LEGAL VIEW
Micro lending and
breaking the bank
A new challange for credit providers
M
icro Loans. Just the mention of them solicits
a variety of emotional responses. Essential service
to the poor or exorbitant; some call it opportunity,
others risk; some say it is part of our culture and
others say it is a financially oppressive system.
The formalised commercial Micro Loan industry in South
Africa originated approximately 20 years ago by an exemption
in the Usury Act, 1968. The effect of this exemption was that
micro-lenders were no longer bound by the maximum rates of
interest laid down in the Usury Act. This paved the way for an
influx of capital into the industry and a handful of entrepreneurs
identified and seized the opportunity. Industry self-regulatory
bodies set the interest rate at the time at 30%. Strangely enough,
in the early days the retail banks viewed this sector (unsecured
credit to low-income individuals) as risky or unsustainable and
had a general disassociation from the market segment due to
their socio-economic assumptions about the consumers.
In 1995 the industry showed an incredible growth of 192% for
the year, while credit volume had almost tripled from R3.6 billion
to R10.1 billion over the same period. It was approximately at
this point that the major retail banks, perhaps because of a fear
of missing out precipitated by the staggering numbers, decided to
revisit their credit policies and warily entered into the market of
micro lending.
In 2006 the National Credit Act, 34 of 2005 (NCA) was promulgated.
In terms of the NCA, there are only three possible ways to gain profit
on a Micro Loan: an initiation fee, service fees, and interest.
50
BANKER SA
IS UNSECURED CREDIT BREAKING THE BANK?
African Bank Investments Ltd (ABIL) represents between 20 to 25%
of the unsecured lending market in South Africa. ABIL announced
on 2 May 2013 that headline earnings were down by 26% for the
six-month period ending in March 2013. This was largely due to
its decision to hike provisions for bad debt while tightening loangranting criteria. ABIL wrote off R445 million to bad debt. This
triggered a sharp decline in the com pany’s share price.
Capitec also faced dual challenges in respect of its unsecured
lending operations in the first half of 2013. Capitec offers unsecured
loans of up to R230 000 and reportedly increased its unsecured
lending by 24% from 2012 to 2013. Its credit granting policies were
widely criticised in the media and the NCR launched an application
against the creditor at the National Consumer Tribunal, alleging
that the bank contravened certain sections of the Act pertaining to
initiation and service fees. It has set aside R2.7 billion for doubtful
debt in 2013.
Notwithstanding this, the SARB maintained in a press briefing on
27 May that unsecured credit levels are too small to pose a risk to
the banking industry.
THE COST OF CREDIT TO THE PROVIDER
In Barko Financial Services (Pty) Ltd v The National Credit Regulator
& another, North Gauteng High Court, A499/2011 (Barko), the court
found that the service provider fee, being the cost of Early Debit
Orders (EDO’s) – the collection method employed by the appellant –
are incl YY[