Rising levels of household indebtedness are a major worry in South Africa, a worry that has been escalating with almost every piece of new data released. In particular, many worry that low-income workers are being subject to abusive lending practices – lenders using garnishing orders inappropriately, lending too much, ignoring the impact that loans will have on take-home pay and so on. Government has begun to take these concerns more seriously, releasing a statement promising new reforms, rules, and regulations to reduce the impact of lending on vulnerable consumers. According to David Woollam, former CFO of African Bank, this news out of government is very encouraging. Government has said that it plans to address issues that have plagued the National Credit Act such as offering a clear affordability test for lenders to use prior to lending. Hopefully, once these and other new rules come into play, the scourge of abusive lending, made so evident by events on South Africa’s mines, can be addressed. – FD
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GUGULETHU MFUPHI: Government is concerned about the high levels of household debt and over-indebtedness. In addition to broader financial sector regulatory reforms, they say an immediate set of comprehensive steps is necessary to deal with the problem of present and future household over-indebtedness. David Woollam, former CFO of ABIL, joins us on the line now for more. Looking at some of the announcements that have come through from government and the pointers they’ve given, I take it this is a positive as you have also been calling for more involvement from government regarding curbing over-indebtedness.
DAVID WOOLLAM: Yes, thank you Gugu. I think it’s a very encouraging statement and what I’m most pleased about is that the statement was actually put out after a full cabinet meeting, so we can take from this that this issue really has been escalated now to one of national importance. The cabinet has authorised both the Ministry of Finance and the Ministry of Trade & Industry who together, cover all the regulatory functions that govern the credit markets, so we are very encouraged and hopeful that we can now see some concrete steps towards dealing with these very concerning issues.
ALEC HOGG: Take us through the two big issues, starting with reckless lending.
DAVID WOOLLAM: We’ve discussed this before and I think reckless lending has been a problem really since the introduction of the NCA in that it was never clearly defined how/what would construe an affordability test. There was a very subjective test and what we’ve seen in the last six years is credit providers continually pushing the envelope, so to speak, and increasingly lending people larger and larger amounts for longer and longer terms, and increasingly up larger proportions of their net pay. We’ve been calling for some time – in the firm that I’m involved with, Summit Financial Partners, that we need an objective test so that there’s a level playing field. If a large lender were to be responsible and pull back on lending, all that happens is that other lenders come over the top and use that affordability to make further loans. We therefore need everybody to be on the same level playing field with one clear set of rules that makes sure that only a certain proportion of people’s income can be allocated to lending or committed to lending repayments.
ALEC HOGG: That’s good news, David. The issue that many are talking about within the industry though, is the interest rates are regulated – everybody knows that – but the personal insurance that is sometimes put onto the loans, is not regulated. In fact, we’ve seen instances…I think you’ve even reported it yourself – a company like Lewis going over the top here. Is there anything in what the DTI and Treasury have said to address this?
DAVID WOOLLAM: They make a statement where they talk about reviewing the regulatory framework for credit insurance policies. I have to say it’s a little bit vague, and one can’t really read anything concrete into this, and so there’s still I would say, a lot of work that needs to follow in the New Year, to turn these statements of intent into concrete actionable steps. I am however, encouraged that they’ve now put a marker down and we really hope that they will follow up with committed actions because we really do need these issues to now be dealt with.
GUGULETHU MFUPHI: David, looking at government calling for all corporates and companies to investigate the legitimacy of garnishee orders, surely this is a big game changer after what we’ve seen in the mining industry in Rustenburg.
DAVID WOOLLAM: Yes, I think it’s a very powerful statement they’ve used here. One can regulate, what they’re really doing is harnessing the power of corporates – the many thousands of corporates out there – who are a party to these emolument attachment orders. They encourage them to use either their own internal processes, or for that matter, companies like ourselves and other companies who provide outsource administration services, to audit and to validate these garnishees to ensure that there are no abusive practices. Government has said that it is going to lead by example, and implement similar proposals early next year, so I think this is a huge step where employers can take a much more proactive role in protecting ordinary citizens of South Africa by providing these types of protective mechanisms. They have the power to do it and I think it’s something that can be widened, and we think employers are going to play a critical role in helping their employees to have better protection and manage their financial affairs better going forward.
ALEC HOGG: What’s the implication of all of this likely to be on the listed companies: Transaction Capital, Capitec, and your old firm – ABIL?
DAVID WOOLLAM: Personally, I think that a more legitimate industry with clearer guidelines will be good for the industry in the medium to long-term, because it will eliminate the growing number of small and unscrupulous players who are acting with total impunity to the law. Whilst some of the bigger players are really trying hard to play by the rules, it’s very difficult when others are playing dirty around you. Yes, there’ll be some adjustment by the big players, they’re going to have to modify some of their business practices, and most certainly, on reckless lending, there’s going to have to be a more considered approach to how much you can lend. However, I really do believe that the long-term sustainability of the industry will be significantly enhanced by these measures. It will also result in a more profitable and a more stable industry, going forward.
ALEC HOGG: Thank you, Dave. David Woollam, the former Chief Financial Officer at ABIL.
