The Rhodes University Legal Aid Clinic ("RULAC") provides free legal services to the poor and historically disadvantaged communities of the Eastern Cape Province. Based upon RULAC’s experience with its clients, it has concluded that micro-lender practices, especially the amounts they charge for credit, are having a tremendously negative impact on poor and previously disadvantaged people and their communities.

Historically, however, micro-lenders have been considered the principle stakeholders in the industry, to the detriment of the consumer. More significantly, although there has been some recognition of over-indebtedness problems, there has been relatively little research and analysis of the impact the interest rates are having on the poor and previously disadvantaged. This submission seeks to improve analysis and understanding of the impact that the interest rates are having on the borrowers and their communities, and also to highlight certain abuses by micro-lenders.

This submission will examine public policy in regard to socio-economic rights enshrined in the South African Constitution, and then go on to apply this law to micro-lender interest rates for the poor by examining:

• The impact of micro-lender interest rates on individual poor persons.
• The macro effect of interest rates on poor communities in general.
• Aids and the impact of interest rates.

It will be argued that the socio-economic impact of the exorbitant interest rates demonstrates a violation of public policy.

Finally, a number of abuses by micro-lenders as well as retail outlets will be highlighted, which result in additional hardship to and exploitation of consumers. This discussion will be based upon the experience of many of RULAC’s clients.

South Africa established interest rate limits in the Usury Act of 1968. However, in December 1992, largely out of a desire to make small loans available to small business, the Minister published a notice in the Government Gazette that exempted loans under R6000 from the Usury Act’s interest rate limits. However, because of abuses, such as the exorbitant interest rates that many micro-lenders were charging, in June 1999 the Minister revised the Exemption. As a result, small loans were exempt from the interest limits contained in the Usury Act, but were subject to a higher interest rate limit that amounted to no more than an annual rate of ten times the average prime overdraft lending rate from time to time of the four banks with the largest asset base providing cheque services. However, in November 1999, a court in the well-known case of Lurama Vyftien (Pty) Ld and 49 Others v. The Minister of Trade and Industry and Another and The Association of Micro Lenders and The Minister of Trade and Industry, case numbers 22125 and 23453 of 1999, p. 11 (hereafter "Lurama") ruled that the Minister had failed to follow the proper procedure in adopting this interest rate limit. The court left the exemption in place, but struck down the interest rate limit.

Since 1999, the Minister has not adopted a new interest rate limit for the Exemption. Currently, the microlenders take the position that they may legally charge whatever they wish for credit. It appears that micro-lenders commonly charge 30% per month (360% per year) and the prevailing belief amongst micro-lenders appears to be that they may legally charge this much or more.

The proposed National Credit Bill (hereafter "the Bill") in its current form provides for the adoption of interest rate limits in credit agreements. When the Bill goes into effect, the interest rate provisions in the Usury Act will apply until the Minister adopts new interest rate limits. The micro-lenders probably will not change their interest rates unless and until the Minister adopts the new limits.

It is submitted that the National Credit Bill does not do enough to place limits on interest rates in credit agreements. The Lurama decision severed the interest rate cap from the rest of the Exemption, and the court’s ruling left a legislative and regulatory gap concerning the legally acceptable interest rates for the small loans that qualified for the Exemption. In the 5 ½ years since the Lurama decision, the Minister has not seen fit to close this gap, the proposed Bill takes the matter no further, and there is no reason to believe that the Minister will now do what he has failed to do in the 5 ½ years since the Lurama decision.

The right to dignity and the socio-economic rights enshrined in the Constitution are critical to understanding public policy as it relates to interest rates charged by micro lenders. The Constitution is intended to transform South Africa from a society that denied people dignity and basic human rights to a society that places a premium on dignity and human rights. The Preamble to the Constitution states that some of the purposes of the Constitution are to "Heal the divisions of the past and establish a society based on democratic values, social justice and fundamental human rights" and "Improve the quality of life of all citizens and free the potential of each person." According to Section 1 of the Constitution, the Republic of South Africa is founded on values that include "Human dignity, the achievement of equality and the advancement of human rights and freedoms." Section 10 of the Constitution explicitly guarantees to all South Africans "the right to have their dignity respected and protected."

