Informal Finance and Its Regulation: A Comparison of South Africa and Zambia

Abstract

Unregulated or weakly regulated financial institutions remain important providers of financial services across Sub-Saharan Africa. This study examines how such institutions operate in South Africa and Zambia, which represent contrasting regulatory approaches-restrictive and enabling, respectively. Drawing on qualitative interviews with providers and users, this research finds that group-based savings-and-credit associations and private money lending remain central in both contexts. In South Africa, savings groups are more closely connected with banks, while private money lending is criminalized. The findings suggest scope for regulatory convergence toward a more plural and competitive financial sector, one that actively supports savings groups while adopting less punitive approaches to private money lending.

1. Introduction

Informal finance plays a significant role across Southern Africa, particularly but not exclusively for people with little access to regulated financial services (Allen et al., 2019; Aly, 2014; Hassan, 2024; Klapper & Singer, 2015; Masuku & Nzewi, 2021; Nguyen & Canh, 2021; La Porta & Shleifer, 2014). Similar patterns are found globally: in Asia for example, community-based savings and credit associations (ROSCAs/ASCAs) remain important complements to the formal banking sector in India and Bangladesh (Ha et al., 2025), while in Latin America, many households rely on loans from family and close social networks in response to inadequate formal credit supply. Informal financial services, defined as payment, savings, credit, insurance and related services operating outside the regulated banking system are particularly important to people living in rural areas, urban townships, with low incomes, and operating micro businesses (Chibesa & Mwange, 2024; Mago & Modiba, 2022).

Globally, similar dynamics exist: in Latin America, socio-economic factors such as low trust in banks, documentation requirements, and high transaction costs drive users toward informal or semi-formal finance (Magalhães et al., 2024; Rubio & León, 2025). In Southeast Asia, informal savings groups are often complemented by NGO-supported microfinance, blurring the lines between informal and semi-formal finance (Ha et al., 2025). Informally regulated finance encompasses a wide array of institutions, including-the twin focus of this paper-community-based savings and credit groups, and individual private moneylenders (Ky et al., 2021).

While informal financial systems offer extensive accessibility and flexibility, they also pose significant risks, including potential exploitation of vulnerable individuals and businesses, facilitation of money laundering activities, and contribution to overall financial instability (Kotut, 2025; Lobato, 2025; Peter & Orser, 2024). Such risks are not unique to Africa: in South Asia, moneylenders are often criticized for charging usurious rates (up to 200% annually), while in Latin America, weak institutional oversight has enabled predatory lending and fraud in informal networks (Ha et al., 2025; Herrero et al., 2025). The unregulated nature of these services can leave users exposed to fraudulent practices and unfair terms, potentially exacerbating economic inequalities (Zia et al., 2022).

Additionally, the lack of oversight may enable illicit financial flows, undermining efforts to combat financial crimes and maintain economic integrity (Makmur, 2024). Conversely, over-regulation of informal finance services may stifle the benefits they can offer and hinder financial inclusion (Lah, 2024). Stringent regulatory measures also risk driving these activities further underground, making them even more difficult to monitor and regulate. Comparative studies confirm this: research across more than 70 countries shows that overly strict regulation reduces access to both formal and informal credit, whereas flexible institutional frameworks allow informal finance to play a complementary role in financial inclusion (Khanh, 2019). This could inadvertently exclude a significant portion of the population from accessing any form of financial services, thereby hampering economic growth and development. This suggests the need for balance regulation, and scope for policy learning through comparison of how informal finance is regulated-and with what outcomes-under different jurisdictions. Comparative studies across continents (e.g., between Asia, Latin America, and Africa) indicate that regulatory regimes that recognize informal finance (rather than purely criminalizing or ignoring it) tend to produce better outcomes in financial inclusion, user satisfaction, and reduced economic exclusion.

This paper draws on qualitative interviews with both users and providers of informal financial services in South Africa and Zambia-two countries that adopt contrast in their regulation of the sector. The paper contributes to this debate in three ways. First, from the supply side, the paper compares how restrictive and enabling regulatory regimes shape the organization and behaviour of informal finance providers. From the demand side, the paper highlights how these regulations influence the choices, strategies and vulnerabilities of users. Third, the paper demonstrates the importance of both tensions and complementarities between formal and informal finance, extending the debates on financial inclusion beyond the binary of regulation versus informality. Therefore, the paper provides insights relevant to policymakers, financial institutions, and development organizations working to enhance financial inclusion and economic stability across the region.

