Our experience and the research in which the MFRC has been involved, have indicated that there are significant weaknesses in the manner in which the credit market functions. These weaknesses have negative implications for all consumers, whatever their income group, but the weaknesses have a particularly negative impact upon low income consumers, resulting in:-

• Skewed access to finance, with availability of high cost consumer credit (normally unsecured), but very limited access to credit for purposes such as small business finance, housing finance or educational finance.
• Whilst some people cannot get finance at all, others are becoming over-indebted as result of reckless behaviour of credit providers, ‘desperation borrowing’ and a range of other factors; Of particular concern is that once a person is over-indebted, there is no effective legal mechanisms to deal with the problem, while the mechanisms that does exist (such as the Administration Order) frequently works to the disadvantage of the borrower.
• Generally, very high cost of finance with indications of weak competition (at least on the price of credit), and misleading disclosure.

1. Fragmented legislative framework

Our experience has shown that it is critically important that sufficient monitoring and enforcement capacity be created to ensure that credit providers comply with the legislation. The total cost of interest and fees paid by South Africans on consumer credit is estimated at just over R95b, with the total value of all consumer credit transaction exceeding R362bn.

We believe that the size of the market – and the vulnerability of the vast majority of consumers – means that it is absolutely necessary to create sufficient regulatory capacity to ensure effective enforcement. Experience in the micro-lending industry has shown that the fragmentation of the regulatory framework, monitoring and enforcement result in a range of undesirable practices, and that it is the low income consumers that suffer the consequences.

We believe that the MFRC’s experience indicates the benefit to consumers of effective enforcement, for instance (a) in being able to assist consumers in the resolution of complaints which may result in redress to consumers in terms of repayment of excess or erroneous payments, (b) in effective prosecutions, in which there is an increased trend in the courts instructing lenders to refund consumers that are negatively affected through prohibited practices, and (c) through increased compliance with legislation.

In some market segments credit assessment is very weak. The lending practices of certain players in the micro-lending and retail finance market borders on recklessness and increases the risk of default, increases the write-offs and lead to higher interest rates. This has far reaching implications both for consumers and for the lending industry. The reckless lending inspections of the MFRC have indicated that there are a number of lenders that do not do sound affordability assessments.

We have found a number of cases where a lender extends a loan, even though they are aware that the consumer may be over-indebted. Our conclusion is that such lending practices were due to the existence of payroll deduction facilities, or due to the fact that the lender may have the power to ensure that their own loan repayments are processed on a "preferential basis" or that lenders simply obtained garnishee or emolument attachment orders when a consumer could no longer meet their repayment obligations.

We believe that it is important that if lenders are found to be reckless, their rights with respect to those transactions should be suspended. Thus, a lender should not get the assistance / authority of the state to do debt collection (through a garnishee or emolument attachment order), if the lender acted recklessly in granting credit to someone that could not afford the loan repayments.

If reckless lending is not addressed systemically through legislation and a requirement introduced for all credit grantors to do proper affordability assessments, we fear that these practices would continue to negatively affect both consumers and the sustainability of the credit sector. Reckless lending inevitably leads to increasing defaults, the cost of which finally has to be borne by the credit granting industry, and ultimately by the consumer.

We also want to point to certain of the social costs, which result from reckless lending and over-indebtedness. Once people are over-indebted and have statutory deductions as a result, they probably cannot meet maintenance payments, care for dependants or start falling into arrears on municipal service payments and other similar obligations. This has a negative impact at all levels of society.

We have an increasing pool of consumers who are over indebted. Whilst preventing "new over-indebtedness", we also have to deal with consumers who are already over-indebted. In a joint programme with the DTI, the MFRC successfully implemented a Debt Rehabilitation Programme on a pilot basis in the last year and a half. Whilst the programme has been a success and nearly all borrowers indicated that they found it to be helpful, we also experienced significant problems, including: (a) frequent unwillingness of lenders to restructure or reschedule a borrower’s debt, and (b) insufficient legal remedies through which to assist over-indebted consumers.

Without an effective rehabilitation mechanisms such consumers will remain permanently excluded from the credit market with the only source of credit being informal operators. Such credit will, of course, come at a high premium. It is also necessary for a framework to be created for the regulation of debt counsellors. Our research into Debt Administration has indicated that debt administration frequently worked against the interest of the consumer, and that it is important for an effective legal mechanism to be created wherein they can be monitored and regulated in the interest of all parties.

The National Loans Register (NLR) developed by the MFRC has been an important learning curve, and feedback received from lenders has been invaluable regarding their increased ability to assess clients’ affordability, level of indebtedness and thus their risk profiles before extending credit. Through the National Loans Register lenders have been able to gain access to information on all the loans that a borrower has already taken out, thus improving lenders’ ability to do affordability assessments. However, we feel that it is important that such a register be expanded to cover all types of loans, and all types of lenders.

Without such comprehensive information, there is always the likelihood that the lender will be unaware of all the borrower’s obligations, and may unwittingly cause the borrower to become over-indebted.

Sustainable lower interest rates and efficient client service are only possible in a competitive market, and effective competition is only possible if it is possible for consumers to compare the prices between different products. The MFRC identified many weaknesses in this area, such as the following:-

• Various fees and charges through which lenders and retailers inflate the cost of finance, and which are frequently not disclosed or disclosed in a misleading manner.
• Credit life insurance premiums frequently makes up a significant portion of the cost of finance, and in the furniture retail sector it makes up as much as 50% of the total cost of credit.
• Certain financiers, including banks, are unwilling to provide detail on the actual cost of borrowing to consumers, prior to the loan contract being signed. This prevents consumers from assessing the actual cost, or from comparing the cost between different products.
• The MFRC research into cost of credit has indicated that the cost ranges from fairly reasonable levels, to exceedingly high interest rates. The latter cases are frequently those where the consumer has least choice or where the disclosure is weakest.

We believe that it is a priority that issues such as reckless lending and insurance abuses (credit life) are dealt with, and to ensure that disclosure and contracting practices improve.

Legislation is of little value if not enforced. The current position is that both the Credit agreement Act, 1980 and the Usury Act, 1968 provide only for criminal sanctions for non-compliance. These sanctions must be enforced through the courts. The usual sanction for non-compliance is a criminal prosecution followed by conviction with sentence meted out being imprisonment or the option of a fine. Recent developments in foreign jurisdictions show a trend towards compensation of the borrower coupled with a fine accruing to the state.

It is also not a disputed fact South African courts are overburdened with a huge workload, with criminal matters receiving priority. It is therefore vital to introduce a less onerous process and specialist ‘tribunals’ with appropriate powers to ensure effective enforcement, protection and redress. This would reduce the workload on our Courts and ensure that we built specialised capacity to regulate the credit market in a consistent and effective manner whilst ensuring that consumer have access to redress.

As indicated earlier, we have over the last 5 years gained valuable expertise in the functioning of the micro-lending industry as well as on the problems facing consumers. We have conducted extensive research in these areas as well as coordinated research on behalf of the DTI as part of the credit law review process.

We would therefore welcome an opportunity to address the Committee on these issues, and to assist in ensuring that we have an all inclusive primary credit legislation that introduces interventions that will address the weaknesses and challenges identified.