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  1. 1. Money-lending, across the ages … <ul><li>Aristotle, 350bc: “Very much disliked is the practice of charging interest; and the dislike is fully justified … money intended to be a means of exchange … of all ways of getting wealth this is the most contrary to nature </li></ul><ul><li>Cicero, 50 BC: “Gentlemen should not toil themselves with means of livelihood which provokes ill-will, such as collecting customs dues and money-lending” </li></ul><ul><li>Bacon, 1597: “It is a vanity to conceive that there would be ordinary borrowing without profit; and it is impossible to conceive the number of inconveniencies that will ensue if borrowing be cramped </li></ul><ul><ul><li>… better to mitigate Usury by declaration, than to suffer it to rage by connivance”. </li></ul></ul><ul><li>Bentham, 1787: “The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him” </li></ul>
  2. 2. Micro-finance: What is an “enabling environment” How does the NCA relate to micro-finance? Gabriel Davel September 2009
  3. 3. Background & framework
  4. 4. What is an enabling environment? - whole spectrum of possibilities Consumers Informal Businesses Formal Businesses Subsidised social welfare approach Fully deregulated, neo-classical approach Special law for non-profit micro-enterprise credit Government lending programmes Broad enabling credit legislation Interest rate control? Sustainable? Profitable? How much profit is “OK” Subsidised interest rates? Deposit taking? Production credit only? Prohibit consumer lending? Reckless lending?
  5. 5. Practical implications? Hot topics & contentious issues <ul><li>General issues </li></ul><ul><li>Consumer loans or enterprise loans? Prohibit cash loans? </li></ul><ul><li>Special protection only for clients of MFIs … what about clients of ‘loan sharks’? </li></ul><ul><li>Special regulatory dispensation for micro-enterprise lenders? What about loan sharks, commercial lenders etc? </li></ul><ul><li>Deposit-taking for micro-enterprise lenders? Risk to depositors? </li></ul><ul><li>Reckless lending rules? Implications of reckless lenders competitors & long term housing loans. </li></ul><ul><li>Interest </li></ul><ul><li>No interest caps? What about fees? </li></ul><ul><li>If regulate - effective / APR%? Fees? </li></ul><ul><li>Only “reasonable” rates, a la Prof Yunus? What is a reasonable rate in SA, given cost base? </li></ul><ul><li>Same rules for NGO & commercial lenders? If different, why? </li></ul>
  6. 6. Short history of micro-finance in SA <ul><li>Through Get-Ahead, group-based lending methodology introduced (mid-80’s) </li></ul><ul><li>Off-shoots: SEF, Marang, WDB … </li></ul><ul><li>Government supported replication through Khula, SEDA, SAMAF, Umsobomvu … even IDC joining the fray </li></ul><ul><li>Note, also: Credit Unions, Co-operative Banking, Housing Finance </li></ul><ul><li>And: Direct & indirect enterprise lending by main stream lenders </li></ul><ul><li>Legislative overview </li></ul><ul><li>1992 – General exemption for small transactions from UA, minimal requirements, no enforcement </li></ul><ul><li>1999 – MFRC established. Exemption for micro-loans on condition of registration & compliance with min consumer protection provisions + enforcement </li></ul><ul><li>2007 – NCA, general law covering all consumer credit & providers + enforcement </li></ul>
  7. 7. MF in SA - comments <ul><li>For a history of 20yrs+ very little to show in terms of traditional micro-finance. Only 3 MFIs with substance, approx 150k clients vs demand of in excess of 2.5m+ micro-entrepreneurs </li></ul><ul><li>Despite substantial investment, only modest impact … why? Are there maybe ‘structural’ reasons … e.g. (1) the dominant position of the commercial retail & production sector; (2) the dominant position of the commercial financial sector, (3) the role of formal employment in the economy (& social welfare payments) & demand for skills (= low skills level in MF sector) </li></ul><ul><li>But integration of micro- & main stream market (started under MFRC) had massive impact on financial availability. Substantial volume of ‘personal loans’ flow through to SMEs. Cash lending also makes huge contribution to demand side. </li></ul><ul><li>SA is an intermediate or ‘maturing’ market, necessarily looking different from an under-developed market such as Bolivia, Bangladesh et al. Has implications for consumers, micro-enterprises, MFIs and main stream finance. </li></ul><ul><ul><li>Consumer product choices, financial needs </li></ul></ul><ul><ul><li>Employment options, salary demands, allocation of skills </li></ul></ul><ul><ul><li>Financing options available – personal, trade credit, commercial, mixed </li></ul></ul><ul><ul><li>Population density, cost structure </li></ul></ul>
