Whereas our concern is poverty alleviation, it is our belief that reckless ding, over indebtedness, excessive interest rates and poor lending practices actually contribute to a widening and deepening of poverty in South Africa.

Nevertheless we respectfully request that Parliament and Ministers give careful consideration to, and/or provide clarification on certain issues. Our concerns fall into three broad categories.

1. Total Cost of Credit and Loan Size

In regard to the first concern, we would request that when setting loan size interest rate limits, if any, for developmental credit providers, the Minister required to consult with developmental credit provider associations and consumer interest groups and that he take into account the costs and positive social impact of providing developmental credit.

Unlike first tier economy lending, developmental credit requires a rigorous, intensive and expensive process to insure that the poor and very poor are reached, fully understand their rights and obligations and are prepared to enter into a credit agreement. The methodologies employed by developmental credit providers, and pro-poor organisations in particular, require large amounts of time, effort and expense in relation to loan size. Loan officers spend a significant amount of time working with clients before and during the loan cycle and this is expensive. This additional expense helps to insure that the credit provided results in positive impact for the client.

While the nominal interest rates of developmental credit providers may be significantly higher than those of traditional, commercial lending institutions lend to "prime" customers at rates three or four points above prime, these costs are offset by the lower non-interest transaction costs e.g. travel costs, because these institutions "go to the people", have limited documentation requirements and often do not even require collateral.

Organisations providing developmental credit must be sustainable and cover 5 if they are to meet the needs of millions, not thousands, of poor people would benefit from credit, but are ineligible under 1st tier economy loan requirements e.g. collateral, credit history, etc. If interest rates are set too pro-poor developmental lenders will have to rely on donor money in order to be able to expand. This becomes impractical when organisations expand to reach tens of thousands of clients, never mind hundreds of thousands or ~ns of clients. (In case the reader thinks it impractical for pro-poor MFIs to reach such numbers, we would refer them to the experience of pro-poor MFIs as Grameen Bank and BRAC in Bangladesh, both of which lend to over 3 million clients).

The alternative is to generate income to remain sustainable by using initiation servicing fees and even mandatory credit insurance. These fees can significantly raise the effective cost of a small loan and reduce transparency, as the client may not be able to determine the true cost of the loan. The setting of restrictive interest rates would jeopardise the ability of pro-poor credit providers to reach those who seek to empower themselves via access to micro-credit and in the case of smaller loans actually lead to a higher cost credit.

While recognising that certain interest rate levels are unacceptable, it is important to understand that it is not relatively high interest rates that prevent people from taking advantage of economic opportunities that move them out of poverty or reduce their vulnerability, but rather the lack of access to credit. Inappropriate interest rate ceilings for developmental credit providers would seriously imperil their ability to provide access to credit by expanding to reach very large numbers of the poor.

Restrictive loan size limitations also raise costs and reduce sustainability. The reason that most commercial lenders do not offer small loans is that the cost to process and manage a loan of R100 is practically the same as for a loan of R1 00,000. A pro-poor developmental credit provider needs to be able to offer a range of loan sizes that meet the clients' needs and help the MFI to responsibly manage costs versus revenue. In addition restrictive loan sizes would leave a large gap between what pro-poor developmental providers can offer (currently R1 0,000) and what a traditional banking institution has as a minimum for a small business loan (usually in the R1 00,000+ range). Just when a client is beginning to excel and gaining the capacity to perhaps provide employment to others in the community, their growth is stunted by loan size restrictions.

In regard to our second category, we are extremely pleased to see that the Specific preservation of rights, instructions, registration and similar status in section 6(1)(b) of Schedule 2 (page 214) of the December 2004 version of the NAC has been amended. This section appeared to designate current for-fit commercial lenders as developmental credit providers. Including purely for-profit institutions within this designation would mean that pro-poor organisations are painted with the same brush as many who may rightly be referred to as "the loan sharks" or "mashonisa". It would also have made it difficult for the Minister and the National Credit Regulator to assess the size impact of true developmental credit providers. Thank you again for recognising this and making this amendment to the December 2004 version of National Credit Act.

We recognise the importance of full disclosure and compliance. The current is quite comprehensive and the creators of this bill have again shown their concern for protecting the consumer, something that all of us are in complete agreement with. These measures combined with education and effective debt counseling will be a large step towards addressing the problems of over indebtedness and reckless lending. Laws are only effective if they are enforced, and we hope that the same amount of consideration and thought be given to the question of the resources that will be required for the effective enforcement of this bill.

