Since the South African economy saw a substantial increase in lending and household debt between 2004 and 2008, we find ourselves still dealing with the consequences of new levels of debt, whether it is public or private.
Head investigator and economist, Rob Jeffrey from Econometrix, noted in his presentation at the recent MFSA Annual General Meeting that the industry has been subject to recent studies and task forces appointed by the NCR, Credit Ombudsman, Banking Association of South Africa and the National Treasury. Jeffrey commented on these as steps in the right direction but said the need for further investigation is paramount to the current debt situation.
With this in mind, Micro Finance South Africa commissioned a recent study to investigate the economic impact of caps on interest rates and fees on the credit industry. The study, conducted by Econometrix, was presented to make recommendations with regards to these caps, particularly looking at the effect on the microfinance sector.
Unsecured lending matters to the SA economy
Looking at important economic trends affecting the credit industry, the study revealed that unsecured lending has undoubtedly become the more important form of credit in our economy. A high growth in unsecured lending has become the driving factor behind this, specifically in the retail and motor sales industry.
Jeffrey said that despite the deterioration of consumers’ financial health and the rise in unsecured lending having serious financial consequences for lenders and borrowers, the market now seems to be in control. However, good payers still seem to be paying the price to make up for bad payers’ behaviour as the debt needs to be “absorbed” in some or other way.
Emolument orders should stay
According to the study, the cost of slow and non-collected debts has a significant impact on costs to other borrowers. With good payers in the economy eventually coughing up to cover the costs and non-payment of debt, these slow and non-payers are essentially seen as “a burden” not only to the banking system but also to other citizens in the country.
The report argues a case against the banishment of emolument orders, stating that it will cause bad borrowers to not take their obligations seriously.
Figures show that the cost of banishing EAOs could amount to R4bn and the equivalent of 24 000 jobs lost. From an economic cost and employment cost perspective, the long term consequences of such a removal need to be revised, Jeffrey said.
Projected calculations suggest an R19.6bn increase in non-payments, almost doubling the current amount lost to current slow and non-payments.
Current caps and fees means higher risk for credit providers
With current caps acting as a form of price control according to Econometrix, competition amongst credit providers is reduced to the detriment of low income borrowers. In order to make up for their losses, credit providers resort to selling associated products that are of no or little benefit to these borrowers who mostly take out short term loans.
The proposed lowering of caps on interest rates is a solution that Jeffrey described as “treating the symptom and not the disease”. This might force consumers to utilise illegal moneylenders, offering them less protection.
Jeffrey argued that caps are not an effective way of addressing real or alleged problems regarding reckless lending as it encourages excessive, unscrupulous, ignorant and misinformed borrowing.
Raising caps and fees will increase competition and clamp down on illegal lending
The increase on caps and fees will allow credit providers to include risk costing into their pricing. The Econometrix report argues that this will then eliminate the need for consumers to cough up for unnecessary or overpriced products.
Small businesses will benefit from a reduction in the economic size of credit lending operations, giving them a chance to become more successful in rural communities and contribute to improving access to credit. Jeffrey emphasised the fact that low-end consumers will be able to obtain credit from legitimate credit providers rather than resorting to illegal moneylenders.
Serious need to foster more responsible lending and borrowing practises
Besides the recommendation to raise the maximum interest rate caps and fees, the study once again turned to the need for borrowers to understand and honour their debt obligations. It emphasised the fact that through reasonable economic rates, fair returns can be managed. Jeffrey said that consumers need to remember that we cannot build an economy on credit.
Amongst many recommendations, the researchers suggested the following*:
- To widen the range of the prescribed interest rate maximums. The current multiple 2.2 X repo rate, should be reduced to 1.6 X the repo rate. In addition, the fixed percentage in each category needs to be increased.
- To make substantial once-off increases in fees to compensate for inflation, compliance costs and other costs that have risen in the industry as a result of the introduction of the NCA and further regulations with cost implications that have been introduced over the period.
- To make annual inflationary increases based on the consumer price index (or a mutually acceptable index of inflation) part of the statutory fee structure and requirements.
*Excerpt from the Econometrix report
Econometrix was founded in 1982, and is South Africa’s largest independent macro-economic consultancy. Econometrix provides a range of economic services, both in the form of on-going economic analyses and specifically defined consulting assignments.
The aim of the research is to conduct an impact assessment into the way rates and fees are currently structured within the sector. The research was completed July 2014 and was released on 28 August 2014 at a well attended press conference in Johannesburg.
To support the cause of sustainable legal Microfinance in South Africa and to make a financial contribution towards the total cost of the research, contact Leonie van Pletzen at 012 346 1081 or click here to fill out the pledge form.