The lending practices of township micro-lenders and their impact on the low-income households in South Africa: a case study for Mamelodi township.
Abstract
Access to finance (cash/credit) is central to economic development and
improving the living standards of people. Faced with uncertainty about future
prospects, illiquid and irreversible nature of assets, the low-income households
become vulnerable to unpredictable events like illness and death. Traditional
requirements of formal collateral, asymmetric information and high transaction
costs used by the formal financial institutions are barriers to the provision of
credit. The low-income households therefore resort to township micro-lenders
to access credit in order to bridge the effects of these events. The objective
of this article is to assess the lending practices of the micro-lenders and their
impact on the households and to determine effective measures that need to
be taken to protect the households from such practices. The article adopts
a case study approach based on micro lending in the Mamelodi township
situated in the Gauteng Province in South Africa. Both random and snowball
sampling were employed to conduct personal interviews with micro-lenders
and households (borrowers). The findings reveal that these micro-lenders,
though easily accessible, exploit the households and place them in emotional
and financial distress (over-indebtedness). Based on the findings, this article
recommends the development of social self-regulatory mechanisms to protect
the households from exploitative practices of township micro-lenders.