While in agreement that compliance and reporting are important, we have some concerns related to some of the proposed loan registration and compliance stipulations. The requirement to provide current and previous loan history to the NCR will impose significant upfront costs to implement, and should there be a fee by either the NCR or a third party provider for each record, there will be additional on-going costs. These additional costs will

either affect the sustainability of organisations trying to reach the poor, or the costs must be passed on to those we are seeking to empower. This added cost burden to the poor may endanger their livelihood strategies or coping mechanisms. Many pro-poor developmental credit providers use a methodology that employs a non-collateralised, non-repossession policy for loans in default. When deciding whether to grant credit, these organisations have last call (actually no call) on insolvent borrowers, and therefore it is they that bear the risk, not the client, regardless of other outstanding obligations. Pro-poor credit providers seeking to provide credit that is empowering, take great care using non-traditional approaches to insure that loans are affordable to he poor. It is therefore proposed that non-collateralised loans and those not repaid via direct debit or other EFT process be excluded from the NCR reporting requirements.

Should this relief not be available, we would request that the provision of address information for certain classes of clients e.g. clients of developmental credit providers and non-collaterised loans, be excluded from reporting requirements. As experienced with the implementation of FICA, 2001, many individuals, especially the rural poor, have difficulty and great cost in providing documentation of their address and this requirement imposes an undue hardship on both developmental providers and their clients.

We would also request that the definition of private dwelling be changed, so where a business is conducted from the home, the premises are still considered to be that of a private dwelling. We also request that "employer" be defined such that the designation "employer" includes the self-employed.

Once again we applaud the purposes of this bill and thank you for the opportunity to present our views and concerns in relation to this legislation. Please find detailed amendments to sections 1, 69, 74 and 105 of the current National Credit Bill attached in Annexure A.

Wessel Venter - Beehive

Olivia van Rooyen - Kuyasa

John de Wit - Small Enterprise Foundation

Bernadette Moffet - Women's Development Bank

South Africa’s finance system is one of pervasive market failure at the lower end of the market. To address these, the policy and regulatory environment should focus energy and resources on supporting savings and resource mobilisation and small loans through which poor families can accumulate and improve their asset base. Mainstream financial institutions such as banks do not see it as profitable to develop such specialised pro-poor housing finance institutions on their own account. There is no source of wholesale finance or technical support to enable the development of a class of institutions offering such alternatives.

In the face of the failure of the formal banking system to provide finance to the low-income population, microfinance has become an important instrument in providing credit facilities to the unbanked. Microfinance organisations provide financial services for a range of uses from housing to income-generation . These organisations are characterised by small loans, short repayment periods and a reliance on the existence of saving ability rather than capital as collateral. As such they are often better suited to meeting the financial needs of the poor than the formal banking system.

The concept of savings as the basis for accessing credit and building equity is fundamental to the microfinance approach, with savers encouraged to network and build savings as a means by which both social and financial capital can be built. In addition to providing credit, microfinance organisations are often involved in creating an enabling environment within which clients can maximise the potential of their loans, through support, education, facilitation or networking with similar groups. In this way, micro finance becomes a tool for creating sustainable, long-term economic and social growth within communities, and enables clients to escape the cycles of debt and poverty

The is a need for this growing microfinance sector to receive the institutional and legislative support of government , not only in order to facilitate the sector's growth and scope, but as an active tool to ensure that we role back the frontiers of poverty.

MICROFINANCE MAKING A DIFFERENCE

Mrs Mfubu in the spaza shop she opened in her new house

Her third loan was of R1200 and with the profit generated during this loan cycle she bought cement and started making bricks after hours to build herself a two-roomed house. She also bought the rest of the building materials as well as furniture for her new house. She has recently taken a seventh loan from Tisha and her business is still growing. She is also buying clothes from Johannesburg and sells at pay points

Creating small –scale enteeprises

Mr Mkwanazi of Elukwatini in the Mpumalanga province was running a small shop when he received his first loan. Since he has been a client of Marang, he has been able to make changes to his business by building a new shop with bricks. The shop is now bigger and stocks a wider variety of goods. He has also bought a van which has made it more convenient for him to conduct his business Through several loans he has been able to increase his shop which is now a thriving micro business . Mr Mkhwanazi said "I only started seeing changes in my business after receiving the loan from the Marang . The interest is very low. I am very satisfied with Marang"

Creating a home and a business

Joyce Nomkhitha Mfubu is a56 year old widow who lives in Site B in Khayelitsha . Although unemployed, she approached Kuyasa for a loan of R2000 to make improvements to her house. With only the R960 (her pension and child grant) she receives from the government , she was determined to make a better life for herself. She was a member of savings group and through combining her savings, subsidy and Kuyasa loans, she has been able to build her own 60m2 home. Mrs Mfubu’s house is ot just a home but a business place : she has turned one room into a spaza shop with a turnover of approximately R100 a day.

Breaking the Cycle of Poverty

Basani Sophy Maluleke is the sole income earner in her family of six. In order to meet their needs, shetried to run a spaza shop, with little success until she was approached by the Small Enterprise Foundation (SEF) with the offer of a loan. Basani took out a loan in the hope that It would enable her to re-open her spaza shop. Over a number of years and with several loans, she has successfully diversified her business, which now employs a further two people Her business currently makes approximately R2300 per month; from this she pays each of her workers R400 per month, leaving her with R1500 per month. As a result of this income, she has opened a savings account with a bank upgrade her home to a four-roomed brick house and been able to educate her children.

