What is the difference between formal and informal credit in South Africa? Arabile Gumede spoke to Reabetswe Riba, Head for the Foundation Market at Old Mutual to help us understand the difference better.

What is the difference between formal and informal credit?

Riba explains that formal credit is when a customer engages with a licensed financial services provider and obtains credit via the licensed financial services provider.

In the informal credit space, where we typically deal with mashonisas, customers approach someone who is not necessarily licensed to provide financial services and is able to get a loan from that person, or able to engage with that person or that entity to close a financial need. Typically, these lenders are not regulated and not within the bounds of good practice or benchmarks with regards to the terms and conditions of that arrangement.

Why do people approach informal lenders?

“I think there are various reasons why customers would approach an informal lender,” Riba says. “On one end, one could argue, yes, it’s easier, because it requires less paperwork. So, the informal lender isn’t necessarily going to take you through a lot of checks and balances and assess your credit score and the likes.”

In most instances, the informal lender’s typically in it to make a return. Because it’s an unregulated market, that return could be anything up to 50% on the original loan amount. So, from a customer perspective, ease of access is there. But, as Riba notes, the customer isn’t protected in that environment.

Are burial societies a formal or informal?

From Riba’s perspective, we consider burial societies as an informal savings vehicle or funeral solution.

However, burial societies, in some way or another, are starting to want to formalize themselves. Therefore, as a burial society, you can come together as a group with the purpose of preparing for that eventuality should a member or a dependent of the member pass away. With that, there's a savings element typically to burial societies.

How do you find the right financial services provider?

• If you're walking into a branch or any sort of financial services provider, they should have a certificate, typically on the wall, that describes what they are licensed to provide.
• If you’re dealing with an agent who is approaching you, they should be able to tell you upfront who they are representing, their qualifications, and what they are allowed to sell.
• If you're unable to ascertain from that individual whether that person is qualified to provide those financial services, Riba recommends you call the company that this person says they work for.

Disclaimer: Old Mutual is a licensed Financial Services and Registered Credit Provider NCRCP 35