An evaluation of the South African National Credit Act and the implications for credit users

ENGLISH ABSTRACT: The National Credit Act came into being on the 1st of June 2007 and besides its other objectiveswas intended to make credit more accessible to all South Africans, to stop unreasonable practicesby lenders and to protect consumers against reckless lending. This research study investigates thecredit environment for the period since the implementation of the Act up to the fourth quarter of2009 to determine whether South African credit users are indeed better off or whether we areheading for a credit crisis.A literature review was conducted to investigate the extension of credit to households during theperiod under review and to investigate consumers’ ability and willingness to repay their debt. Dueto the global and local financial crisis that happened during this period and the losses and wealthdestruction that ensued, the research was extended to consider the influence of themacroeconomic situation on the debtors’ ability to honour their debt commitments.To determine whether South African households are heading for a credit crisis the researcherreviewed literature relating to the financial vulnerability of households, the application of theirmonthly disposable income, the main reasons for entering into credit agreements, and lastly theextent of over indebtedness.The findings indicate that credit has indeed become more accessible to all South Africans as thenumber of credit active consumers continued to increase from quarter to quarter. With regards tothe cost of credit and the minimum qualifying criteria, credit also became more accessible asindividuals earning as little as R1 500 per month became eligible for credit and store cards thatused to be exclusive to higher income earners. During the period under review the standing ofcredit active consumers continued to deteriorate with only 54% of credit active users classified ascurrent at the end of the period, almost 10% lower than before the implementation of the act.It was also found that macroeconomic influences from around the world had a real influence on theability of credit active consumers to honour their financial commitments. Increased interest rates,inflation, higher transport and energy costs, unemployment and many other factors influenced theincome available for and the ability to repay debt over the period under review.Lastly it was found that households are increasingly vulnerable to any changes in their income,expenses, savings or debt position. It is increasing to such an extent that more than 50% of allcredit active consumers surveyed during a previous study admitted to borrowing in order to re-paydebt and that a relatively large percentage of users are committed to debt repayments for morethan 100% of their monthly income. These findings support the opinion that a credit crisis is on theloom in the South African credit industry.Due to the relatively short period covered by the research stretches and the multitude of incomegroups and credit agreements included, more research is needed to make specificrecommendations to improve the position of credit active consumers. The challenges facing theindustry are further complicated by the need credit and other needs of the lower income earners,the required price-for-risk-policies of credit providers and the low levels of financial educationamongst users. All three these themes require more research.