Is South Africa About to Have a Sub-Prime Crisis?

Major investment banks around the world, such as Bear Stearns, CitiGroup, Morgan Stanley and Merrill Lynch, have been affected by the sub-prime lending crisis.

Collectively financial institutions have lost an estimated $150-billion on sub-prime lending. Home owners have been severely affected, home repossession have spiked in the US and Europe, and property prices are falling worldwide.

In South Africa, the sub-prime crisis as manifest in America and Europe was for the most part averted. Potential home owners and the emerging middle class were to an extent protected from reckless bond extension due mainly to the pre-National Credit Act (NCA) laws that protected consumers from delinquent credit lending.

Unfortunately the pre-NCA laws did not do enough to protect the South African public from reckless credit extension or aggressive and irresponsible marketing of credit products by local banks, clothing stores and suppliers of luxury consumables.

The introduction of the National Credit Act, which focuses on areas such as predatory lending, should now protect SA from experiencing a sub-prime crisis in the future. But it was implemented a little too late to avoid the current South African credit crisis. A combination of low interest rates, a glut of credit products provided by over-enthusiastic and perhaps pre-NCA panicky credit lenders, has created a type of sub-prime crisis in South Africa that has resulted in increased consumer debt and rising interest rates as part of an inflation targeting exercise.

South Africans are now spending up to 77% of their monthly income on debt- servicing leaving very little money for any type of asset expenditure. This is further depressing any potential growth in local business communities.

A further indicator of the extent of the pre-NCA lending is the percentage increase in vehicle and house repossessions which have doubled year on year.

So who is at fault? It is generally agreed that the current credit crisis fault lies with over-enthusiastic and in some cases reckless credit lenders and short sighted consumers who took full advantage of favourable interest rates and a glut of credit opportunities.