Rates on short-term loans too low

Spurring growth in loan sharks, larger loans.

JOHANNESBURG – Low rates and fees on short-term unsecured loans are forcing smaller lenders out of business, leading consumers to take larger (and consequently unaffordable) loans with banks or turn to loan sharks, according to MicroFinance South Africa (MFSA).

“The rates and fees charged on unsecured loans were last reviewed in 2007. At the time, no feedback was given to the industry as to how they were reviewed or on what basis they were set,” MFSA CEO, Hennie Ferreira tells Moneyweb.

Rates and fees on unsecured loans are currently under review by the National Credit Regulator (NCR) and Ferreira believes that to ensure a competitive and fair industry, which reflects the actual cost of credit provision and promotes financial inclusion, rates need to increase.

Currently, regulated credit providers charge an initiation fee, service fee and a maximum monthly interest of 5% on a short-term unsecured loan. According to Ferreira, capping the interest on short-term loans at this rate for the past seven years has forced a number of smaller lenders to close doors since they cannot cover business costs. He says that close to a quarter of MFSA members have deregistered as credit providers in the past year.

This forces consumers to access credit from larger credit providers, such as banks, which prefer not to extend smaller, short-term loans. “It’s uneconomical for a bank to issue a R500 short-term loan to a consumer. They would rather issue an R8 000 loan. Even if the consumer qualifies for this, it might not necessarily be the right product or loan for them,” Ferreira says.

This can lead to a debt spiral because the repayment term is longer, the interest higher and part of the money is undoubtedly spent on unplanned consumption. The consumer then ends up paying more in interest charges for the same amount of money, as the below graph illustrates:

Source: MFSA

“If a decrease in rates occurs, smaller players will be forced to either close down, go underground or not comply. Loan sharking will increase and rates will become even more exorbitant than they already are,” Ferreira says.

The problem with credit information amnesty

Credit information amnesty, according to Ferreira, compounds pressure on smaller players, as it hinders the ability to take good credit decisions. Credit information amnesty forced credit bureaus to remove all adverse credit information relating to consumers as of April 1 2014. Credit providers can still access the payment profile of an individual, but this requires becoming a paying member of the Credit Protection Association (CPA).

“With less data available, credit providers will issue fewer loans or simply price in the extra risk. This means that people who would have qualified for loans may no longer qualify and might turn to loan sharks,” Ferreira says.

“Credit information amnesty also has the potential to create a non-payment culture, where there are no repercussions on consumers for accumulating bad debt,” adds Leonie van Pletzen, MFSA operations manager.

She points out that unsecured lenders are all tarnished with the same brush, when it is in fact the illegal and unregistered lenders that are lending recklessly and skewing the perception of all unsecured credit providers.

The below graph reflects the growth in rands of unsecured loans since 2007 versus the growth in short-term loans (loans smaller than R8 000 repaid over a period of up to six months), which are the kind predominantly provided by MFSA members.

Source: NCR

Although all lenders are required to comply with the provisions of the National Credit Act (NCA), they are generally not registered with the NCR and therefore simply do not comply. “At this stage, only lenders that have issued more than 100 loans at a total exceeding R500 000 per year must be registered with the NCR. We believe that all lenders should be registered with the regulator, irrespective of the threshold, in order to ensure compliance with the NCA,” Van Pletzen comments.

She says it is highly likely that all lenders will have to be registered when the latest round of amendments to the NCA are approved and passed, hopefully by the end of July.

Ferreira says the MFSA commissioned an Econometrix report on the unsecured lending market, the results of which are expected in the coming weeks.


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