Pricing caps are stifling short-term lending
IN THE YEAR since Trade and Industry Minister Rob Davies promulgated new pricing caps on interest rates and fees for short-term credit agreements, it’s far from clear that they are having the desired effect. While affordability assessments introduced in 2015 by the National Credit Regulator (NCR) have been very effective in protecting consumers and limiting debt stress, the value of the Department of Trade and Industry’s (dti’s) 2016 pricing caps is less evident.
Although the intention of price capping was to reduce the cost of borrowing for consumers, the likelihood is that it has instead driven borrowers into the arms of unregistered and unregulated lenders.
These lenders don’t play by the rules set out by the minister, and charge significantly higher interest rates and fees.
What the minister’s cuts on lending fees and interest rates mean is that it became unviable to lend to borrowers who fall into high-risk categories. The new pricing caps may effectively prevent these borrowers from obtaining credit altogether – at least in the regulated, formal market. Reckless lending has been on the increase in recent years, despite it being against the law.
In May, the National Consumer Tribunal informed Parliament’s trade and industry portfolio committee that in the 2015/16 financial year the number of reckless lending complaints had more than doubled to 19 097 cases from 9 589 in the previous period. The majority of these cases related to loan sharks, or unregistered lenders.
There are numerous situations in which people are desperate for a short-term loan to alleviate a crisis such as unexpected medical expenses, or covering unavoidable expenses like school fees or deposits. Unable to get credit from reputable lenders, many desperate South Africans turn to loan sharks or “mashonisas”, who charge well above the interest rate prescribed by the minister.
The PwC report
Price capping regulations remain in force, despite a high court order having set them aside, pending the outcome of an appeal by the NCR and the minister against the judgment. It is worth noting that the reason the court set aside the regulations was that neither the minister, nor the NCR, could show they had meaningfully considered the effect of these caps on either the shortterm credit industry or on consumers.
The court questioned the lack of an impact assessment, as well as why the NCR had not followed recommendations laid out in a PricewaterhouseCoopers (PwC) report it had commissioned.
The National Credit Act requires that fees be reviewed every three years, but fees went without revision for nine years. Being unable to recover their costs, many credit providers went out of business.
Despite the PwC report recommendation that service fees be increased from R50 to a maximum of R80.54, the regulator suggested a fee of R65 which the minister reduced, without explanation, to R60.
The court also found that the minister offered no explanation, beyond an unsubstantiated desire to reduce over-indebtedness, for reducing the maximum interest rates across different credit agreements.
International experience
Drawing on Wonga’s experience in international markets, we find that even in a developed country such as the United Kingdom – where 80 percent of the population has access to credit – the maximum interest rate that can be charged on a short-term loan is 0.8 percent per day, up to a maximum of 100 percent of the loan amount.
This is significantly higher than the interest rate caps in South Africa, where comparable access to credit is as low as 38 percent. The NCA has now broadened its focus to assess other forms of credit, such as unarranged overdrafts and higher purchase agreements, for which costs can often be significantly higher than shortterm credit.
Compared to the daily interest rate cap of 0.8 percent in the UK, South Africa’s interest rate on short term credit is roughly 0.25 percent a day. Given the current economic constraints in South Africa, the question we need to pose is whether our rates are appropriate for our market.