A discussion of access to credit in South Africa with specific reference to reckless lending and over-indebted consumers.

Abstract

Access to credit is very important as it allows consumers to buy goods that they cannot necessarily buy with one month’s salary. Having access to credit also allows consumers to start small businesses. This not only benefits individual consumers, access to credit also helps the economy of a country to grow. However, due to the history of South Africa, many poor consumers were not able to access the formal credit sector as they did not have the necessary security to obtain credit. Many poor consumers had to use the informal credit sector or ‘mashonisa’ (informal money lenders) where they were open to abuse by credit providers who did not care about the law. At this point in time the credit industry was regulated by the Credit Agreements Act 75 of 1980 and the Usury Act 73 of 1968 which had certain requirements which made access to credit for poor consumers difficult. The South African government tried to make access to credit easier for poor consumers by introducing two Exemption Notices. However, an unintended consequence of this was that credit providers were able to offer many small loans to one consumer at very high interest rates. Levels of over-indebtedness then increased to the point where the government became very concerned about the situation both for consumers and for the economy as a whole. After an in depth study by the Department of Trade and Industry, the National Credit Act 34 of 2005 (NCA) was enacted. The NCA was specifically introduced to stop reckless lending by creditors and to prevent consumers from becoming over-indebted. When the Act came into operation it was very difficult for consumers to obtain loans. This was because of the onerous penalties provided for in the Act and because the Act established the National Credit Regulator (NCR) and the National Consumer Tribunal (NCT). These two bodies were established to ensure that credit providers, debt counsellors and credit bureaux were complying with the Act. The NCR investigates allegations of non-compliance with the Act and refers matters to the NCT for a hearing. If credit providers are found to be contravening the Act the Tribunal can impose heavy administrative fines or they can deregistered the credit provider. However, after a period of time, it seems that credit providers discovered that the Act was not being enforced properly and so it became easier for consumers to obtain loans.This has created a situation where over-indebtedness is still on the increase. It also shows that the mechanisms put in place by the NCA have not worked and more and more consumers are becoming over-indebted. This has caused the government to relook at the NCA and it has introduced amendments to the NCA. By introducing the new regulations the government believes that the regulations will close the loopholes and will bring down levels of over-indebtedness. However, whether these amendments will achieve this will ultimately depend on how the NCR and the NCT are able to enforce them. If they cannot enforce the NCA properly then credit providers might just continue to offer loans to consumers who cannot pay them back.