While US and European financial institutions reel from the fallout caused by poor lending practices, South African lenders have remained relatively unscathed. The recent implementation of stringent legislation governing credit practices, as well as sound credit management systems practiced over a number of years, have combined to ensure that local financial institutions have a solid grip on our consumer credit situation.

In South Africa, there is a very robust regulatory environment where the rubber hits the road – at the exact point where the credit is advanced to the individual. This ensures that the entire process is very responsibly managed.

Bad debt blow-out

The positive earnings coming through from most of our local financial institutions and the relatively low bad-debt ratios, are evidence that there is not the ‘blow-out’ that we are seeing from our international counterparts. We have had no huge write-offs. Of course due to external market factors, all financial institutions are going to be facing tough times. Currently the South African economy is going through a high interest-rate cycle, but it appears that the challenges are more cyclical than structural.

Stricter legislation governing credit has been introduced in recent years to protect unsophisticated consumers from ‘loan sharks’ and the exploitative lending practices that were taking place.

In South Africa, the lower to middle income markets are generally financially less sophisticated. There was a fair degree of exploitative lending that was going on that needed to be addressed through legislation and regulation protecting the consumer from incurring excessive debt and also enforcing a solid collection process. An extensive list of legislation has been introduced in South Africa in recent years:

— National Credit Act (NCA) – which was signed off on 15 March 2008 and protects credit takers as well as credit providers by supplying consumers with measures that will allow them to make more informed decisions as well as placing greater responsibility on credit providers for the amount of credit that they extend and the eligibility of their clients for such credit.

— The Debt Collectors Act – the purpose of which is to provide for the exercise of control over the occupation of debt collectors by the creation of a regulatory council.

— Consumer Protection Bill – while not yet an Act, the purpose of this legislation will be to promote a fair, accessible and sustainable marketplace for consumer products and services by providing for consumer protection, improved standards and a prohibition of certain unfair marketing and business practices.

— Magistrates Court Act – This very extensive piece of legislation regulates a wide area of topics, including, but not limited to, the civil debt collection procedures.

The successful implementation of this legislation means that a ‘sub-prime’ type crisis is extremely unlikely to happen in South Africa. The extensive regulations mean that affordability is the number one requirement for the granting of any credit. It is illegal for any credit provider to extend credit to an individual without a proper documented consideration of an individual’s ability to service the debt. Hence lending on the strength of future income or growth, or on the perceived stability in underlying security is not allowed.

As a result, South Africa has a household debt-to-income ratio of 76 percent, substantially lower than the US, UK, most of Europe and Australia, where this ratios are well over 100 percent.

This is also partly because we have had to develop very sophisticated methods for evaluating credit worthiness. In the upper income markets, there is a higher level of financial literacy amongst borrowers, comparable with those in Europe and the US. Default rates at this end of the market are reasonably low. However, in the substantial lower income market, there is a decided lack of financial literacy and therefore traditionally a higher default risk of around 15 percent. South African lenders have therefore been required to build up a substantial skill set to manage credit in this area of the market.

Sophisticated scoring

Over the last five years, South African lenders have developed more sophisticated credit scoring methods and credit information databases. The South African market has also become fairly segmented and ‘niche’. Specialist providers, such as Real People, service the lower to middle market, built specific ways to evaluate and deal with risk in this market, which have stood us in good stead in recent times.

For example, a great deal of personal interaction is needed between credit providers and consumers in the lower income markets. We have found that those at the top end of the market are more internet-savvy and sophisticated enough to shop around for themselves. At the lower end of the market, we have had to implement substantial branch networks and distribution channels to service these consumers on a more interpersonal level. This is far more costly, which puts pressure on providers to improve their distribution and collections efficiency.

An example of the innovative and competition friendly developments taking place to efficiently service the lower to middle market, is the NAEDO direct debit system implemented by the South African Reserve Bank in 2007. While traditional systems only allow for one attempt at collection, this system allows the credit provider to make three attempts per day, for a number of days. The collections costs, including unpaid charges, are absorbed by the credit provider. This is clearly more expensive than traditional systems, but it also allows for more effective debt collection practices.

The systems that South African credit providers have in place and the experience in dealing with the lower end of the market, means that we are in a far better position to do business successfully in the rest of Africa and other emerging markets, which feature a similar, large, financially unsophisticated consumer base..

Neil Grobbelaar is Joint MD of Real People, one of South Africa’s leading credit specialists.


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