Regulation of over- indebtedness & reckless lending in South Africa Gabriel Davel CEO, Micro Finance Regulatory Council, Policy Advisor in the National Credit Law Reform South Africa Context Legal environment for consumer credit 1968 “Usury Act”, & „Credit Agreements Act‟ From 1992 an approach of “exempting” small loans from Usury Act, and from 1999 a set of regulations similar to the EU Credit Directive applied, but still no interest limit (<US$1,600) Until then, black South Africans typically only had access to finance for consumer goods, and 1994 elections brought huge aspirations Credit law reform process No integration between sub-markets, low income consumers only receiving “unsecured loans”; plus a lack of access to banking services for a large section of the population, with increasing over- indebtedness for others High debt servicing and at very high interest rates In 2002 MFRC initiated a legislative reform process Lender self-interest, threat of default, sufficient protection against reckless behaviour ? However, lenders isolated from consequence of reckless decisions Profile of a reckless lender “Preferred collection arrangements” (payroll or payments system) ? State assisting in enforcement of reckless 17% of loans contracts ? = No interest limits … over-recovery on debt repayments > income performing clients ? 17% Weak disclosure, weak competition 100% + High exclusion, aspirational borrowing or 49% desperation borrowing ? 60% Further loans when clients 34% to 100% already over-indebted ? < 60% 0-60% of gross income 60-100% of gross income 100%+ of gross income SA’s new Consumer Credit Law Measures to combat reckless lending & over-indebtedness Affordability assessments reasonable steps to determine consumer‟s existing financial means, prospects and obligations … & assess ability to meet obligations under agreement If reckless provider may be prosecuted by Regulator magistrates may not issue court orders for debt recovery debt counselor may restructure or cancel debt (with confirmation of Court or Tribunal) but: protections reduced when consumers misrepresent Create statutory “indebtedness register” only debts & repayments, not a credit bureau ! Remove incentives: e.g. collection preferences Statutory obligation to monitor indebtedness thank you !