THE CONCEPT "LOAN SHARK"
Misconception:
a.) All micro financiers are "loan sharks"
The truth:
Micro financiers are usually professional lenders who lend money from an established office and are registered with the MFSA and NCR, the stringent ethical codes and prescriptions of which, they have to comply with.
Professional micro financiers do not exploit their clients and act strictly in accordance with established ethical codes and codes of conduct, and in the interest of the client. After all, the objective is to get repeat business from the same client. "Loan sharks", by contrast, frequently do not have a fixed address, charge excessive interest, have no book-keeping or operating system in place, and resort to unethical methods of collection.
Professional micro financiers distance themselves from ''loan sharks'' and insist that the authorities do everything in their power to curtail the activities of these operators, ridding the industry of them in the process.
INTEREST RATES
Misconception:
a.) Micro financiers charge excessive interest rates
The truth:
The cost of credit charged by micro financiers is referred to incorrectly as being the interest rate. However, it represents the total finance costs charged by micro financiers, inclusive of components such as administration costs, management of the account and risk. This mark-up can, therefore, not be equated with the interest rate charged by a bank as this would be tantamount to comparing apples with pears. Micro financiers may not charge any other costs e.g. administrative costs separately. The mark-up, therefore, is all the client pays and there are no hidden costs.
The main reason why the interest rate portion, only, of micro financiers' charges is higher than that of the banks is because micro financiers take a far greater risk than banks do. Banks are invariably not prepared to help any client who does not have security. Micro financiers lend money without any security being offered by the client.
The administrative costs related to lending transactions, are relatively higher for smaller loans. Several small loans are necessary before a Micro financier is able to generate income equal to that which a bank is able to generate by means of one big loan over a term. Micro financiers are entitled to cover their costs and to make a reasonable profit in line with the risks to which they are exposed.
Misconception:
b.) No competition within the industry results in higher interest rates
The truth:
The micro finance industry is a highly competitive one, involving several individuals and groups, and new entrants to the industry, including commercial banks. Market forces such as competition amongst the different players, and demand and supply keep interest rates market-related.
Misconception:
c.) A ceiling on interest rates would be simple to impose and would protect consumers.
The truth:
A ceiling on interest rates is contrary to free market principles. Interest rates pegged in an unscientific fashion could see many micro financiers shutting their doors due to their inability to cover the costs or handle the risk - a court decision in 1999 against the Minister of Trade and Industry underscores this point of view. In reality, there are several kinds of micro loans e.g. over 30 days, over a term, housing, training, small business development etc. A uniform interest rate cannot be made applicable to all these different kinds of loans. Unjustified rates forced onto the industry could result in a large part of the industry going underground and operating as ruthless ''loan sharks''. Pegged interest rates will not protect borrowers from exploitation by ''loan sharks'', whose operations, in any event, fall beyond the scope of the provisions of the Usury Act.
Misconception:
d.) Formal banks will be able to offer micro loans more efficaciously and at lower interest rates.
The truth:
Formal banks are not prepared to take the risks associated with lending money to the informal sector. The cost structure of formal banks is such that they find small loans completely unprofitable. Formal banks do not have the infrastructure and distribution network of micro financiers to deliver a service to the remote corners where this service is required. Formal banks do not have the necessary expertise of the micro finance industry to run this kind of business as successfully as they do.
Misconception:
e.) Exploitation with regard to the extension of credit is a problem caused by micro financiers
The truth:
Micro financiers are but one of several institutions which grant credit or loans to consumers. These institutions include banks, pawnbrokers, clothing stores, the furniture trade and several others. Professional micro financiers only grant loans to clients in accordance with their ability to repay, in an attempt to ensure that they do not get into financial trouble as a result of their dealings with micro financiers. Micro financiers only lend money. In this, they differ from, for instance, the furniture trade or clothing stores where articles are marked up by about 200% to 400%. They then make this inflated amount available to the client in the form of a loan, at substantial interest rates.
CARD AND PIN
Misconception:
a.) Micro financiers commit fraud with the clients' cards and pins
The truth:
There has been no court case, nor are we aware of any other case that proves that micro financiers abuse their client's cards or pins to commit fraud with them. Nor has any evidence been given led by the State (in recent court cases) to this effect.
