Background_ SARB Discussion by wuyunqing

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									Credit Law Review


  Overview of background research




                                    1
In 2002, Dr Ruiters appointed a
technical committee for Credit Law
Review:-
 Members                         Mandate


Prof Roshana Kelbrick (UNISA)    To review the regulatory
Dr David Porteous (Finmark)          environment for small
Moses Moeletsi (Prov. Gvt)           loans & consumer credit
Kgosi Pule (Practicing Lawyer)
                                     in South Africa,
Gabriel Davel (MFRC)
                                 … in order to make
                                    recommendations for
                                    legislative and regulatory
                                    reform

                                                                 2
Procedure followed by the
Committee

 Review International Dispensations

 Appointed consultants to do research in SA: (a)
  consumer perceptions, (b) industry/stakeholder
  views; (c) cost of different products; (d) expert
  opinions on different aspects

 Arranged workshops with DTI, local & international
  experts (including SARB & Treasury officials)

 Compiled detailed report with assessment of
  situation & regulatory proposals & presented to
  Minister in August 2003
                                                      3
Research Reports &
Expert Opinion
   Cost, Volume & Allocation of        Regulation of Payday Lending
    Consumer Credit, Dr Hawkins,         in US, Partick Meagher,
                                         University of Maryland (IRIS)
    FEASibility                         Interest Rate Regulation, Prof
   Consumer Perspectives on             Dympski, University of
    Consumer Credit Products,            California, Riverside
    SAtoZ & Realty research Africa      Legislation in SA, Rudolph
                                         Willemse, Hofmeyr, Herbstein,
   Industry & Stakeholder Views,        Ginwala
    Portia Sekati, Rudo Consulting
   Comparison of SA &               Workshops
    International Legislation, Mdu    with SARB, Treasury et al
    Kunene, Legal Advisor, MFRC       with local & international
                                        „experts‟
                                      to confirm statistics & discuss
                                        conclusions
                                      with international experts in
                                        London … policy & Bill


                                                                          4
Primary findings - 1

 Consumers:-
     feel disempowered, see certain products as dangerous
      but don‟t believe they really have much choice
     Would like more disclosure, better treatment,
     but consistently indicate that the urgency of obtaining
      credit/excitement of making a purchase „overrides
      reason‟ when entering into contract


 Industry & experts:-
     agree that current laws weak, outdated & inconsistent in
      treatment of different products; and that lack of
      consistent enforcement a particular problem
                                                                5
    Primary findings - 2
 Compared to leading dispensations
      SA at least 20 years behind, but current challenges very similar: over-
       indebtedness, credit bureaux, marginal/high cost cash lenders, credit life
       insurance, disclosure/consumer awareness


 Empirical research
      market into “super-included” and “super excluded” components
      extremely high cost for certain products
      huge differences between disclosed & actual cost of credit
      Little real competition (price),
      with current Usury Cap distorting market, misleading consumers & providing no
       real protection


 Legislative weaknesses & weak enforcement a major
  contributor to current problems, aggravated by problems in
  contract enforcement through courts
                                                                                    6
The case for new legislation &
effective enforcement
   R362bn consumer credit market, approximately 19 million
    accounts, with South Africans paying about R95bn of interest &
    fees per year

   But a large number of consumers are paying as much as
    100% p.a. on loans & furniture finance … from micro-lenders
    as well as leading retailers & banks !

   The benefit of access to finance is undermined by this
    extremely high cost of finance, and skewed allocation, with
    least access to those that need it most

   Yet, „discrimination‟ not the main cause; rather, legislative
    weaknesses & competition problems
      (findings confirmed by more recent investigation into “Competition in Banking”




                                                                                  7
International
Benchmarks

   Which countries ?
   Why ?

             Accessibility
             Level of development of credit market
             …. Financial literacy of consumers ?
             Enforcement

             London workshop




                                                      8
 International Benchmarks
 Common issues - 1
 Improved disclosure of the cost of credit in order to enhance
  the consumer‟s ability to make informed choices;
      particularly, between cash purchases & credit use & to compare
       different providers.
      BUT: debate between “comprehensive disclosure” vs “simplified
       standard disclosure”

 Preventing credit life insurance from being used to inflate cost
  of credit;
      mostly included in disclosable interest rate (SA excluded)
      impact of fees & charges a concern in other countries as well

 Number of countries giving attention to over-indebtedness,
  rules to enhance responsible lending (& affordability
  assessment)
      curbing reckless sales and marketing techniques
                                                                        9
International Benchmarks
Common issues - 2
 Importance of credit bureaux increasingly recognised for
  the role in combating over-indebtedness, improving credit
  assessment & lowering cost of credit;
      Recognising need for regulation, protection of consumer rights

 Weaknesses in competition in the credit market generally
  recognised
      With concern on inherent problems, e.g. related to consumer’s
       inability / unwillingness to “shop around”

 Marginal (high cost) lenders vs main stream lenders
      Concern with focus on latter, while vulnerable consumers use
       former
      Receiving attention in New Zealand, UK & US (& others)


                                                                   10
Observations




               11
In political terms …
“Poor (black) people pay exorbitant rates, rich (mostly
white) people have lots of low cost options”




       Super-included vs super-excluded               12
        Cost of credit, effectiveness of
        current cap … & competition

