The body that represents most of the country’s registered microlenders has launched an urgent application to stop the Minister of Trade and Industry and the National Credit Regulator (NCR) from implementing the regulations that prescribe the maximum fees and interest rates that you can be charged when taking out credit.
Microfinance South Africa (MFSA) is seeking a court order to suspend the regulations, which are due to come into effect on May 6, until the finalisation of a review of the new regulations.
The urgent application will be heard in the North Gauteng High Court on May 3.
The regulations slash the maximum interest on certain types of credit agreements, in one instance by 12 percentage points:
* For unsecured credit, the maximum rate will drop from 35.4 percent to 28 percent (or the repo rate – currently, seven percent – plus 21 percent);
* For credit facilities (overdrafts and credit card debt), the rate will drop from 24.4 percent to 19 percent (repo rate plus 12 percent); and
* For short-term credit transactions (microloans), the rate remains at five percent a month for the first loan, but reduces to three percent a month for subsequent loans taken out in the same calendar year. A rate of five percent a month works out to an annualised interest rate of 60 percent. In terms of the National Credit Act (NCA), a short-term credit transaction is a loan of no more than R8 000 repayable within six months. If the regulations are implemented on May 6, a consumer who takes out two microloans in the same calendar year will pay a maximum of 48 percent interest in a year on both loans.
Members of Parliament’s portfolio committee on trade and industry, which has oversight of the NCR, believe these reduced rates are still too high, specifically those that relate to mortgage agreements and developmental credit. Under the new regulations, the maximum interest rates on these have in fact increased. Earlier this year, MPs asked Parliament’s chief legal adviser if the portfolio committee had the power to review the regulations. But they were advised that they couldn’t make changes to regulations, since that is the job of the department (of trade and industry).
While MPs believe the new interest rates due to take effect in May are still steep, the MFSA says the reduced rates will have “catastrophic consequences” for MFSA members and the general public, because the lower rates will put many credit providers out of business, Hennie Ferreira, the organisation’s chief executive, says in his founding affidavit.
MFSA is arguing that implementation of the regulations needs to be suspended and reviewed because the minister and the regulator have failed to:
* Take into account the effect that the new fees and interest rates will have on the providers of microloans;
* Conduct proper market research to determine whether the new fees and interest rates will benefit the market as a whole; and
* Consider the views of MFSA’s members, or any microfinanciers.
The net effect of the regulations will bring the microloan industry to its knees and make it impossible to do business, because it will not be profitable, Ferreira says.
An economic impact assessment by an independent consultant commissioned by MFSA found that the new regulations would put between 30 and 50 percent of MFSA members out of business, the affidavit says.
The closure of MFSA members’ businesses would not only affect them, but also the five to six million consumers whom they service, he says. MFSA members provide credit to a niche market that is not serviced by traditional banks.
If MFSA members were taken out of the market, consumers would not be able to obtain credit from legitimate sources, and it is possible that the number of unregistered lenders will increase, Ferreira says.
When the public is forced to obtain finance from unregulated and unregistered sources, it increases the prospect of them being exploited.
Ferreira’s affidavit states that the MFSA sought expert opinion on the likely impact of the regulations on the credit industry. These experts included economists Dr Penny Hawkins and Rob Jeffrey.
Hawkins specialises in credit provision and has consulted to the minister in the past, and Jeffrey provided a comprehensive report on the effect and impact of the regulations when the public was invited to comment on them.
Ferreira quotes from an opinion issued by Hawkins in February this year, stating that the regulations are likely to have a “severe” impact on the short-term credit market.
She says, “These limitations appear to depart from the aims of the NCA to ensure a sustainable and efficient credit market and balance the interests of consumers and providers. It is difficult not to conclude that either the new limi_tations have been drafted without taking all the relevant costs into consideration, or the limitations implicitly hold the possibility of a new policy regarding access to credit.”
Jeffrey is quoted in reports as stating that decreasing the prescribed interest rates and fees “will have a negative effect on the industry, with the primary disadvantage being decreased access to credit to the low-income/high-risk/rural consumer, less credit being granted in general and informal/unregulated loan-shark activity increasing”.
He says fees need to be increased to compensate for inflation, additional compliance costs and other costs that have been incurred [by microlenders] since the introduction of the NCA.
“There is a myth that cheapcredit can and should be made more readily available to the underprivileged. This is low-cost credit made available to high-risk borrowers. This is not the function of business-oriented credit providers. [Cheap credit] is imposed through price control and leads to unintended consequences, and can destabilise financial markets and the structure of the industry.”
Ferreira’s affidavit also refers to the September 2015 issue of the Financial Stability Review, a quarterly report issued by the South African Reserve Bank. The report notes that responses to the regulations when they were in draft form “differed markedly between those supporting greater consumer protection and those involved in the actual provisioning to consumers”.
The Reserve Bank review says that, if [access to] credit is curtailed, as suggested by some analysts and banks, “it is unlikely that overall consumer welfare will be improved … At this conjuncture of the economy and the evolution of domestic credit markets, it would be prudent to conduct a detailed macro-economic impact assessment of the proposed changes.”
MFSA says it can only conclude that such an assessment has never been done, Ferreira says.
In February this year, the organisation outlined its concerns in a letter to the minister and the regulator, and asked for an urgent meeting to discuss the costing and pricing analysis by the authorities and proposed a postponement of the implementation of the regulations. But no response was forthcoming.
The NCR told Personal Finance that the minister and the regulator would oppose the application, but their papers were not available at the time of going to press.