By Azwidohwi Mamphiswana
Small businesses are increasingly turning to informal lending sources as traditional banks fail to provide support to the sector.
Stokvels, microfinance institutions and loan sharks are increasingly filling the gap, offering vital financial assistance to those excluded from formal banking systems.
While informal lending provides much-needed access to finance, experts warn there are many risks.
Business analyst Thelma Komana from Tshwane University of Technology cautions that informal lending can exploit entrepreneurs if left unchecked.
“Informal lending can empower businesses, but without proper regulation, it can entrap entrepreneurs in cycles of debt,” she said.
When Alexandra retail shop owner Sipho Ndlovu urgently needed money to pay a supplier, he turned to a loan shark for a bailout.
“The interest rates were so high that I couldn’t keep up with the repayments. I ended up borrowing more from the mashonisa (loan shark) to pay off the interest,” Ndlovu told Vutivi News.
Other small business owners like Mpho Khumalo from Soweto relied on microloans to keep their businesses running.
“Imali encane was important for my business to start, but the repayment terms are too much. If cash flow is tight, it can be too much. I am done paying now after six years of repaying,” she said.
Stokvels are increasingly being used to finance businesses. With nearly 11 million members, stokvels save R50 billion annually, providing crucial capital for businesses.
The National Stokvel Association of South Africa reports that these groups are becoming more significant for township entrepreneurs who lack access to formal loans.
Microfinance institutions also provide critical services by offering small loans to businesses without collateral.
In 2022, the South African Microfinance Apex Fund lent over R2 billion to small businesses.
These institutions are filling the void left by banks, offering an alternative for entrepreneurs who need immediate funding.
However, loan sharks remain a persistent issue in township communities. These informal lenders often charge exorbitant interest rates that can exceed 200%, which is far above the legal limit.
Despite the risks, they remain a common option for business owners who need fast cash.
The Financial Sector Conduct Authority warns that the high interest rates and harsh repayment terms trap borrowers in debt, making it nearly impossible to repay loans.
Currently, there is little regulation governing informal lending in South Africa. The National Credit Regulator oversees microfinance, but stokvels and loan sharks operate largely outside the formal regulatory framework.
As a result, township entrepreneurs remain vulnerable to exploitative practices. Stronger oversight and greater financial education are essential to ensure informal lending remains a helpful tool, not a harmful one.
Informal lending remains a lifeline for many township businesses.
However, experts agree that better regulation is needed to protect them from debt traps and ensure these financial services foster growth rather than hinder it.
