While the concept of writing off the debt of the poorest of the poor as envisaged in the newly-signed Credit Amendment Bill may seem like a good idea, the reality is quite different.
Credit providers like banks and other financial institutions are going to take a heavy hit estimated by the National Treasury to be as much as R20bn. These losses are going to be factored into new loans which means that hard-pressed consumers are going to end up paying more for borrowed money.
- Banks worried over new SA law giving clients debt relief
- 5 questions on the 'debt relief bill' unpacked
- Why the debt relief bill will see loan sharks circling consumers
It may also have the unintended consequence of encouraging less financially savvy consumers to borrow more in the mistaken belief that the state will simply write off these loans if they can’t repay them.
And then there is the issue of South Africa’s financial standing internationally. Article 25 of this country’s Constitution guarantees property rights and that most certainly includes outstanding loans which means that the legislation may be unconstitutional.
What kind of message are we sending to the holders of South African bonds, the World Bank and the ratings agencies when this country is in desperate need of foreign direct investment to create jobs and to help grow the economy.
"[T]his is not the time to play populist politics with our financial systems"
Is that message that we will simply write off our loans if we don’t feel like repaying them?
We are already saddled with the hugely negative perception that the state is planning to expropriate land without compensation. Writing off loans belonging to banks and other financial institutions albeit under strict conditions, is sending out entirely the wrong message.
Let us not kid ourselves: this is populism at its worst and the legislation was designed entirely to win votes at the cost of South Africa’s reputation internationally as having world class financial institutions.
As CEO of Debt Rescue, one of the largest debt counselling companies in South Africa, we deal with deeply indebted consumers every day. We know their finances intimately and we know how they think.
Not a free pass
While the more financially astute among them will understand that this legislation is not a free pass to stack up more debt in the hope that those debts will be forgiven, there are many out there who lack that knowledge and who will incur more debt plunging themselves even deeper into debt.
What is desperately needed is for everybody involved in the debt cycle to reach out to consumers in order to educate them on the finer points of the financial system including how to make debt work for them. In this case, the state should take the lead and introduce basic financial knowledge as a school subject.
Let’s not kid ourselves: South Africa is in deep trouble. With the state’s debt mounting up at an alarming rate and consumer debt at an all-time high, this is not the time to play populist politics with our financial systems.
*Neil Roets is CEO of Debt Rescue, a lawyer by profession and Qualified Solicitor of England and Wales. Views expressed are his own.