Empowering women

After Anna ‘s divorce in 2000 she went to stay at he sister'shouse with her four children and two grand children. She borrowed a sowing machine from her mother, to manufacture and sell clothes.

In the early months of 2002, Anna attended one of Tisha’s village meeting and took the initiative to form a group with other potential entrepreneurs and applied for a loan. She used her first loan of R600 to buy material to make clothes on order for customers.

Page15

Current wording : "private dwelling" "private dwelling" means any part of a formal or informal structure that is occupied as a residence, or any part of a structure or outdoor living that is accessory to, and used wholly for the purposes of; a residence.

Proposed change: "private dwelling " means any part of a formal or informal structure that is occupied as a residence, or any part of a structure or outdoor living that is accessory to, and used primarily for the purposes of; a residence.

Section 68 National register of credit agreements

Page 89

Subsection 2

Current wording:

(2) Upon entering into or amending a credit agreement, other than a pawn transaction or prepaid transaction, the credit provider must report the following information either directly to the National Credit Regulator, or to a credit bureau, in the prescribed manner and form, and within the prescribed time:

(a) the credit provider's name, principal address, and registration number, if any;

(b) the name and address of the consumer

(c) if the consumer is -

(i) a natural person, their identity number, or in the case of a person who is not a South African citizen and does not have an identity number, their passport number.

(ii) A juristic person, its registration number

Proposed change

2....

(f) Non-collaterised loans and those not repaid via direct debit or other EFT process of registered developmental credit providers are exempt from subsection (2)

With the introduction of the Mzantsi account and because the financial .services charter presents the opportunity for greater cooperation between banks and non-banks it may be better to try and exclude debit orders and EFT from the legislation.

Should there be no exemption allowed we would then ask that (2)(b) be changed as follows:

Current Wording:

(b) the name and address of the consumer;

Proposed change:

(b) the name and address of the consumer, except in the case of developmental credit providers who must provide the name only:

Section 74. Marketing and sales of credit at home or work

Page 99

Subsection 5

Current Wording:

(5) Sub-section (2) does not apply in respect of developmental credit.

Proposed change:

(5) Sub-sections (2) and (3) do not apply in respect of developmental credit.

Section 105. Maximum rates of interests , fees and charges

Page 104

Sub section105

Current Wording :

(1) Th Minister, after consulting the National Credit Regulator, may prescribe a hod for calculating -

a) the maximum rate of interest; and

b) the maximum fees contemplated in this Part applicable to each sub-sector of the consumer credit market, as determined by the Minister.

Proposed Wording:

(1) The Minister, after consulting the National Credit Regulator, may prescribe a method for calculating-

(c) the maximum rate of interest; and

(d) the maximum fees contemplated in this Part

applicable to each sub-sector of the consumer credit market, as determined by the Minister. The maximum rate of interest for developmental credit shall be no lower than ten times the average prime overdraft lending rate.

Page 105

Sub-section 3

Current Wording:

(2) When establishing regulations contemplated in this section, the Minister

(a) must establish different maximums for credit agreements within each sub-sector of the consumer credit market; and

Proposed Wording:

(3) When establishing regulations contemplated in this section, the Minister (a) must establish different maximums for credit agreements within each sub-sector of the consumer credit market. No category of credit agreement shall have a maximum below R15, 000; and

Section 108: Statement of Account

Current Wording:

© six rnonths in respect of mortgage.

Proposed change:

© six months in respect 9f rnortgage and low income housing loan with repayment period exceeding six months. Housing loan value should not exceed the limit as set in section 105 3a.

Page 214

Item 6

Current Wording:

6. Specific preservation of rights, instructions, registration and similar status

(1) Subject to Item 7(1), a person who, immediately before the effective date, was registered by an organ of the state contemplated in Item 8-

(a) as a debt counsellor, is deemed to have been registered as such; or

(b) as a micro-lender, is deemed to have been registered to provide developmental credit,

Proposed Wording :

6. Specific preservation of rights, instructions, registration and similar status

(1 Subject to Item 7(1), a person who, immediately before the effective date, registered by an organ of the state contemplated in Item 8-

(a) as a debt counsellor, is deemed to have been registered as such;

(b) or as a micro-lender, who meets the criteria and standards prescribed bv the minister and applied by the National Credit Regulator in considering whether a credit providers' dominant purpose for making an agreement was profit or a purpose other than profit including but not limited to the extent to which the credit agreement concerned contributes to the socio-economic development and welfare of persons contemplated in section 13(1 )(a) is deemed to have been registered to provide developmental credit,