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.