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Johannesburg - The government should not make it more difficult to collect debt, and the credit industry should get higher maximum interest rates and fees.
This was according to one of the country’s major independent economic consultancies, reported City Press on Monday.
MicroFinance South Africa (MFSA) released a report, researched by Econometrix, making the case for increasing the caps on credit fees and interest rates that were set in 2007 with the promulgation of the National Credit Act.
MFSA has been lobbying government to increase the maximum fees and rates allowed on short-term loans its members tend to provide.
The Econometrix report ends up endorsing one part of MFSA’s crusade but arguing against the other.
While the maximum fees for all kinds of credit should increase, the report singles out short-term loans as the only part of the sector that should not get higher maximum interest rates.
Short loans
The current cap is 5% a month on “short loans”, which are defined as less than R8 000 over a period of under six months. The report noted that the most mispriced kind of credit is actually at the opposite end of the spectrum – mortgages.
Initiation fees are capped at R5 000 and need to be doubled or even quadrupled, according to Econometrix managing director Rob Jeffrey.
With more wriggle room on rates and fees, the banks could better serve riskier, lower-income households, he suggested.
Jeffrey also attacked a number of popular notions around South Africa’s credit situation he said are misguided.
The blame for over-indebtedness is wrongly put on small, short-term loans, according to him. The real culprit is longer-term, unsecured loans, which have made South African households vulnerable to shocks like the platinum strike this year.
But the unsecured boom was nowhere near as dangerous as the boom in secured lending was before the economic crisis.
Garnishment orders
Jeffrey said the growing antipathy towards garnishment orders, where lenders obtain court orders to deduct credit repayments directly from employees’ salaries, is wrong. And eliminating these orders would have a devastating effect on the economy.
The result would be the eradication of small legal lenders, encouraging more reckless borrowing and pushing more people into the arms of illegal loan sharks. The nonrecovery of debt would spread through the economy and raise the cost of credit for borrowers who repay their loans, according to Jeffrey.
For the same reason, consumer protections like debt review are unwise, he said, because it leads to credit providers recovering fewer bad debts then raising average interest rates, in effect resulting in good debtors subsidising defaulters.
Jeffrey also attacked the demonisation of unsecured lenders as the cause of the country’s large-scale over indebtedness. According to him, “reckless borrowing” must also carry part of the blame. “There are lots of greedy, unscrupulous borrowers,” he said.
Price controls
MFSA specifically commissioned Econometrix to look into the caps on fees and rates. Caps are meant to prevent usury, not to act as price controls, Jeffrey said. But when caps are so low that credit providers cannot make profits, they become price controls.
Based on MFSA information, this is the case in the micro-credit industry already because the caps have not been adjusted since 2007, he said.
Inflation has meant it becomes less and less profitable to make small loans.
Jeffrey said this led to lower availability of credit to lower-income households as well as a reduction in competition. Ultimately, it made credit providers seek other ways to make money such as selling unnecessary insurance products with their loans.
The report for MFSA comprises mainly theoretical arguments, using data provided by MFSA itself for illustrative purposes.
It ends with a health warning: that it used information from MFSA “in good faith”, but it had not carried out an audit to establish the accuracy of the estimates and information given.
Although the theoretical arguments are sound, better data would be needed before acting on the recommendations, it concludes.
Credit where it’s due?
The Econometrix report proposes the maximum fees on all kinds of credit agreements be given a one-off boost to compensate for the seven years of inflation since 2007 – and they then be automatically adjusted for inflation in the future.
This includes the “initiation fee” that is capped at R5 000 for mortgages, R1 000 for vehicle loans and up to R1 000 for six-month personal loans.
It then proposes the interest rate scheme be changed by raising the maximums and making the allowed rates less tied to the SA Reserve Bank repo rate.
The maximum rate for almost all credit products is set by multiplying the repo rate (currently 5.5%) by 2.2, then adding an extra percentage of between 5% (on mortgages) and 20% (on non-short-term, unsecured loans). Only short-term loans work differently with an unchanging maximum of 5% a month.
Econometrix says a better formula would be to multiply the repo rate by 1.6 then add between 15% and 30% for different products.
The argument is that this would allow credit providers to make money even when the repo rate was low. It would simultaneously result in lower interest rates when the repo rate was high.
What is MFSA?
MFSA claims a membership of 496 entities with 1 519 offices across the country. This is the bottom end of the credit industry. It is concentrated, with 11 companies owning about half of those offices.
There are also 385 MFSA members that consist of only one office each.
- City Press