The remainder of this section elaborates on the regulatory regime prevailing in each country and locates the paper in wider literature. The third section of the paper outlines the research methodology employed, the fourth presents findings, and these are discussed in the fifth section. The paper concludes by suggesting that South Africans could benefit from a more liberal policy framework that allows private money lenders to compete more openly and on an equal basis with group-based institutions.

2. Theoretical Framework

In South Africa, financial institutions are subject to a comprehensive regulatory framework under the National Credit Act (2005) and the Financial Sector Regulation Act (2017). These laws, enforced by the Prudential Authority and the Financial Sector Conduct Authority, require licensing, capital adequacy, risk management, and compliance with market conduct standards. While this strict regime applies to both formal and informal lenders such as mashonisas-whose operations without compliance are deemed illegal-stokvels remain largely exempt. Their regulation is comparatively lax, reflecting their community-based nature, but this exemption also means they are not formally recognized or protected under the Acts (DTIC, 2024; Yimer, 2024).

In Zambia, the Ministry of Finance and National Planning is actively involved in promoting financial inclusion, which includes supporting both formal and informal financial services. The Banking and Financial Services Act (BFSA) of Zambia which regulates formal financial institutions, stipulates that informal activities like money lending also require licensing. Kalobas (informal money lenders) need to obtain a licence from the Magistrate/Subordinate Court, involving registration with PACRA, obtaining a ZRA Tax Certificate, and a police clearance certificate, according to the Zambian Finance Ministry (Bank of Zambia, 2024).

Globally, different regulatory regimes provide useful comparative lessons. For example, India’s Self-Help Group (SHG)-Bank Linkage Program integrates informal women’s savings groups into the formal banking sector, while in Brazil and Mexico, community-based savings cooperatives operate under lighter regulatory supervision but are recognized as contributors to financial inclusion (Ha et al., 2025). In Southeast Asia, some governments have supported hybrid models where fintech platforms partner with ROSCAs to increase transparency and record-keeping (Ha et al., 2025).

In a nutshell, Zambia has a more relaxed regulatory framework for informal finance, while South Africa’s regulatory framework is as tight as that which applies to formal finance. This opens up scope for useful comparison with other countries, such as Zambia, that have looser regulations. The informal money lenders in South Africa generally do not comply with the requirements of the NCA which renders them illegal, meanwhile the Stokvels are exempted from this act which makes them legal and encouraged regardless of the form or shape they take. In contrast, while the Zambian government has introduced regulations to protect consumers against unfair and illegal practices, they positively recognize and allow all forms of informal finance including informal money lenders and different types of group-based finance.

Given the distinct regulatory environments and levels of official recognition of different types of informal finance, this study compares these two types of informal finance (private money lending and group-based finance) between the two countries. At the same time, by situating these findings within the global literature, the paper contributes to broader theoretical debates on how governments across Africa, Asia, and Latin America mediate the tension between informality and financial regulation. Definitionally, informal finance includes financial services that are neither registered nor beholden to a formal regulatory framework such as the National credit Act (NCA) in South Africa or Banking and Financial Services Act (BFSA) in Zambia. The novelty is that some countries including South Africa and Zambia have started to positively recognize and institute loose regulations to certain forms of informal finance. Thus, it is important to compare the different forms of both individualized and group-based informal finance between South Africa and Zambia.

Many studies evidence the diversity and resilience of informal financial institutions across Southern Africa (Mago & Modiba, 2022; Sibindi & Mpofu, 2022) even as regulated financial services have expanded. Informal financial service providers are as capable of adapting and extending their services to a wider clientele as are formal financial institutions (Awunyo-Vitor, 2015). They include rotating savings and credit associations (ROSCAs), accumulating savings and credit associations (ASCAs), informal moneylending, loan brokers, and burial societies, village savings and loans associations (VSLAs), inter alia. They serve a variety of needs such as consumption smoothing, enterprise financing, credit and savings, and intermediate between savers and borrowers (Aliber, 2015). Self-help community-based organizations are usually owned and managed by members who pool savings and lend to members and sometimes non-members depending on the structure of the financial service (Aryeetey, 2008; Simatele et al., 2021). In some cases, individuals are required to buy, whether in full or by instalments, a share of the cooperation or association to become members. Other self-help groups have mandatory deposit requirements and credit limits for their members.

