Amendments to the National Credit Act (NCA) will be introduced tomorrow and will require anyone lending money to be registered as a credit provider. Although targeted at loan shark activity, the legislation could have an effect on more informal lending arrangements.
Section 40 of the NCA 34 of 2005 requires a person to register as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements exceeds the threshold determined by the minister of trade and industry.
Before the amendments, a person had to register as a credit provider only if he or she was the credit provider of at least 100 credit agreements, or if the principal debt owed exceeded R500 000.
This has allowed for more informal lending in communities – for example, a spaza shop owner can allow a running tab for his or her customers. This type of informal credit agreement is a lifeline in many poorer communities.
The problem is that the loophole has been abused by loan sharks, who issue loans outside of the NCA and charge exorbitant fees and undertake dubious collection methods such as withholding an individual’s bank cards. Because they do not fall under the NCA, there is no legal recourse and the authorities are unable to bring them to book.
Lesiba Mashapa, company secretary at the National Credit Regulator, says by closing the loophole, the regulator will at least be able to investigate complaints and prosecute loan sharks.
“We realise we will never completely stop underground lending. In fact, one of the biggest challenges is that communities themselves protect these loan sharks because, in this weakening economy, they offer the only access to credit. However, the change in legislation will make it easier to shut them down and it will be more difficult for the loan shark to collect their loans as they will be illegal,” Mashapa says.
In fact, as of this past Friday, failure to register as a credit provider could result in the credit agreement being declared void as it will be an unlawful agreement.
Mashapa says there has been discussion around the unintended consequences of the changes, such as the potential for some loan sharks to resist registration and continue to operate underground. In many communities, there are social networks of support providing loans to members such as stokvels and social clubs. These will be difficult to detect unless the regulator receives complaints or tip-offs from these communities.
It is also important to note that this amendment only affects arm’s-length arrangements – in other words, if you do not have a close relationship with the individual. This means you can still lend money to family members and close friends where your intention is not to gain the utmost advantage from the transaction. Loans between shareholders and the company are also exempt from the legislation in the NCA.
The changes to the NCA will, however, affect crowd lending platforms such as RainFin, which act as facilitators between individuals who want to borrow money from other individuals.
Under the new legislation, if you lend money to someone through a lending platform, you will have to be registered as a credit provider – even if that loan is just R1 000 to help someone buy a car.
Altesh Baijoo, chief marketing officer at RainFin, says that the amendments will affect RainFin’s business model.
“We are amending our processes to ensure that we continue to publish consumer loans for our lender community to participate in, and we are aiming to have the revised processes implemented this month.”
Mashapa says that further discussions need to take place with the industry as the whole issue of crowd lending or peer-to-peer lending needs to be reviewed. The National Credit Regulator is investigating the fees and commissions charged by the platforms and whether these are appropriate and fully disclosed.
“There are clearly cost savings by providing loans online, but are these cost savings being passed on to consumers in reduced credit fees? For example, does the consumer have to pay origination fees to originating agents in addition to the initiation fees and services fees payable to the credit provider? What are they charging for origination fees? Does it really work out as being more cost-effective, ultimately, for the borrower?” asks Mashapa.
The regulator also wants to understand who takes responsibility for affordability assessments and, if the loan is deemed reckless, who will be accountable – the individual who lent the money or the entity that provides the lending platform? What contingency plans are in place if the platform goes bust?
It also needs to ensure that no money laundering is taking place through the platforms.