on earning a higher income” said Doret Jooste, head of money management and advisory at Standard Bank.

“Having cash savings on hand is the cornerstone of healthy money management and likely the most important thing to prioritise when you want to start building your wealth.”