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Usury Act, 1968 (Act No. 73 of 1968)

Report on Costs and Interest Rates in the Small Loans Sector

Annex V: Overview of Problems, Causes, Types of Solutions and Various Options

 

 

Problem from DTI Perspective

Cause

Type of Solutions

Options

Over Indebted Client (Debt Spiral)

Aggressive Lender

Restrict/control Lenders:

Interest Rate ceilings
Total cost of credit ceiling
Restrict access to Persal and clients
If > 3 loans already, then no recourse
Closer MFRC monitoring

Uninformed Client

Educate Borrowers & Employers

Improved MFI education materials
Intervention of employers on behalf of employees
National Education
Programmes (DTI & MFRC)
Consumer Groups

Exploitation of Clients (Loan Sharking)

Poor information to Client

Improve Information flow

Loan register
Link Credit bureaux
Full disclosure by lender

Aggressive Lender

Same as above

Same as above

Irresponsible Client behaviour

Restrict Borrowers access (for employees with <8K/mo.

Limit no. of loans
Limit % of net salary to be used for payment

Insufficient microenteprise finance

Inappropriate Technologies for SMME lending

Promote investment in the development of new lending technologies

Increase the ceiling for loan size for SMME under the exemption to R25,000
Increase interest rate ceiling for SMME lenders below R50,000

Perceived high risk and cost to lending to SMME

Provide incentives to banks and microlenders to enter the market

 

SUMMARY OF VARIOUS OPTIONS AND TILE ADVANTAGES AND DISADVANTAGES

 

Restrict / Control Lenders


Options1: Institute interest rate ceilings or Total Cost of credit ceiling

Pros:

Sets a limit on the cost that the lender can place on a borrower;
If set properly, above the point where supply and demand Intersect, should not affect the supply of credit.

Cons:

Provides a disincentive to invest In the sector;
If set too low, will ration credit, excluding those at the bottom
Can be very difficult to monitor and enforce;
Does not prevent the borrower from going elsewhere;
Can force marginal lenders to go outside the regulated sector or "underground".

Option 2: Restrict access to Penal for lenders found to abuse the system by making dangerous loans, defined as surpassing 25 percent of gross salary, or more than 3 loans

Pros:

Access to Persal is a privilege, Serves as a reward to incite responsible lending.
Easy to monitor;
Easy to enforce;
Serious penalty for irresponsible lending

Cons:

Must define "abuse of the system"

Option 3: Institute measures to increase risk to the lender for unsafe lending. if a borrower already has more than three loans or has passed 25 percent of gross take home pay, then the lender loses recourse to any compensation in case of default

Pros:

Incentivizes responsible lending.

Cons:

Implies that the borrower has no responsibility for his actions
May force borrower to use informal sources of credit.

Option 4: Closer monitoring by MFRC and DecentraIization of Inspection and Education

Offices to the provinces, (must do cost benefit analysis first)

Pros:

Specialized regulatory body knows what to monitor and has comprehensive records;
Brings the MFRC closer to the clients

Cons:

Becomes expensive
Requires larger infrastructure and staff for the MFRC;
"Big brother is watching" syndrome
impossible to monitor everything

Option 5: Improve system for handling complaints

Pros:

MFRC will be able to react more effectively to penalize irresponsible lenders

Cons:

Increase in costs, may increase regulatory fee, adding to lender’s premium on margins.

Option 6: Microlenders institute more stringent industry standards on lenders for numbers of loans and level of debt exposure that is acceptable for borrowers to provide for a strong microlending industry that have been determined in conjunction with DTL

Pros:

Increase awareness among lenders of dangers that are facing the industry.
Lenders take positive steps to address the debt spiral problem and maintain strong market for microlending
Puts onus on individual microlenders to protect the market from abuse which could lead to collapse and greater government intervention.

Cons:

Impossible to police
May be difficult to reach consensus

Option 7: Promote the continued formalization of the microlending industry through strict controls on larger informal lenders, but should not waste time on the small Informal microlenders

Pros:

Cost effective way to capture 99% of the credit flow in the sector

Cons:

May be some irresponsible borrowers left out in the informal sector who are not captured.

