Restrict / Control Lenders
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Options1: Institute interest rate ceilings or Total Cost of credit ceiling
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Pros:
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Sets a limit on the cost that the lender can place on a borrower; |
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If set properly, above the point where supply and demand Intersect, should not affect the supply of credit. |
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Cons:
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Provides a disincentive to invest In the sector; |
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If set too low, will ration credit, excluding those at the bottom |
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Can be very difficult to monitor and enforce; |
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Does not prevent the borrower from going elsewhere; |
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Can force marginal lenders to go outside the regulated sector or "underground". |
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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
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Pros:
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Access to Persal is a privilege, Serves as a reward to incite responsible lending. |
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Serious penalty for irresponsible lending |
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Cons:
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Must define "abuse of the system" |
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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
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Pros:
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Incentivizes responsible lending. |
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Cons:
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Implies that the borrower has no responsibility for his actions |
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May force borrower to use informal sources of credit. |
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Option 4: Closer monitoring by MFRC and DecentraIization of Inspection and Education
Offices to the provinces, (must do cost benefit analysis first)
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Pros:
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Specialized regulatory body knows what to monitor and has comprehensive records; |
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Brings the MFRC closer to the clients |
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Cons:
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Requires larger infrastructure and staff for the MFRC; |
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"Big brother is watching" syndrome |
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impossible to monitor everything |
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Option 5: Improve system for handling complaints
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Pros:
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MFRC will be able to react more effectively to penalize irresponsible lenders |
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Cons:
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Increase in costs, may increase regulatory fee, adding to lender’s premium on margins. |
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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
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Pros:
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Increase awareness among lenders of dangers that are facing the industry. |
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Lenders take positive steps to address the debt spiral problem and maintain strong market for microlending |
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Puts onus on individual microlenders to protect the market from abuse which could lead to collapse and greater government intervention. |
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Cons:
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May be difficult to reach consensus |
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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
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Pros:
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Cost effective way to capture 99% of the credit flow in the sector |
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Cons:
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May be some irresponsible borrowers left out in the informal sector who are not captured. |
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Educate Borrowers and Employers to create more informed clients
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MFI Develop and deliver improved education materials to prospective borrowers and to their employers. Provide awards for best sensitization materials
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Pros:
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Forces MFI to think about problems associated with extending credit to small borrowers. |
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Puts onus on MFI to educate borrowers as to risks and promote sound borrowing practices. |
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Strengthen the future market for microlending. |
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Cons:
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Difficult to monitor to ensure compliance. |
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Intervention of employers on behalf of employees for requiring credit education by microlenders and controlling the debt spiral due to over-indebtedness
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Pros:
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Employers are concerned about their employees financial condition as it will impact on their performance. |
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Employers can play an important role in screening responsiveness of lenders to needs of their employees |
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Employer set own standards and conditions for lenders to work with their companies |
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Cons:
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Preventing borrower from accessing credit may force it into the informal sector with higher interest rates. |
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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.
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Pros:
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Government has the financial capacity to fund awareness campaign for the public good |
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Gets NGOs involved in the most difficult side of the equation: responsibilising the borrower. |
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Cons:
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Government and consumer groups not directly implicated in the contract between borrower and lender, so may have limited impact. |
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Improve information flow for lenders as well as borrowers
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Establish a Loan register that will capture all loans that are currently outstanding managed by the MFRC
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Pros:
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Allows MFl to see the full extent of client exposure. |
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Lessens the risk of creating bad debt problem for the lender. |
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Cons:
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Provides irresponsible lenders with accurate data on the limit of credit ceiling still available to borrower. |
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Very difficult and expensive to implement |
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Credit checks and references are normally the domain of the private-sector. |
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Link Credit Bureaux to provide comprehensive client analysis
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Pros:
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Credit bureaux are already collecting information on borrowers, have the systems in place and the loyalty of their clients (the mfi). |
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Will be funded through fees for service, removing the funding onus from government |
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Cons:
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Requires the credit bureaux to collect more information on clients. |
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May require some funding from the government, initially, to get off the ground |
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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
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Pros:
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Provides maximum information to the client, so that the client does not have the excuse of blaming the lender. |
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Cons:
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Restrict Borrowers access to lenders for certain categories of borrowers
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Limit the number of loans
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Pros:
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Prevents easy access to loans that would push the borrowers over the edge of heavy indebtedness and into debt spiral. |
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Cons:
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Force Borrower to go to informal lender for emergency loans. |
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Impossible to monitor completely |
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What is government’s right to intervene in the actions of individuals |
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Set limits on the percentage of gross or net salary based on ability of the client to repay, in conjunction with the banks
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Pros:
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Prevents easy access to debt load that would push the borrowers over the edge of heavy indebtedness and into debt spiral. |
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Cons:
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May force the borrower to go to the informal lenders for absolute needs. |
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Provide Incentives to Invest in SMME Lending
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Increase the ceiling on the exemption from SMME beyond R10,000 to R25,000
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Pros:
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Will provide greater profit incentive for microlenders to enter the market for enterprise lending. |
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Stimulate innovation among existing lenders to provide more diversified products in the R10,000 range. |
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May improve the choice of lenders and products for borrowers/SME. |
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Keeping the ceiling substantially below the current commercial bank floor for SMME lending will limit the diversion effects of the increase. |
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Cons:
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May lead to substitution/diversion of credit to under the credit ceiling where banks can charge higher rates. |
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May promote businesses with riskier profiles to get loans with banks. |
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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
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Pros:
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Will provide greater financial incentive to commercial banks to provide SMME with loans. |
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Cons:
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May lead to substitution/diversion of credit |
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May promote businesses with riskier profiles |
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Will require greater monitoring costs. |
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Promote technological Innovation
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Facilitate access to capacity building through Government sponsored programmes, like Khula
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Pros:
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Strengthen the capacity of microenterprise lenders |
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Cons:
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Cost may be too high for the smaller microenterprise lenders already under pressure. |
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Promote Standardized Reporting to the MFRC
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Pros:
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Focus the MFI on key issues relating to sustainability |
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Ease of information flow into the MFRC |
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Cons:
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Readjustment for some of the MFI with cost of changing their systems. |
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