South Africans earning less than R7,500 a month in trouble

Many South Africans, especially low-income earners, are excluded from formal credit solutions and rely on informal lenders and loan sharks to make ends meet.

South African short-term lender, Wonga, has released the findings of its latest Credit Utilisation Survey, which surveyed over 12,000 respondents, revealing that nearly 90% of respondents are actively using credit.

The survey reveals a financially strained population navigating a widening gap between earnings, access to savings, and the rising cost of living, with more than two-thirds of respondents reporting no savings.

“Each year we survey a substantial database in winter and summer, and the reality is clear; far too many South Africans earn less than R7,500,” said Wonga spokesperson Tina Manyanya.

“The majority are unable to meet basic needs like seeing the month through without needing additional lifelines.”

According to the World Economic Forum, access to formal credit is one of the drivers for bridging the economic divide.

For example, developmental credit, which facilitates economic and socio-economic growth, such as housing, education, and business funding, allows individuals to build better lives. This is critical to South Africa’s economic aspirations of growing the economy.

“The problem is, however, that in many cases individuals cannot access formal credit, which leads them to turn to informal lenders, such as Mashonisas,” Manyanya explained.

Mashonisas, a term often translated as “loan sharks”, are common in townships and informal settlements around the country.

They are illegal and unregulated, which means their operating models are not impacted by regulations, and they incur no compliance costs under the National Credit Act.

In 2017, research commissioned by Wonga Finance SA and conducted by Eighty20 found that these lenders were far more common than many people realise.

Based on a physical count conducted in the streets of Enkanini, an informal settlement outside Khayelitsha, researchers conservatively estimated that there could be at least 40,000 mashonisas operating in South Africa. In fact, the qualitative evidence collected suggests this was likely a low estimate.

Informal lenders fill the gap

Almost all (94%) respondents indicated that, given the choice, they would prefer to borrow money from a registered credit provider, friends or family, or through their employer.

Only 5% of respondents indicated they prefer using informal lenders, such as a mashonisa, to meet their credit needs.

This aligns with Wonga’s 2017 study, which found that informal lenders meet a fairly specific need that formal lenders generally do not adequately address.

Even though most South Africans do not prefer informal lenders, 15% of respondents said they have used one in the past 12 months. Most of these individuals were earning less than R7,500 per month

This is indicative of higher vulnerability and limited access to formal products, Manyanya said. “Our survey shows that despite many South Africans wanting to utilise formal lending channels, many are being driven to use informal lenders.”

The survey shows that despite 90% of respondents confirming that they use credit, 65% had been declined for credit. Decline rates were disproportionately concentrated among lower-income groups.

More than half of those using informal lending channels earned less than R3,000 per month. A quarter of those who used informal lending over the past year reported that their repayments were their most expensive monthly outgoing.

“It is concerning that many South Africans, especially those in lower income bands, are excluded from formal credit, due to a mismatch between need and regulation,” Manyanya said.

“When formal credit options are inaccessible, people turn to informal sources by necessity, not by choice. Even more worrying is that our survey also showed that 6% of credit users didn’t know the difference between formal and informal lending.”

Solutions needed

Around a quarter of respondents (26%) reported taking out credit to meet developmental needs. This essentially means they were borrowing to better their lives.

They took out loans to build or renovate a home, pay school or university fees, or start or grow a small business.

The survey showed that these developmental credit needs were often met through general-purpose loans or informal lenders. This was due to a lack of accessible, clearly defined developmental credit options in the formal market.

Manyanya explained that even though this is seen as “good credit” since it allows individuals to create a better future, they are turning to non-developmental, traditional credit products to fulfil these needs.

Manyanya said that even when South Africans can access credit, formally or informally, there is a worrying trend of using it simply to survive mid-month and month-end.

Around 27% of respondents indicated using credit every month just to cover groceries, transport, and electricity. This outranked the need to utilise credit for development needs, or even to address unplanned emergencies.

“What the data shows is that South Africans are not borrowing frivolously,” Manyanya said. “They are borrowing out of necessity to survive emergencies, educate their children, get to work mid-month, or simply to keep the lights on.”

“This is concerning. Using credit for these essential needs is simply using it for survival.” Manyanya explained that credit is not just a financial tool; it is a survival mechanism and a stepping stone for many.

The findings from this survey revealed a significant opportunity to bridge the gap between the formal and informal credit markets.

Where developmental credit is concerned, leveraging fair credit practices and more clearly defined regulations was particularly necessary.

“Formalised credit is critical, and it can be a powerful tool that can drive economic growth when used well,” she explained.

“That said, we believe that it requires a regulatory rethink and more accessible, well-communicated credit options.”

“A better understanding of how formalised credit is critical to South Africa’s economic aspirations of a growing and stabilising economy.”

According to Manyanya, the survey’s findings pointed to a deeply felt demand for safe, developmental credit solutions and an urgent need for:

• Clearer product visibility and education around developmental credit
• A more inclusive regulatory framework
• Improved access to formal credit for low to middle-income earners

“It is the responsibility of lenders and policymakers to make sure credit works for everyone and not just the privileged few – doing our part to help those excluded from the formal credit sector due to the mismatch between need and regulation,” Manyanya said

“This will help bolster much-needed economic growth and help an estimated 15 million South Africans that are currently unable to access formal credit.”