File picture: Denis Farrell

Johannesburg - Micro Finance South Africa (MFSA), a body representing credit providers in the micro finance industry, has put its weight behind the government’s decision to require all credit providers to register with effect from November.

Trade and Industry Minister Rob Davies last month approved the reduction of the threshold for registration from R500 000 to zero, effectively requiring all credit providers in the country to register.

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MFSA said yesterday it supported an “appropriately regulated” micro-finance regime in order to ensure consumer protection and responsible and fair credit provision. “We wish to place on record our support for a well-regulated and functioning credit market,” said MFSA.

Exorbitant fees

MFSA represents about 30 percent of the micro finance industry, with 487 members conducting business across 1 190 branches in South Africa.

The micro finance industry is generally associated with exorbitant interests and initiation fees. While commercial banks still account for the bulk of unsecured loans, there are many South Africans – especially the poor – who still rely on micro lenders for “micro” loans.

According to the National Credit Regulator, banks held about 84 percent of unsecured loans entered into between the fourth quarter of 2012 and the fourth quarter of last year. The extent of indebtedness to micro lenders because of short-term and unsecured lending particularly came into stark focus after it emerged that many of the workers who went on strike at Marikana, North West, in 2012 were over reliant on loans from micro lenders.

“MFSA is of the opinion that (the reduction of the threshold) is a breakthrough for the industry as a whole and (we) believe that this will create a level playing field in the market. This will also increase legal and responsible credit to consumers that will in turn lead to financial inclusion of all consumers.

“MFSA will support all efforts by the Department of Trade and Industry and the National Credit Regulator to implement and sustain the proposed amendments,” said MFSA.

Last year the industry suffered a major blow when the Western Cape High Court ruled that the use of emolument attachment orders or garnishee orders by micro-lenders to collect their debt was ”unconstitutional” and “an assault on human dignity”.

In the landmark judgment, the court criticised what it called “predatory lending practices by credit providers” and urged the ministers of justice and of trade and industry‚ as well as the National Credit Regulator‚ the Human Rights Commission and the Law Society to “take whatever steps they deem necessary to alert debtors as to their rights in terms of this judgment”.

Lloyd Chater, a partner at law firm Bowman Gilfillan Africa Group, yesterday said unregistered credit providers would only be able to recover the capital amount granted to the consumer, but not any interest or other fees charged to the consumer. “Under the new prescription by the minister, even if a loan of R1 is given on credit – in that more than R1 is repaid – the credit provider must register,” said Chater.

Changes

He said all credit arrangements, including loans given by companies to their employees, where a fee or interest was levied, required the credit provider to register.

Commenting on the changes, Janine Will, a senior associate at law firm Garlicke & Bousfield said yesterday if a credit agreement was unlawful because the lender was unregistered, a court was required to make an order which could include declaring the credit agreement void.

The government’s efforts to tighten the regulation of the micro lending industry have rattled the micro lenders. MFSA last month failed in its North Gauteng High Court bid to stop Davies from implementing regulations which stipulated the maximum interest rates and service and initiation fees credit providers could charge on micro loans. But the court said MFSA could take the decision on judicial review.

In the regulations, published in November last year, Davies has capped interest rates for unsecured credit transactions at 27.75 percent. The regulations came into effect last month.

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