Impact of Increased VAT on Microfinance Consumers

By Leonie van Pletzen – CEO of MicroFinance South Africa

An increase in VAT has a disproportionate and regressive impact on low-income consumers, many of whom rely on microfinance to manage irregular or limited income. The consequences are far-reaching:

1. Reduced Disposable Income

Most low-income consumers spend a large portion of their income on VAT-inclusive goods and services, such as transport, electricity, hygiene products, and food (where VAT is applicable). An increase in VAT makes these essentials more expensive, shrinking the limited funds consumers have left after meeting basic needs.

2. Greater Financial Vulnerability

As costs rise across the board, consumers are forced to reprioritise or reduce spending, often sacrificing important items like healthcare, education, or nutrition. This can lead to long-term socio-economic setbacks, particularly in already marginalized communities.

3. Threat to Financial Inclusion

For consumers already on the edge of the formal financial system, rising living costs may mean they can no longer afford even the most basic loan repayments or savings contributions. This may lead to:

• Defaults on existing credit, resulting in negative credit records.

• Loss of access to formal financial products, such as insurance, mobile banking, and savings.

• A reduction in financial confidence and trust, making consumers hesitant to engage with regulated financial services in the future.

4. Erosion of Informal Safety Nets

In many lower-income communities, families rely on one another or community-based support systems. As VAT eats into every household’s budget, these informal safety nets also weaken, leaving consumers more isolated and exposed to financial shocks.

Conclusion

An increase in VAT places significant strain on microfinance institutions, particularly those operating in high-volume, low-margin environments under the National Credit Act’s capped pricing model. Microfinanciers incur VAT on a wide range of operational inputs—such as technology systems, compliance services, collections, and outsourced administration—which they cannot fully recover or pass on to consumers due to strict regulatory fee caps.

This erodes profitability and threatens the sustainability of smaller and developmental lenders who are essential to reaching underserved areas. As operational costs rise and margins shrink, some providers may be forced to downscale, reduce their footprint, or exit the market altogether. This leaves low-income consumers with fewer safe, regulated options for credit—potentially pushing them toward illegal, unregulated lenders where there is no consumer protection, transparency, or recourse. Ultimately, the VAT increase risks weakening the inclusive financial ecosystem and leaving vulnerable consumers more exposed to exploitation and exclusion.

The VAT increase places a heavy burden on low-income consumers, threatening their financial resilience and undoing progress made toward financial inclusion. It increases the cost of living, reduces access to financial services— all of which have long-term consequences for the well-being of vulnerable South Africans.

About Leonie van Pletzen

Leonie van Pletzen is the Chief Executive Officer of MicroFinance South Africa (MFSA), a leading voice for the microfinance sector in South Africa. With nearly 15 years of experience in the industry, Leonie is recognised as a passionate advocate for ethical lending, financial inclusion, and regulatory reform. Having risen through the ranks at MFSA since 2010, she brings a wealth of expertise in industry advocacy, corporate governance, stakeholder engagement, and sustainable development. Leonie has played a key role in shaping policy dialogue between government, regulators, and the private sector, and is an active contributor on various national committees, including the National Credit Regulator’s Credit Industry Forum and the Banking Sector Education and Training Authority. Her leadership is defined by a commitment to protecting vulnerable consumers while ensuring the long-term sustainability of responsible credit provision in South Africa.

About MFSA

MicroFinance South Africa (MFSA) represents South Africa’s registered microfinance institutions, advocating for ethical lending, consumer protection, and financial inclusion. Through industry leadership, MFSA promotes responsible credit practices that empower individuals, support small businesses, and drive economic growth.

For further information contact:

Claire Watt | Ntokozo Kalako

The Friday Street Club

Tel: 082 490 3796 | 067 610 6879

Email: claire@thefridaystreetclub.co.za | ntokozo@thefridaystreetclub.co.za