For many, the informal sector is a sanctuary from the alphabet soup of agencies that would like to regulate them — the South African Revenue Service (Sars), the Companies and Intellectual Property Commission (CIPC) and municipal licensing authorities, to name a few.
That lack of oversight comes at a price. ‘Informal sector’ is a synonym for poor, a stigmata that debars entry to the formal sector aristocracy.
The government’s professed concern for the poor does not extend to the informal sector.
We saw this during Covid when it offered financial support for small entrepreneurs provided they registered for tax, applied for municipal licences and signed up with the CIPC. Needless to say, this was a hopeless failure, with just 12 percent of entrepreneurs surveyed by the Small Enterprise Foundation (SEF) willing to take government money in exchange for government intrusion.
Instead, tens of thousands of businesses quietly shut down and signed up for government welfare.
Some of the best data we have is from the SEF, which extends micro-loans of a few thousand rands to assist ‘micro entrepreneurs’ to purchase stock and basic supplies. In December 2021, it had about 225 000 clients. That dropped to 145 000 as the effects of the Covid lockdowns started to bite and has since clawed its way back to 158 000 — still nowhere near its level of four years ago.
Informal sector employment
Statista shows 7,8 million people employed in SA’s informal sector in 2023. Despite a slight drop in the years immediately after Covid, the number of South Africans employed in this sector has grown 24 percent in 10 years.
“The lockdowns and regulations around this were disastrous for the informal sector,” says John de Wit, SEF founder and CEO.
“It wasn’t just the lockdowns. Surprisingly, the war in Ukraine has also had a devastating effect [on] small entrepreneurs. One of our clients sells day-old chicks and the cost of feedstock went up 35 percent, while she was only able to increase her prices by 6 percent.
It’s a constant battle against inflation and these entrepreneurs, in the communities where they operate, cannot pass on the cost increases to their customers.
“On top of that we’ve seen competition from shopping malls springing up in rural areas and formal sector businesses moving into territories traditionally serviced by these small entrepreneurs.”
With the economy in stasis for the last four years, the poor are corralled into the hands of moneylenders, many of them operating illegally to make ends meet.
The National Credit Regulator (NCR) website shows nearly 4 000 credit providers lapsed their NCR registrations in recent years.
“Many of these providers may still be operating, potentially illegally, putting more consumers at risk,” says Leonie van Pletzen, CEO of MicroFinance South Africa, which represents more than 1 500 registered microlenders and service providers.
Illegal credit providers, often referred to as mashonisas, operate outside the law and are not subject to any of the protections or oversight that registered lenders must follow. They often charge exorbitant interest rates, impose hidden fees, and use aggressive and unethical collection practices.
“These unregulated lenders exploit consumers, driving them into a cycle of debt from which it is difficult to escape,” says Van Pletzen.
“Individuals may find themselves in the unfortunate situation where most of their earnings go into repaying loans every month, and are unable to sustain this.”
De Wit notes that the savings of small entrepreneurs have been hit by the closure of the SA Post Office.
“Many of our clients relied on the Post Office for savings, but that is no longer an option for them.”
Another indicator of distress is the bad debt write-offs at SEF: from R7 million a year (out of a loan book of about R500 million) pre-Covid to R42 million post-Covid, as entrepreneurs who lost their businesses were unable to repay loans. That figure returned to a more respectable R18 million in 2023.
A common misconception is that the informal sector is the employer of last resort for those unable to find work in the formal sector.
The Covid experience tells us something quite different: of the 1,8 million jobs lost in 2020/21, the highest percentage of these came from the informal sector.
Time to review regulated charges?
Evans Maphenduka, executive coordinator for the Development Microfinance Association (DMA), an umbrella body for several microfinance organisations, agrees with Van Pletzen that many consumers are being forced into the hands of illegal lenders due to the unsustainable conditions facing the formal microfinance industry.
The last review of the rates and fees charged by registered credit providers was nearly 10 years ago, and the cost of doing business has risen dramatically since then.
“The current method of fixing charges where the rates are linked directly to the repo rate prejudices microfinance institutions and compromises their ability to earn sufficient revenue to cover their costs,” says Maphenduka.
“We would like to see a more regular review of allowable interest rates that we can charge, but we would also like fees and charges to be responsive to consumer inflation on an annual basis.
“While this recommendation may seem to increase the cost of credit to our rural clients, it must be noted that most of our development lenders provide more than just credit. They also provide financial education as well as a range of other non-financial services. They basically provide services to their clients in their localities.”
Bleeding clients
to the loan sharks
Development microfinance intermediaries are regulated the same as lenders to the formal sector.
“As a result, our clients have to comply with complicated regulations that do not make sense to them.
“There is need for government to look at the multiple regulations that place unnecessary burdens on the informal business owners and the institutions that lend to them,” Maphenduka says.
DMA members lost about 20 percent of their clients post-Covid 19. Maphenduka says inappropriate regulations, increases in the basic costs of living, load shedding and other undefined challenges are the likely causes. — Moneyweb
