AFRICAN Bank may have been the first to fall, but this is just one part of a tragic story that concerns all microlenders who provide cash loans to fund consumption, which affects SA much more broadly and deeply than the collapse of a single business.

This article appeared in financialmail.co.za on August 14 2015.

Overwhelmingly, people who require a short-term cash loan of a few thousand rand are low-income earners with modest balance sheets. To these people, microloans hold out a promise of relief from the debilitating effects of being poor and offer a chance to sidestep the frustration of deferred consumption.

On this first point, the world economy is in decent shape, helped in no small measure by the slumping oil price. Specifically, given that the globe’s largest economies are oil consumers, rather than producers, the lower oil price is overwhelmingly positive for them. Perhaps the easiest way to illustrate the impact of the lower oil price is to liken the price fall to a tax cut for oil consumers.

According to one microlender’s website, I can borrow R1 000 for 30 days and repay the loan with R1 288,56 at the end of the month. In this way, if I were earning R12 000 a month, I could borrow from next month’s payslip to fund this month’s spending.

But if my life ran into a speed bump and I was unable to pay the R288,56 interest at the end of the first month, within four months my interest bill would be up at R1 000, to be paid within 30 days.

Imagine buying a home for R1m and within four months the interest on that home loan had ballooned to R1m. Such loan costs mar the landscape of microlending, where interest charges can amount to as much as 5000% a year on a cash loan.

In the case of the SA story, this financial torture turns into socioeconomic tragedy by virtue of the fact that the millions of cash loans that have been extended by the microlending industry have been used to fund consumption rather than production.

The cash-for-consumption nature of the microlending industry can be evidenced in many ways. Perhaps two simple illustrations are sufficient to make the point.

If microloans were being used to fund enterprise development, then the SA economy would be awash with newly formed microbusinesses. Or, if loans were being used to fund school fees, there would have been an explosion of enrolments in private schools.

Yet the total loan amount of African Bank’s 2,5m clients is more than twice the size of SA’s entire private education system.

Of course, some of the loans have been used to finance microenterprise development and spending on education — but these are the exceptions, not the rule.

Also, some of the loans have been used to fund more permanent spending, such as home improvements. But keep in mind that though home improvements can add to quality of life, homes are a consumption item, not a production item.

Lending at usurious rates, especially to poor people who use these loans to fund consumption, is a path to financial ruin. Even if we were to halve the interest rates currently applied to microloans, this merely lengthens the financial torment. The debt traps that these borrowers face have many ramifications, including aggravating the country’s already grossly distorted income distribution.

Far from being a social enabler that facilitates economic empowerment, consumer-facing microlending is a road to economic ruin. On top of the individual tragedy of immiserating debt, the reallocation of a country’s scarce resources from investment to consumption drags economic growth lower and diminishes job creation.

It is in this way that the microlending industry in SA has not been the financial champion it imagines itself to be. Instead, the industry is responsible for a crime against society that has torn our economic and social fabric.

I am not for one moment suggesting that credit is bad. Investment spending, which is at the heart of all growing economies, normally has to be funded out of loans. In this way, access to credit is a critical function in any modern economy. Indeed, all modern economies require credit extension to grow and develop. When wisely used, leverage leads to wealth creation.

It is equally important to underscore the point that not all microlending is irresponsible. An excellent case in point is Bangladesh’s Grameen Bank, which bases its lending philosophy on creating a "credit system which serves the poor and not vice versa". Loans are granted to establish microenterprises and the borrower is assessed for character and ability to repay the loan from income, as well as existing assets. This is conscious capital of the highest order.

As much as borrowing can be reckless and irresponsible, the same can be said of lending practices.

What African Bank and similar entities have done in extending credit to fund unaffordable consumption is unconscionable.

It is shameful that the vulnerable and exposed have been exploited and a disgrace to our society that we tolerate the perpetuation of this poverty trap. This has to stop.