The assistant ombudsman for Financial Services Providers, Thobile Masina, has warned SMMEs to watch out for predatory lending practices by financial services providers. She said small businesses could avoid falling for this practice by becoming financially literate. Masina spoke to Vutivi News as part of Money Smart Week, which is an initiative of the National Consumer Financial Education Committee (NCFEC), which is chaired by the National Treasury.
Money Smart Week takes place between 29 August and 4 September. It seeks to promote financial literacy. “One of the things we need to understand is that when small businesses are not financially literate, this makes them vulnerable to scams, predatory lending, and acquiring inappropriate financial products or services that do not suit their specific needs,” she said. “When we talk about predatory lending, we refer to when specific people are targeted for lending even when the person is not in a position to receive the type of financial assistance offered to them.
“The reality is that if as a businessperson you see that you have a surplus of profit in the business, it opens you up to making reckless decisions,” Masina said that the factors that defined predatory lending included unfair or abusive loan terms such as high-interest rates, high fees, and terms that made it unfair for a business. She revealed that SMMEs were predominantly the victims of predatory lending because they struggled to obtain funding from financial institutions.
Masina also criticised government institutions for not making it any easier for SMMEs to access crucial funding. “The requirements that government institutions put on small businesses in order to access funding are strenuous, and the same institutions that were created to assist small businesses are themselves creating barriers for these small businesses to be assisted,” she said.
Masina said it was essential that SMMEs endeavoured to become financially literate. “When a business owner is unable to provide a track record of other credit facilities under their name, this exposes them to very high-interest rates which are imposed by lenders to mitigate the effect in the event that the lender is unable to recover the money,” she said.
“When a small business is financially literate and is able to talk and behave in a way that shows financial literacy, this will encourage financial institutions to reconsider or possibly consider whether the small business may qualify as an exception because financial literacy makes it easier for them to identify whether that SMME will be able to use those funds.”
Several factors determined whether a small business owner was financially literate. “One of the things we use to determine financial literacy is being able to understand and negotiate the financial landscape, whether they are able to manage risks, and whether they understand financial principles and information that is needed for them to adapt good financial habits,” she told Vutivi News.
