Economic Update

Unsecured lending is on the rise in South Africa, sparking debate over whether the growth rate in this loan category should be reined in to avoid a potential credit bubble and protect vulnerable consumers from entering into a cycle of over-indebtedness.

According to figures from the South African Reserve Bank (SARB), unsecured credit –which is characterised as loans extended without asset as collateral, typically at much higher interest rates – surged by 21% in the year leading to June 2012. Currently, the country’s “gross debtor” book stands at approximately R1.3trn ($146.91bn).

While this amounts to just below 10% of total retail lending, those expressing concern over a pending credit bubble point to what happened in the US in 2008, when subprime mortgages, despite being only a small percentage of total outstanding loans, nonetheless contributed greatly to the economic crisis.

However, the benefits of the broader rise in access to credit that unsecured lending has brought about are seen by South Africa as worth the potential risk. Dube Tshidi, the CEO of South Africa’s Financial Services Board (FSB), which regulates market conduct for financial institutions, told OBG, “In choosing between more-secure lending over no growth in lending at all, we perceive unsecured lending as the lesser of two evils. We need to provide access to finance for those previously disadvantaged. To do so, sometimes you have to be more lenient in what is permitted.”

Financial inclusion has been a major focal point for South Africa since it achieved democracy in 1994, with substantial inroads having been made in terms of the proportion of South Africans who can afford and are able to benefit from access to financial products. According to the National Treasury, 68% of South Africans have access to financial services from a formal sector provider. This is up from 63% in 2011, and well exceeds the 25% average for Sub-Saharan Africa.

Riaan Stassen, the CEO of Capitec, a retail bank that specialises in unsecured lending, told OBG, “While there is the possibility of too much credit being provided in too short a time, South Africa will not be subject to a credit bubble. It is dangerous to take a global phenomenon and apply it to South Africa without understanding the significant impact of the apartheid system on the existing credit market and the credit market going forward.”

Stassen continued, “When people lack measurable assets they can borrow against, the only alternative is to fund individuals using unsecured instruments based on your ability as a bank to determine the quality of the customer’s cash flow.”

However, while unsecured lending may be a necessity for South Africa to expand its bankable population, it must be undertaken more responsibly, Nomsa Motshegare, the CEO of South Africa’s National Credit Regulator (NCR), which is responsible for the regulation of the South African credit industry, told OBG. “This type of lending is not a problem, so long as credit providers undertake proper affordability assessments,” Motshegare added. “The problem arises when consumers take on credit without properly understanding what they are getting into in terms of future repayment terms and rates.”

Based on NCR figures, nearly half of South Africa’s almost 20m active credit consumers are financially impaired, placing huge financial pressures on households, particularly those in the lower income brackets. According to a study undertaken by South African news agency Moneyweb among South Africans earning between R3500 ($396) and R10,000 ($1130) per month, nearly 40% of their income goes toward covering loan costs.

In mid-August, the broader socio-economic perils of high levels of consumer credit among low-income communities came to the forefront during the strikes that took place at the Marikana platinum mines, where violent clashes with police caused the deaths of 47 people.

NCR raids at Marikana included investigations of small-scale lenders operating in the area, and subsequent examinations found that 10 of 12 micro-credit lenders investigated were acting unlawfully through violations such as charging credit far in excess of the legally capped rate of 31%, and illegally taking repayment deductions directly from workers salaries. Rob Davies, the minister of trade and industry, told local press in recent weeks that he believes the phenomenon of loan sharks acting in violation of credit laws has contributed significantly to the violent labour unrest that has recently plagued the country, with workers’ motivation for dramatic wage increases partly stemming from the rising and unmanageable debt levels they need to service.

Overall, while regulators and industry players do not perceive a rise in unsecured lending as potentially contributing to a credit bubble, there is concern that unsecured lending, when not undertaken ethically and responsibly, will lead to further socio-economic risk and a cycle of over-indebtedness amongst the poorer segments of society.