Banks' adherence to the National Credit Act: its effects on domestic indebtedness and fragility in South Africa

Abstract

South African credit industry is governed by the National Credit Act 34 of 2005 (NCA), which came into effect on 1st June 2006. This Act was created to bring about efficiency, transparency and accessibility to credit, which was not achievable under the predecessor provisions of the Usury Act 73 of 1968 and the Credit Agreements Act 75 of 1980. South Africa’s credit history has been riddled with discrimination and unfair practices; therefore the NCA is seen as an important regulation in attempts to bring stability and equality to the financial sector. All credit providers are governed by the NCA and are subjected to strict regulations and compliance in terms of interest rates, fees, conduct and disclosure. Unsecured credit is one of the credit agreements which is regulated by the NCA. This refers to all credit agreements that the credit provider and the consumer has entered into, where there is no tangible security offered as recourse for non-payment by the consumer. In statistics produced by the National Credit Regulator (NCR), figures showed an astounding growth in unsecured credit. It was therefore valuable to investigate the role that the NCA played in the growth of unsecured credit and the effect this growth has had on domestic indebtedness and fragility for the South African economy. Both literature and primary data was drawn on to analyse the research problem. The primary data tools consisted of an interview instrument and a questionnaire instrument which was used to glean two perspectives on the subject researched. There were 10 interview respondents and 223 questionnaire respondents that were included in the sample. Interviews consisted of 8 open-ended questions which were aimed at respondents that had a good knowledge of the credit industry, the NCA and unsecured lending in South Africa. Respondents were categorised according to the sector they represented namely banks, regulators and investment companies. The questionnaire instrument consisted of 3 sections namely demographic information, knowledge of the NCA and debt information, with a total of 34 questions. Given the literature on hand, the analysis of both primary data instruments provided results that showed that the NCA’s regulations was a key driver in the growth of unsecured credit, alongside consumers’ demand. The research also indicated that the incidence of a credit bubble bursting was minimal particularly due to the introduction of the National Credit Amendment Act 19 of 2014, which closed a few loopholes found in the NCA. A further inference that could be drawn is that banks have adequate credit assessment criteria and systems in place and are therefore in a position to profile consumers correctly. Consumers, it was found, are knowledgeable on credit related matters and in addition to this; there are many initiatives, by both banks and the government, for consumer credit education. Overall banks did comply with the NCA’s regulations; however, it was found that it was the NCA’s regulations that had effects on domestic indebtedness and by extension, the fragility on the economy.