A recently broadcast interview with Brett van Aswegen, CEO of short term lender Wonga S. Africa, featured on a Newzroom Afrika segment, has brought fresh attention to how well-meaning regulatory reforms may be having the opposite impacts than intended.
The news piece explored how outdated pricing regulations, which have not been revised in an extensive nine-year period, have left credible, regulated, and values-focused lenders reluctantly refusing credit to consumers simply because they cannot viably do so under the current framework.
Concerns arising from this scenario are stark—they range from the unintentional exclusion of legitimate consumers from safe credit lending to the funnelling of borrowers to recently de-registered lenders and even directing everyday people to illegal lenders when they are left with precious few alternatives.
Events Leading to Static Credit Lending Pricing Regulations
Pricing regulations in South Africa were overhauled with the introduction of the National Credit Act and subsequent reforms, which stipulated factors such as the maximum lenders can charge in fees, service charges, and collection costs.
This element in itself is not in contention, but the years that those initial regulations have been left unrevised have meant that many verified regulated lenders are severely limited in the demographics and proportions of applicants they can support.
The statistics speak for themselves, with financial exclusion in 2021 estimated to extend to 32% of the population, according to a thought leadership piece published by the Head of Youth Segment at personal banking provider Nedbank.
During the interview, the Wonga CEO lamented that the end result is that a consumer may be forced to use unregulated lenders, including the 1,000+ previously regulated lenders who have opted not to renew their registrations and are expected, in some cases, to continue operations without regulatory compliance.
Exclusion from formal lending markets and environments is extremely high risk, where consumers who might otherwise be eligible for borrowing but haven’t previously entered into the market may be automatically refused, regardless of their income or ability to repay.
How Credit Lending Cuts Put South African Consumers in Harm’s Way
Credit regulations are largely perceived as a form of consumer protection – as originally intended. The challenge today is that countless lenders who actively comply with pricing rules find that:
- Any applicant with any level of income but who does not have a credit record is automatically rejected since the lender cannot cover the costs of compliance.
- First-time credit users who otherwise would be highly creditworthy are locked out of safe, regulated lending purely based on their position and pricing restrictions.
- Lenders are forced to respect pricing limitations that have not kept pace with inflation, making all but the most profitable products redundant and leading to further gaps in the market, where established lenders may need to withdraw products altogether.
The biggest impacts have been felt by families on lower incomes, albeit those with verified earnings and no previous history of adverse credit or debt that would otherwise possibly disqualify them from a lending product.
Instead, their lack of credit history and the stagnation of pricing regulations mean huge demographics may be prevented from accessing credit markets, even if the purpose of the loan would otherwise be seen as beneficial, such as business investment financing or lending to fund the cost of a higher-level educational course.
In the worst cases, lenders are deeply concerned that vulnerable, low-income people and those without good financial literacy will be left reliant on unregulated, illegal, or de-registered lenders. These lenders do not uphold any commitment to regulatory standards and may hold zero accountability for their actions or the exorbitant charges they levy on desperate borrowers.
Now, the ball has been firmly placed in the court of The Banking Association South Africa, which has been asked to review pricing regulations, consider how well-intended rules are creating barriers to participation in safe credit markets, and analyse how the impacts of sustained inflation mean respected lenders cannot serve consumers in the way they wish. Only time will tell if a review and subsequent action will take place.