Organised crime and illicit trade are sucking billions out of the South African economy. Illegal trade can take many forms in South Africa, from counterfeit cigarettes and alcohol to pharmaceuticals, clothing and even food. These illegal industries have been turbocharged by a perfect economic storm of rising inflation, unemployment, corruption and the ongoing fallout of the Covid-19 pandemic, leaving many people with little choice but to work in these tax-avoiding industries.
A recent estimate from the South African Revenue Service suggests that this type of illicit trade costs the economy around R100 billion every year in lost tax revenue. But the effects are also felt more widely than the public purse. Here we take a closer look at two of the illicit industries that are bringing South Africa to its knees.
Illegal scrap metal dealing
One of the fastest-growing illicit industries in South Africa is illegal scrap metal dealing. It is crippling power supplies, damaging public facilities and leaving trains unable to operate. Such is the scale of the problem that stringent measures and prison sentences of up to 20 years have been used to deter the theft of expensive metals, but so far they have had little effect.
Scrap metal theft has become so widespread in the last few years that it’s now one of the fastest-growing crimes in the country, and it’s having a devastating effect on utilities and public services. One area that has been hit particularly hard is South Africa’s rail networks, so much so that one railway line that used to see 72 trains per day now handles less than 10.
Two of the main reasons for the surge in metal theft are the rise in drug use and unemployment, which are two of the country’s enduring problems. In the first quarter of 2023, the unemployment rate in South Africa was 32.9%, which is among the highest rates anywhere in the world. This desperate situation is pushing people towards drug use, and to pay for their drugs, people are stealing the most valuable material they can easily get their hands on, which happens to be scrap metal. And aluminium, copper, stainless steel and nickel are all fair game.
To address the widespread theft of metal, the Department of Trade, Industry and Competition has produced draft policy proposals that outline the steps they’ll take. The plans include a six-month ban on the export of scrap metal from South Africa, which is intended to reduce the routes to market. This ban was initially approved by the cabinet in November 2022 and has recently been extended by another six months.
Illegal loan sharking
Another growing problem is the widespread proliferation of illegal loan sharks, known as mashonisas, who are taking over the short-term credit market in many of South Africa’s townships. So widespread is the practice that a report commissioned by the personal loan lender Wonga found that over 40,000 mashonisas are estimated to be in operation across the country.
Mashonisas provide short-term loans, typically of between R50 and R5 000, to borrowers looking to boost their cash flow to pay for transport, food, prepaid electricity bills and mobile phone airtime. Although the loan sharks are often portrayed as intimidating money lenders, research shows that they can also be respected members of the local community, such as bus drivers, hotel employees and even door-to-door Avon salespeople.
Some South Africans believe mashonisas provide a useful service by filling the void left by formal credit streams in South Africa, which many working-class people struggle to access. In fact, many borrowers choose to use loans from mashonisas alongside formal products. That suggests people value the service mashonisas provide, with speed, convenience and ease of access often touted as the benefits of this type of loan.
However, while there might be some benefits to the illegal lenders, they also cause a lot of damage. The lost tax receipts are a big cost to the economy. The loans also come with interest rates of between 30 and 50%. And when repayments are not forthcoming, the lenders can use intimidatory tactics and threats of violence.
To reduce the rate of illegal lending in South Africa, Brett Van Aswergen, the Wonga CEO, believes regulated lenders need to step up and do more to fill the void in the formal credit market. He thinks that widening access to loans to those with low credit scores and improving financial literacy across the board will reduce people’s reliance on the illegal lenders.