While legislation regulating microlenders is the subject of a legal battle, the industry is in a state of flux, writes Belinda Beresford
It happens to even the most highly paid individuals. Bad personal money management or just a particularly demanding month financially, and suddenly there’s a cash crunch.
Creditworthy customers can turn to their banks. The less creditworthy, and those without access to the formal banking system, have to turn to other resources such as pawn shops and moneylenders.
Legislation regulating the microlending industry was due to take effect on September 15, but the issue has been clouded by a court judgment this week that some regulations could not be implemented.
The legislation promulgated by the Department of Trade and Industry requires all microlenders to register with the Micro Finance Regulatory Council (MFRC).
The Pretoria High Court decided that while the registration requirement can stand, a cap on interest rates and the ban on taking ATM cards, personal identification numbers (PINs) and identity books as security is unenforceable. Rather they’ll be the subject of further debate in court next month.
Microlenders who do register will be exempt from the Usury Act. Those who do not comply will fall under the provisions of that Act and be limited to maximum yearly interest rates of between 29% and 33% a year, according to the MFRC.
The legislation had capped maximum annual interest rates at 10 times the prime interest rate. Presently the interest rate is capped at 165% a year. This compares to interest rates of about 27% a year on credit cards.
Moneylenders have justified their higher rates by the greater risks they accept in lending in the informal market. While this relationship between risk and return is generally accepted, there have been numerous instances where moneylenders have abused their customers. An industry insider says interest rates of 30% to 40% per month are common.
In addition, microlenders do not have to register as a company or close corporation by the deadline; they can instead do so as a natural person and change the registration later.
The Association of Microlenders, one of the parties in the court case against the legislation, has said the interest rate had been calculated in an “ill-considered and unscientific manner”.
But this week executive officer Flip du Plooy would not say what a “scientifically” reasoned interest rate might be, other than to agree that an annual rate of 1 000% would be excessive.
Microlending is fraught with problems. Some moneylenders demand customers sign blank contracts, which are filled in later.
Another disquieting problem is the practice of demanding the PIN and ATM cards of their customers, and their identity books. This allows the lender to withdraw money directly from the borrower’s bank account.
The drawback for the borrower is difficulty in getting access to their account, unless they incur the charges of going to a bank counter to make a withdrawal.
The system is also open to gross abuse – loan sharks have been known to spontaneously take out extra sums of money as extra “fees”.
For the lender there is also risk: one banking official says that microlenders sometimes have to wait by ATMs in the middle of the night, armed with borrowers’ cards and PINs in an attempt to get the money before the customer gets to the bank to withdraw it.
Microfinancing fills an important niche and is not only used by the desperate. For entrepreneurs, for example, microfinancing may be the only way to get seed capital for their business.
Certainly, microfinancing is big business.
Exact industry figures are hard to come by, since it is so informal. However, Absa estimates that when the dust from the required registration dies down there will be about 5 000 legal microlenders.
The bank estimates the industry provides about R15,5-billion in advances. Repayments of R1,125-billion are made through more than two million monthly installments.
The risks are undoubtedly there, but so is the moneymaking potential, demonstrated by the number of entrants into the market, such as Unibank and King Finance.
Increasingly, the major banks are interested in lower-income finance.
Standard Bank, for example, is looking at moving into the microfinancing arena using its 2,6-million E-Plan customers, while Absa created NUBANK for this kind of business.
A new development has been the cration of Nu Payment Solutions, by Absa and electronic company Itas, to provide technological solutions to improve the moneylending industry.
The new system will see special point of sale machines installed at participating vendors. Once a loan has been agreed to, the borrower will insert his or her ATM/debit card and key in the PIN. The borrower will then authorise future-dated monthly installments to repay the loan. Once the transaction is done, the lender knows the repayments are scheduled and authorised, and that they will be deducted automatically, while the borrower will retain his or her card and the PIN will remain private.
Eric Tomlinson, operating executive at Absa, says neither party can alter the repayments unilaterally, but similarly, anyone wishing to repay a loan early will have to get the approval of the lender. Merchants will be probably be charged about 2%, according to Tomlinson.
There is still a debate about whether this charge can be passed on to the consumer or whether it would be contained under the disputed interest rate cap.
This is the latest attempt at finding a way which gives lenders security that they will get their money back, while protecting consumers. Previous methods, such as payroll deduction, have their drawbacks – the employer could go bust or refuse to co- operate.
While the government and the microlending industry argue over regulation, the action by Absa and Itas seems to indicate another moderating influence on microlending. The movement of the mainstream banks into the industry is likely to contain interest rates and improve the treatment of customers.
Unfortunately, there will probably always be those so desperate they will agree to anything to get a loan.
Additional reporting by David le Page