The right to dignity is closely connected to socio-economic rights. In Soobramoney, the Constitutional Court recognised this when it stated:

Similarly, in Grootboom, the Constitutional Court noted:

The Constitution therefore expressly guarantees certain socio-economic rights. These Constitutional provisions "entrench the right of access to land, to adequate housing and to health care, food, water and social security. They also protect the rights of the child and the right to education." Grootboom at para. 19.

Socio-economic rights must all be read together in the setting of the Constitution as a whole. Grootboom at para. 24. These rights also must be interpreted and understood in their social and historical context. Grootboom at para. 25. Socio-economic rights are expressly included in the Bill of Rights; they cannot be said to exist on paper only. Grootboom at para. 20. Rather, these rights require Government to act or refrain from acting in certain ways. "The state is obliged to take reasonable measures progressively to eliminate or reduce the large areas of severe deprivation that afflict our society." Minister of Health v. Treatment Action Campaign at para 36 (hereafter "TAC").

Although it is difficult to precisely identify what these socio-economic rights are, there is a minimum core of rights. As the Constitutional Court has recognised, "[t]his minimum core might not be easy to define, but includes at least the minimum decencies of life consistent with human dignity. Noone should be condemned to a life below the basic level of dignified human existence. The very notion of individual rights presupposes that anyone in that position should be able to obtain relief from a court." TAC at para 28.

In order to ensure that all South Africans have these Constitutionally guaranteed socio-economic rights, the courts must require Government to take certain actions and to refrain from taking other actions. "Section 7(2) of the Constitution requires the state ‘to respect, protect, promote and fulfil the rights in the Bill of Rights’ and the courts are constitutionally bound to ensure that they are protected and fulfilled." Grootboom at para. 20. " The Constitution obliges the State to act positively to ameliorate these [deplorable] conditions. The obligation is to provide access to housing, health-care, sufficient food and water, and social security to those unable to support themselves and their dependants. The State must also foster conditions to enable citizens to gain access to land on an equitable basis. Those in need have a corresponding right to demand that this be done." Grootboom at para. 93.

Government’s Constitutional obligations are not limited only to positive actions. When the Government refrains from taking some actions, it may fail to live up to its Constitutional obligations. As the Constitutional Court established when it certified the Constitution, "[a]t the very minimum, socio-economic rights can be negatively protected from improper invasion." Grootboom at para. 20 (quoting Constitutional Court’s confirmation proceedings of the Constitution, Ex Parte Chariperson of the Constitutional Assembly: In Re Certification of the Constitution of the Republic of South Africa, 1996 1996 (4) SA 744; 1996 (10) BCLR 1253 (CC) at para 78.)

The Constitutional Court has applied this principle in multiple cases. For example, in a case involving emergency temporary housing, the Court held that, although section 26 "does not expressly say so, there is, at the very least, a negative obligation placed upon the state and all other entities and persons to desist from preventing or impairing the right of access to adequate housing." Grootboom at para 34. Similarly, in a case involving the medical treatment of pregnant women with HIV, the Court held that this "‘negative obligation’ applies equally to the section 27(1) right of access to ‘health care services, including reproductive health care.’" TAC at para. 46.

As a result of these Constitutional obligations, the Constitutional Court has issued orders requiring Government to formulate policies and take extensive action. In Grootboom, the Court was faced with a situation in which people were homeless because they had been evicted from the informal homes they had established on private land earmarked for low-cost housing. The respondents sought temporary shelter from the Government. The court held that the Constitution "requires the state to devise and implement within its available resources a comprehensive and coordinated programme progressively to realise the right of access to adequate housing." Grootboom at p. 60. The court further held that the programme must include reasonable measures to provide relief for people who have no access to land, no roof over their heads, and who are living in intolerable conditions or crisis situations. Grootboom at p. 60.

In TAC, the Constitutional Court addressed a situation in which Government was refusing to provide most pregnant women who were infected with HIV with the medicine and other medical care that would reduce the chances of the women transmitting HIV to their babies. The Court held that Government must revise its policy. The Court held that Government’s policy was unconstitutional because it prevented most doctors from prescribing nevirapine to reduce the risk of mother-to-child transmission of HIV. TAC at para. 80. The Court therefore ordered Government to remove the restrictions that prevented nevirapine from being made available to anyone outside of research sites and also ordered Government to facilitate the use of nevirapine for the purpose of reducing the risk of mother to child transmission of HIV. This included making counsellors and nevirapine available to all pregnant women where medically indicated. TAC at p. 74-76.