Misconception:
b.) Micro financiers prefer to retain the card and pin
The truth:
Micro financiers have always been in favour of doing away with the practice of retaining the card and pin as soon as an acceptable, universal and affordable method of recovery could be introduced in its place. Legally the Reserve Bank is compelled to create this system and, similarly, every commercial bank is compelled to lend its cooperation in this regard. The MFSA at its own expense is taking the lead in facilitating the creation of such a recovery process. This is however a cumbersome process due to the nature and complexity of the industry.
The decision by the government in 1999 to ban the use of the card and pin was, premature and under false impression that an acceptable alternative method of recovery already exists in the market. A cost effective system complying with the requirements of the industry, is not yet available. The MFSA will continue to strive for acceptance of the use of the card and pin until such time as an alternative system has been put in place.
Misconception:
c.) The criticism by banks re the retention of the card and pin is justified
The truth:
Banks only grant loans based on adequate security being offered by the lender while micro-lenders grant loans in the absence of any security. By using the card and pin as a method of recovery, micro financiers are able to recover their uninsured loans. Losses do still, however, take place in cases where, for instance, borrowers simply close their accounts.
Banks contribute the use of the card and pin as they are the ones, in the first instance, to benefit by the transaction costs charged on these. Secondly, they have to accept joint responsibility for the development of an acceptable system of payment for the industry.
Misconception:
d.) Clients object to the retention of the card and pin
The truth:
There is no known case of the client objecting to the retention of his or her card and pin. In fact, several clients prefer this practice and request a Micro financier to safeguard their card. This simply goes to show that there is a relationship of trust between the lender and the client.
ID DOCUMENTS
Misconception:
a.) Micro financiers retain the ID documents of clients
The truth:
It is both illegal, and unnecessary, for the Micro financier to retain the client's ID document and this is something that the MFSA strongly disapproves of.
THE "LOAN SHARK" IMAGE
Misconception:
a.) The name "Micro financier" is simply another name or a euphemism for ''loan shark''.
b.) Micro financiers are usually unpleasant and shady characters
c.) Micro financiers exploit the poor and the uninformed
d.) Micro financiers exploit desperate people who have no recourse to the bank.
The Truth:
There is a clear distinction between formal micro financiers who observe strict business ethics and informal lenders who choose to remain faceless (no office or fixed address etc.) The latter often show no mercy in their dealings with their clients. It is this kind of operator that is the essence of "Loan Sharking".
In order to survive in a competitive free market, formal micro financiers have to conduct themselves professionally, in a friendly and helpful fashion, delivering an acceptable service to ensure that their client's rights are protected. Acceptable service levels are paramount to lenders business cycle.
Informal micro financiers or ''loan sharks'' are not registered with the NCR as regulatory body and do not belong to any professional organisation, such as the MFSA, who is their collective representation in their industry. Their conduct falls beyond the ambit of the provisions of the law, which gives the entire industry a bad name.
Formal micro financiers, who conduct themselves professionally and comply with the law, make an important contribution to the economy, in providing loans to a market segment which cannot be serviced by banks due to the risks involved. These loans are used for education and training, housing, the running of businesses and for personal needs. The lender seeks to ensure that clients do not expose themselves to loans that are too high for their particular circumstances.
NO ALTERNATIVE
Misconception:
a.) Micro financiers' clients have no alternative
The truth:
It is a clients own choice whether or not to take out a loan. No-one coerces them into doing so. In other words, it is the client's constitutional right to decide for himself and to conduct his affairs as he sees fit. Clients' choices in respect of acquiring money and loans include that of not taking out a loan at all, or taking out a bank loan, of borrowing money from a professional Micro financier, of borrowing money from a ''loan shark'' and of stealing money. The choice is his and one can only hope that he will be given the correct guidance in the process of being educated. Historical facts have proved that in the small loans market, consumers prefer and support the professional micro financiers.
LOANS ARE GIVEN TO UNQUALIFIED CLIENTS
Misconception:
a.) Micro financiers do not approve a loan without first determining what the client's circumstances are and their ability to honour the loan repayments.
The truth:
The financial position of the client and his ability to repay is accurately determined based on information provided by the client and also by means of discreet enquiries made by the Micro financier. The loan, interest (including costs), conditions, amount to be repaid and contents of the agreement are explained to the client, usually in his own language so that he understands clearly what is involved. The latter particulars are concluded in a written agreement between client and Micro financier. The client is provided with a copy of the agreement.
DEBT SPIRAL
Misconception:
a.) Consumers easily get themselves into a debt spiral from where there appears no way out.