The main identifying feature of informal financing is that it is based on personal relationships rather than anonymous interactions between the clients and formal financial institutions (Aliber, 2015). They often rely on personal relationships with and knowledge of the clientele rather than relying on documented credit histories and collateral to determine and minimize the risk involved in granting credit. This enables them to offer differentiated products and serve different niches and needs. For example, kinship or membership is key for a group-based informal institution such as a RoSCA or SCA to grant credit sometimes without proof of collateral or documented credit history. Informal money lenders are important as they cater for the population segment whose lack of collateral and documented credit history precludes them from accessing formal credit facilities (Zondi, 2016).

However, informal financial agents are not subject to formal regulations that shield clientele against exploitation and illegal activities which sometimes occur in the informal market. For example, private money lenders, also known as loan sharks in South Africa, sometimes confiscate the identity documents or bank cards of the clients to ensure that the borrowers do not default on loan repayment (Zondi, 2016). This is an illegal Act in South Africa and many other countries. Additionally, the cost of credit from informal moneylenders can be exorbitant, with demand coming from people lacking in formal education and financial understanding and education, or who have no other option. Informal sources are often the only ones available because it does not require them to satisfy membership eligibility criteria or meet collateral requirements. Although this may be the only source of available credit, short maturity periods and high interest rates do not make this credit attractive, particularly for those seeking working capital and finance for fixed investments.

While rural households are generally known to borrow from their own communities, they sometimes travel far to borrow from a moneylender. Other sources of informal finance, especially in rural areas and townships, are family members and relatives, neighbours and friends. Unlike money lenders such as loan sharks, these sources are non-commercial and usually associated with low cost of borrowing (Nguyen & Canh, 2021). Non-commercial informal financial arrangements often occur between friends as investments into social security in the form of future reciprocity (Johnson, 2017). On the other hand, the commercial informal financial arrangements are those that are aimed at making profits (Ngalawa et al., 2013).

3. Materials and Methods

The data was collected through semi-structured interviews which focused on the supply side of the financial landscape. This supply-side interview guide mainly covered information about financial services providers’ choice of services, how they run their services, the benefits and challenges of offering these services, as well as registration status of their businesses.

Data collection started with a pilot study was conducted in the Eastern Cape province of South Africa, where the author is resident. These interviews were mostly conducted face-to-face. Constraints on time, language proficiency and resources meant that some were also conducted by telephone and/or with the help of research assistants who also helped with transcription and translation of the interviews. The choice of interview locations was opportunistic, starting with areas where the authors had personal links, including Mevana village in Port St Johns, peri-urban areas of East London and of Gqeberha in the Eastern Cape. The data collected from Eastern Cape province of South Africa was contrasted with a second round of data collection carried out by the author with the help of locally recruited field assistants in Lusaka, Zambia. All these areas are densely populated and characterized by a high concentration of informal financial services.

Once the specific areas have been identified, respondents were identified through friends and acquaintances in the respective areas. Subsequently, snowballing sampling wherein the first participants linked us up with the next potential participants. For example, when the users of the financial services were interviewed, they would also be asked where it was possible to link the researcher with the providers of the services they use. Similarly, when the suppliers of the financial services were interviewed, they would also be requested, where it was possible and appropriate, to link the researcher with some of their clients and competitors. Moreover, careful consideration was given to the heterogeneity which includes the race, education and income levels gender as well as age of the participants. Although the primary focus of this study is on the supply side, a total of 89 interviews were conducted including 24 supply-side interviews, two policy representatives and 63 users. The breakdown of these interviews conducted in illustrated in

Table 1. Breakdown of interviews.

	South Africa	Zambia	Total
Providers:
Informal money lender	4	3	7
Stokvels/Mutuals	11	6	17
Users	30	33	63
Policy representative	0	2	2
Total	45	44	89

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The qualitative methodology was chosen to capture the lived experiences and nuanced perspectives of both users and providers of informal finance, which are often obscured in large-scale quantitative studies. While the sample size is modest, it aligns with established guidance on qualitative research, where depth and richness of data are prioritized over breadth (Guest et al., 2020). The point of data saturation was reached, as recurring themes and practices emerged consistently across interviews, suggesting that the sample was sufficient to address the study’s objectives.

