South Africa's Debt Trap - Indebtedness

Quarterly Roundtable Series
South Africa’s Debt Trap
22 Feb 2011

Executive Summary

The Helen Suzman Foundation, in association with its partner the Open Society Foundation For South Africa,
hosted its first QRS of the year. The QRS explored South Africa’s Debt Trap against the background of
the National Credit Act, and the responses to this Act from the Banking sector and Micro Finance Industry.

The Roundtable brought together experts from all sides of the debate – regulators, bankers and micro financiers. The ensuing discussions were open, engaging and thought provoking. Chairperson of the National Consumer Tribunal, Diane Terblanche, argued for the rights of the consumer to be protected from reckless credit extension. Too many people fall into debt stress as a result of taking on too much debt from unscrupulous credit agencies, without being properly briefed on interest rates charged and repayment plans. Diane argued that this practice needed to be addressed. The regulatory measures in place to deal with these issues had not been properly tested and too many cases were ending up in the courts. This added further costs, and the process took too long.

Did South Africa avoid the financial crisis? Gabriel Davel, former CEO of the National Credit Regulator, argued that South Africa had not avoided the crisis although the effects had not been as severe as in other countries due to the National Credit Act having been in place prior to the crisis unfolding. He maintained, however, that elements of the Act were being undermined by various interest groups at the expense of the people who need the protection it affords. The reasons he put forward for South Africa not having avoided the crisis were the massive contractions in consumer credit and loan disbursements. Small business, starved of credit saw demand for their goods massively decrease, while tariffs for electricity surged in the same period. South Africa shed over 1 million jobs as a result of credit lines beingcurtailed with many small businesses going out of business.

From the perspective of those who are largely financially excluded, Peter Roussos made the case for Micro lending enterprises creating indebtedness. He services a sector of the economy which has never been extended credit before. There are 6 million small and micro businesses operating in South Africa currently, without access to proper lines of credit. Micro lending is a long term project aimed at building social capital and providing a means to an end for budding micro and small business owners.

Funeka Ntombela, of Standard Bank, offered insights into bank lending practices via the broad range of consumer and commercial debt instruments. South Africans spend about 78c in every R1 to service their debt. People in some income bands were borrowing to live. Standard Bank has been actively involved in proactively restructuring R30bn in loans. Funeka argued that banks are finding it increasingly expensive to raise money in the markets which has resulted in raising their input costs across a number of products. Banks need to return to the basics – deposits and lending; consumers need to be empowered to make the right choices about debt. She argued that a structural change was taking place throughout the banking sector and this needed to be embraced. 

Full publication to follow shortly.