Ambitious Attempt to Take the Sharks Out of South African Credit Provision

Johannesburg, South Africa – The trade and industry department has published ambitious draft legislation aimed at creating a more responsible lending environment for banks, microlenders, credit bureaus and retailers selling on hire purchase or credit and even pawnbrokers.

Unfortunately, the details in the draft imply that the new structure will not be cheap. Theoretically, the credit-granting industry will have to carry the costs of compliance, but in practice they will be passed on to consumers, in one form or other. This could undermine one of the intentions of the draft Consumer Credit Bill, which is to make credit more accessible for a greater proportion of South Africans.

According to the explanatory memorandum to the bill, most of SA’s R362bn credit market consists of mortgages, vehicle finance and overdrafts at moderate rates, but the bulk of South African consumers do not have access to these products. Most only qualify for in-store cards, hire purchase or microloans, all at higher rates. Research conducted for the trade and industry department shows 72% of credit is extended to about 15% of the population while 67% of the population enjoys only 6% of total credit granted.

Interest rates charged vary from 2 percentage points below prime annually for mortgage and provident-fund secured loans, to 50%-100% for furniture finance, right up to an annualised 360% for one-month loans. The cost of credit is frequently inflated further by credit life insurance, loan application fees, administration and club fees, which are poorly disclosed. “Consumers often are not aware that fees and credit life insurance make up 50% of the total cost of credit,” trade and industry says.

“Nonstandardised disclosure prevents consumers from comparing the product offerings of different credit providers, leading to a lack of competition in the market and high costs.”

The draft Consumer Credit Bill aims to address developments in the past few years such as an increase in microlending, concerns about consumer overindebtedness, a lack of financing for small and medium enterprises and abuses related to administration orders. Administration orders are intended to help overindebted consumers owing less than R50 000 and with few assets to reschedule their debts.

For this complete story, please visit Ambitious Attempt to Take the Sharks Out of South African Credit Provision.