The focus on South Africa and Zambia is deliberate and theoretically motivated. These two countries provide contrasting regulatory environments: South Africa represents a restrictive regime toward informal finance, while Zambia demonstrates a more enabling and integrative approach. Examining these divergent cases allows for a comparative analysis that highlights how regulatory frameworks shape informal financial practices. This “most-different systems” logic (Fleming, 1970) enhances the analytical value of the study despite the limited geographical scope.

It is acknowledged that findings cannot be generalized to all African or developing-country contexts. However, the case study design provides analytical generalizability (Yin, 2003) by generating insights into how regulation interacts with informality-insights that can inform debates in other settings where similar tensions between formalization, regulation, and financial inclusion exist. Future research could build on this foundation by incorporating additional country cases or mixed-method designs to broaden the scope of inference.1

Descriptive analysis was used to describe and compare the different types of financial services between South Africa and Zambia, then inductive thematic analysis to analyze the data in more depth. Themes are reflected in the structure of the Results Sections below. This is a suitable analysis method for text data obtained through open-ended semi-structured interview questions about a myriad of different types of informal financial services ranging from credit, saving and insurance services. The fact that the themes are extracted from the content of the data without imposition of a prior coding structure had the important advantage of enabling the study to capture not only the ‘known unknowns’ but also ‘unknown unknowns’ regarding informally regulated finance.

Thematic analysis was conducted following the six-step process outlined by Braun and Clarke (2006). This approach ensured systematic coding, theme development, and interpretation of the interview data. The key steps are summarized in

Table 2. Thematic analysis process.

Step	Description	Key Actions Taken
1. Data Preparation	Recorded and transcribed all semi-structured interviews. Local language interviews translated into English.	First author + translator ensured accuracy; verified against audio to preserve meaning.
2. Initial Coding	Familiarization with the data.	Open coding: identified relevant segments; assigned descriptive labels.
3. Axial Coding	Linked codes into categories.	Categories developed into potential themes describing financial services.
4. Theme Generation	Combined and refined codes into themes.	Preliminary themes created; weak themes merged, split, or discarded.
5. Theme Review & Definition	Validated themes against dataset.	Multiple transcript reviews: ensured themes were coherent and well-supported.
6. Analysis & Interpretation	Advanced arguments connecting data and theory.	Manual processing used (no qualitative software) to retain analytical depth.

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The research received prior ethical approval from Fort Hare University’s ethical clearance committee, certifying that it complied with the University’s ethical principles. Data quality was also strengthened by using the first three interviews in each country to test and strengthening the quality of the semi-structured interview guide, while also ensuring the concentration and suitability to the local conditions. This entailed discussion between the author and fieldwork assistants, with revisions were made where necessary to improve the quality and effectiveness of the interview questions. Research confirmability was also enhanced by a rigorous and transparent process of coding the study findings. Lastly, while the study’s findings build directly on the experiences and perceptions of a relatively small number of interviewees their generalizability was enhanced through cross-comparisons both internally across users and providers in the two countries, and with secondary literature.

4. Results

The analysis of interviews conducted in South Africa and Zambia highlights how individuals and groups engage with informal finance in ways that reflect both social realities and economic principles. Using a thematic analysis approach, the findings are presented across two broad categories: group-based informal finance and individualized informal finance. Within each, the subthemes are linked to economic theory, particularly concepts of risk management, information asymmetry, enforcement mechanisms, and commitment devices. Illustrative quotations from respondents are integrated throughout to substantiate the thematic interpretations.

4.1. Group-Based Informal Finance

Group-based informal finance emerged as one of the most prominent themes in both South African and Zambian contexts. These arrangements do not merely substitute for formal financial services; they represent collective strategies of risk mitigation, social inclusion, and commitment enforcement, particularly for populations marginalized by formal finance. Women, low-income households, unemployed individuals, and rural dwellers mobilize around shared vulnerabilities to design self-help systems for saving, borrowing, risk pooling, and consumption smoothing.

Importantly, the findings reveal that these institutions are heterogeneous, adapting to diverse member needs through different models such as rotating savings clubs, burial societies, grocery groups, and village banks. The ways in which risk is mitigated, information asymmetries are managed, and formal linkages are established demonstrate the sophistication of these grassroots systems.

Table 3. Group-based informal finance in South Africa and Zambia.

