Microfinancing industry body calls for review of outdated credit pricing regulations
(05 June 2024, Tshwane) Financial products drive our country’s financial ecosystem, of which consumer credit forms a major part. Given the significant impact that the credit sector has on the local economy, credit risk assessment and pricing of credit is of vital importance in ensuring the stability of this system.
South Africa was the first African country to introduce a legal framework for the consumer credit market. The National Credit Act (NCA), which became effective in March 2005 in South Africa, is a pivotal piece of legislation for businesses involved in credit provision.
The Act was part of a comprehensive legislation overhaul designed to protect the consumer against unscrupulous lending and over-indebtedness, and make credit and banking services more accessible. The NCA established the National Credit Regulator to regulate the entire credit market, including pricing policies that determine the maximum fees that lenders may charge for opening and the monthly servicing of a loan.
“The NCA places a cap on the maximum amount that a credit provider can charge for fees such as initiation fees, monthly service, and default and collection costs, however these fees have not been updated since 2015,” states Leonie van Pletzen, CEO of MicroFinance South Africa (MFSA), a representative body of over 1 500 registered and legal microfinance credit providers, and service providers to the industry.
“With fees remaining unchanged and the costs of granting credit rising every year, credit providers are forced to reduce risk,” she explains. “The stagnated pricing and stringent risk assessments have negative implications for many South African consumers, in that credit is inaccessible to them and they are financially excluded.”
This reflects in recent data from the quarterly Consumer Credit Market Report that is published by the National Credit Regulator. The report shows that there has been a surge in the demand for credit since the pandemic, however, these seemingly positive figures are met by a sharp rise in rejection rates.
“A widespread risk adjustment on the issuance of credit is resulting in more applications being rejected and is contracting the formal lending market,” continues van Pletzen. “This is forcing consumers into an informal market, where providers are not bound by the regulations of the National Credit Act.”
“As the rejection rate continues to climb, this in turn affects the accessibility of credit for a large portion of the population,” says van Pletzen. “The consumers whose applications are rejected are largely middle to low income earners, and prevents the majority of working South Africans from accessing finance, building wealth and ultimately boosting economic growth.”
Van Pletzen reports that after numerous engagements with MFSA members to discuss the impact of the outdated pricing regulations, the feedback received was that of considerable concern.
Brett van Aswegen, CEO of MFSA member, Wonga, expresses his views on the topic. “Unless the pricing is re-evaluated, we are going to see a burgeoning financial exclusion crisis where the wealthy enjoy an artificially low cost of credit, while the working class are excluded, or worse yet, are forced to access high-cost credit from unregulated informal lenders.”
Adding to this, Mr. Pakie Mphahlele, Chairperson of MFSA and a prominent industry role player focused on consumer protection, states, “The outdated pricing regulations not only hinder the formal credit market, but also expose vulnerable consumers to unregulated and potentially exploitative lending practices. A review of these regulations is essential to protect consumers and ensure fair access to credit for all South Africans.”
“We urge policymakers to embrace policies and strategies that address our country’s high levels of income inequality, such as reviewing pricing regulations,” concludes van Pletzen. “This will lay the groundwork for both a financially inclusive and prosperous future for all citizens in our country.”
Ends.
About MicroFinance South Africa
MicroFinance South Africa is the largest microfinancing association in South Africa that represents over 1 500 registered and legal microfinance credit providers, and service providers to the industry. Over the past 27 years, it has remained focused on its vision to ensure a sustainable microfinancing industry and has continued to expand its footprint, presence and impact.
MicroFinance South Africa is a community of individuals and organisations that are dedicated to enhancing consumer confidence in micro-finance by ensuring professional, legal, and ethical conduct. The MFSA has established a Code of Good Practice as a voluntary standard to which its members have agreed to adhere.
For further information contact:
Claire Watt | Ntokozo Kalako
The Friday Street Club
Tel: 082 490 3796 | 067 610 6879
Commentaires