I am Jonathan Campbell, an attorney and the Director of Rhodes University Legal Aid Clinic, representing RULAC, many staff members of which have contributed to this submission. I would like to sincerely thank the Portfolio Committee for this opportunity to address it. RULAC is a non profit organization, independently funded, forms part of RU, staffed by 11 professional staff in offices in Grahamstown and Queenstown, but works throughout the rural areas of the Eastern Cape Province, providing training and support to some 38 paralegal advice offices throughout the province.

One of our core functions is provision of free legal services to indigent communities, and one of the most common types of cases that we deal with concerns micro-lenders. On a daily basis we see clients who are deeply in debt to micro-lenders, both registered and unregistered, who are charging exorbitant interest rates of very typically 30% per month, but sometimes as much as 50% and even 100% per month, and whose practices are unlawful (many of these abuses by micro-lenders are discussed in the cases referred to in paragraph 4 of our written submission). It is because of the injustice and abuse of socio-economic rights that we witness daily that we have made this submission.

The primary purpose of this submission is to highlight the socio-economic hardship suffered by recipients of micro-loans occasioned by the exorbitantly high interest rates currently being charged by both registered and unregistered micro-lenders that prey upon desperate consumers who are usually poor, ignorant, uneducated and functionally innumerate. And I include in this statement registered micro-lenders that are practicing lawfully as per the Exemption Notice to the Usury Act. This will be addressed at both a micro and a macro level.

The devastating impact of high interest rates on the individual consumer is often not appreciated or understood. Crucial to remember is that 30% per month is 360% per year, 18 times the current maximum in terms of the Usury Act. The cost of poor people’s debt is proportionately higher, 18 times higher, than that of the well off.

Money-lenders generally lend to people who have a fixed income, be it wages or social security grants. Many recipients of micro-loans are pensioners with an income of R780 per month. Besides the ordinary monthly living expenses (which such people are often forced to pay with a loan from a micro-lender), such pensioners are not going to have the funds to pay for bigger expenses such as school clothing. Typically, therefore, a pensioner may take out a loan of R1000 or more to clothe one or two children.

Review of examples table of the impact of interest rates on consumers:

(to be read with power point slides)

1. A new case we received just yesterday – the pensioner is left with just R130 for the month.
2. In this example the consumer will end up paying nearly R6000 for an initial debt of R500 (12 x the initial debt).
3. Here the debtor will pay over R8000 altogether.
4. The interest alone is R1500 per month, the agreed instalment is R1000 (leaving only R500 per month for other living expenses), and the capital is never reduced and monthly instalments are paid in perpetuity. This is a common scenario found at RULAC, and the client is usually totally unaware of the implications of servicing this debt.
5. This example illustrates the same point: based on the facts of one of our cases discussed on page 18 of our written submission.

These examples assume simple interest – ie interest on the capital only. Many micro-lenders from our experience are compounding interest (ie interest charged on outstanding interest as well as capital). Many other micro-lenders do not seem too concerned with the progress of the reduction of the debt through monthly instalments, being concerned only with the income generated on the loan through monthly instalments being paid on a seemingly indefinite basis.

SA has extremely high levels of illiteracy which cannot be ignored or wished away. In addition, those recipients of loans that have some education generally have extremely poor or non-existent numeracy skills. Many of my final year law students at Rhodes do not fully understand and cannot calculate interest, and the same applies to law graduates (eg from EL SLP). Of course, one can argue that innumerate people should not be so stupid as to take out such a loan. But if such an individual is none the wiser about the dangers and desperate, and there is no other way to feed her family, she will do it, totally unaware of the well-documented debt trap that she is falling into. And of course I am talking here about recipients of loans made lawfully by registered micro-lenders.

Thus to allow such an industry to function without legislated and enforced interest rate limits gives rise to exploitation of the ignorance of the very poorest of the poor. We see clients become victims of debt traps merely because of their poverty, and their poverty is exacerbated as a result. To leave the matter to market forces in these circumstances is irresponsible and untenable. And most people who qualify for a bank loan remain blissfully unaware of this economic abuse by micro-lenders. Over the years we have become increasingly appalled at the lack of interest and concern about this issue. If the impact of such practices is not felt personally (which is probably the case in respect of most of us in this room), and if the vast majority of South Africans are functionally innumerate and do not understand interest, then there are going to be very few people who speak out against usurious interest rates.

In these circumstances, I submit that Government has a duty to act in order to limit and control the negative impact of high interest rates, and to protect the consumer who is unable because of ignorance to protect him/herself.