Category	South Africa (Stokvels)	Zambia (Mutuals)
Rotational savings	Rotational savings stokvels-members contribute fixed amounts (usually monthly) and receive a lump sum on a rotating basis. Some groups run for 11 months to avoid December contributions. Supports discipline and lump-sum purchases.	Chillimba-similar rotating scheme with flexible contribution intervals (weekly, fortnightly, or monthly). Lump sum can be freely used, though some groups encourage or monitor spending on tangible items.
Accumulating savings & credit	Accumulating savings and credit stokvels-combine saving with lending. Interest on loans increases group savings. Some groups open bank accounts, though most still rely on members’ accounts.	Saving groups & village banks-operate on 9–12-month cycles with distribution at cycle end. Provide interest-bearing loans and emphasize financial literacy. Often supported by NGOs/MFIs; more structured with bylaws and elected leaders.
Consumption-focused groups	Grocery stokvels-members pool funds to buy groceries in bulk, often at year-end. Negotiate discounts and delivery from suppliers. Provides food security and cost savings.	Less common in Zambia under same label, but similar bulk purchasing may occur informally within saving groups.
Insurance/risk-sharing	Burial stokvels-provide funds for funeral expenses. Function as informal insurance schemes.	Informal burial insurance-members contribute regularly or per bereavement to cover funeral costs. Organized via churches, workplaces, or social groups.
Major events/social support	Major events stokvels-support members’ major life events (weddings, graduations, traditional ceremonies) with money, gifts, or groceries. Reinforce community bonds.	Major events insurance cover-informal arrangements covering weddings, graduations, milestone birthdays. Contributions pooled to support members at key life events.
Cultural/social dimension	Deeply rooted in South African community traditions; promote solidarity, trust, and social belonging.	Strongly embedded in Zambian social structures; promote mutual aid, often linked to churches, NGOs, and grassroots organizations.

illustrates comparative summary of insights for group based informal finance in South Africa and Zambia.

4.1.1. Collective Savings and Rotational Finance

Rotational savings schemes illustrate how groups develop commitment devices to encourage disciplined savings and periodic access to capital. In South Africa, stokvels (also called umgalelo) are the most established form of collective finance. Members contribute fixed amounts monthly and take turns receiving lump-sum payouts. This practice addresses the economic challenge of “time-inconsistent preferences,” by forcing members to save through group rules. One South African respondent explained how cultural and financial considerations shape the cycle: “Others prefer to accept 11 members so that the cycle will run for 11 months because December is a busy month for everyone. It makes sense to relieve members of the responsibility to contribute to a stokvel.” (SA-07, female, rotational stokvel member).

In Zambia, the comparable system is Chillimba, which operates with similar rotating principles. Contributions may be weekly or monthly, but groups differ in how they manage risk of misuse. Some allow members to freely use lump sums, while others exercise monitoring to ensure tangible purchases: “We do not give you money directly… you tell us what you want to buy and then we go with you to the shop to buy everything, then share the receipt with the group as proof.” (ZM-11, female, chillimba member). Thus, while both systems address savings constraints, South African stokvels emphasize discipline through rotation, whereas Zambian chillimbas employ oversight to manage moral hazard.

4.1.2. Consumption-Oriented and Insurance-Based Groups

Economic theory emphasizes the role of informal finance in risk pooling and consumption smoothing. The interviews confirm that groups often organize not only for credit and savings, but also for collective consumption and insurance. In South Africa, grocery stokvels pool funds to purchase bulk goods, reducing household expenditure through economies of scale and collective bargaining. One member noted: “We buy our groceries from Sparks because after purchasing from their shop in bulk, they ask us whether we have transport or not… and if we say no, they offer their big truck at a low price, the one that carried us last December.” (SA-12, female, grocery stokvel member).

Burial stokvels illustrate informal insurance: contributions are pooled to cover funeral costs, a major financial shock in African households. Similarly, in Zambia, informal burial and “major events insurance” provide coverage for weddings, graduations, and milestone birthdays. These arrangements demonstrate how groups create informal risk-sharing contracts, substituting for missing formal insurance markets.