Thus, current public policy values the dignity and basic socio-economic needs of South Africans, especially for children and people who have been historically disadvantaged. Public policy reflects these values and all contracts must therefore be consistent with these values.

1. The Impact of Micro Lender Interest Rates on a Poor Person

The financial impact of the loans and interest rates on borrowers is devastating. It is a sobering and alarming exercise to compare the percentage of a borrower’s income that goes to interest with the percentage of a borrower’s income that remains for him / her to spend on necessities.

For example, consider a mother of three children who is receiving a disability grant. She must pay for school fees and uniforms for her children. If she borrows R500 at 30% per month and pays R300 per month to the credit provider, after three months, this mother will have paid R304 in interest and 37.8% of her debt will be interest. Because a disability grant pays R780 per month, for the first two months, this mother will have only R480 per month remaining to live on.

If the same mother takes out a thirty day loan, then it is easy to see how she might get into a debt spiral. At the end of thirty days, she will owe a total of R650 (R500 capital plus R150 interest). If she pays this in full after one month, this will leave her with only R130 remaining to live on for the month. It will be virtually impossible for her to support herself and her children on this amount of money. She may then decide that she needs to borrow another R500. She will then be supporting herself and her family on R630 for that month. Again, at the end of the month, she will owe the micro lender R650 and will be left with only R130 from her grant. If she continues to do this, she will pay the micro lender R1800 in interest over the course of a year. This is a very large amount of money for someone in her financial position. It will significantly decrease her purchasing power. Close to 20% of her annual income will go just to paying interest.

Similarly, workers can quickly find themselves with pay slips containing very little money. Even when they are not required to pay legal and administrative costs as a result of defaulting on loans and having their salaries garnished, loan payments and interest can leave them with very little money to support themselves and their families.

The gross amounts of interest that borrowers are paying to micro lenders will not seem like a lot of money to people who are paying house bonds in Somerset West or Sandton, but they are huge for the working poor and those who are trying to support themselves on social grants. The percentage of their income going to pay interest to micro lenders is very big and the amount of money they are left to live on is very small. As a result of the high percentage of debt that consists of interest, these poor consumers may be purchasing more on the date of the loan, but they are actually purchasing far less in the long term because they are spending so much money on interest. This has a terrible impact on the borrower. The borrower now has less money to spend on necessities such as food, housing, clothing, medicine, school fees, and school uniforms. It does not over-state the position to assert that the permissible rate of interest being charged results in extortion from the debtor of an excessive or exorbitant amount of interest.

Moreover, it is clear that the micro lenders and the impoverished consumers who are borrowing from them are not dealing at arms length and the lenders are clearly taking advantage of the inexperience and desperation of the borrowers. The lenders know that most rational consumers would not pay 30% per month interest on a loan, but an inexperienced, uneducated (and often illiterate) borrower might agree to this interest rate, especially if she does not understand the loan agreement or is in a position where she is desperate to pay for necessities and has no other option.

An examination of the impact of high interest rates on poor communities in general demonstrates that these rates are a violation of public policy. The negative impact of a high interest rate charged to a poor person is not limited to that particular person. When a person has less money to spend overall because of their interest payments, that means they are putting less money into their local communities. The owner of a registered micro lender may live in Johannesburg and may be able to buy more German luxury cars as a result of his booming business. That does not benefit the poor and historically disadvantaged townships where a large percentage of the borrowers live. The interest payments economically drain these poor communities. In 2003, registered micro lenders had a loan book of R16 455 639 711. Although not all micro loans have interest rates of 360% per annum or higher, that is the typical rate and most of the micro loan interest rates are at least 240% per annum and are made to poor people. MFRC Report on Impact of Credit and Indebtedness of Clients at 28, 36. Thus, it is beyond question that every year billions of rands are being drained out of poor communities in the form of interest on micro loans.

The overall decrease in funds amongst cash borrowers has additional negative impacts on other people in these poor communities. For example, in some of these situations, the overall decrease in money will mean that parents will not have the money needed to pay school fees. This impacts the quality of education for all of the children in the school and has a long term impact for South Africa. Similarly, some of these people may not be able to pay for municipal services as a result of further impoverishment resulting from these exorbitant interest rates.

