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NCR given May deadline to review service fees on loans

MicroFinance SA says it’s waited six years for changes.

JOHANNESBURG – The National Credit Regulator (NCR) has until the end of May to submit proposed changes to the monthly service fees that credit providers are allowed to charge on credit agreements in terms of the National Credit Act (NCA), a judge has ruled.

Following an urgent application brought by MicroFinance South Africa (MFSA) in the North Gauteng High Court last month, Justice Prinsloo issued a court order this week to the effect that the NCR must submit draft recommendations to the Department of Trade and Industry (dti) on changes to service fee caps by no later than May 29.

MFSA has been lobbying for rates and fees on short-term loans to be reviewed for the past six years, CEO Hennie Ferreira told Moneyweb.

The maximum monthly service fee has been capped at R50 since June 2006, despite provisions in the NCA that this amount be reviewed at intervals of no less than three years. According to the MFSA, the NCR “still prosecutes members with impunity on the invalid regulations”, where service fees above R50 are charged.

The NCR’s company secretary, Lesiba Mashapa, said that in some cases where regulatory action was taken, credit providers had contravened other sections of the NCA and not only those pertaining to service fees. “A service fee is part of the cost of credit which includes interest rates and credit insurance. The cost of credit insurance is not capped currently and the pricing of some credit providers on credit life insurance is high and substantially increases the cost of credit,” Mashapa said.

Ferreira argued that the low rates chargeable on short-term loans is precisely what leads credit providers to find other sources of income, such as credit life insurance.

“We want to see a review of the rates and fees and we want to see it done scientifically,” Ferreira said.

Regulated microlenders are legally allowed to charge an initiation fee, a service fee and a maximum monthly interest of 5% on a short-term unsecured loan.

A short-term unsecured loan is payable over a maximum of six months and may not exceed R8 000.

The maximum initiation fee that can be charged no these loans is R150, plus 10% of the amount of the agreement in excess of R1 000. An initiation fee may never exceed R1 000.

Loan sharks thrive as microlenders die

Ferreira said 1 000 MFSA members have closed down due to the fact that rates and fees on loans do not cover the cost of providing these loans. This, said Ferreira, has simply pushed the majority of credit-seeking consumers “underground”, into the arms of loan sharks.

Last year, MFSA commissioned an Econometrix report on the unsecured lending market, which insists that, in order to maintain a sustainable microfinance industry, rates and fees on loans must “reflect the real costs of credit provision”.

Since short-term loans often aren’t cost effective to provide, credit providers tend to issue larger loans with longer terms to consumers who may in fact need much smaller amounts. This is a major cause of over-indebtedness: just because you qualify for a R15 000 loan, doesn’t mean it should be granted to you.

Mashapa said the review of service fees was currently being finalised. “I cannot divulge any details regarding the changes, but the factors that are taken into account include the impact of the fees on access to credit by consumers from previously disadvantaged, low income and remote communities,” he said via emailed responses.

Mashapa did not comment on why service fees have not been reviewed for almost nine years.

Justice Potterill ordered a review of these fees within nine months of a court order delivered in June last year pertaining to the Bitline Case, which also centred on service fees.

That the NCR and dti missed the March 4 deadline was the grounds on which the MFSA brought this most recent urgent application declaring both the regulator and the department to be in contempt of court.

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The NCR falls under DTI – in other words, government. Why would they obey a court order and meet a deadline?

Never mind that the NCR as a regulator of a law has been totally ineffective since its inception: it refused point blank for years to investigate complaints of reckless lending to consumers. Many parts of the Act it administers it doens’t even seem to understand itself. Hopeless body!

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