4.1.3. Social Homogeneity and Membership Screening

A striking feature across both contexts is the reliance on social homogeneity as a mechanism to reduce information asymmetry. Groups are often organized along shared gender, age, or employment lines, enabling trust and predictability in financial behaviour. Women-only groups, for instance, cited the desire to avoid male dominance and elder “bullying.” Membership screening was also relational rather than documentary. As one South African treasurer explained: “Sometimes there are people who, when they come in, they ask us to take their things because they feel we might not trust them. Sometimes they come in and say, ‘Please take my things because you might not believe in me.’” (SA-10, female, stokvel treasurer). Such practices reflect the use of reputation and peer guarantees as collateral substitutes, reducing the enforcement costs typically faced by formal lenders.

4.1.4. Collateral Substitutes and Enforcement Mechanisms

When trust was insufficient, groups developed informal enforcement mechanisms. In South Africa, some stokvels required members to hand over essential documents, such as ID or bank cards, as symbolic collateral. In Zambia, receipts and joint purchasing provided evidence of appropriate use of funds. These mechanisms serve the same purpose as formal collateral: deterring default and ensuring accountability, albeit in socially embedded forms. They illustrate how communities adapt enforcement strategies to mitigate credit risk without excluding vulnerable borrowers.

4.1.5. Integration with Formal Banking Institutions

The extent of linkages between informal and formal finance diverged sharply between South Africa and Zambia. In South Africa, stokvels often maintained formal bank accounts, with some fixing deposits for six or twelve months to earn interest. Burial societies and emergency funds opted for non-fixed deposits, prioritizing liquidity despite bank charges. These practices highlight a hybrid system in which informal collectives leverage formal banking infrastructure for both security and yield.

In Zambia, by contrast, most groups relied on physical cash or mobile platforms such as Airtel Money. None of the interviewed Zambian groups had a formal bank account. This disconnect reflects the relatively underdeveloped financial infrastructure, although some banks are beginning to tailor products for informal finance.

4.1.6. Policy Recognition and Institutional Engagement (Zambia)

While Zambia lagged in integration, it benefitted from policy recognition, which increased legitimacy and reduced regulatory uncertainty. One Financial Sector Deepening (FSD) respondent explained: “Since the policy announcement was made to recognize and promote the informal financial sector… before then, members were not sure whether to publicly have those meetings or to do it secretly. Now everyone knows they can actually just operate, and it gives them confidence.” (ZM-21, FSD representative).

Zambian respondents also noted growing engagement from formal banks: “There’s so many banks that have offices dedicated to informal finance. That was really impressive for me, and I look forward to a period when we also have something like that in our market.” (ZM-17, microfinance practitioner). This suggests that Zambia’s institutional environment, though less integrated, is undergoing a transition phase, with policy recognition encouraging formal–informal linkages.

4.2. Individualized Informal Finance

While group-based finance relies on collective structures of trust and solidarity, individualized informal finance illustrates how financial intermediation emerges through personalized relationships and market-like exchanges. The findings reveal two major forms: (1) interest-bearing lending, dominated by private moneylenders such as Mashonisas in South Africa and Kalobas in Zambia, and (2) interest-free lending, typically involving friends, relatives, and neighbours. Here, the analysis focuses on the interest-bearing segment, since it is the most prominent and controversial, linking strongly to economic concepts of information asymmetry, risk pricing, enforcement mechanisms, and market competition.

4.2.1. Informal Moneylenders in South Africa-Mashonisas

In South Africa, Mashonisas operate in what can be described as a shadow credit market. They provide unsecured, short-term loans to households and small businesses excluded from formal credit due to lack of collateral, credit history, or regular income. From an economic perspective, Mashonisas respond to market failures in formal credit markets by leveraging local knowledge and social ties to reduce information asymmetry. However, all interviewed Mashonisas reported being unregistered, reflecting both legal barriers and perceived criminalization. As one respondent explained: “I heard that the law is against what we are doing. They are treating us like criminals when we are actually trying to survive… there are no jobs in this country. Trying to register would be tantamount to handing myself over for arrest.” (SA-03, male, moneylender).

Another reinforced this sentiment: “Where are we supposed to register? Besides, I think it is pointless because this is just a small business that I am running for survival and I might close it down when I find a job.” (SA-06, male, moneylender). These statements demonstrate how regulatory exclusion not only criminalizes informal lenders but also shapes their perception of risk, discouraging formal engagement.

