How to start a money lending business in South Africa

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South Africa’s fintech market has been growing fast over the last five years.

According to German consumer data company Statista, it is projected that the largest segment will be digital payments, with a total transaction value of US$14,340 million in 2022.

  • With a population of over 60 million and a high mobile penetration rate of 180 per cent, there’s a ready market for the money lending business in South Africa
  • Financial inclusion in the country is still a challenge as 32 per cent of the population has no access to financial services, including bank accounts and loans
  • South Africa’s banking sector has largely been controlled by four major banks with a market share of over 80 per cent but digital lenders are catching up fast
South Africa’s Finance Minister Enoch Godongwana. NCA regulates digital lenders in the country. (Photo/Business Tech).

With a population of over 60 million and a high mobile penetration rate of 180 per cent, there’s a ready market for the money lending business. Financial inclusion in the country is still a challenge as 32 per cent of the population has no access to financial services, including bank accounts and loans.

South Africa’s banking sector has largely been controlled by four major banks with over 80 per cent market share. The lenders have not been unwilling to take risks to lend to small and medium enterprises (SMEs), disadvantaging them. This has resulted in almost a third of the population being locked out of credit needs.

The gap left by banks has been filled by alternative lenders targeting low-income earners. 89 per cent of this section of the market have mobile phones, with 39 per cent being smartphones. This means they can access online financial services.

South Africa has a population of over 60 million people offering a ready market for money lenders. (Photo/Getty Images).

The lending market was unregulated until 2005, when the country introduced the National Credit Act (NCA). NCA protects borrowers against traditional banks and other rogue lenders. It aims to increase access to credit, especially for low-income earners, and ensure fair lending terms.

Lending platforms are leveraging technology to reach more consumers. So, how can one start a money lending business in South Africa?

Steps

  1. Business plan

Establish a business plan to articulate the strategy for the business. The plan includes the name of the business, the startup cost, operational cost, target market, and how much you will charge customers (interest rate).

  1. Establish a legal entity

After writing the business plan, the next step is to formalise your company to protect you from being held personally liable if sued. The company must be compliant with the National Credit Act (NCA). Register your company with the National Credit Regulator (NCR).

  1. Register for taxes

Within 60 days of establishing your company, you must register for state and federal taxes. The application form for taxes is available in local South African Revenue Service (SARS) offices. Alternatively, you can register online on SARS website.

  1. Open a business bank account

It’s important to open a separate business account different from the personal one for accountability purposes.

About 32% of South Africans have no access to financial services. (Photo/Getty Images).
  1. Keep records/business accounting

Ensure that you record sources of income and expenses. This will help in understanding the performance of the business. Keeping records comes in handy when filing tax returns or seeking a business loan.

  1. Get a business insurance

Getting insurance for your company helps you operate safely without worries. Insurance tends to cover the company’s financial well-being in the event of a covered loss. The most common form is general liability insurance, which helps protect small businesses from bodily injuries and property damage claims.

  1. Define your business

Establish a strong brand reputation and stand out from competitors. In this case, find out how best to serve your target market and how to maintain customers. Promote and market your micro-lending company.

  1. Establish an online presence

A website and social media presence increase the credibility of the company. Through this, you can educate the target audience on your products. You can also get new clients online.

Despite a few challenges, South Africa’s digital lending market is poised for growth. Investors have a chance to enhance financial inclusion with the increasing loan investment opportunities.

READ: Kenya: Mobile lender Branch International to launch pan-African digital bank

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