A further community impact of the high interest rates charged to many poor people is that financial institutions are investing less money in micro enterprises that might stimulate the poor communities and provide more jobs. Lenders invest their money where it is more profitable. Most rational business owners are not going to borrow money at 30% per month, because there are very few business people who could legally obtain a rate of return that would result in a profit. A desperate or uninformed consumer, however, may borrow money at those rates. As a result, lenders choose to loan money to desperate consumers instead of lending to businesses. Currently, the finance industry is not addressing the financing needs of micro enterprise; this is a significant problem because such loans would be used for productive purposes and would result in economic development and growth, resulting in more jobs. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 1.

The courts have declared that the interests of the community are of paramount importance in determining whether contracts are a violation of public policy. Given the way that the interest rates charged by micro lenders are negatively impacting not only the borrowers but their communities in general, it is readily apparent that these loans are "inimical to the interests of the community" and "run counter to social or economic expedience." These interest rate provisions therefore violate public policy and are unenforceable.

As discussed above, 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.

When determining whether a contract is a violation of public policy, courts have the power to look at the consequences that might flow from a class of contracts. The interest being charged by micro lenders in Exempt loans is having a significant adverse impact on the poor and historically disadvantaged. South Africans earning R15000 per year or less spend a disproportionately large percentage of their money on bank and finance charges. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 20-21. This provides increasing evidence of the vulnerability of the poorest South Africans and raises the question of protecting these vulnerable groups by requiring lower interest rates than those that they currently have to pay. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 21.

The increases in debt costs put pressure on the liquidity of the poorest households. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 62. Although the absolute amount of debt is lower for the poor than for the rich, the impact the debt has on the poor is much more significant. The rich are in a much better position to afford their debt. Moreover, the cost of poor people’s debt is proportionally higher. Poor people have to resort to micro lenders who lend money at much higher interest rates, so it is not surprising that poorer households have high indebtedness levels even though they have small incomes. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 4-5. Research shows that the two poorest income categories for South Africans are spending very large percentages of their finances on bank charges. This "provides a startling revelation: even though relative levels of indebtedness at the bottom end of income distribution are low, the cost of servicing that debt is very high. This is possibly the most important insight of the analysis thus far, for it implies that poorer individuals will remain in a debt trap under the best of circumstances, and further deepen that debt trap under the worst of circumstances." MFRC Report on Impact of Credit and Indebtedness of Clients at p. 60. The fact that most of this debt is being incurred to pay for consumables rather than to pay for assets or durable commodities makes these poor people even more vulnerable. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 60.

Research shows that it is the historically disadvantaged African and Coloured households that are most likely to fall into a debt trap and become permanently indebted due to their poor asset base and to the fact that they do not earn enough to cover the costs of necessities and therefore have to borrow money from micro lenders to meet their basic needs. MFRC Report on Impact of Credit and Indebtedness of Clients at p. v, 26-27, 59-60.

Research concerning the reasons people borrow from micro lenders increases concerns over interest rates. It appears that loans are most commonly used to pay for school fees, groceries and food, and to pay for other accounts. MFRC Report on Impact of Credit and Indebtedness of Clients at p. 44. This suggests that borrowers are borrowing to pay for necessities and are therefore involuntary borrowers. Moreover, it suggests that the poorest people are struggling to pay for education and are paying a great deal of interest on the education expenditures they do make. This is a troubling development in a country where the Constitution places a high value on education and where education can play a significant role in ending the lack of education and the poverty that are legacies of apartheid.

Given the impact of the high interest rates charged for micro loans, it becomes apparent that these results are not consistent with public policy as reflected in the Constitution. The high interest rates are making some poor people permanently indebted and are reducing their purchasing power. This makes it very difficult for them to obtain the land, housing, medical care, and food that the Constitution values. Moreover, when people are forced to spend significant percentages of their social grants on interest, it endangers their Constitutional rights to social security and often endangers the best interests of the child, including when the borrowers are grant recipients who are parents or foster parents. Given the disproportionate impact these high interest rates have on Coloured and African people, they do nothing to "improve the quality of all citizens and free the potential of all people." They also do nothing to promote equality for persons disadvantaged by past discrimination. Instead of bringing dignity to people, they reduce them to further impoverishment, especially when they are experiencing trauma. None of this is consistent with public policy as it is enshrined in the Constitution.

People with AIDS need access to a variety of things in order to survive. The neviropene at issue in the TAC case is just one example. People with AIDS need other medicine, access to doctors, nutritional food, and healthy places to live or they risk losing their lives. It is impossible for them to obtain these essentials if they are already poor and they are forced to borrow at exorbitant rates in an attempt to improve their health while supporting their families.

