It’s true that not all debt is bad debt, but unregulated debt always is. With household debt levels rising in South Africa as a proportion of disposable income and many people ‘drowning in debt’, the National Credit Act came into force in 2007 to level up the playing field.
It was designed to reduce reckless creditor behaviour by both credit providers and consumers, and it’s been largely successful.
Here, we’ll explore how the National Credit Act made the credit markets safer for South Africans and touch on the threats borrowers still need to be aware of.
The purpose of the National Credit Act
The National Credit Act (NCA) was introduced to give South Africans access to fair and non-discriminatory consumer credit. It’s done this by improving the standard of information that’s given to consumers about loans and preventing unfair credit practices.
The Act also introduced tighter rules around lending decisions and regulated the advertising and marketing of loan products at home and in the workplace. And crucially, it gave borrowers the right to cancel a loan agreement within five days of signing the contract, without incurring a penalty.
How has the NCA made lending safer?
All legal lenders in South Africa must be registered with National Credit Regulator. If you enter into any kind of credit agreement with a legal lender, you are protected by the laws and regulations included in the National Credit Act. This protects consumers by giving them access to all the key information they need to make responsible borrowing decisions. It also prevents them from being taken advantage of by unscrupulous lenders.
Before the NCA was introduced, one of the key issues was that consumers were being given credit without undergoing the proper checks. They’d then find themselves in a debt spiral, where they’d borrow more money to repay existing loans. This can be extremely damaging and difficult to escape from.
There was also a big problem with access to credit, particularly for lower earners. Low levels of financial literacy among these consumers meant many were unable to access formal credit channels. Instead, they were being exploited by unlicensed lenders, known as mashonisas. Although the NCA’s requirement to include clear, concise and simple information about the total cost of loans has helped to resolve this, mashonisas are still a threat to financial wellbeing.
The continuing threat of informal lending
While the National Credit Act has helped to counteract the threat of informal lending, estimates suggest that there are still as many as 40,000 mashonisas operating in South Africa. And unfortunately, when finances are tight, many South Africans, particularly those living in the country’s townships, still choose to access loans from their unregulated neighbourhood lenders. This is a decision that can cost them dear.
According to the National Credit Act, short-term lenders regulated by the Act can have a maximum interest rate of 5%, and the total cost of a typical R1000 loan is capped at R1150. If you compare that to unregulated mashonisas, they commonly charge interest rates of up to 50%, leading to a repayment of R1500 on a R1000 loan. They can also enforce the repayment of loans through social humiliation, intimidation and threats of violence.
Increasing the reach of responsible lending
Although the NCA has helped to clean up the lending sector, the challenge still remains to increase the reach of regulated lenders and reduce the use of informal credit channels.
Improving financial literacy is the key here. Formal lenders also need to build speed into their decision-making process and provide more flexibility around their terms, including offering smaller loans. If more regulated lenders can take this approach, it’s hoped that more South Africans will finally turn away from the unregulated lending space and benefit from the protections provided by the NCA.