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Crucial week as currency braves a tempe... Raft of bad news leaves economy bruised... Modern 'loan sharks' fill gap left by ba... |
Modern 'loan sharks' fill gap left by banks
By lending small amounts, micro-lenders charging interest of up to 30% a month are able to bypass the Usury Act, writes ANDREW GILL
Micro-lenders have come under fire for high interest rates and for questionable business practices but they are among SA's fastest-growing businesses. By lending amounts of less than R6 000 they are able to bypass stipulations of the Usury Act. In the short-term lending market monthly interest rates of 25% to 30% are standard. The success of many lenders grew from the inability of SA's conservative banking institutions to tap the market. They have filled a gap which the major banks have not, but a question mark hangs over business practices and the astronomical interest rates being charged. With growing competition and a declining cost of capital due to deals such as the recent tie-up between New Africa Investments and Theta, a shakeout of the bad seeds in the industry is seen as inevitable. Leon Kirkinis is managing director of Theta, which has close to 10% of the estimated R13-billion micro-lending market, and makes a strong case for it. He says he would welcome a more regulated market. "What drives the market is a client, a client who has certain basic needs and he or she wants those fulfilled. It is all well and good for people to sit on the sidelines and criticise but it is a R13-billion industry based on strong, vibrant client demand." Werner du Plessis, who runs a Louhen franchise in Johannesburg, says the market is evolving and becoming a more formal and accepted business as established major businesses look to enter the market. "People are lowering interest rates and bringing more products to the table. You had a lot of riff-raff in the market. All the guys are trying to purge those elements and get friendly service to the clients, try to establish what their needs are, shorten queues and evolve technology." Du Plessis sees operators in different markets over time merging and creating larger finance houses. "It is very fragmented now but it is going to merge into one very much the way Theta has done it." Theta has three major micro lending operations - Altfin, King Finance and Unity Financial Services, operating in different markets, segmented chiefly by loan maturities and different repayment methods. By linking with Nail, Theta has access to Nail's Metlife and African Bank, offering more cross-selling and improved distribution. Theta has a client base of about 300 000 growing every month, says Kirkinis. It reports annual results next month to a market excited by the concept. Theta's share has soared from a starting price of about 600c in September last year to nearly R26. Kirkinis says regulation should take the form of best business practice and not implementing interest rate caps, saying that would simply drive the business underground where the real loan sharks lurk. "What you need is to ensure you have a level playing field, that you have disclosure, consumer protection, best business practice methods. The client determines if someone is charging too much." Du Plessis says the system, as it stands, is open to abuse and needs more consumer protection, but sees it is providing an important service. "People don't realise that if there is not this industry, the guy goes to the townships and pays 100% a day. And if he doesn't pay there, don't think they just send him a nasty letter, they really knock him over the head." He defends the rates charged, pointing out that interest is not compounded and for clients is viewed as a simple overhead. He expects new technology to eliminate some murky collection practices such as taking a client's ATM card and PIN number to withdraw money owing. Corrie Human, managing director of the 30-branch Elite Group active in the one- to six-month market, believes there are unscrupulous players in the industry acting like loan sharks. "If you look at the way some people are doing the business they are doing it like loan sharks. You must not put the client in a position where he cannot pay initial capital back . . . You have got to prevent a debt spiral." He says collection practices have to be stringent to ensure a successful business. "The type of person who comes to a micro-lending organisation is the guy who doesn't pay his accounts. A bank won't touch this guy. That is why they take the cards. If you don't take the cards you are not going to get the money."
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