1 Credit Law Review Overview of background research

2 In 2002, Dr Ruiters appointed a technical committee for Credit Law Review:-  Members Prof Roshana Kelbrick (UNISA) Dr David Porteous (Finmark) Moses Moeletsi (Prov. Gvt) Kgosi Pule (Practicing Lawyer) Gabriel Davel (MFRC)  Mandate To review the regulatory environment for small loans & consumer credit in South Africa, … in order to make recommendations for legislative and regulatory reform

3 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

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

5 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making a purchase ‘overrides reason’ when entering into contract  Industry & experts:- agree that current laws weak, outdated & inconsistent in treatment of different products; and that lack of consistent enforcement a particular problem

6 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

7 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”

8 International Benchmarks  Which countries ?  Why ? Accessibility Level of development of credit market …. Financial literacy of consumers ? Enforcement London workshop

9 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

10 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)

11 Observations

12 In political terms … “Poor (black) people pay exorbitant rates, rich (mostly white) people have lots of low cost options” Super-included vs super-excluded

13 Cost of credit, effectiveness of current cap … & competition Cap All loans & credit M/loans & furniture finance (MFRC) Average of 91%; Cheapest lender in each category = non-bank Average for NGOs ≈ 90% BUT ALSO: increasing availability of low cost options banks:- payroll retail

14 Reckless lending – MFRC  Further loans extended when clients already very high debt servicing levels  One case: 20% of loans to clients with 80% debt service commitments  Implications:  Increases risk & unpredictability of financing low income market … disincentive for long term / housing finance  Over-indebtedness  Inability to meet municipal service, maintenance & similar commitments  How possible ? = payroll & bank account preferences > 100% = crisis 50% to 100% = ‘intermediate’ 0 to 50% = OK Reckless Lending Inspections

15 CREDIT ACTIVITY OF BORROWERS PER INSTITUTION

16 Lack of Access or over-indebtedness? Stats SA 1995 & 2000 (per HSRC/Reza Daniels) Households with access: alarming % in vulnerable position, & lowest income groups most stressed ! Most poor h/hs still have limited or no access to formal finance

17 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 Furniture Retail Family housing

18 Analysis, conclusions

19 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

20 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)

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