South Africa’s City Press has reported that the country’s National Credit Act (NCA), introduced last June to regulate the ZAR 30 billion (USD 3.84 billion) microfinance industry, has touched off a wave of consolidations as competition heats up and existing small lenders merge with or acquire others in order to buffer their loan books.
The intent of the law was to stop reckless lending and unfair pricing. It set limits on rates micro-lenders could charge customers and restricted the offering of micro-loans – that is, loans not exceeding ZAR 8,000 (USD 1,024) – to licensed institutions. For instance, a six-month, ZAR 8,000 loan is now limited to an interest rate of five percent a month, not counting initiation or service fees.
The article claims that the NCA appears to have successfully driven loan sharks and other predatory lenders out of the market (though it does not cite any statistical data to support this), due both to rate caps and competition from large banks that are able to offer lower rates. Big lenders such as African Bank, Capitec Bank, and Blue Financial Services have been doing well under the new law, as they have greater access than others to cheap capital. They too have been part of the consolidation process — African Bank, for example, acquired furniture retailer and credit provider Ellerines for ZAR 10 billion (USD 1.3 billion).
Many lenders are reported to have disappeared or been absorbed by others, but many new ones have entered the market as well. Indeed, whereas the National Credit Regulator ’s predecessor had 2,000 registered micro-lenders, the current list has 2,100. What is less clear is the future of these new lenders, especially due to the present competitive rate environment. Interestingly, it seems that many small lenders are now leaning towards offering short-term cash loans (ZAR 100 to 500, equivalent to USD 12 to USD 64), for which they can charge higher rates than on long-term loans – differentiating themselves from the established large banks in order to survive.
The numerical rise in lenders does not necessarily translate into a greater availability of credit. Thami Sokutu, an executive director of the African Bank, is quoted as saying that the amount of credit extended has actually decreased as a result of the consolidation of older institutions.
By Stephen Son
Additional Resources:
City Press: “Credit act turns foes to friends in will to survive”
Oanda: FX Converter
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