South Africa’s financial sector is defying economic gravity, with banks, alternative lenders and private credit funds expanding rapidly despite weak growth. This surge raises questions about risk, sustainability and whether credit-led momentum signals resilience or masks structural fragilities in a stagnant economy.
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The combined headline earnings of the country’s largest banks grew by an impressive 11.2% in the first half of 2025, reaching R69.7bn, far outpacing South Africa’s modest GDP growth rate of less than 1%.
This divergence raises critical questions about where all this money is going, the sustainability of such credit expansion, and the risks for borrowers in a landscape crowded with competing lenders.
The South African lending boom in context
While the economy shows only tepid growth—projected at just around 1% for 2025, a modest improvement from 0.5% in 2024, the availability of credit is surging aggressively. This surge is fuelled not only by traditional banks but also by a rapidly expanding set of private credit funds.
“Much like in the US post-2008, where private credit now comprises over half of the commercial lending market, these entities compete vigorously for borrowers in an increasingly complex lending ecosystem shaped by evolving economic conditions and regulatory environments,” acknowledges Gary Palmer, chief executive officer of Paragon Finance.
“It's a good time to be a borrower, because there's currently a surge in credit, fuelled by not only traditional banks, but also insurance companies, Developmental Finance Institutions (DFIs), private credit funds, FinTech lenders and asset managers,” adds Palmer.
Borrowers facing a crowded, complex market
Many small businesses face cash-flow challenges and feel underserved by traditional banks. According to a recent small business survey, 56% of SMEs experience cash-flow issues while 63% feel that traditional banks do not prioritise their lending needs. This has fuelled demand for alternative lenders, including fintech platforms offering fast, flexible loans, but often with opaque and complex terms.
A critical issue is that the pace and scale of lending far exceed the economy’s growth rate, highlighting a disconnect: much of this capital flows toward riskier borrowers, including SMEs traditionally underserved by banks due to regulatory restrictions and cautious portfolio management.
While fintech has increased access to credit for underserved individuals and SMEs, providing speed, convenience, and alternative credit scoring through non-traditional data, improving aligning repayments with cash flows and reducing default risk during low periods. However, the complexity of repayment models risks borrower misunderstanding, potentially leading to over-borrowing and debt traps.
Many fintech and private credit providers frame their products as purchasing future revenue rather than traditional loans, yet from the borrower’s perspective, they must repay with costs that may not be transparent.
“Sadly, this blurring of lines often masks the true cost of borrowing, making it difficult for borrowers to understand effective interest rates and repayment burdens, and risks borrowers unwittingly entering expensive and complicated debt arrangements,” says Palmer.
These smaller, more expensive lenders can be helpful when businesses need quick cash. However small business owners need to understand in advance how they will pay back or exit the debt, in order to avoid falling into a debt trap.
“The problem starts when short-term, high-cost loans become a permanent part of the business’s finances with no clear plan to repay them. When this happens, businesses struggle because they are stuck with expensive debt that is built into their capital structure, making it harder to grow and survive,” notes Palmer.
Comparing South Africa and the US: Parallels and divergences
The US private credit market, now at $3tn in assets under management and projected to reach $5tn by 2029, is far larger and more mature, tightly interwoven with the broader financial system.
However, recent reports highlight emerging cracks: the share of private credit deals featuring "payments-in-kind" (PIKs)—where borrowers defer interest by adding it to principal—has risen from 7% in Q4 2021 to 10.6% in Q3 2025, with over half now classified as "bad PIKs" added post-deal due to borrower distress. These signs of deteriorating credit quality serve as a cautionary tale for South Africa, where similar vulnerabilities could amplify risks in a slower-growth economy.
Operating within an environment of stringent regulation and systemic oversight, American private credit funds provide vital financing while mitigating risks related to liquidity mismatches and "covenant-lite" loans—though recent wobbles underscore the need for vigilance. South Africa, in contrast, is still developing such regulatory frameworks, striving to balance innovation with financial stability.
Banks in South Africa occupy a dual role: they compete with private credit funds but also finance them. This interconnectedness amplifies credit availability but may obscure underlying risks within the financial system, especially if borrowers begin defaulting.
“Although private credit is growing swiftly in South Africa, it does so against the backdrop of slower economic expansion, intensifying concerns over credit quality, leverage, and the possibility of a credit bubble, particularly as we witness cracks forming in the more mature US market that we need to avoid here,” cautions Palmer.
Impact on borrowers and the economy
South African banks have shown resilience, benefiting from diversified income streams such as fees, trading, commissions, and wealth management alongside lending revenue. They also enjoy improved loan quality, stable deposits, and geographic expansion into other African markets, coupled with disciplined cost management amid favourable interest rates.
However, the combined forces of aggressive bank lending, fast-growing private credit, and fintech disruption operating within a slow-growth economy amplify systemic risks, including over-indebtedness, liquidity mismatches, and widespread borrower confusion about financial obligations.
“As a result of the increased competition among banks and other lenders, they (the banks especially) are forced to go up the risk curve and conduct riskier transactions for the same, if not less margins, which is not healthy,” states Palmer.
This disconnect between booming financial-sector earnings and sluggish economic performance indicates that credit growth is not translating fully into productive economic expansion. Many SMEs and consumers, driven by urgent capital needs and lower interest rates - the repo rate at 7.00% and prime lending rate at 10.5% following recent SARB cuts -, are borrowing without fully understanding complex or high-cost lending terms.
Opaque lending increases the risk of borrower over-indebtedness and defaults, which could have broader implications for financial stability. In this evolving dynamic landscape, Paragon Finance advocates for greater transparency across the credit ecosystem to protect vulnerable borrowers and the economy.
"We believe borrowers deserve full transparency on lending terms and clear interest rates, irrespective of who the lender is. Clients need simple, accessible information to make smart choices without getting caught in confusing debt traps.
"Lenders need to lend responsibly, and there’s an obligation for regulators to enforce stronger rules to protect everyone from predatory products or confusing credit products and keep our financial system safe," affirms Palmer.
South Africa stands at a pivotal moment in shaping its private credit markets. It is imperative for regulators, financial institutions, and investors to collaborate closely. Understanding capital flows, managing systemic risk, and protecting vulnerable borrowers will be vital as South Africa’s financial system navigates traditional banking, burgeoning private credit markets, fintech innovation, and economic realities.
By learning from international experiences, particularly the US, and tailoring policies locally, South Africa has a unique opportunity to foster sustainable growth alongside prudent financial stewardship.
