SOUTH AFRICA: CREDIT ACT PROTECTS CONSUMERS

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SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV SF
SUBJECT: SOUTH AFRICA: CREDIT ACT PROTECTS CONSUMERS

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(U) This cable is Sensitive But Unclassified. Not for
Internet Distribution.


1. (SBU) Summary. South Africa's National Credit Act came
into effect on June 1, replacing weak and outdated
legislation. This Act seeks to protect primarily poor South
Africans, who have endured exorbitant interest rates, lender
exploitation, and rising personal debt. The previously-named
Micro Finance Regulatory Council (MFRC) now serves as the
National Credit Regulator (NCR) and is charged with creating
a national register of all loans and overseeing all credit
issued. The Act improves lending transparency, prohibits
unfair contracts, bans anti-competitive practices, and
provides means to assist over-indebted consumers.
Significantly, the Act stipulates limits on interest rates
and fees lenders can charge. The lending industry and
opposition parties have grumbled a bit about the Act's
increased bureaucracy and costs, but most also applaud the
protection of consumers. The upcoming year will reveal if
the NCR can implement the Act effectively and if the Act
produces the desired effects. End Summary.

Legislation Long Overdue
--------------


2. (U) After years of review and debate, Parliament passed
the National Credit Bill on December 13, 2005. President
Mbeki promulgated the National Credit Act in March and it
became effective June 1. The Act's purview covers all loans,
credit cards, leases, and retail credit, but does not extend
to "stokvels" and other community savings groups. The Act
established the National Credit Regulator (NCR),which is
charged with creating a national register of all loans and
overseeing all credit issued. The former Micro Finance
Regulatory Council (MFRC) is transforming to fulfill its new
role as the NCR. Prior to June 1, the MFRC regulated South
Africa's micro lending R18 billion ($2.6 billion) market
(i.e., loans of less than R10,000 or $1,400) that served
about three million clients. Its role increased
substantially as the NCR, as the former MFRC now has to
regulate a R500 billion ($71 billion) credit market with 20
million customers. The MFRC has been preparing for this
transition for some time, hiring new staff, and will phase in
compliance through June 2007, when all sections of the Act
come into full effect.


3. (U) South Africa has long recognized the need for revision
of its consumer credit legislation. The historical
legislation, including the Usury Act of 1968, Credit
Agreements Act of 1980, and Exemption Notices of 1992 and
1999, was weak and could not keep up with an ever changing
South Africa. As a result, primarily poor South Africans
have suffered in the wake of exorbitant interest rates,
lender exploitation of consumers, rising levels of
over-indebtedness, and lack of access to proper credit.
Therefore, in 2002, the Department of Trade and Industry
(DTI) called for a review of consumer credit legislation.
The review team undertook the monumental task of developing
new legislation based on an analysis of consumer views and
behavior as well as credit industry practices.

Lenders Beware
--------------


4. (U) The National Credit Act seeks to whip reckless lenders
into shape while protecting consumers from credit woes. The
Act improves transparency, prohibits unfair contracts, bans
anti-competitive practices, and offers means to assist
over-indebted consumers. The Act empowers the NCR and the
National Credit Tribunal to enforce all of these
stipulations. The Tribunal can impose administrative fines
up to R1 million ($143,000) or 10% of a lender's annual
revenue, but not criminal sanctions. One goal of this Act
was to move away from "apartheid-era" segregation and create
comprehensive legislation for all types of lenders.
Microlenders were not the only ones to abuse its customers,
as the banks were accused of charging high fees and
"blacklisting" customers while accounting for over 80% of
lending.


5. (U) One of the Act's main feats was to cap microlending
interest rates. Under the old Usury Act, a 20% interest rate
was the cap for normal bank loans less than R10,000 ($1,400),
but was 17% for larger loans. However, most microlenders
operated under the Usury Act Exemption Notice, which meant
they could charge any rate they chose. Many microlenders

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charged over 100% interest per annum or even 25% to 30%
interest per month. The new Act capped rates and fees for
all types of credit, ranging from 21.5% to 48% at the current
repo (repurchase) rate of 7.5%:

Credit Type Interest Limit Initial Fee
-------------- -------------- --------------

Mortgages (Repo x 2.2) 5% R1,000-R5,000
Credit Facilities (Repo x 2.2) 10% R150-R500
Unsecured Credit (Repo x 2.2) 20% R150-R500
New Business (Repo x 2.2) 20% R250-R2,500
Low-Income Home (Repo x 2.2) 20% R500-R2,500
Other Credit (Repo x 2.2) 10% R150-R500
Short Term Loan 48%/yr or 4%/mo R150-R350

Note: The initial fee may never exceed 15% of loan amount.
The maximum monthly service fee is R50 ($7).


6. (U) The Act tasked the NCR to conduct inspections, monitor
compliance, and investigate problems with a number of
additional regulations designed to protect consumers.
Additional highlights from the Act include:
-- Lenders must report new lending within 30 days and file
annual reports.
-- Any contracts should use plain language and disclose all
fees up front.
-- Quotations from a lender must be valid for five business
days and lenders must allow for "cooling off" periods before
certain contracts can be signed.
-- Lenders' advertising must disclose all offer details in
the same size font or larger and cannot be misleading.
-- If a lender lends money to an over-indebted consumer, the
National Credit Tribunal could fine the lender for not
running proper credit checks.
-- The NCR will monitor credit bureaus to ensure they are
using consumer information appropriately. Consumers can
request a credit report for free once a year, and will not
have to pay more than R20 ($3) to check it again.
-- When a consumer has run into trouble, a qualified debt
counselor will be assigned to help them pay of their debts.
The Act also speeds up the process for consumers to regain a
good credit standing.

Unfortunate Consequences
--------------


7. (SBU) Parliament's Trade and Industry Committee admitted
that this "bill will not please everybody but reform is
necessary." Democratic Alliance opposition party members
complained of the increased costs and excessive bureaucracy
contained within the Act. The Banking Association is pleased
that consumers will be protected, but noted that the Act's
demands will have a major impact on lending. Lender
institutions will endure one time costs, ongoing costs, and
time consuming procedures in order to comply with Act. It
will be most difficult for microlenders to adapt to the Act,
as they have limited staff and tight budgets. For example,
USAID partner Kuyasa Fund, a home loan microlender in Cape
Town, worried about having the human resources to report to
the NCR on its lending every 30 days. Additionally, Kuyasa
Fund will have to look for alternative sources of financing,
as the Act forbids its historical practice of taking cash
deposits up front.

Comment
--------------


8. (SBU) The National Credit Act is one of the many pieces of
legislation the South Africa Government (SAG) is applying to
protect its citizens from powerful or predatory businesses.
National Treasury is working on drafts of the Dedicated Banks
Bill and the Co-operative Banks Bill, which both seek to
create more competition and offer reliable lower-cost banking
options. In March, the DTI also released the Consumer
Protection Bill for comment that should provide consumers
protection against faulty products and unfulfilled service
obligations. The SAG's real challenge is to balance the need
to protect consumers and promote competition with providing
the poor access to affordable products and services. For
this reason, the SAG has taken years to draft the
aforementioned pieces of legislation. In due time, we will
see if the SAG has gotten the balance right with the National
Credit Act and if the MFRC/NCR is up to the implementation
challenge.


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9. (U) Complete text of the National Credit Act can be found
online at
http://www.dti.gov.za/ccrdlawreview/nationalc reditact2006.htm
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