              All loans & credit                                                                 M/loans & furniture finance
                                                                                                         (MFRC)
               Effective cost of different products - inclusive of credit insurance &           R5000 for 12 months Legal % TCOC of lenders in 4 sub groups
                                               fees
                                                                                                           Low        High       Weighted Average
200%                                                                                    180%
                                                                                        160%
                                                                                        140%
150%
                                                                                        120%
                                                                                        100%
                                                                                                       banks:-
100%                                                                            Cap
                                                                                         80%
                                                                                         60%                                 retail
50%                                                                                      40%
                                                                                         20%
 0%                                                                                       0%
  Mortgages     Overdrafts     Vehicles     C/Cards &     Instalment   Term micro-             A B C D E F G H I J K L M       N O P     Q R S T U V     W

                                            accounts         sales        loans


                                                                                                            Average of 91%;
                                                                                               Cheapest lender in each category = non-bank
                                                                                                        Average for NGOs ≈ 90%
                                                                                                BUT ALSO: increasing availability of low cost
                                                                                                                                      13
                                                                                                                  options
    Reckless lending – MFRC
   Further loans extended when clients         Reckless Lending Inspections
    already very high debt servicing
    levels
        One case: 20% of loans to clients
         with 80% debt service commitments
                                                          > 100%
   Implications:                                         = crisis
        Increases risk & unpredictability of                        0 to 50%
         financing low income market …
         disincentive for long term / housing      50% to 100%         = OK
         finance                                  = ‘intermediate’
        Over-indebtedness
        Inability to meet municipal service,
         maintenance & similar commitments


   How possible ? = payroll & bank
    account preferences
                                                                                14
                             CREDIT ACTIVITY OF BORROWERS PER
                                      INSTITUTION
                    100%
                    90%
                    80%
                    70%
% of applications




                    60%
                    50%
                    40%
                    30%
                    20%
                    10%
                     0%
                           NGO, rural NGO, peri-   Lender to      Credit        Mutual   Housing    Lender to
                            lender      urban       miners        union          bank      micro   pensioners
                                       lender                                             lender
                                                               Type of lender
                                                                                                      15
                                                           % credit active
          Lack of Access or over-indebtedness?
          Stats SA 1995 & 2000 (per HSRC/Reza Daniels)



            % H/hs with cons debt > 20% of income: 2000
                                                                         Most poor h/hs still have limited
     40
     35
                                                                         or no access to formal finance
     30
     25
 %




     20
     15                                                                      % Households without any debt
     10
      5
      0
                                                                  100
                    0K

                     0K
                      K

                      K

                      K

                      K

                      K

                      K

                      K
                    0K
                    5K




                   15

                   20

                   25

                   30

                   40

                   50

                   75




                 15
                  15
                 R1
       -R




                -R

                -R

                -R

                -R

                -R

                -R

                -R

               -R
     R0




              >R
              K-

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             5K

             0K

             0K

             0K




                                                                  80
            5K
            R5

           R1

           R1

           R2

           R2

           R3

           R4

           R5

          R7




                          H/h regular disp. income        % H/h   60
                                                                  40
Households with access: alarming % in
                                                                  20
 vulnerable position, & lowest income
                                                                   0
        groups most stressed !




                                                                                  0K

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                                                                                    K

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                                                                                  0K
                                                                                  5K



                                                                                 15

                                                                                 20

                                                                                 25

                                                                                 30

                                                                                 40

                                                                                 50

                                                                                 75



                                                                               15
                                                                                15
                                                                               R1
                                                                    -R



                                                                              -R

                                                                              -R

                                                                              -R

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                                                                              -R

                                                                              -R

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                                                                             -R
                                                                  R0




                                                                            >R
                                                                            K-




                                                                                                             16
                                                                           0K

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                                                                         R5

                                                                        R7
Debt profile
* Short term, high cost; Traditionally, linked to purchases (this is changing); Unsecured
* Township properties: R115bn of “dead assets” … no asset accumulation, & locked
into high cost debt




  Family


                Furniture




           Retail

                                 housing




                                                                                            17
Analysis, conclusions




                        18
Yet, suppliers not making super profits,
& avoiding certain market segments
   High rejection rates, high origination cost, high defaults

   Credit bureaux information incomplete, unreliable

   Enforcement in courts inefficient, time consuming, costly

   Credit risk high, uncertain (predators, fraud, court action,
    preferences)

   High level of uncertainty: unpredictable government
    intervention, legislation (& „exemptions‟) uncertain,
    treatment by courts uncertain

   Profitability uncertain, volatile


                                                                   19
    Economic causes of a dysfunctional
    market …
   Usury Act & Exemption Notice “segments market”, prevents integration,
    cap makes main stream products unprofitable in low income market;
    Exemption conditions locks micro-lending into small, short term, high cost
    products

   Legislation fragmented, inconsistent … undermines security-based lending
    … enforcement inefficient, costly

   Weak disclosure, too late … no consumer pressure for lower prices

   Predatory & reckless behaviour of some raises risk for all ... many
    incentives for reckless behaviour
       Payroll deductions; Debit order preferences; Being able to get a court order, even if the loan
        was extended recklessly

   Very many factors that undermine competition (preferences, access to NPS
    …)

   Regulatory uncertainty played a big role (Persal, danger of exemption
    notice being withdrawn … others)
                                                                                              20
  Summary

 Move away from a             To a system that integrates
  system of ineffectual         the market
  price control, that          are effectively enforced,
  results in misleading
  disclosure, that distorts    forces simple, comparable
  the market and that           disclosure,
  segregates it into the
                               that curtails over-
  “super included” and          indebtedness,
  “super excluded”
                               & assistance for consumers
                                that are vulnerable or
                                treated unfairly
                                                        21

								
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