The vicious cycle of the debt trap fallen into by social grant recipients

The Christmas countdown is upon us with the now-usual temptation to overspend in the name of “goodwill and cheer”. It’s a debt trap for many and for social grant recipients who have to lend to spend, it’s outright exploitation.  

Anthropology professor Deborah James of the London School of Economics (LSE) says the looming seasonal debt trap should be another opportunity to sound the alarm on a grant system that has got it wrong by putting the burden to provide in poor households on the shoulders of pensioners, children and the disabled.

Income shortfalls and realities of what it takes to survive means grantees are forced to borrow, and then often end up in unequal relationships with lenders. Lenders range from loan sharks and mashonisas to stokvels and formalised short-term and “pay-day” lenders. They all get away with charging inflated interest rates that are disproportionate to the income, loan amounts and risk of typical loans made by social-grant recipients.

“Because of how the grant pay-out system is set up, there is no risk for the lender. The borrower has no way of defaulting because the amount they owe will be automatically collected before they can withdraw any money from their accounts. It’s shooting fish in a barrel by cowboy capitalists who have made this practice go on for so long.

“With these unfair advantages they should not be allowed to lend at the rates they do.” says James, who previously lectured at Wits University.

She and co-authors David Nevis (a researcher from the University of the Western Cape) and Dr Erin Torkelson (a Mellon Post-Doctoral fellow of Western Cape) compiled the Black Sash report titled Social Grants: Challenging Reckless Lending in South Africa. It was funded by LSE and released in September. 

The authors outline in the report how historical and structural inequalities have shaped access to fair credit for many, mainly black, people. This, together with loopholes for abuse in social grant pay-out systems and inadequate legislative protection in the lending market, has left grantees vulnerable.

And unsecured lending is big business – the National Credit Regulator (NCR) noted that the market in 2019 quadrupled in a decade to stand at R220-billion. NCR’s latest figures released at the beginning of October show that unsecured credit granted for the quarter ending in June 2020 decreased by R15.10-billion (59.64%) quarter-on-quarter and by R18.42-billion (64.32%) year-on-year.

The authors point out that the NCR allows the highest interest rates and fees for short-term unsecured “and presumably risky” loans. They warn, though, that overlooking that grant recipients make up a big portion of these borrowers is a damning blind spot.

It feeds the paradox: social grants paid to about 18 million South Africans are meant to support the most vulnerable, but turning grantees into an unprotected credit market keeps them pushed to the margins of indebtedness and poverty.

Torkelson explains: “When the National Credit Act was passed it was with the explicit intention to extend credit to black workers, mostly people who were historically excluded from accessing credit. Lenders were eager to make money off black workers in secure government jobs. But high unemployment in South Africa has limited the number of people creditors can lend to. Then in 2012-2018 the  SASSA/CPS grant system delivered secure, monthly payments from the government to social grant recipients through the formal banking system making grantees a new credit market.”

Typically, grantees borrow between R500 and R1,500 over one- to six-month repayment terms. These are small amounts that don’t blip on the NCR radar. But James says, the NCR should take notice and recognise these unique circumstances for grantees, as well as the power imbalance that exists and the reality of low levels of financial literacy and limited avenues for recourse for grantees.

“It can be very difficult to regulate lending in this market because the NCR is stretched and doesn’t have a strong presence in many rural communities where grant recipients are,” James says.

Unchecked, however, lenders quickly earn their reputation as loan sharks and mashonisas, charging above 50% interest – and sometimes even 100% interest – on loan amounts, the researchers found in their case studies.

The report calls for ways to short-circuit vicious debt traps. They recommend interventions like delinking child grants from the social grant credit market; applying levies on lenders; banning lenders from operating at grant collection points; banning all third-party lending (the likes of the Post Office or Net1) that SASSA contracts to facilitate payments; addressing aggressive marketing of products that target grantees; and pushing South African banks (which have among the highest bank charges in the world) to make fair-credit options available for the poor.