Scrapping the credit act would change the lives of millions

MUCH FREER ACCESS TO CREDIT WOULD BE PARTICULARLY HELPFUL TO INFORMAL TRADERS AND ASPIRANT ENTREPRENEURS

Ihave a very radical policy proposal: repeal the National Credit Act. Repeal would allow lenders and borrowers the freedom to contract with each other for credit on any terms they found agreeable. It would help transform the economic prospects of those many South Africans who do not benefit from regular incomes and so do not qualify for credit.

Much freer access to credit would be particularly helpful to informal traders and aspirant entrepreneurs and farmers.

Saving the significant costs of complying with regulations, a repeal might lead to less expensive borrowing terms for the many who receive credit.

Strong competition for potential credit business would convert lower compliance costs of providing credit into lower charges for all borrowers.

The reputation of the lenders for fair treatment of customers would become even more critical in attracting new and repeat business. The importance of maintaining reputation — brand value — in which so much is invested, including training employees to deliver their services better than their rivals, is what keeps profit-seeking businesses honest and efficient. It attracts the most valuable of business: repeat business.

Perhaps the now unemployed regulators and compliance officers could be converted into increasingly useful predictors of the ability of potential borrowers to deserve the credit on offer.

Accurately identifying the credit rating of a potential borrower would allow for well-targeted, attractive offers of credit — perhaps initiated at very low cost over the internet.

Credit markets are particularly well placed to apply the new science of big data management, which is revolutionising all business.

There is a long history of limiting interest rates that may be charged borrowers, which has complicated the contracts borrowers and lenders agree to and, in turn, has encouraged regulation of these complicated terms. If lenders were free to declare all revenues they expect to receive from a borrower as interest or capital repayment, borrowers could easily make comparisons of the costs or benefits on offer. As in the case of leasing a car, how much of the monthly payment pays for the car and how much for the motor plan is irrelevant to the driver.

We do not pay a hotel separately for towels, linen or air conditioning and a “free” breakfast may even be included in the daily rate. And no regulator (yet) tells the hotel to itemise its menu or what services they are allowed to charge for and how much they can charge

The National Credit Regulator, however, allows the lender only clearly defined fees and payments, which include the repayment of the principal debt, an initiation fee, a service fee, interest, the cost of any credit insurance, default administration charges and collection costs.

It has argued that a fee charged to retail customers to join a club of customers cannot be levied. The jury, or rather the judges, are out on this one.

Club fees or delivery or insurance charges all contribute to the lender’s revenue, in addition to interest payments, which are controlled. Reducing the lender’s ability to raise revenues from explicit interest charges or to protect themselves with capital repayments leads to a complicated array of fees.

Restricting the flow of revenue, therefore, means less credit supplied to well-qualified borrowers. Surely this is an unsatisfactory outcome that unregulated credit markets would overcome?

● Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.