Regulation of overindebtedness

1
Regulation of over-indebtedness reckless
lending in South Africa

• Gabriel Davel
• CEO, Micro Finance Regulatory Council,
• Policy Advisor in the National Credit Law Reform
• South Africa

2
Context

• Legal environment for consumer credit
• 1968 Usury Act, Credit Agreements Act
• From 1992 an approach of exempting small loans
  from Usury Act, and from 1999 a set of
  regulations similar to the EU Credit Directive
  applied, but still no interest limit (ltUS1,600)
• Until then, black South Africans typically only
  had access to finance for consumer goods, and
  1994 elections brought huge aspirations
• Credit law reform process
• No integration between sub-markets, low income
  consumers only receiving unsecured loans plus
  a lack of access to banking services for a large
  section of the population, with increasing
  over-indebtedness for others
• High debt servicing and at very high interest
  rates
• In 2002 MFRC initiated a legislative reform
  process

3
Lender self-interest, threat of default,
sufficient protection against reckless behaviour ?

• However, lenders isolated from consequence of
  reckless decisions
• Preferred collection arrangements (payroll
  or payments system) ?
• State assisting in enforcement of reckless
  contracts ?
• No interest limits over-recovery on performing
  clients ?
• Weak disclosure, weak competition
• High exclusion, aspirational borrowing or
  desperation borrowing ?
• Further loans when clients already
  over-indebted ?

100
lt 60
4
SAs new Consumer Credit LawMeasures to combat
reckless lending over-indebtedness

• Affordability assessments
• reasonable steps to determine consumers existing
  financial means, prospects and obligations
  assess ability to meet obligations under
  agreement
• If reckless
• provider may be prosecuted by Regulator
• magistrates may not issue court orders for debt
  recovery
• debt counselor may restructure or cancel debt
  (with confirmation of Court or Tribunal)
• but protections reduced when consumers
  misrepresent
• Create statutory indebtedness register
• only debts repayments, not a credit bureau !
• Remove incentives e.g. collection preferences
• Statutory obligation to monitor indebtedness

5
thank you !