  8. 8. Approach adopted in the NCA, & underlying philosophy <ul><li>Remove obstacles from law </li></ul><ul><li>Create general framework in which greatest possible range of commercial and non-for-profit institutions are able to provide broad range of finance to all categories of consumers </li></ul><ul><li>Avoid “special dispensations” which fragment the market and marginalise low income consumers and micro-enterprises </li></ul><ul><li>Apply consumer protection equally, irrespective of source of finance. Also most vulnerable consumers who only have access to “loan sharks” </li></ul><ul><li>Draw loan sharks into the net – prohibitions do not work </li></ul><ul><li>Accommodation for “developmental credit” </li></ul>National Credit Act Agreements & quotes Unlawful agreements, provisions Credit Bureaus National Credit Register Debt counselling Enforcement & debt collection Reckless lending rules Marketing & sales practices Interest & fees
  9. 9. Perspective from sub-prime crisis How does NCA provisions compare? NCA  Comprehensive, uniform coverage  S163 = principal responsible  S103 & S104  Reckless lending sections  Debt counselling … & incentive to reschedule <ul><li>Problems in sub-prime loan origination:- </li></ul><ul><ul><li>= misleading disclosure + abusive practices </li></ul></ul><ul><ul><li>Brokers incentivised to maximise origination and minimise cost … & able to pass risk of default on to others … & given access to unlimited funding through securitisation </li></ul></ul><ul><ul><li>“ Teaser rates” attractive draw-card, with 2 year lag before reality sets in </li></ul></ul><ul><ul><li>“ Reduced documentation loans” means affordability disregarded </li></ul></ul><ul><ul><li>… and then the housing prices declined </li></ul></ul><ul><li>consumers not innocent little angels, </li></ul><ul><li>but a consumer that is pressurized & mislead </li></ul><ul><li>cannot be expected to make “informed or rational choices” </li></ul>
  10. 10. NCA provisions for “developmental credit <ul><li>Requirements </li></ul><ul><li>Act applies generally, but a special category for ‘development credit providers’ </li></ul><ul><li>Special procedures may be approved, e.g. affordability assessment </li></ul><ul><li>Different documents may be approved, e.g. pre-agreement disclosure & statements </li></ul><ul><li>Increased fee limits + interest at highest limit </li></ul><ul><li>Process to apply </li></ul><ul><li>Development credit should in most areas be able to fit within normal forms & procedures </li></ul><ul><li>If different treatment required, </li></ul><ul><ul><li>Apply to NCR for approval </li></ul></ul><ul><ul><li>Specify areas where approval required </li></ul></ul><ul><ul><li>Indicate how consumer rights would be protected </li></ul></ul><ul><ul><li>Indicate anticipated volumes </li></ul></ul>
  11. 11. Post script - - statistical overview of consumer credit market - Impact of NCA on cost & access
  12. 12. Credit Provider Statistics Overview of consumer credit market <ul><li>Approximately R1.1trillion consumer credit, provided to 17 million consumers & consisting of 36m accounts </li></ul><ul><li>Registration </li></ul><ul><ul><li>3,700 credit providers with 31,000 branches (23 temporary registered) </li></ul></ul><ul><ul><li>11 credit bureaus, managed 22 audits, 16,8 m data removals </li></ul></ul><ul><li>Mortgages biggest category, “other secured” next biggest (m/vehicles & furniture) </li></ul><ul><li>Banks 90% of total, non-bank vehicle 3%, retailers 3% </li></ul>Outstanding balances Banks 90% (exclude micro-lenders & other small providers) Gross loans outstanding Accounts Banks 90% 19 m Motor dealers 3% 286,000 Retailers 3% 15,8 m approx R1.1 trillion
  13. 13. Survey of impact of NCA: Access & Cost – FEASibility <ul><li>The NCA changed the consumer credit market in a number of ways … </li></ul><ul><li>Integrating previously capped Usury market with exempt market for micro-loans </li></ul><ul><li>Improved quality of access for the low-middle income consumer </li></ul><ul><li>Increased transparency & competition </li></ul><ul><li>Price reductions in most segments, biggest in micro-loans & furniture finance </li></ul>Store Cards – R1,500 Furniture Finance – R5,000
  14. 14. <ul><li>Impact of NCA : curbed excesses, creating basis for lower but more sustainable credit growth – without courts acting as debt collectors, curbing social cost of reckless lending </li></ul><ul><li>Debt counselling – reconcile claims of different credit providers , creating sustainable repayment stream on non-performing consumer </li></ul><ul><ul><li>While minimising social cost, </li></ul></ul><ul><ul><li>And, lets not forget the hard-selling that took place in the good times! </li></ul></ul><ul><ul><li>BUT, significant implementation challenges </li></ul></ul><ul><li>Fall-out from debt stress still increasing, driven by loss of variable sources of income as much as loss of employment </li></ul><ul><li>On-going external impact of financial crisis , with risk of 2 nd fall post stimulus </li></ul><ul><li>Dramatic reduction in domestic credit a major negative impact, aggravating domestic decline </li></ul><ul><li>In policy response, important to focus not just on protection of industry , but also on protection of households, </li></ul><ul><ul><li>noting that crisis impacts differently on different consumer groups </li></ul></ul><ul><ul><li>loss of income & loss of employment each have an impact </li></ul></ul><ul><ul><li>the longer the downturn lasts, the more households with high debt burdens run out of options </li></ul></ul>Concluding observations:-
  15. 15. Thank You !