People affected by AIDS are disproportionately vulnerable to the negative impact of the exorbitant interest rates charged by micro lenders. 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. The Effect of HIV/AIDS on the Micro-Finance Sector in South African and Implications for the MFRC, Report to the Micro Finance Regulatory Council, 15 July 2003 (hereafter "Effect of HIV/AIDS Report"). HIV is most financially burdensome during the times when the HIV infected person becomes sick with AIDS (incurring medical costs and losing income due to inability to work), dies (resulting in funeral costs), and leaves orphans in need of care. Effect of HIV/AIDS Report at p. i. The majority of South Africa’s HIV infected citizens have not yet become sick with AIDS or died. The MFRC has noted that there will be a significant increase in the number of people who have not only been infected with HIV, but are in the later stages of infection where people become very sick. Effect of HIV/AIDS Report at p. 2. The MFRC has estimated that there were 6,558,000 South Africans infected with HIV and 453,352 South Africans who were actually sick with AIDS in 2002. Effect of HIV/AIDS Report at p. 2. However, the MFRC anticipates that, by 2006, there will be 7,697,000 South Africans who are infected with HIV and 1,049,742 South Africans sick with AIDS. Effect of HIV/AIDS Report at p. 2. This represents over a 230% increase in the number of people who will be sick with AIDS. The number or people expected to be sick with AIDS in 2010 is expected to skyrocket to 1,393,926. Effect of HIV/AIDS Report at p. 2.

AIDS is expected to increase household indebtedness in South Africa. Effect of HIV/AIDS Report at 24. The MFRC expects that its client base will be one of the most affected groups. Presentation: Effect of HIV/AIDS on the South African Micro Finance Sector, June 2003 at p. 7 (hereafter "Effect of HIV/AIDS Presentation"). 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 overindebted. Effect of HIV/AIDS Presentation at 14. This is especially true of poor people who have no savings or other assets to draw upon, but have access to loans. Overindebtedness is most problematic amongst the poorest South African households, and permanent indebtedness is likely due to debt covering the gap between small incomes and necessary expenditures. Effect of HIV/AIDS Report at 20. Amongst the poor, borrowing is inelastic because people are borrowing to meet basic needs. Effect of HIV/AIDS Presentation at 14, 24. The MFRC recognises that the poorest South Africans have the greatest debt problem and that such persons should not be borrowing further to cope with the economic shock caused by AIDS. Effect of HIV/AIDS Report at ii. Nevertheless, research shows that, unlike most countries, South Africans borrow first (rather than using savings or assets) to deal with the economic shock of illness. Effect of HIV/AIDS Report at 18. This is likely because poor South Africans do not have access to savings or assets, but do have access to loans. Effect of HIV/AIDS Report at 18. Of course, these loans are associated with tremendous costs that further impoverish the poor people who are borrowing money at exorbitant interest rates. The poorer households face the highest costs for credit. Effect of HIV/AIDS Report at 22.

A majority of South Africans infected with HIV are women, with young women bearing the brunt of the disease. Effect of HIV/AIDS Report at 5-6. This fact, combined with the MFRC’s projections regarding AIDS deaths, leads to the conclusion that there inevitably will be an increase in the number of maternal AIDS orphans, leading to increasing numbers of foster children (and the foster grants that enable loans) and greater financial strains on already poor extended families who take in these orphans. In 2004, 29,5% of pregnant women attending government clinics were infected with HIV compared to 27.9% in 2003. National HIV and Syphilis Sero-prevalence Survey in South Africa 2004 at 12. This undoubtedly indicates an increase in the coming years of the number of babies with AIDS and the number of AIDS orphans. The current number of South African orphans is approaching one million and that number is expected to triple by 2015. Centre for Actuarial Research, The Impact of AIDS on Orphanhood in South Africa: A Quantitative Analysis, 2001. The rates of orphanhood are highest among the black African population group and among poor socio-economic groups. Ibid at p. 3. This suggests again that the historically disadvantaged and those who are already in the most desperate situations will be vulnerable to exploitation by micro lenders when they are impacted by AIDS.

The group of South Africans hardest hit by the AIDS epidemic is the economically active age group, with those between 25 and 34 affected the most. Effect of HIV/AIDS Report at 5. Amongst workers, it is the unskilled and semi-skilled workers who most commonly suffer from AIDS. Effect of HIV/AIDS Report at 6-7. Thus, those who bring income into the households are most adversely affected by AIDS with the lowest wage earners suffering the most. Such an impact affects the entire household and can lead to unmanageable debt.

