South Africa perpetuates a dangerous debt culture that is strangling the poor. If the government doesn't step in to save its citizens, Geoff Embling warns that desperation and social unrest could sink the country and its economy.
South Africa perpetuates a dangerous debt culture that is strangling the poor. If the government doesn't step in to save its citizens, Geoff Embling warns that desperation and social unrest could sink the country and its economy.
South Africa has witnessed extraordinary growth in unsecured micro lending over the past few years. Micro loans are easily accessible to the greater public and demand for them is so great that even though banks and lenders charge whopping interest rates, loans still remain attractive to borrowers.
A major contributing reason to all the unrest, demanding and striking is because a large portion of SA’s population is in debt. Debt was found to be one of the reasons for the Marikana miners’ strike.
The strikers’ aggressive and demanding behaviour is hard to sympathise with and at first glance seems to be driven by pure greed, but if one looks deeper one starts to realise that the anger and violence shown is actually driven by desperation.
There is an unfortunate history of exploitation of debt among poor South Africans, and unscrupulous micro-lenders have been allowed to run rampant in poor mining communities. If a loan shark takes your identity document and bank card (which they are not supposed to do) and you have a family to feed, you become desperate. Debt can be a killer. Creditors step up interest rates when debt isn’t paid and the problem spirals out of control.
When you end up having to pay over R10 000 for an initial R1 000 loan plus legal fees (and I have heard of worse scenarios), it is enough to drive anyone to insanity. The vast majority of borrowers are completely financially illiterate, and debt drives them to depression, anger, desperation, and in many cases suicide.
The world drums out the message that all debts must be paid or else you’re a bad person or a bad country, and bad things will happen to you. That’s the message that creditors send to debtors to maintain control. It is only partly true though, and you start to rethink that premise when you hear stories of miners hanging themselves and leaving letters saying that they could see no way out of R3 000 debt; while greedy, usurious, unscrupulous lenders make a mint and don’t care a hoot about the anxiety of their victims.
This brings us to the role of government and what it should do about the problem.
First of all, what is a government there for – what is its job? It is primarily to protect its citizens. And what if many of its citizens are completely financially illiterate? Then it must institute laws to protect them from exploitation via usury. The solution is not very complicated, so what is government waiting for? It should make a rule forthwith that no money in South Africa is to be lent above an interest rate of, say, 12%. And it should ensure that the law is adhered to with the utmost vigour.
The highest legal rate for banks in SA is 31%, which is nothing less than sheer usury, and is soul-destroying as well as country-destroying.
Many of the micro-credit providers however, ignore that rate and charge a whole lot more than 31% interest. Most revolutionary movements around the world have revolved around the dual objectives of debt cancellation and land redistribution. From Mesopotamia to Ancient Greece, autocratic rulers feared debt-fuelled revolt to such an extent that debts would regularly be forgiven in order to stave off social unrest.
When a government bans drugs or gambling casinos it is protecting vulnerable people from their own vices. The same should happen for financially illiterate people. They need to be protected from their own ignorance and from exploitation by others.
When citizens are in debt up to their necks, the solution is not to raise salaries. That will just cause more inflation and exacerbate the sad, vicious cycle of further borrowing. By striking and asking for more money, workers are actually shooting themselves in the foot. They think that more money will solve their problems but it won’t. The underlying issue of financial illiteracy and a borrowing-dependent culture will still remain, and the more they borrow, the more they will spend, causing food prices to rise and general inflation, which strangles the poor.
