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Predatory lending on borrowed time?

29 March 2007 African Bank

Much has been written about the fact that South Africa does not save, that it is in love with credit. The fact that there are now over 100 credit cards available in South Africa, a good 40 more than just two years ago, is evidence of this.

And because each of those cards needs to find a customer base, the phones have been ringing - and not just during office hours. Suicide hour and weekends too. This means you could easily be accosted by someone selling you a R50,000 loan you don't need or up to three credit cards ,in one phone call, at pretty well anytime of day.

This scenario has been happening all over South Africa over the past year; but on June 1 it will have to stop. By law. That's when the third and final stage in the new National Credit Act (NCA) kicks in, supposedly heralding the end of reckless credit marketing and the advent of pre-agreement disclosures and the hitherto rather hidden options of clear credit advice and consolidatory debt counselling.  Cold calling will be (marginally) restricted and negative option marketing (where consumers must opt out of an offer, rather than in) outlawed.

Some companies have been in line with the somewhat neglected constitutional right to consumer education, and they have been aware of the more burning issues that the upcoming international Responsible Credit Conference (Cape Town, April 11-13) will be grappling with. If the experts are discussing Predatory Lending, Consumer Bankruptcy, Prevention of Over-Indebtedness and Debt Counselling, all on behalf of The Financial Citizen, we can be sure that we, as those financial citizens, need to get wise to the predators before they bankrupt us.  African Bank, because of its core lower middle market franchise, has always been aware of these factors.

Into these murky waters, to their credit, the major retail banks and African Bank have recently launched a new code of conduct designed to improve the protection of consumers against unscrupulous lending. Not before time. The current household debt figure, running at 73% of household income and the highest ever, does not bode well. Well-nigh invisible rates of saving are their disturbing economic bedfellow. South Africans are on a spree and no one much, till June 1's deadline for the last stage of the NCA's implementation forces them otherwise, has sought to put a stop to it, the Reserve Bank Governor's cries of "madness" notwithstanding.

"African Bank provides unsecured credit products to South Africa's domestic low to middle income markets, largely the formally employed and are increasingly doing so at rates and on terms that ensure that loans are affordably, conveniently and responsibly extended,' says Tami Sokuto, ABIL's Executive Director. Credit xtension is a carefully planned process: instalment sizes and loan terms are reduced for higher risk clients; client debt burden is monitored on a quarterly basis and affordability guidelines reduce exposure. "In addition," he says, " at ABIL we believe that financial literacy is pivotal to our success and the education of our target market, hence we have allocated a sizeable budget towards our financial literacy programme".

Not only are these checks and balances in place, but access to credit is quicker and simpler as there are now more branches, web-based loan applications and mobile sales agents who can come to clients at home or at work (the other side of the credit 'madness' coin, bringing properly assessed new clients into the financial system, should not be forgotten). Interestingly, the cost of borrowing has have been reduced at African Bank - down 16% on average since 2005 - and monthly administration and insurance charges have replaced upfront fees, reducing the outstanding amount on which clients pay interest.

That there are now more ways to raise credit is clear (and, ironically, there may be more as banks compete across a new and wider band of fees and interest rates designed to widen the credit net). That there is some effort being made to offer those choices more responsibly remains to be seen. But the banks' code of conduct is a good sign. Just watch out for the "non-banks' (not covered by the same code of conduct are retail stores, cellphone companies, medical schemes and airlines, amongst others). And beware those last minute attempts to woo you without restriction before June 1st...


NOTE: James Scurlock's controversial documentary, "Maxed Out", a chilling indictment of credit-wild American lenders and the sometimes desperate effects their credit-pushing has on people, opened in the US last week. The financial equivalent of "Supersize Me", it may well be one of the best deterrents to credit over-extension. Perhaps the FSB and the Reserve Bank should sponsor its wider release?


 

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