Balboa Finance (Proprietary) Limited ("Balboa") is a micro-lending private company operating throughout the Republic of South Africa specialising in micro loans between R750.00 and R5 000.00.

Balboa sells its products utilizing highly trained agents both in the field and at broker offices. At present Balboa directly employs 300 agents throughout the country. These agents are all commission earners and are by and large the sole income earners of their respective families. The credit vetting and approval of loans is done at one centralised point at its head office at Parktown in Johannesburg. The agents thus have no decision making powers insofar as the loans are approved. This obviously avoids fraud and other unscrupulous acts.

Balboa is a duly registered member of the Micro Finance Regulatory Council ("MFRC") and has ensured on a regular basis that it complies with all the MFRC's Rules and Regulations. An affordability calculation is contained within Balboa's loan document in which the borrower is requested to complete truthfully so Balboa can assess informatively whether the borrower qualifies for a loan and for what amount. Balboa specifically includes this within its loan documents solely to ensure that moneys are not disbursed to individuals who could not afford the repayments.

An ITC Consumer Profile is then obtained along with the borrower's salary slip and last three months bank statements. Balboa thus ensures, based on the information at hand, that its consumers are able to repay the instalments in respect of any of its loan products. It is clear from the proposed bill is that the intention is to avoid reckless lending resulting in consumers being caught in a "debt spiral".

Balboa further obtains information from the National Loans Register ("NLR") to establish whether a potential consumer has other loan indebtedness prior to approving the loan. The NLR, however, often does not contain accurate information and by and large its subscribers do not update information on a monthly basis or often at all. Very often the payments made by consumers are not reflected on the subscriber's information profiles hence providing a distorted view on a consumer's current position. Whilst Balboa welcomes a more accurate NLR it cautions that one without strong checks and balances to ensure that the updated information is submitted will not be helpful to either the credit provider nor the consumer.

At times Balboa is approached by a variety of debt consolidators, debt counsellors and potential debt administrators to restructure a consumer's loan repayments. A formalised debt counsellor definition and governing body would certainly be welcomed to avoid unnecessary legal action being taken against defaulting consumers, more particularly if one has the debt administrators appointed in terms of Section 74 of the Magistrate's Court Act in mind. Consumers being placed under administration in terms of the aforesaid section invariably receive short-term relief but long-term financial suffering as a result of the exorbitant fees charged by these administrators.

In many cases consumers are simply never able to emancipate themselves from an administration order. Balboa is in favour that all debt counsellors obtain minimum formal qualifications for example, a Bachelor of Commerce Degree, or in certain circumstances qualified accountants or attorneys. These counsellors would have to be registered with a governing body and submit to strict regulations with regard to fees charged with their actions such to review by consumers or credit advisers at any time.

The implementation of a consumer tribunal is welcomed, however clear and unambiguous rules of procedure will have to be drafted and prepared to ensure that matters are handled efficiently and fairly by the appointed arbitrator I conciliator of such body. Balboa proposes the use of this tribunal solely for the purposes of complaints and investigations. The normal contractual disputes with consumers should be settled through the Magistrate's Courts as is currently the position.

Balboa operates and disburses money to its consumers under the Exemption Notice with relation to the Usury Act. In this regard the interest rates charged are decided along commercial lines taking into account the profitability of the business and its monthly overhead expenses both fixed and variable.

Whilst the Bill proposes that the Minister has the power to cap the interest rate at any time, Balboa proposes that should this be implemented, a period of not less than twelve months be granted to all credit providers, before the interest cap is implemented. The understanding is that any proposal could be effected retrospectively and obviously if such decision is made it could have drastic and dramatic implications within the entire micro lending industry. A balance needs to be reached between the rights of the consumers on the one hand and those of the credit providers on the other.

It is proposed that should the minister be of the opinion that an interest cap be implemented within the South African context that he invites interested parties to submit suggestions and comments before making a final decision.

Further to the above comments, detailed below are more specific comments with regard to particular sections of the proposed Bill:

Section 74 Marketing & Sales of Credit at Home or Work

While it is understood, that certain commission driven agents attend at the work places of potential consumers to enter into loan agreements, very often these consumers are not able during office hours to attend at the credit provider's physical premises. It is certainly convenient, speedy and efficient both for the credit provider and the consumer for the loan agreement at times, to be concluded at the consumer's work premises. The trend in respect of direct selling across the world is that this industry or mode of selling is increasing as factors such as convenience become more and more applicable.

This clause as it stands will result in many small credit operator businesses relying solely on agents to sell their goods and/or products to employees at their work having to either close their businesses or re-structure at tremendous additional costs.

The thousands of agents currently operating within the South African framework would immediately lose their jobs resulting in catastrophic implications for their families and extended families. It is clear that the purpose of the clause is to prevent harassment and consumer's making sudden and rash decisions to enter into credit agreements but by preventing business being done at work or at home a large section of the economy will effectively be destroyed overnight. Surely the emphasis should be on curbing and/or presenting harassment as detailed above coupled with the powers of the Consumer Tribunal hence penalising such unscrupulous credit providers.

