Credit Law Review

1. Credit Law Review Overview of background research

2. Members Prof Roshana Kelbrick (UNISA) Dr David Porteous (Finmark) Moses Moeletsi (Prov. Gvt) Kgosi Pule (Practicing Lawyer) Gabriel Davel (MFRC) Mandate To review the regulatory environment for small loans & consumer credit in South Africa, … in order to make recommendations for legislative and regulatory reform In 2002, Dr Ruiters appointed a technical committee for Credit Law Review:-

3. Procedure followed by the Committee • Review International Dispensations • Appointed consultants to do research in SA: (a) consumer perceptions, (b) industry/stakeholder views; (c) cost of different products; (d) expert opinions on different aspects • Arranged workshops with DTI, local & international experts (including SARB & Treasury officials) • Compiled detailed report with assessment of situation & regulatory proposals & presented to Minister in August 2003

4. Cost, Volume & Allocation of Consumer Credit, Dr Hawkins, FEASibility Consumer Perspectives on Consumer Credit Products, SAtoZ & Realty research Africa Industry & Stakeholder Views, Portia Sekati, Rudo Consulting Comparison of SA & International Legislation, Mdu Kunene, Legal Advisor, MFRC Regulation of Payday Lending in US, Partick Meagher, University of Maryland (IRIS) Interest Rate Regulation, Prof Dympski, University of California, Riverside Legislation in SA, Rudolph Willemse, Hofmeyr, Herbstein, Ginwala Workshops with SARB, Treasury et al with local & international ‘experts’ to confirm statistics & discuss conclusions with international experts in London … policy & Bill Research Reports & Expert Opinion

5. Primary findings - 1 • Consumers:- • feel disempowered, see certain products as dangerous but don’t believe they really have much choice • Would like more disclosure, better treatment, • but consistently indicate that the urgency of obtaining credit/excitement of making a purchase ‘overrides reason’ when entering into contract • Industry & experts:- • agree that current laws weak, outdated & inconsistent in treatment of different products; and that lack of consistent enforcement a particular problem

6. Primary findings - 2 • Compared to leading dispensations • SA at least 20 years behind, but current challenges very similar: over-indebtedness, credit bureaux, marginal/high cost cash lenders, credit life insurance, disclosure/consumer awareness • Empirical research • market into “super-included” and “super excluded” components • extremely high cost for certain products • huge differences between disclosed & actual cost of credit • Little real competition (price), • with current Usury Cap distorting market, misleading consumers & providing no real protection • Legislative weaknesses & weak enforcement a major contributor to current problems, aggravated by problems in contract enforcement through courts

7. The case for new legislation & effective enforcement • R362bn consumer credit market, approximately 19 million accounts, with South Africans paying about R95bn of interest & fees per year • But a large number of consumers are paying as much as 100% p.a. on loans & furniture finance … from micro-lenders as well as leading retailers & banks ! • The benefit of access to finance is undermined by this extremely high cost of finance, and skewed allocation, with least access to those that need it most • Yet, ‘discrimination’ not the main cause; rather, legislative weaknesses & competition problems (findings confirmed by more recent investigation into “Competition in Banking”

8. International Benchmarks Which countries ? Why ? Accessibility Level of development of credit market …. Financial literacy of consumers ? Enforcement London workshop

9. International BenchmarksCommon issues - 1 • Improved disclosure of the cost of credit in order to enhance the consumer’s ability to make informed choices; • particularly, between cash purchases & credit use & to compare different providers. • BUT: debate between “comprehensive disclosure” vs “simplified standard disclosure” • Preventing credit life insurance from being used to inflate cost of credit; • mostly included in disclosable interest rate (SA excluded) • impact of fees & charges a concern in other countries as well • Number of countries giving attention to over-indebtedness, rules to enhance responsible lending (& affordability assessment) • curbing reckless sales and marketing techniques

10. International BenchmarksCommon issues - 2 • Importance of credit bureaux increasingly recognised for the role in combating over-indebtedness, improving credit assessment & lowering cost of credit; • Recognising need for regulation, protection of consumer rights • Weaknesses in competition in the credit market generally recognised • With concern on inherent problems, e.g. related to consumer’s inability / unwillingness to “shop around” • Marginal (high cost) lenders vs main stream lenders • Concern with focus on latter, while vulnerable consumers use former • Receiving attention in New Zealand, UK & US (& others)

11. Observations

12. In political terms …“Poor (black) people pay exorbitant rates, rich (mostly white) people have lots of low cost options” Super-included vs super-excluded

13. Cap banks:- payroll retail Cost of credit, effectiveness of current cap … & competition All loans & credit M/loans & furniture finance (MFRC) Average of 91%; Cheapest lender in each category = non-bank Average for NGOs ≈ 90% BUT ALSO: increasing availability of low cost options

14. Reckless lending – MFRC • Further loans extended when clients already very high debt servicing levels • One case: 20% of loans to clients with 80% debt service commitments • Implications: • Increases risk & unpredictability of financing low income market … disincentive for long term / housing finance • Over-indebtedness • Inability to meet municipal service, maintenance & similar commitments • How possible ? = payroll & bank account preferences Reckless Lending Inspections > 100% = crisis 0 to 50% = OK 50% to 100% = ‘intermediate’

15. CREDIT ACTIVITY OF BORROWERS PER INSTITUTION

16. Lack of Access or over-indebtedness?Stats SA 1995 & 2000 (per HSRC/Reza Daniels) Most poor h/hs still have limited or no access to formal finance Households with access: alarming % in vulnerable position, & lowest income groups most stressed !

17. Debt profile* Short term, high cost; Traditionally, linked to purchases (this is changing); Unsecured*Township properties: R115bn of “dead assets” … no asset accumulation, & locked into high cost debt Family Furniture Retail housing

18. Analysis, conclusions

19. Yet, suppliers not making super profits, & avoiding certain market segments • High rejection rates, high origination cost, high defaults • Credit bureaux information incomplete, unreliable • Enforcement in courts inefficient, time consuming, costly • Credit risk high, uncertain (predators, fraud, court action, preferences) • High level of uncertainty: unpredictable government intervention, legislation (& ‘exemptions’) uncertain, treatment by courts uncertain • Profitability uncertain, volatile

20. Economic causes of a dysfunctional market … • Usury Act & Exemption Notice “segments market”, prevents integration, cap makes main stream products unprofitable in low income market; Exemption conditions locks micro-lending into small, short term, high cost products • Legislation fragmented, inconsistent … undermines security-based lending … enforcement inefficient, costly • Weak disclosure, too late … no consumer pressure for lower prices • Predatory & reckless behaviour of some raises risk for all ... many incentives for reckless behaviour • Payroll deductions; Debit order preferences; Being able to get a court order, even if the loan was extended recklessly • Very many factors that undermine competition (preferences, access to NPS …) • Regulatory uncertainty played a big role (Persal, danger ofexemption notice being withdrawn … others)

21. Move away from a system of ineffectual price control, that results in misleading disclosure, that distorts the market and that segregates it into the “super included” and “super excluded” To a system that integrates the market are effectively enforced, forces simple, comparable disclosure, that curtails over-indebtedness, & assistance for consumers that are vulnerable or treated unfairly Summary