‘Outdated’ pricing structure is harming microlenders and consumers, says MFSA

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The “outdated” interest rates and fees set for micro or short-term loans are having a detrimental impact on the micro-finance industry and consumers, says MicroFinance South Africa (MFSA).

MFSA, which represents more than 1 500 registered microfinance credit providers, as well as service providers to the industry, has embarked on a campaign to have the Department of Trade, Industry and Competition revise the regulated rates and fees.

The interest rates and fees are set by regulations issued in terms of the National Credit Act (NCA).

A micro loan is an unsecured loan of up to R8 000 with a term not exceeding six months. The maximum interest rate is 5% a month on the first loan in a calendar year. If a consumer takes out a second short-term loan within a year, the maximum interest rate is 3% a month.

A provider of a short-term loan may charge a once-off initiation fee of R165 plus 10% of the amount above R1 000 but with a cap of R1 050. The maximum monthly service fee is R60.

The most recent revision of the rates and fees was in November 2015 – with the revisions taking effect six months after they were published in the Government Gazette.

Leonie van Pletzen, the chief executive of MFSA, said the almost decade-old pricing regulations increasingly mean the cost of providing short-term credit is not worth the risk.

Since the 2015 regulations, microlenders have faced higher compliance costs – with tighter affordability assessments, the Protection of Personal Information Act, and the Financial Intelligence Centre Act. This is on top of inflation rising each year, which impacts microlenders’ staff and other operational expenses.

Van Pletzen said the pricing regulations are making it unsustainable for microlenders – particularly those outside the major centres – to do business. They are laying off staff or closing. Worse, some are deciding to evade the regulations by “going underground” and operating as loan sharks, charging exorbitant rates and fees.

MFSA says risk-aversion among microlenders is having a detrimental impact on consumers.

“With fees remaining unchanged and the costs of granting credit rising every year, credit providers are forced to reduce risk. The stagnated pricing and stringent risk assessments have negative implications for many South African consumers, in that credit is inaccessible to them and they are financially excluded,” Van Pletzen said.

According to the MFSA, data from the quarterly Consumer Credit Market Report published by the National Credit Regulator (NCR) shows there has been a surge in the demand for credit since the pandemic. However, there has also been a sharp rise in rejection rates.

“A widespread risk adjustment on the issuance of credit is resulting in more applications being rejected and is contracting the formal lending market. This is forcing consumers into an informal market, where providers are not bound by the regulations of the NCA,” Van Pletzen said.

“As the rejection rate continues to climb, this in turn affects the accessibility of credit for a large portion of the population. The consumers whose applications are rejected are largely middle- to low-income earners and prevents the majority of working South Africans from accessing finance, building wealth, and ultimately boosting economic growth.”

A statement by the MFSA quoted Brett van Aswegen, the chief executive of Wonga, as saying: “Unless the pricing is re-evaluated, we are going to see a burgeoning financial exclusion crisis where the wealthy enjoy an artificially low cost of credit, while the working class are excluded, or worse yet, are forced to access high-cost credit from unregulated informal lenders.”

Regulation 45 of the NCA Regulations issued in 2006 states the NCR must review the interest rates and fees at least every three years and advise the Minister of Trade, Industry and Competition of any changes that may be required.

Reviews have been conducted since 2015 – with the NCR publishing a circular in August 2021 calling on stakeholders to provide input on the prescribed rates and fees. However, the rates and fees were not changed.

It appears the NCR has placed the ball in the microlending sector’s court to make a case for a “more realistic” pricing structure.

To this end, the MFSA has commissioned research that will ascertain how the current pricing structure is affecting consumers and microlenders. The results of the research project are expected to be released in about six months.

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