4.2.2. Enforcement and Risk Mitigation

Given the absence of legal contracts and collateral, Mashonisas rely on informal enforcement mechanisms that range from symbolic collateral to coercion. For trusted clients, loans were often granted based on reputation and social standing. For borrowers from outside the local community, lenders demanded guarantees such as ID cards, bank cards, or social grant (SASSA) cards: “If I do not know you, you are not from my village, I don’t know how you pay, I take your ID and card so that you can go and make another card. Then when the pay day arrives, I go and withdraw with your card.” (SA-09, male, moneylender). This illustrates the use of collateral substitutes as a way to mitigate default risk, though often in exploitative or illegal forms.

Some respondents also noted the role of intimidation. One young female moneylender described using her father as an enforcer: “I only lend to trustworthy female students who live on campus. If they don’t pay, I ask my father, who is a well-known mashonisa, to call or visit. He is muscular and knows how to put up a serious face and strong voice. So far, this has been very effective.” (SA-14, female, student moneylender). These findings align with theories of informal contract enforcement, where the threat of reputational loss or social sanction is complemented by physical enforcement.

4.2.3. Interest Rates and Market Power

Unlike formal banks that adjust rates based on credit risk and income profiles, Mashonisas in South Africa charge uniform interest rates, often between 30% and 50% per month. These high rates reflect both the risk premium for unsecured lending and the limited competition in local credit markets. Borrowers confirmed that while such loans were often a last resort, they remained indispensable for emergencies.

4.2.4. Informal Moneylenders in Zambia-Kalobas

In contrast to South Africa, Kalobas in Zambia are visible, competitive, and semi-formalized. Unlike the secretive operations of Mashonisas, Kalobas openly advertise through signboards, social media, and other platforms. This transparency reduces stigma and allows borrowers to make informed choices, reflecting a more competitive informal credit market. Respondents emphasized that Kalobas were officially recognized: “Informal money lenders are required to be registered in Zambia so that they become semi-formal.” (ZM-18, RUFEP representative). Formal recognition has several effects: it encourages contractualization, reduces borrower fear, and strengthens market legitimacy.

4.2.5. Contracts, Collateral, and Market Segmentation

Kalobas typically use written contracts specifying loan terms, repayment schedules, and penalties. They also segment their market into collateral-based and non-collateral-based loans. Non-collateral loans are capped at about K20,000, while larger loans require assets as security. Nevertheless, cases of abuse remain. One respondent noted: “I hear there are some that will give you money to pay and tell you your money is due in 30 days... then they will unexpectedly call you and tell you that your money is due at 12 h. If you cannot pay, immediately they sell your personal assets.” (ZM-09, borrower). This demonstrates that even under regulatory recognition, power imbalances and opportunism persist. However, compared to South Africa, Zambian Kalobas operate under more transparent and competitive conditions, which likely explains their relatively lower interest rates (18–40% per month).

4.2.6. Competition and Borrower Choice

Unlike the localized monopolies often observed with South African Mashonisas, Zambia’s dense network of Kalobas creates competitive pressure, benefiting borrowers through lower rates and better treatment. Lenders differentiate themselves not only through pricing but also through advertising, customer service, and added benefits, echoing economic models of market competition in segmented credit markets.

4.2.7. Comparative Insights

The comparative findings highlight the ways in which individualized informal finance adapts to different regulatory, cultural, and competitive environments. Mashonisas in South Africa reflect a high-risk, monopolistic credit market sustained by regulatory exclusion, while Kalobas in Zambia operate in a semi-formalized, competitive environment with greater borrower protections. Both systems illustrate how economic constraints such as information asymmetry, lack of collateral, and weak contract enforcement are managed through locally adapted but often exploitative strategies.

Table 4. Comparing informal money lenders between South Africa and Zambia.

Country	South Africa	Zambia
Local term	Mashonisa	Kaloba
Recognition (/legality)	Illegal	Legal
Average interest rate charged per month	Relatively high interest rate (30% to 50%)	Relatively low interest rate (18% to 40%)
Popularity and outlook	Few and unpopular and stigmatized	Widely used and less stigmatized
Collection and risk mitigation measures	Aggressive and sometimes illegal mechanisms of collection and risk mitigation	Less aggressive and mostly legal mechanisms of collection and risk mitigation
Contracts	Mostly verbal	Mostly written

illustrate a summary of comparative insights for informal money lenders in South Africa and Zambia.

