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
it co
nsum
er le
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