A recommendation would surely be to appoint an Ombud to deal with complaints against harassing agents and/or brokers. An Ombud would be able to satisfactorily gauge extent of a possible abuse and/or harassment in the Industry rather than simply painting all agents and brokers with the same brush as this provision contemplates. The national effect of "outlawing" direct credit sales needs to be further investigated.

Section 81 - Prevention of Reckless Credit

Section 81 (2) places an onus on the credit provider to take reasonable steps to determine the consumer's financial means - what can be termed "reasonable'? As stated above Balboa requests an affordability schedule to be duly completed by potential consumers and signed before taking a decision to furnish credit. Within the micro-lending industry this practise must surely be deemed to be reasonable. Is the credit provider compelled to question the consumer on what is contained in the affordability schedule, especially if the figures completed do not appear to be accurate nor truthfully completed?

Section 82 : Assessment Mechanisms and Procedures

Section 82(1) requires the credit provider to "objectively" assess the financial ability of the consumer to meet his obligations under any credit agreement -how can this objectively be brought into process when the credit provider is dealing with individuals with different circumstances and from different backgrounds?

Section 92 - Pre-Agreement Disclosure

Section 92(1) refers to small credit agreements but same is not properly defined as it requires further clarification

Section 103 (5) – Interest

This provision attempts to override certain common law provisions, more particularly with regard to the in duplum rule. No differentiation has been made with regard to whether judgment has been obtained against the consumer. At present the in duplum rule protects the consumer until judgment has been obtained to avoid a plaintiff delaying the collection of monies whilst protecting the plaintiff after judgment, hence punishing the consumer for failing to pay his debts. This obviously must be read in conjunction with the objective and focus of this Bill to ensure that debtors are able and can afford to settle their debts.

It appears, on my reading of this clause that should a consumer be in default, the credit provider will never be able to recover more interest, admin fees and/or other charges than the outstanding capital amount is at date of default. This would imply that if a consumer borrows R1000.00 carrying an interest rate of 150% per annum, it would be in the consumer's benefit and advantage to default as soon as possible as the credit provider would then never be able to recover what was due to him in terms of the agreement, hence rendering the initial agreement unenforceable. I do not believe that this was the intention of this clause to provide the consumer with more rights than he would have in the agreement in the event of him not defaulting. It is possible that the intention of this clause was that the in duplum rule as per the common law would be enforceable.

Section 105 - Maximum Rates of Interest and Fees and Charges

Section 105(1) provides the Minister with unwavering power to cap the maximum interest rate charged by any credit provider at any given time. It does not state whether any decision made by the Minister is made from the present to the future retroactively. Obviously if it is made retroactively it will have dire consequences for the current micro lending industry and resulting in tremendous uncertainty within the market. This particular clause is to be investigated in view of all the clauses contained in the proposed Act.

Section 105(3) proposes that a National Credit Regulator research economic conditions and trends before proposing to the Minister any change or capping of interest rates. This process needs to be transparent and open to comments and suggestions by all credit providers prior to any decision being made by the Minister. The Minister should present statistics, graphs and scientific calculations explaining the need for the interest rate cap as well as a basis upon which the interest would be capped at a certain rate.

Section 111- Disputed Accounts

In this section it provides the consumer with 20 (twenty) business days grace after receiving a statement of account and disputing same before it appears that any action can be taken against him.

It is understood that should a consumer dispute any aspect of his account indebtedness he is entitled to have his dispute attended to by the credit Tribunal but not that it be used as a delaying tactic and an excuse not to pay. Whilst Section 111(2) prevents the credit provider from enforcing its and proceeding against the consumer in respect of outstanding amounts, surely it refers only to the disputed amount and not the entire statement (if the other amounts contained in the statement are not under dispute).

It is proposed that any disputes that the consumer raises must be specific in nature to avoid globular refusals to adhere to consumer's obligations under credit agreements.

Section 130 - Deferral of Debt Enforcement Procedures

It appears from Section 130(4) (b) that the Court must adjourn debt collection proceedings under the Magistrate's Court Act in order that the counsellor w the consumer's obligations unless the Court is satisfied that the credit agreement was not reckless.

This clause is certainly open to abuse as it provides unfettered rights by the court to decide whether a loan is reckless or not. Surely all credit agreement transactions should be de facto fair and only if a consumer takes the advise of a debt counsellor and in his opinion the transaction is reckless that the legal process be suspended and referred to the tribunal for finalisation.

Schedule 3 - Transitional Provisions

National Credit Regulator

Currently the micro lenders submit the information to the National Loan Register and are obliged to do so as members of the MFRC.

As things stand at present most members do not submit accurate information in fact overstate the consumer's indebtedness while not updating any payments received by the consumer against his particular loan.

Rae Landau - Legal Consultant