Although the most immediate and extreme financial problems affect households coping with AIDS during the period immediately before, during, and after the AIDS death, the financial losses can have long term effects for these families. Families unaffected by AIDS use their money for education and acquiring assets, while households affected by AIDS use their funds instead for paying the costs of illness and death. Effect of HIV/AIDS Report at 18. This includes not only the person with AIDS, but also family members who care for that person. As the MFRC recognises, many poorer households are already overindebted and stretching to meet repayment obligations; poor people with access to credit "will have difficulty repaying the emergency loans they would need for AIDS. This would cause longer term financial difficulties for the households." Effect of HIV/AIDS Report at 21. The exorbitant interest rates can only contribute to and exacerbate these problems.

The values of dignity and the basic socio-economic rights enshrined by the Constitution play an important role when assessing whether micro lender interest rates violate public policy. The Constitutional Court has repeatedly enforced these rights in cases like TAC and Grootboom. They are now a central part of public policy. The exorbitant interest rates charged to people with AIDS who turn to micro lenders in desperation are in direct conflict with these values. Instead of eradicating the legacy of apartheid, the exorbitant interest rates exacerbate these inherited problems. The exorbitant interest rates are therefore a violation of public policy.

Many borrowers are subjected to a wide range of abuses by micro-lenders, both registered with the MFRC and not, and such abuses seem to go by largely unchecked. Most of these borrowers are specifically targeted by micro-lenders as a result of their poverty, desperation and low levels of literacy.

The Rules of the Micro Finance Regulatory Council provide inter alia that micro-lenders registered with the Council must comply with the conditions of the Usury Act Exemption Notice (Notice in terms of Section 15A of the Usury Act 73 of 1968). These conditions include the following (Annexure "A" to the Notice):

• Prior to the conclusion of a loan agreement, the lender must explain the essential terms of the agreement to the borrower in a language understood by the borrower (Rule 2.5).
• Prior to the conclusion of the loan agreement, the lender must allow the borrower an opportunity to read the agreement, or must have it read to the borrower in the event that the borrower is illiterate (Rule 2.6).
• The lender must provide the borrower with a copy of the signed loan agreement (Rule 2.7).
• The lender may not make use of personal information such as PIN codes and bank cards for purposes of security or collection arrangements (Rule 5.1).

The following RULAC case provides a typical example of how the above rules are simply disregarded by many lenders.

The borrower in this case is a Xhosa-speaking pensioner and her income is R1 270.00 per month. On that income she has to support herself as well as her two young grandchildren. She is barely literate and is almost completely blind. Out of sheer desperation, she borrows money on a regular basis from a particular micro-lender. She has never been given copies of the loan agreements entered into. Furthermore, she has never fully understood the terms of the loan agreements (for example, terms relating to interest payable which in this case is 30% per month on the capital amount), as these terms have never been properly explained to her in a language she understands. The micro-lender concerned requested that the borrower give them the PIN number for her bank account, which she did. The micro-lender has since gained access to her bank account via the Internet and withdraws money from the borrower's account on a monthly basis (the borrower in this case does not even know what the Internet is, and has never given her consent to allowing her account to be accessed in this way by the micro-lender). The borrower has no idea from one month to the next what amount will be withdrawn, nor when she will have paid the debt in full, as she never fully understood the terms of the loan agreement in the first place. She is therefore unable to monitor her indebtedness, and this leaves her vulnerable to an unscrupulous moneylender who can effectively withdraw money from her meagre bank balance arbitrarily without her knowing any better.

For example, in one instance she took a loan of R700.00 which was to be repaid over a period of three months. Having not been properly apprised of the implications of interest on that amount, she then failed to understand why a total of R1 180.00 was withdrawn from her account to settle that debt.

Further examples of abuses of RULAC clients by micro-lenders include the following:

(a) Reckless lending:

A RULAC client is a pensioner with a monthly income of R780,00. A loan was advanced without taking into account the pensioner’s income and expenditure or liabilities at all. No regard was had at all as to whether the pensioner would be in a position to afford the monthly instalments. The lender advanced an amount of R5 800,00 at an interest rate of 30% per month. The monthly repayments were R500,00, and the client is left with R280,00 per month to survive.

