Money-lending, across the ages …

Aristotle, 350bc: “Very much disliked is the practice of charging interest; and the dislike is fully justified … money intended to be a means of exchange … of all ways of getting wealth this is the most contrary to nature

Cicero, 50 BC: “Gentlemen should not toil themselves with means of livelihood which provokes ill-will, such as collecting customs dues and money-lending”

Bacon, 1597: “It is a vanity to conceive that there would be ordinary borrowing without profit; and it is impossible to conceive the number of inconveniencies that will ensue if borrowing be cramped

… better to mitigate Usury by declaration, than to suffer it to rage by connivance”.

Bentham, 1787: “The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him”

Micro-finance:What is an “enabling environment”How does the NCA relate to micro-

finance?

Gabriel DavelSeptember 2009

Background & framework

What is an enabling environment?- whole spectrum of possibilities

Subsidis

ed s

ocial

welfa

re a

pproac

h

Fully dere

gulated,

neo-classical

approach

Specia

l law

for n

on-

profit

mic

ro-

ente

rpris

e cr

edit

Govern

men

t

lendin

g

progra

mm

es

Broad

enab

ling

cred

it le

gisla

tion

Inte

rest r

ate contro

l?

Sustai

nable? P

rofit

able

?

How much

pro

fit is

“OK”

Subsidis

ed in

tere

st ra

tes?

Deposi

t tak

ing?

Product

ion c

redit

only?

Prohib

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nsum

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nding?

Reckl

ess

lendin

g?

ConsumersInformalBusinesses

FormalBusinesses

Practical implications?Hot topics & contentious issues

General issues

Consumer loans or enterprise loans? Prohibit cash loans?

Special protection only for clients of MFIs … what about clients of ‘loan sharks’?

Special regulatory dispensation for micro-enterprise lenders? What about loan sharks, commercial lenders etc?

Deposit-taking for micro-enterprise lenders? Risk to depositors?

Reckless lending rules? Implications of reckless lenders competitors & long term housing loans.

Interest

No interest caps? What about fees?

If regulate - effective / APR%? Fees?

Only “reasonable” rates, a la Prof Yunus? What is a reasonable rate in SA, given cost base?

Same rules for NGO & commercial lenders? If different, why?

Short history of micro-finance in SA

Through Get-Ahead, group-based lending methodology introduced (mid-80’s)

Off-shoots: SEF, Marang, WDB …

Government supported replication through Khula, SEDA, SAMAF, Umsobomvu … even IDC joining the fray

Note, also: Credit Unions, Co-operative Banking, Housing Finance

And: Direct & indirect enterprise lending by main stream lenders

Legislative overview

1992 – General exemption for small transactions from UA, minimal requirements, no enforcement

1999 – MFRC established. Exemption for micro-loans on condition of registration & compliance with min consumer protection provisions + enforcement

2007 – NCA, general law covering all consumer credit & providers + enforcement

MF in SA - comments

1. For a history of 20yrs+ very little to show in terms of traditional micro-finance. Only 3 MFIs with substance, approx 150k clients vs demand of in excess of 2.5m+ micro-entrepreneurs

2. Despite substantial investment, only modest impact … why? Are there maybe ‘structural’ reasons … e.g. (1) the dominant position of the commercial retail & production sector; (2) the dominant position of the commercial financial sector, (3) the role of formal employment in the economy (& social welfare payments) & demand for skills (= low skills level in MF sector)

3. But integration of micro- & main stream market (started under MFRC) had massive impact on financial availability. Substantial volume of ‘personal loans’ flow through to SMEs. Cash lending also makes huge contribution to demand side.

4. SA is an intermediate or ‘maturing’ market, necessarily looking different from an under-developed market such as Bolivia, Bangladesh et al. Has implications for consumers, micro-enterprises, MFIs and main stream finance.