The truth:
Consumers are selected and assisted in only borrowing such amounts as they are able to repay. Clients are assisted further in elementary financial planning and basic budgeting, as explained in the MFSA's community education publication: "Personal Money Management". Specific attention is given to the aspect of granting loans that the client is capable of repaying. If a Micro financier intends to continue the business cycle with his clients and repeat business, it is not in his interest to over lend. (By doing so he would only have a market for his loans for a few months, where after he would have to shut down. Would not mention)
MICRO FINANCE IS A "GET RICH" SCHEME
Misconception:
a.) Micro financiers make exorbitant profits and get "rich quick"
The truth:
The interest charged by micro financiers, includes the recovery of the micro financiers' administrative costs and the discounting of the risk that is involved. According to the law, micro financiers may not charge separate amounts for administrative costs. Consequently the interest charged represents the micro financiers' total mark-up. The interest charged by a Micro financier is the sum total of the gross income. (When comparisons are made with other financial institutions, like should be compared with like when it comes to interest rates and expenses. Sentence does not make sense)
(There are industries such as furniture and the clothing trade, in which the mark-up is up to 400% per article. The mark-up of micro financiers is nowhere near as high as this and is just enough to give the Micro financier a reasonable income in return for his initiative, extended working hours, unselfish service and the huge risks to which he is exposed. OBJECTIVE)
In industries like the furniture and clothing, the mark-up can sometimes be as high as 400% on products. The formal micro financiers collectively represented by the MFSA insist that their members offer their clients products that are concluded according to strict business ethics ensuring a reasonable return for the risk taken.
THE MICRO FINANCE INDUSTRY IS ILLEGAL AND UNREGULATED
Misconception:
a.) Micro financiers are illegal and unregulated.
The Truth:
Micro financiers act in terms of legal provisions that have been put in place by the authorities, in terms of the Usury Act or Regulations. All micro financiers have to be registered with the Micro Finance Regulatory Council (NCR) and be able to prove their membership to the public. By registration with the NCR, a Micro financier does not automatically become ethical end therefore, as a form of self-regulation; MFSA members are subject to a stringent code of ethical behaviour codes that also include proving membership to the public.
Professional micro financiers, consequently, are registered, act in terms of the law and maintain high professional, ethical and moral standards in the course of conducting their business. Several conventional banks have also now joined the ranks of micro financiers.
THE MICRO FINANCE INDUSTRY CONTRIBUTES SIGNIFICANTLY TO THE ECONOMY
Misconception:
a.) The Minister of Trade and Industry has publicly stated that "THERE CAN BE NO QUESTION that a valuable service has been provided by the members of the micro-lending industry"
The truth:
Micro financiers make finance available to a mass of consumers in the low-income groups that banks do not traditionally want to assist because of the inability to provide security. Loans are used for training, education, and housing, the funding of businesses and for personal use. Micro financiers are the only source of funds to this particular market segment.
The estimated turnover of the micro finance industry, as an important sub-division of the RSA'S financial services sector, is estimated at R15bn per annum. As provider of jobs and contributor to the economy and the treasury, the industry should not be under-estimated. The Micro Financing Industry contributes in excess of R15bn/ annum to South Africa 's financial services sector. This industry's contribution to the gross National Product by way of job creation and community upliftment should never be under-estimated.
THERE IS NO FUTURE FOR THE "GET RICH QUICK" INDUSTRY
Misconception:
a.) The micro finance industry is a temporary social "evil" that is due to disappear in due course.
The truth:
The micro finance industry has been established all over the world, and in most countries it has been regulated and structured. This is presently happening in South Africa . For as long as micro financiers deliver a service that meets a specific need in the market, there is a raison d'�tre for the Micro financier or justification for his existence. With the formalisation and regulating of the micro finance industry in SA, exciting possibilities are being created for the growth and progress of the industry.
CLIENTS BORROW MONEY FOR TRIVIALITIES
Misconception:
a.) Clients borrow money impulsively for trivialities such as lotteries.
The truth:
As within all democratic countries, he client has the freedom of choice as how to spend the money in order to meet the needs. Clients are educated and assisted with the planning of their personal finances during the borrowing process. In practice, a large number of loans are granted for emergency or bridging finance, and in the case of death, illness, damage, accidents and theft. These are granted over and above loans for education, training, housing and businesses. Loans are taken out, therefore, for important or essential purchases of products or services.