Educate Borrowers and Employers to create more informed clients

MFI Develop and deliver improved education materials to prospective borrowers and to their employers. Provide awards for best sensitization materials

Pros:

Forces MFI to think about problems associated with extending credit to small borrowers.
Puts onus on MFI to educate borrowers as to risks and promote sound borrowing practices.
Strengthen the future market for microlending.

Cons:

Difficult to monitor to ensure compliance.

Intervention of employers on behalf of employees for requiring credit education by microlenders and controlling the debt spiral due to over-indebtedness


Pros:

Employers are concerned about their employees financial condition as it will impact on their performance.
Employers can play an important role in screening responsiveness of lenders to needs of their employees
Employer set own standards and conditions for lenders to work with their companies

Cons:

Preventing borrower from accessing credit may force it into the informal sector with higher interest rates.

National Education Programmes (DTI and MFRC) in conjunction with Consumer Groups: To be carried out for both the MFI on risks of creating over indebted clients, and for the clients on the debt trap and how easy it is to fall in.


Pros:

Government has the financial capacity to fund awareness campaign for the public good
Gets NGOs involved in the most difficult side of the equation: responsibilising the borrower.

Cons:

Government and consumer groups not directly implicated in the contract between borrower and lender, so may have limited impact.

Improve information flow for lenders as well as borrowers


Establish a Loan register that will capture all loans that are currently outstanding managed by the MFRC


Pros:

Allows MFl to see the full extent of client exposure.
Lessens the risk of creating bad debt problem for the lender.

Cons:

Provides irresponsible lenders with accurate data on the limit of credit ceiling still available to borrower.
Very difficult and expensive to implement
Credit checks and references are normally the domain of the private-sector.

Link Credit Bureaux to provide comprehensive client analysis


Pros:

Credit bureaux are already collecting information on borrowers, have the systems in place and the loyalty of their clients (the mfi).
Will be funded through fees for service, removing the funding onus from government

Cons:

Requires the credit bureaux to collect more information on clients.
May require some funding from the government, initially, to get off the ground

Full disclosure by lender of all charges to the consumer and the monthly flow of payments over the course of the loan in easily understandable language, including the APR as calculated by the MFRC


Pros:

Provides maximum information to the client, so that the client does not have the excuse of blaming the lender.

Cons:

 


Restrict Borrowers access to lenders for certain categories of borrowers


Limit the number of loans


Pros:

Prevents easy access to loans that would push the borrowers over the edge of heavy indebtedness and into debt spiral.

Cons:

Force Borrower to go to informal lender for emergency loans.
Impossible to monitor completely
What is government’s right to intervene in the actions of individuals

Set limits on the percentage of gross or net salary based on ability of the client to repay, in conjunction with the banks


Pros:

Prevents easy access to debt load that would push the borrowers over the edge of heavy indebtedness and into debt spiral.

Cons:

May force the borrower to go to the informal lenders for absolute needs.
Difficult to monitor

Provide Incentives to Invest in SMME Lending


Increase the ceiling on the exemption from SMME beyond R10,000 to R25,000


Pros:

Will provide greater profit incentive for microlenders to enter the market for enterprise lending.
Stimulate innovation among existing lenders to provide more diversified products in the R10,000 range.
May improve the choice of lenders and products for borrowers/SME.
Keeping the ceiling substantially below the current commercial bank floor for SMME lending will limit the diversion effects of the increase.

Cons:

Difficult to monitor
May lead to substitution/diversion of credit to under the credit ceiling where banks can charge higher rates.
May promote businesses with riskier profiles to get loans with banks.

Increase the interest rate for SMME lending for loans in the R25,000 to R50,000 range, and continue supporting Khula’s loan guarantee programme


Pros:

Will provide greater financial incentive to commercial banks to provide SMME with loans.

Cons:

May lead to substitution/diversion of credit
May promote businesses with riskier profiles
Will require greater monitoring costs.

Promote technological Innovation


Facilitate access to capacity building through Government sponsored programmes, like Khula


Pros:

Strengthen the capacity of microenterprise lenders

Cons:

Cost may be too high for the smaller microenterprise lenders already under pressure.

Promote Standardized Reporting to the MFRC


Pros:

Focus the MFI on key issues relating to sustainability
Ease of information flow into the MFRC

Cons:

Readjustment for some of the MFI with cost of changing their systems.


 


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