Their report, Social Grants: Challenging Reckless Lending in South Africa, with Deborah James of the London School of Economics and Black Sash, exposes and challenges the “exploitative” lending to grant recipients and offer possible solutions.
A Mellon Postdoctoral Fellow at UWC, Dr Torkelson has been working with Black Sash since 2016, when she was doing her PhD examining the role of debt in the social grant system under Cash Payment Services. In 2018, when grant delivery was moved to the Post Office, they designed a research project to see whether - and how - debt was still affecting social grantees.
Their research found that social grant beneficiaries continue to be targeted by both legal and illegal money lenders who engage in “reckless lending” by charging excessive interest rates on low-risk loans. While most people have heard of mashonisas or loan sharks engaging in unethical practices, Torkelson and Neves have shown that even legal lenders exploit the poor.
This was a significant problem under the old Cash Paymaster Services grant payment regime The 2018 introduction of a new South African Post Office bank account, called the Special Disbursement Account, limited automatic deductions and ended the abuse suffered by 71% of recipients. However, almost 30% of all grantees still receive their grant income through commercial bank accounts, including EasyPay accounts, which are still subject to abuses.
The researchers documented how legal and illegal lenders regularly charge high rates of interest, and engage in exploitative practices such as failing to give grantees loan conduct affordability tests, and honor a “cooling off” period between consecutive loans. They also often engage in fraudulent practices like deducting more than contracts stipulate.
But it doesn’t need to be this way.
“The first thing to do is to ensure that it is illegal to lend money on children’s grants (CSG and foster care) as well as temporary grants,” Dr Torkelson said. “In the case of children's grants, the money is meant for the child, who is under 18 and is not legally allowed to enter into loan agreements. The grant is far too small to support basic needs and should be completely de-linked from credit markets.”
We also need to protect adult grants like those for pensioners and disability grantees.
“Currently, the legal interest is far too high on loans secured with social grants because there is no policy specifically for them. They are deemed risky because of who they are, not by virtue of an analysis of their actual financial circumstance.”
According to Dr Torkelson, there is also a need to build a social safety net that does not require grantees to seek credit to cover basic needs.
“Grant amounts are very small. Individual grants, like pensions, often support whole households, not just the pensioner. Individual pensions are used to support whole households because South Africa does not have comprehensive social assistance for 13 million adults between the ages of 18 and 59 with no or little income. The exclusion of these adults from social assistance requires pensioners and disability grantees to borrow money to cover their households’ basic needs and emergencies.”
Because of that, she noted, individual action on its own will never be enough to protect people from excessive indebtedness.
“If a pensioner has a sick child in the house, and the local clinic is closed, she will likely take a loan to go to a private doctor. Many people borrow to pay for things that the state should be providing, like healthcare or education. The best way of solving the problem of debt among social grantees is to enact basic income support for 18-59 year olds with little or no income, raise the grant amounts so people have enough money to cover the basics, and ensure that other state services like healthcare and education are comprehensive and accessible.”
The researchers have had a number of positive engagements with the National Credit Regulator about the issues raised in the report, Dr Torkelson said, and they will soon be meeting with the Department of Trade and Industry, the South African Social Security Agency, and the Department of Social Development. ?