In 2003, registered micro-lenders alone had a loan book of R16,4 billion (MFRC 4^th annual report). A large percentage of this figure must be attributable to interest paid in order to service this debt. (If not, then there must be billions spent over and above this R16 billion on servicing this debt). Thus it is beyond question that every year billions of rands in the form of interest on micro-loans are being drained out of the hands of poor communities into the hands of micro-lending enterprises, which are getting rich at the expense of the very poor. This money is certainly not being re-cyled back into poor communities, but rather is lost to such communities. In the case of registered micro-lenders that are practicing lawfully (usually well-established micro-lenders with large turnovers), this practice is currently sanctioned and encouraged by Government.

Yet Govt repeatedly claims that poverty alleviation is a high priority. This is why I believe that the devastating socio-economic impact of these exorbitantly high interest rates cannot possibly be understood by people at the highest level, and why we have made this submission. (The only other explanation can be that the vested interests of this massive, burgeoning industry stretch much further than would at first seem apparent.)

Furthermore, given that a large percentage of consumers of micro-loans service these loans from the proceeds of social grants (the vast majority from our experience), billions of rands of the proceeds of such grants per year are ending up in the hands of micro-lenders. This amounts to an abuse of the social grant system which must surely be totally unacceptable to Govt (and indeed to the taxpayer).

People living with HIV / AIDS need access to medicine, doctors, nutritional food, and healthy places to live or they risk losing their lives. This group of vulnerable people is likely to grow significantly as a result of the AIDS crisis. South Africa has yet to feel the full impact of AIDS since the trend in AIDS related deaths has not peaked in South Africa. AIDS is expected to increase household indebtedness in South Africa, and people living with Aids are extremely vulnerable to the negative impact of the exorbitant interest rates charged by micro lenders. The financial burden resulting from their illness, unemployment, and deaths will lead to an increased likelihood that they will borrow money and an increased risk that they will become over-indebted. As has already been pointed out, people with disability grants, including Aids sufferers, are frequently targeted by micro-lenders.

The negative impact of high interest rates on poor communities in general demonstrates that these rates are a violation of public policy, and offend against their right to dignity and socio-economic rights entrenched in the Constitution. The courts have declared that the interests of the community are of paramount importance in determining whether contracts are a violation of public policy. The South African Constitution reflects a public policy that is committed to lifting up the historically disadvantaged people of this nation who have been living without dignity or basic human rights. Contracts that exacerbate the plight of such people are thus in direct conflict with this public policy. (see the written submission for lengthy references to the law in this regard).

I submit that Govt should see the strict control of the industry, in particular the capping of interest rates at a level much closer to the current interest rate limits of the Usury Act (17 and 20%), as an opportunity to:

- improve the benefits of social grants for their recipients by ensuring that so much of their proceeds do not end up in the hands of micro-lending enterprises.

- contribute towards poverty alleviation.

Perhaps Govt could set up a micro-lending enterprise themselves, with reasonable interest rates which could compete successfully with micro-lenders that are charging exorbitant interest rates. This could also serve to stamp out the illegal practices of unregistered micro-lenders.

These constitutional rights can be enforced by the courts, but it should not be left to the courts to do so. The legislature and the Minister should not wait for a court challenge to current or future laws regarding interest rates (a challenge which has since the Lurama case of 1999 to my knowledge not occurred), but should rather pro-actively ensure that those laws are in keeping with public policy and the socio-economic rights espoused by the Constitution.

One way for the legislature to be more pro-active in this regard would be for the National Credit Bill to set a date by which the Minister must adopt interest rate caps. Further, the NCB should provide specific enforcement mechanisms or penalties for unlawful interest rates and charges. Currently, there is only a very general catchall provision in Section 90 which does not go far enough. Debt counseling, although a positive step, is cold comfort for consumers already in a debt trap.

It is well documented that the micro-lending industry is growing every year, and that 30% per month is the most common interest rate adopted (see, for example, the assertions of the MLA in the Lurama case). The longer that nothing is done to cap interest rates, the more entrenched these practices will become and the more difficult it will be to enforce compliance with interest rate limits, even in the case of registered micro-lenders.

For 5 ½ years (since the Lurama case) the Minister has not seen fit to cap interest rates, and based upon this fact, there is little reason to believe that he will do so in terms of his powers under the proposed Bill. Indeed, the 2002 report of Ebony Consultants, commissioned by the DTI, recommended that there should be no interest rate cap.

I would therefore submit that it is incumbent upon the legislature to pro-actively ensure that interest rates are capped, in the interests of justice, fairness, poverty alleviation and the protection of the basic human rights of the most vulnerable South African citizens.