Barry Streek The imposition of interest-rate ceilings would affect those who had the greatest need for short-term emergency credit, forcing them to go to informal lenders who were even more expensive, a government-appointed inquiry into the R25-billion-a-year small-loans sector has concluded.
“Setting interest-rate ceilings will restrict the flow of credit into the system by forcing marginal lenders (primarily in the rural and peri- urban areas) to close or go underground,” it said. However, if the Department of Trade and Industry insisted on setting interest rates, these should not be based on the cost of money but on the administrative costs of making the loans. To promote transparency in the industry and stimulate investment in new products, the interest-rate
ceiling should be as high as possible and it should be set at a fixed rate, recommended at 30%. The report, Examination of Costs and Interest Rates in the Small Loans Sector, prepared by Ebony Consulting International (ECI), has been published in the Government Gazette, and the Department of Trade and Industry has invited comment, to be submitted by August 25.
It says the microlending industry has “veritably exploded” since the interest-rate ceiling on small loans under R6 000 was removed.
“It has been an excellent example of how a virtually non- existent
financial industry can develop given the right incentives.”
There had been so much growth that an exemption to the Usury Act created a regulatory institution, the Micro Finance Regulatory Council in June 1999 to manage the sector, but this was challenged in court, which upheld the new notice but struck down the interest-rate ceiling. The Department of Trade and Industry then appointed ECI to look into a number of issues regarding interest rates and to examine the cost of making small loans to help it establish a new interest-rate policy. It said the dynamic formal side of the industry was highly diverse (850 registered institutions with more than 3E500 branches) and its size was growing, with an average outstanding balance of about R5,3-billion for about 2,5- million clients. The estimated turnover for registered firms was about R10-billion, for more than 7,6-million clients.
The informal side of the market consisted of traditional sources of short-term money, including the mashonisas (township lenders), who provide 30-day money at rates of 30% to 50% a month, stokvels (including burial societies) that provide rotating credit and informal savings operations to their members, and pawnbrokers. The inquiry concluded that “merely fixing an interest level at a specific level is a nave approach to regulating this sector. This sector is far more complex. “Fixing an interest-rate ceiling will not address the indebtedness of the people already trapped. It will not increase competition to the extent of driving down prices. It has not worked in other countries and it will not work in South Africa. “People in debt will suffer more, since ceilings will drive many of their providers underground, out of public scrutiny. Even if a ceiling is fixed, no amount of resources will ensure complete monitoring of the sector. “Instead, we suggest a more pragmatic approach should be pursued, based on the reality of the sector and the assumption that we do not want to stifle the sector with legislation,” the report said.