• Consumer product choices, financial needs

• Employment options, salary demands, allocation of skills

• Financing options available – personal, trade credit, commercial, mixed

• Population density, cost structure

Approach adopted in the NCA, & underlying philosophy

Remove obstacles from law

Create general framework in which greatest possible range of commercial and non-for-profit institutions are able to provide broad range of finance to all categories of consumers

Avoid “special dispensations” which fragment the market and marginalise low income consumers and micro-enterprises

Apply consumer protection equally, irrespective of source of finance. Also most vulnerable consumers who only have access to “loan sharks”

Draw loan sharks into the net – prohibitions do not work

Accommodation for “developmental credit”

National Credit

Act

Agreements& quotes

Unlawful

agreements,

provisionsCredit BureausNational Credit

Register

Debt counselling

Enforcement &debt collection

Reckless

lending rulesMarketing

& sales practices

Interest & fees

Perspective from sub-prime crisis How does NCA provisions compare?

NCAComprehensive, uniform coverage

S163 = principal responsible

S103 & S104

Reckless lending sections

Debt counselling … & incentive to reschedule

Problems in sub-prime loan origination:-= misleading disclosure + abusive practices

Brokers incentivised to maximise origination and minimise cost … & able to pass risk of default on to others … & given access to unlimited funding through securitisation

“Teaser rates” attractive draw-card, with 2 year lag before reality sets in

“Reduced documentation loans” means affordability disregarded

… and then the housing prices declinedconsumers not innocent little angels, but a consumer that is pressurized & mislead cannot be expected to make “informed or rational choices”

NCA provisions for “developmental credit

Requirements Act applies generally, but a

special category for ‘development credit providers’

Special procedures may be approved, e.g. affordability assessment

Different documents may be approved, e.g. pre-agreement disclosure & statements

Increased fee limits + interest at highest limit

Process to apply Development credit should in

most areas be able to fit within normal forms & procedures

If different treatment required,– Apply to NCR for approval– Specify areas where

approval required– Indicate how consumer

rights would be protected– Indicate anticipated

volumes

Post script -

- statistical overview of consumer credit market - Impact of NCA on cost & access

Credit Provider Statistics Overview of consumer credit market

Approximately R1.1trillion consumer credit, provided to 17 million consumers & consisting of 36m accounts

Registration 3,700 credit providers with 31,000 branches

(23 temporary registered)11 credit bureaus, managed 22 audits, 16,8

m data removals

Mortgages biggest category, “other secured” next biggest (m/vehicles & furniture)

Banks 90% of total, non-bank vehicle 3%, retailers 3%

Outstanding balances

Banks90%

Gross loans outstanding AccountsBanks 90% 19 mMotor dealers 3% 286,000Retailers 3% 15,8 m

approx R1.1 trillion(exclude micro-lenders & other small providers)

Mortgages, 63.97%

Short Term , 0.06%

Un-Secured, 4.18%

Facilities, 12.01%

Secured(Other),19.78%

Survey of impact of NCA: Access & Cost– FEASibility

The NCA changed the consumer credit market in a number of ways …

Integrating previously capped Usury market with exempt market for micro-loans

Improved quality of access for the low-middle income consumer

Increased transparency & competition

Price reductions in most segments, biggest in micro-loans & furniture finance

Store Cards – R1,500

Furniture Finance – R5,000

Impact of NCA: curbed excesses, creating basis for lower but more sustainable credit growth – without courts acting as debt collectors, curbing social cost of reckless lending

Debt counselling – reconcile claims of different credit providers, creating sustainable repayment stream on non-performing consumer

o While minimising social cost,o And, lets not forget the hard-selling that took place in the good times! o BUT, significant implementation challenges

Fall-out from debt stress still increasing, driven by loss of variable sources of income as much as loss of employment

On-going external impact of financial crisis, with risk of 2nd fall post stimulus

Dramatic reduction in domestic credit a major negative impact, aggravating domestic decline

In policy response, important to focus not just on protection of industry, but also on protection of households,

o noting that crisis impacts differently on different consumer groupso loss of income & loss of employment each have an impacto the longer the downturn lasts, the more households with high debt burdens run out of options

Concluding observations:-

Thank You !

www.ncr.org.za