Thu, 19 Sep 2019

The new National Credit Amendment Bill mentions in its preamble that there are consumers within South Africa for whom existing insolvency measures are inaccessible. This bill is meant to provide a solution, but fails to consider the consequences of those it aims to protect.

To fall within its ambit, consumers must earn a gross income of R7 500 or less per month, have unsecured debt of R50 000, or have been found to be critically indebted. They will be able to first apply for debt intervention before having their debt extinguished.

According to the Southern Africa Labour and Development Research Unit's income comparison tool, some 90% of South African households are earning less than R7 500 per month. Estimates of debt that could be written off range in size from R13-R20bn.

These households use credit to manage volatile incomes and expenses within any given month. Credit forms an integral part of financial management and is available both formally and informally.

Unfortunately, the bill is likely to set off a dangerous series of events. First, the lending risk is heightened as the bill incentivises bad behaviour by borrowers in the form of non-repayment or taking on credit they can't afford. To compensate for this, formal lenders will look to hike interest rates and/or reduce the volume of credit extension to this cohort.

With consumers battling the effects of a harsh economic climate, rising living costs and low job security, a lack of formal credit and more expensive formal credit will force this group to look elsewhere.

This leads borrowers to the informal credit market. A market which is not governed by this bill or other credit relevant regulations of the country.

A study by Wonga found that the prevalence of informal credit from 'mashonisas' or loan sharks sees one mashonisa per 100 households in low-income areas. This is arguably better penetration than seen by formal structures.

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Mashonisas offer a local option, quick payout, no formal documents and ease of understanding. On the flip side, these loans do not qualify for debt relief, typically charge between 30 - 50% interest on loans, can seize belongings of and humiliate borrowers in their communities.

Studies also show that the informal market has insufficient liquidity to adequately provide to this group. Reaping the benefits of demand outstripping supply, Mashonisas can also raise their rates.

Affected consumers risk ending up in a worse position as these events play out seeing people struggling to pay for food, transport, and unplanned events. A more responsible approach may have seen formal lenders considering the context of the low-income community, looking abroad at alternative lending models, and implementing harsher restrictions to avoid and rectify reckless lending in both formal and informal structures.

This bill, unfortunately, does not promote a more inclusive lending environment.

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