(b) Intimidation:

The client (a pensioner) is required to hand over her Identity Document and Pension Card to the micro-lender before the money is loaned. The micro-lender waits at the entrance of the building where client receives her monthly pension.

The client collects her ID from the micro-lender on pension day and is obliged to hand over the entire pension, ID book and Pension Card to micro-lender. The micro-lender gives the client his/her "change" and retains the ID and Pension Card.

Community members confirm that borrowers continue to borrow money in the aforementioned manner as they are intimidated by the lender and believe that they are strictly bound by these arrangements.

(c) Fraudulent collection methods

A client on applying for a loan had to provide a micro-lender with 3 copies of bank statements, salary slip and copy of her ID. No authority / power of attorney or debit order instruction was signed with the micro-lender at all. The client borrowed an amount of R5 700,00. The client does not recall any agreement in respect of interest, thinks the repayments were in the region of R500,00 per month, was never given a copy of the contract and the terms were never explained. Client’s monthly instalments were deducted from her bank account – and she assumed this was in order.

A few months after the loan was granted the client’s pension was transferred into her bank account – an amount of R33 000.00. The day after the amount was transferred, this amount was transferred out of her bank account – the note on her bank statement read "internet banking". The client confronted the micro-lender about the transfer and was advised that she owed an amount of R76 000,00. The micro-lender told the client she could have another loan and client was given a cheque for a few thousand rand. The cheque had to be signed for as a "new loan", and interest was to be charged on this amount.

The client thereafter approached RULAC who in turn approached the bank. The bank is investigating and trying to ascertain how the micro-lender was able to transact on client’s account without her authority and her pin code. The micro-lender’s "statements" reflect client as having made monthly repayments in cash at the lender’s place of business, but client is certain that she never did so.

A number of typical kinds of abuses by retail outlets of clients of RULAC are outlined below.

(a) Pre-approved buying power

In a bid to lure clients, particularly during the festive period, clothing outlets have taken to sending potential clients ‘pre approved buying power’, at times as much as R3000. These clothing outlets neglect to mention the terms and conditions, and thus often unsophisticated buyers find themselves as unwitting clothing account holders with a debt they cannot afford.

Another common practise by clothing outlets is to embark on an account opening campaign in public places such as taxi ranks, particularly at month ends or social grant paydays when they know that people have money.

There also appears to be a laxity in the identification of account holders in both the clothing and furniture retail outlets. There are numerous instances in which friends and relatives have fraudulently made purchases on another’s account, leaving the account holder responsible for the account. It is submitted that where there is clear negligence on the part of the credit grantor, then there should be apportionment of responsibility, or the credit grantor should lose its right of recourse in respect of that customer. Ultimately a customer should not be responsible for any losses incurred as a result of the retail outlet’s negligence.

(c) Lack of consensus

In reaching these credit agreements often the very fundamentals of a binding contract are undercut in that customers do not understand the terms and conditions of the credit agreement. There appears to be some misconception as to the difference between the cash prices and the price on credit. Even if the terms and conditions are set out, they are often set out in a language that is not understood by the customer. Terms such as ‘insurance’, ‘repossession’, ‘instalment’ and ‘default’ need to be clearly elucidated in the language preference of the customer. This issue goes to the core of the law of contract, in that where there is a lack of consensus, any ensuing agreement becomes unenforceable.

(d) Customer’s ability to pay

There appear to be very few, if any, checks on clients’ ability to pay off accounts after being granted credit. Often pensioners and other persons on social welfare grants pay instalments totalling as much as R500 and yet receive a grant of only R780. Clearly the balance is insufficient to sustain a decent lifestyle, thus defeating the purpose of social grants. It is submitted that these retail outlets should conduct a compulsory ‘means test’ for all credit clients to ensure that the client is still able to live a decent lifestyle after paying off instalments. Pertinent questions to be asked in such means test could be inter alia: source of income, amount of such income, dependents supported, monthly expenditure etc. Where such retail outlet is negligent in granting credit, then again they should forego a right to recourse in the event of default by a customer.

In the light of the extreme socio-economic hardships experienced by consumers as a result of the exorbitantly high prevailing interest rates in the micro-lending industry as well as abusive and exploitative practices by micro-lenders and certain retail outlets, it is submitted that our Constitution makes it incumbent upon the legislature to ensure that the interests of such consumers are protected in a pro-active and effective manner.