5. Discussion

Although South Africa has made strides in expanding the reach of formal financial services through financial technology, microfinance, and liberalization, a substantial portion of its population remains unserved or underserved, continuing to rely on informal finance. Compared to Zambia, South Africa maintains a more negative stance toward informal finance-particularly informal moneylenders-and has sought to formalize or suppress many such practices. By contrast, Zambia has adopted a more enabling environment, actively recognizing and supporting group-based mechanisms such as Chillimbas, savings groups, and village banks.

In both contexts, individuals increasingly engage with both formal and informal finance, reflecting complementarities rather than simple substitution. This dual usage challenges conventional binaries of “formal versus informal finance” and highlights the persistent value of community-based systems in meeting needs not addressed by formal providers. In South Africa, the enduring popularity of stokvels illustrates how informal mechanisms thrive even under restrictive regimes, aided by exemptions and linkages with the formal banking sector. Similarly, Zambia’s open recognition of informal groups underscores how enabling regulation can reinforce financial inclusion from below.

However, regulatory environments also generate unintended outcomes. In South Africa, the suppression of informal moneylenders appears to have spurred the proliferation of credit-focused stokvels that charge high interest rates and, at times, adopt exploitative practices reminiscent of moneylenders. This finding aligns with international research showing that overly restrictive regulation can push informal providers into riskier or more opaque practices (Kendall et al., 2020). Conversely, Zambia’s relatively relaxed regulatory environment echoes experiences from Latin America and South Asia, where supportive frameworks for savings groups and microfinance institutions have strengthened community resilience and enhanced inclusion (Allen et al., 2019; Banerjee et al., 2019).

Theoretically, these findings advance institutional perspectives by demonstrating how regulatory regimes do not simply formalize or suppress informal finance but actively reshape its forms, practices, and complementarities with formal systems. This contributes to a growing body of work emphasizing the co-evolution of formal and informal institutions (Helmke & Levitsky, 2004; Meagher et al., 2016). By showing how regulation produces both enabling and constraining effects, the study enriches debates in financial inclusion, institutional theory, and socio-legal studies of informality. Moreover, linking finance to broader issues of law, development, and social inclusion highlights its interdisciplinary relevance.

These findings resonate with evidence from Asia and Latin America, where informal savings groups and unlicensed lenders remain important even amid expanding formal financial systems (Jadagu, 2018). By situating the South African and Zambian cases within these wider comparative debates, the study underscores the global relevance of informal finance as both a challenge and a complement to regulated financial systems.

The study contributes to international academic debates in three ways. First, it enriches institutional theory by showing how different regulatory regimes (restrictive in South Africa, enabling in Zambia) shape the boundaries and complementarities between formal and informal finance. Second, it extends the literature on informal finance in developing countries by empirically demonstrating how state recognition or suppression of informal mechanisms produces unintended consequences, such as the formalization of exploitative practices under the guise of community groups. Third, it connects financial inclusion studies with interdisciplinary perspectives from development studies and law, emphasizing that informal finance cannot be fully understood outside its socio-legal and cultural contexts.

5.1. Policy and Practical Implications

For policymakers, the findings suggest that neither blanket suppression nor unchecked tolerance of informal finance is optimal. Instead, balanced approaches that recognize the social embeddedness of informal mechanisms, while protecting users against exploitation, may be more effective. In South Africa, a more enabling stance toward informal moneylenders-similar to the recognition afforded to stokvels-could reduce exploitative practices by bringing such actors into light-touch regulatory frameworks. In Zambia, efforts should focus on strengthening linkages between informal groups and formal providers, building on successes in savings groups and village banks. More broadly, both countries demonstrate that inclusive financial ecosystems must embrace pluralism, leveraging complementarities between formal and informal systems to promote resilience, innovation, and equity.

5.2. Limitations and Future Research

This study is not without limitations. The analysis draws on a relatively small sample, restricted to South Africa and Zambia, which may limit the generalizability of findings. The reliance on purposive and snowball sampling also raises potential selection bias, as participants may be drawn from interconnected networks rather than representing the full diversity of providers and users. Nevertheless, the study provides rich insights into underexplored dynamics of informal finance. Future research could extend the analysis through larger comparative studies across multiple countries, particularly those that have made greater strides in integrating informal finance into formal systems, such as India, Kenya, or Peru. Quantitative approaches could also complement the qualitative insights presented here, offering broader tests of the relationships identified.