This column was first published in Business Day
A big part of our economy is untouched by registered lenders: the informal economy. That is an unintended consequence of credit regulations that make it impossible to lend to anyone who can’t produce a payslip and three months’ bank statements. If you’re an informal entrepreneur, you either must fund yourself or turn to illegal and often unscrupulous lenders.
The informal economy could be an important driver of jobs and economic growth. It makes up 30% of the national economy and provides 31% of employment. Given the oft-stated policy intention of stimulating small businesses, the informal sector represents a huge opportunity for development.
The National Credit Act and its regulations stipulate that lenders must undertake an affordability assessment before granting a loan. That applies to consumers and to businesses that have a turnover of less than R1m, but because informal businesses are not registered they are effectively sole proprietors and therefore seen as individuals.
Because those individuals are not formally employed (unless their business is a side hustle) they have no way of producing the required documents. Street-side hawkers, for example, have to have working capital to fund their stock. The absence of any formal lending makes it impossible for many people to enter the market, or to do so at expensive rates.
Historically there have not been big protests from the lending industry. That’s because the informal marketplace has been difficult to lend to anyway. Records are often scarce, there is limited accounting or assets to hold as security, and informal businesses can be hard to identify or locate. Thay are not creditworthy on traditional ways of measuring it.