Obligations, repayments and regulations: the debt conundrum in the global South

Retailers offer ‘rewards’ programs and loyalty cards that can trap customers into a debt cycle. Deborah James

This is part of a series of articles The Conversation Africa is running on financial inclusion and micro credit and their role in economic development.

Why should we repay our debts? Why do we borrow in the first place? And why do some people, despite intense feelings of obligation and shame, default?

Worldwide, and especially in the global South where, as researchers Mosa Phadi and Claire Ceruti have said, “everyone is now middle class”, and people are not willing – as they once might have been – to think of themselves as belonging in a low and stigmatised social bracket, these questions have taken on particular relevance.

Although there are commonalities across different settings – people in India, Mongolia, and Guatemala have all experienced a sudden rise in indebtedness – the answers also vary depending on context.

In South Africa, a concerted attempt to abolish all apartheid’s facets coincided with a massive rise in expectations. This demand was met with a burgeoning supply. As members of a rising black middle class replaced the mostly white incumbents of the previous civil service, these newly redundant public servants started lending money to those replacing them – and others – at high rates of interest. They did so without incurring risk: they were using their borrowers’ salaries as a form of collateral.

Other micro-lenders soon joined them. Salaries deposited in people’s bank accounts thus started circulating around the system, with a considerable proportion – plus interest – ending up in the pockets of lenders. Is it any wonder that debtors began to despise and mistrust these mashonishas (loan sharks), and seek ways to avoid payment?

Why get into debt in the first place?

The answers are complex. The expectations of the newly upwardly mobile took the form not only of a desire for an increase in material wealth, but for investment in education.

Householders borrow from the future in order to secure the present – but they often do so, in turn, with a view to investing in that future. Many black South African parents, their own education options having been severely restricted under apartheid, are now expected to send four or five children to university.

Often the only way to do so is by borrowing against future earnings, even for those who abhor doing so. The Kekanas, a Sowetan family, have two parents working for a parastatal company. The mother, a frugal person, dislikes all forms of credit.

But the spouses disagree about their priorities. Should their daughter go out to work after finishing high school, or attend university? She does the latter, but extra financial pressures plus the parents’ arguments over budget priorities mean that the university is obliged to wait until the mother gets an annual bonus before the fees are paid.

Here, as is often the case, present day debt repayments need to be weighed up against other obligations. Luckily, the Kekanas’ daughter ends up getting a good job.

But recent student protests in South Africa show that, while such aspirations for higher education are ubiquitous, many parents – unlike the Kekanas – lack a regular income. Debts to banks and short-term/high-interest microlenders are incurred, and non-repayment can result.

Credit apartheid

For decades before this, however, borrowers mostly did keep up their repayments on the small loans they were able to incur for less substantial things. This was the only way that credit apartheid – a highly exclusionary system which had lent money to those in disadvantaged groups, but only in unequal ways – was able to maintain its business model and develop its characteristic features.

People disallowed from land or house ownership, and with few credit options, bought furniture or appliances on instalments, usually at more than twice the cash price, and paid them off item by item. Although most responded assiduously to the invoices that arrived monthly in brown envelopes, a complex system of procedures evolved to “catch” the defaulters.

Retailers, granted permission by clerks of the court, took what was owed to them directly out of debtors’ bank accounts, via the now-infamous ‘garnishee order’ system.

In recent times, given the steep rise in aspirations and expenditure, many employees – especially civil servants, but also train drivers, factory workers and supermarket employees – were having substantial parts of their salaries reclaimed by creditors before they were able even to see the money. This was, in effect, a system of legal regulation skewed to the advantage of lenders and lamentable in its lack of protection to borrowers.

Creditors rarely lost out or received a sanction for failing to check if clients were able to repay, and they had ways of getting their money back against all the odds. The negative consequences of debt, from people resigning from their jobs to escape creditors through cashing in their pensions, were here being intensified by illegal and unregulated collection practices.

This “advantage to creditor” culture has not gone unchallenged. A class action court case eventually ruled against some of these practices in 2015.

Escape routes

Besides this legal challenge, people were finding other means to escape from creditors. Some employees were regularly changing their bank accounts. Some employers were resorting to paying wages directly in cash to avoid creditors’ getting their hands on their employees’ money.

But truly effective regulation has been difficult to put in place, not least because borrowers are reluctant to stop accessing credit, or accept the strictures that bankruptcy would impose.

Anthropologist Parker Shipton is critical of the “self-evident truth” that

… all loans and repayments should cancel each other out.

Local ideas and values that underpin relations of debt, he says, are usually irreconcilable with financiers’ and bankers’ priorities.

David Graeber criticises similar assumptions that lie at the heart of the global capitalist order. Something originally thought of as “reciprocity”, in which gifts are returned only after long delays or are transferred onwards over the generations, has been transformed by the modern financial system into a relationship of unequal power and of enduring hierarchy – between creditor and debtor, first world and third world nations, rich and poor.

To reject the power of that system is also, implicitly, to question the obligations that require borrowers to repay their loans.

Deborah James is the author of Money from Nothing: Indebtedness and Aspiration in South Africa.