Solomon Moos had never applied for a loan before and he had no idea what to expect when he walked into Louhen's Quick Cash here. The sign on the wall that read "We Serve The Black Community" struck him as a bit patronizing, but he needed the money. So he bit his lip, waltzed up to the counter and asked to borrow $100.
The lender assured Moos that the loan wouldn't be a problem so long as he agreed to pay the 40 percent monthly interest and surrendered his ATM card and pin number for collateral. Without reading any of the papers shoved toward him, Moos signed.
"When payday came they put a hole in my checking account," Moos, 24, said recently, recalling the costly bargain he struck more than a year ago. "I had nothing left so I had to go back to them and borrow again. This time they offered me more money, and when you haven't had much your whole life, it really makes your head swell when someone gives you money like that. The lenders think that a lot of us blacks are dumb when it comes to business and they take advantage of us."
Freed, finally, from nearly 50 years of oppression by a white minority government, South Africa's black majority is sinking in consumer debt. Wanting the good life that apartheid denied them, and able to establish credit for the first time, this nation's 31 million blacks are taking out more than 9 million loans each month. Since voters here abolished apartheid five years ago, loan shops offering quick cash at fat interest rates have become the country's fastest growing industry.
South Africa's blacks have discovered that neither their new-found political power nor the promise of opportunity guarantees them equality. Blacks have never owed so much. Household debt as a proportion of income eclipsed 70 percent last year, an all-time high.
White moneylenders who aggressively court black customers have seemingly appeared out of nowhere to capitalize on the population's suddenly heightened expectations. Practically nonexistent just six years ago, there are nearly 30,000 cash loan outlets in South Africa today, both mom-and-pop operations and publicly owned national chains. Last year, the industry collected $1 billion in interest payments, virtually all of it from poor blacks.
Nationwide, civil court cases involving debt have increased by roughly 20 percent every year since apartheid ended, while personal savings dropped last year to three tenths of one percent of annual household income, its lowest level ever.
Industry critics compare the dependence of poor and even illiterate blacks on mostly white lenders to the sharecropping system that emerged in America's Deep South after the Civil War. Needing field hands, white landowners exploited their paternalistic relations with freed but uneducated slaves to essentially con them into farming their crops for little or no pay.
"They've all of a sudden got freedom," said Bart Ngxolwana, who started a debt counseling firm here in Knysna two years ago, "but no money, no education, nowhere to go. And so these opportunists prey on their ambitions and lure them into an arrangement that is every bit as inequitable as the one they just escaped."
During the apartheid era South African blacks were known as the "unbankables." Legally forbidden from owning their homes, they rarely had the collateral to qualify for credit, and banks were not required to lend money even to credit-worthy black applicants. The revolutionaries-turned-rulers in the African National Congress prohibited racial discrimination in lending and housing. Still, with few resources and no credit history, most blacks failed to qualify for traditional loans.
Using savings and capital accumulated during decades as a privileged minority, white entrepreneurs took advantage of an almost obscure law passed in the final days of apartheid that was intended to kick-start small business development by deregulating the market for loans smaller than $1,000.
"They never dreamt that these loans would be used almost solely for consumption purposes," said Duncan Marsh, who works with a non-profit organization, Black Sash, that helps provide debt relief to the poor here in the Eastern Cape region. "So there was no thought given to how to draft the law in a way that would protect consumers."
Unlike microlending schemes in other developing countries like India, Bolivia and Indonesia that funnel money into agricultural projects and small businesses, only about 1 percent of South Africa's microfinance industry is used for commerce. By contrast, a 1996 World Bank survey of 206 microlenders worldwide indicated that almost 70 percent of loans were used for small business and agricultural development. South African microlenders charge 2,000 percent annual interest on average, compared with 44 percent worldwide.
Lenders here argue that they provide a service that no one else is willing to provide, and say their practices are necessary to turn a profit in a risky market. Said moneylender George Kolbe: "I've never held a gun to anyone's head and made them take out a loan. It's a free country now. If you want to make a loan, you can make a loan."
Since 1995 Kolbe and his brother Johan have opened three of the 10 cash loan shops in Knysna, an unhurried seaside retreat of mountainous vistas east of Cape Town, Main Street boutiques and country cottages. Thirty thousand of the town's 50,000 year-round residents are black, most living in the shantytowns that circle Knysna's quaint center.
"Everyone here," said Moos, "has either borrowed money from a moneylender, or knows someone who has."
Since he took out his first loan, Moos hasn't been able to free himself from the debt spiral. Already living paycheck to paycheck, Moos was left with virtually nothing when the lenders dipped into his bank account to retrieve the money he owed them.
"You have to keep going back just to put food on the table or just to have a little money in your pocket," Moos said. "I know now they are just robbing people."
The bottom fell out for Moos when he lost his job at a bakery this year and was unable to repay his $2,000 debt. Louhen's posted his picture in its store window, then followed with a lawsuit. To make ends meet, Moos's wife, Lezzie, borrowed $1,000 from another lender, repaying $1,500 over three months.
A Black Sash survey earlier this year showed that borrowers in Knysna and the surrounding communities used loans to bury relatives, finance their children's education, buy food or furniture, pay off other loans and take weekend trips. Nearly all borrowers surveyed either surrendered their ATM cards or signed forms enabling lenders to deduct repayments from their paychecks.
The survey reflected the borrowers' ambivalence toward the lenders. While the vast majority believed they had been cheated, most returned to borrow more, and many said they will repay the moneylender before satisfying any other debt. Lezzie Moos, for instance, described the lenders as "loan sharks," but said she planned to borrow money again because she wants to buy a used car.
Government officials created an agency last year to monitor the growing industry, and Parliament approved legislation this year to cap interest rates and stop lenders' use of bank cards. But an association of lenders challenged the law in court, winning an injunction until a hearing in November.
"The government is trying to make us the scapegoats" said Martin Grobler, a marketing consultant for Money Wise, which has opened 250 cash loan centers nationally since 1995, including three in Knysna. "But most of the people are already in deep water financially when they come to us."
Jobless and widowed, Dina, 54, borrowed money last year to help bury her daughter, who died unexpectedly. She did not want her full name used because she fears it will anger her lender.
Unable to make the payments on time, Dina was visited by the lender at her dark, two-room house in a neighborhood of hovels and lean-tos. When Dina explained that she had no money but would repay the loan when she did, the lender suddenly produced a stack of papers.
"I don't know if it was his fault or my fault, but he said sign and I just signed," she said.
The document, she later learned, gave ownership of her home to the lender. He is now demanding that she pay $50 a month in rent.
"It was very kind of him to lend me the money like he did, but what he did was wrong," Dina said. "I didn't know it worked like that."
CAPTION: Into the Red (This graphic was not available)