THE MICRO FINANCE INDUSTRY IS AN EXCLUSIVE INDUSTRY
Misconception:
a.) The micro finance industry is exclusive to certain racial and language groups
The truth:
The micro finance industry is an ''open'' one, attracting entrepreneurs from all walks of life. In accordance with the Constitution of the RSA, the MFSA imposes no language or racial prescriptions. Any micro financier meeting the admission requirements of the MFSA may become a member. The MFSA has a significant number of black members amongst its ranks. In accordance with South Africa 's laws, the MFSA views transformation very seriously and the board of 12 directors includes whites, blacks, Afrikaans and English-speaking members, as well as those who speak other languages. (The board is fully representative of the different geographic areas of the RSA.) Gender in transformation is also being attended to.
THE DEVELOPMENT OF THE MICRO FINANCE INDUSTRY IN SOUTH AFRICA IS UNIQUE
Misconception:
a.) The micro finance industry which is a unique concept has been developed to exploit the lower income groups.
The truth:
The micro finance industry is an accepted sector of virtually every country's financial sector. In all countries it is recognised and regulated by the authorities. Countries where this industry is represented include the USA , Belgium , the Netherlands , Australia , France , Canada and England . The sole purpose of the industry is the provision of loans and services to a specific market sector that is not serviced by formal commercial banks. It seeks to run a business over the long term. Exploitation does not come into the picture.
THE MICRO FINANCE INDUSTRY IS A NEW INDUSTRY
Misconception:
a.) The micro finance industry is a totally new, untested industry
The truth:
Micro loans is a concept that is centuries old. Micro loans are frequently referred to as the second oldest profession. Micro loans are also referred to in the Bible and in old Greek and Roman documents. In South Africa , micro loans in some or other form have always been available to the public. The industry has also developed into a professional, structured and regulated industry over the past decade.
THE MICRO FINANCE INDUSTRY IS CONTROLLED BY MONOPOLIES
Misconception:
a.) Certain monopolies act as cartels in controlling the micro finance industry.
The truth:
The micro finance industry is not dominated by any single individual or group. Role players within the industry include a large number of individuals and groups, as well as a variety of commercial banks and financial institutions. The industry operates according to free market principles
CREDIT AND LOANS ARE THE SAME THING
Misconception:
a.) The allocation of loans and credit are one and the same thing and uniform throughout the financial sector.
The truth:
There are several different forms of loans and credit available. A distinction must be drawn between mark-up and interest rate. It should also be determined whether administrative costs are included in the rate or charged separately. The interest rate is calculated by the risk to which the lender exposes him. Different laws regulate different sectors of the financial industry, which inevitably also brings about differences in the terminology used and the types of credit available. It is also permissible to charge different interest rates and administrative costs. A loan by a micro financier can only be compared with one by a bank, if the necessary adjustments are made to the comparison so that we have a situation in which apples are compared with apples
THE FUNCTIONS OF THE MFSA AND THE NCR OVERLAP
Misconception:
a.) Obligatory NCR-registration means that the MFSA has no reason to exist, because of the overlapping of functions.
The truth:
The NCR is a legally established authority designed to regulate and police the industry. By forcing registration on micro financiers, it implies ethical behaviour. The MFSA is a voluntary association of micro financiers who strive for an ethical and professional micro finance industry, and who promote the industry and protect it where necessary. The MFSA is a founder member of the NCR.
There are no overlapping functions of the MFSA and NCR. The MFSA is, now more than ever, the established spokesperson of the Industry to the authorities and the controlling body, thereby ensuring the Industry's survival as well as the implementation of reasonable regulatory measures. Every Micro financier is by virtue of representation obliged to join the MFSA and to promote and strengthen this independent Association.
THERE IS NO NEED FOR MICRO FINANCIERS IN THE FINANCIAL SERVICES SECTOR
Misconception:
a.) There is no need really, for short-term loans and micro financiers distort other markets by attempting to create an artificial market.
The truth:
Throughout the world, amongst the lower income groups, there is a strong demand for micro loans, who cannot offer normal security for loans. The products of micro financiers satisfy this specific need to the satisfaction of the client and at a price the latter considers being reasonable and which he is, therefore, prepared to pay. No other sector of the economy is prepared to meet the needs of micro financiers due to the high risks involved. Should professional micro financiers due to deliberate over-regulation disappear from the scene, the gap will quickly be filled by "loan sharks".
