South Africa: Credit act turns foes to friends in will to survive

Apr 2008
South Africa, April, 05 2008 - Since its introduction in June last year, the National Credit Act (NCA) has pushed the micro-lending industry into consolidation mode as foes turn into friends to survive harsh competition in the market.

Players in the sector say the NCA has intensified competition, resulting in some small loan lenders merging with or acquiring competitors to put more muscle on their loanbooks.

The act was introduced to stamp out reckless lending and unfair pricing in the country’s credit industry, which is said to be worth R850 billion. The act also put limits on the interest charged by micro-lenders.

Micro-loans – defined by the NCA as loans of no more than R8 000 – account for about R30 billion of the entire credit industry, which also includes home loans and vehicle finance.

It appears the act has succeeded in driving loan sharks or mashonisas out of the market. These informal lenders earned the micro-finance sector a bad name because of their unfair lending practices, which inflicted financial misery on consumers who could not access credit from commercial banks.

Under the new legislation, unregistered lenders are not allowed to extend credit. And while small informal lenders are said to be disappearing, big listed micro-lenders like African Bank, Capitec Bank, and Blue Financial Services are thriving.

Because they have greater access to cheap capital than other players, they are able to offer loans at lower interest rates. On the other hand, small informal lenders have for years built their businesses on charging super-high interest rates. But the interest-high margins business model is no longer viable because of the NCA’s interest charge limits and aggressive price undercutting by larger competitors.

Before the arrival of the NCA, micro-lenders could charge whatever interest amount they wanted. But interest rate limits have reduced their margins. For instance, on an R8 000 six-month loan, they are allowed to charge an interest rate of 5% per month, over and above a 15% initiation fee and a R50 service fee.

“The NCA has levelled the playing field. We are seeing informal lenders disappearing from the market. They are unable to cope with the act and competition in the market,” says Riaan Stassen, chief executive of Capitec Bank.

Wessel Smit, head of the legal department at Blue Financial Services, says some small lenders have left the industry because of a lack of access to affordable capital.

“Bigger players have more access to capital at a lower cost and therefore are able to charge their customers lower interest rates. But if you are a one-man company it is difficult to grow your business because you don’t have the same access to capital as a bigger player,” says Smit.

However, Gabriel Davel, chief executive of the National Credit Regulator (NCR), says there is no clear evidence that the number of micro- lenders in the market has shrunk due to heightened competition.

“There are people that have closed down, and others have come from underground to register with us. New players have also come to the market.

“But some players may exit in future because of strong competition. There are cheaper options of finance than was the case. So one would expect that customers will go for those cheaper options,” predicts Davel.

Official figures show that there are 2 100 micro-lenders currently registered with the NCR, compared with the 2 000 lenders that were registered with the NCR’s predecessor, the Micro Finance Regulatory Council.

Thami Sokutu, an executive director at African Bank, says the NCA has consolidated the micro-lending market, which has resulted in a reduction of credit extension.

“Before it came into being, there was a lot of credit flooding the market. But since its introduction there has been a cutback in credit extension. In our case, we have been able to grow our loan book while at the same time reducing prices on our loans,” he says.

As part of the consolidation process, African Bank acquired furniture retailer and credit provider Ellerines for R10 billion. Blue Financial Services, which has extensive operations across the African continent, acquired rival micro-lender, Future Finance, thereby boosting its earnings from South Africa.

While big players are extending the repayment periods on their loans to reduce interest costs for customers, small lenders prefer short-term cash loans as they yield higher interest charges than longer-term loans.

Cash loans which range between R100 and R500 are expensive one-instalment loans. Long-term loans tend to be cheaper as instalments are reduced to allow customers to pay over a longer period.

“There is a big demand for cash loans. I think there is a need to move the industry away from this anomaly created by the interest rate limits,” says Garth Whitford, MD of MicroFinance South Africa, which represents 1 500 micro-lenders.

Source : City Press

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