VZCZCXRO5537
RR RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #2831/01 1921451
ZNR UUUUU ZZH
R 111451Z JUL 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4474
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHTN/AMCONSUL CAPE TOWN 3059
RUEHDU/AMCONSUL DURBAN 7949
RUEHJO/AMCONSUL JOHANNESBURG 4824
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 002831 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV SF
SUBJECT: SOUTH AFRICA: CREDIT ACT PROTECTS CONSUMERS 
 
PRETORIA 00002831  001.2 OF 003 
 
 
(U) This cable is Sensitive But Unclassified.  Not for 
Internet Distribution. 
 
¶1. (SBU) Summary.  South Africa's National Credit Act came 
into effect on June 1, replacing weak and outdated 
legislation.  This Act seeks to protect primarily poor South 
Africans, who have endured exorbitant interest rates, lender 
exploitation, and rising personal debt.  The previously-named 
Micro Finance Regulatory Council (MFRC) now serves as the 
National Credit Regulator (NCR) and is charged with creating 
a national register of all loans and overseeing all credit 
issued.  The Act improves lending transparency, prohibits 
unfair contracts, bans anti-competitive practices, and 
provides means to assist over-indebted consumers. 
Significantly, the Act stipulates limits on interest rates 
and fees lenders can charge.  The lending industry and 
opposition parties have grumbled a bit about the Act's 
increased bureaucracy and costs, but most also applaud the 
protection of consumers.  The upcoming year will reveal if 
the NCR can implement the Act effectively and if the Act 
produces the desired effects. End Summary. 
 
Legislation Long Overdue 
------------------------ 
 
¶2. (U) After years of review and debate, Parliament passed 
the National Credit Bill on December 13, 2005.  President 
Mbeki promulgated the National Credit Act in March and it 
became effective June 1.  The Act's purview covers all loans, 
credit cards, leases, and retail credit, but does not extend 
to "stokvels" and other community savings groups.  The Act 
established the National Credit Regulator (NCR), which is 
charged with creating a national register of all loans and 
overseeing all credit issued.  The former Micro Finance 
Regulatory Council (MFRC) is transforming to fulfill its new 
role as the NCR.  Prior to June 1, the MFRC regulated South 
Africa's micro lending R18 billion ($2.6 billion) market 
(i.e., loans of less than R10,000 or $1,400) that served 
about three million clients.  Its role increased 
substantially as the NCR, as the former MFRC now has to 
regulate a R500 billion ($71 billion) credit market with 20 
million customers.  The MFRC has been preparing for this 
transition for some time, hiring new staff, and will phase in 
compliance through June 2007, when all sections of the Act 
come into full effect. 
 
¶3. (U) South Africa has long recognized the need for revision 
of its consumer credit legislation.  The historical 
legislation, including the Usury Act of 1968, Credit 
Agreements Act of 1980, and Exemption Notices of 1992 and 
1999, was weak and could not keep up with an ever changing 
South Africa.  As a result, primarily poor South Africans 
have suffered in the wake of exorbitant interest rates, 
lender exploitation of consumers, rising levels of 
over-indebtedness, and lack of access to proper credit. 
Therefore, in 2002, the Department of Trade and Industry 
(DTI) called for a review of consumer credit legislation. 
The review team undertook the monumental task of developing 
new legislation based on an analysis of consumer views and 
behavior as well as credit industry practices. 
 
Lenders Beware 
-------------- 
 
¶4. (U) The National Credit Act seeks to whip reckless lenders 
into shape while protecting consumers from credit woes.  The 
Act improves transparency, prohibits unfair contracts, bans 
anti-competitive practices, and offers means to assist 
over-indebted consumers.  The Act empowers the NCR and the 
National Credit Tribunal to enforce all of these 
stipulations.  The Tribunal can impose administrative fines 
up to R1 million ($143,000) or 10% of a lender's annual 
revenue, but not criminal sanctions.  One goal of this Act 
was to move away from "apartheid-era" segregation and create 
comprehensive legislation for all types of lenders. 
Microlenders were not the only ones to abuse its customers, 
as the banks were accused of charging high fees and 
"blacklisting" customers while accounting for over 80% of 
lending. 
 
¶5. (U) One of the Act's main feats was to cap microlending 
interest rates.  Under the old Usury Act, a 20% interest rate 
was the cap for normal bank loans less than R10,000 ($1,400), 
but was 17% for larger loans.  However, most microlenders 
operated under the Usury Act Exemption Notice, which meant 
they could charge any rate they chose.  Many microlenders 
 
PRETORIA 00002831  002.2 OF 003 
 
 
charged over 100% interest per annum or even 25% to 30% 
interest per month.  The new Act capped rates and fees for 
all types of credit, ranging from 21.5% to 48% at the current 
repo (repurchase) rate of 7.5%: 
 
Credit Type       Interest Limit       Initial Fee 
-----------       --------------       ----------- 
 
Mortgages         (Repo x 2.2)  5%     R1,000-R5,000 
Credit Facilities (Repo x 2.2)  10%    R150-R500 
Unsecured Credit  (Repo x 2.2)  20%    R150-R500 
New Business      (Repo x 2.2)  20%    R250-R2,500 
Low-Income Home   (Repo x 2.2)  20%    R500-R2,500 
Other Credit      (Repo x 2.2)  10%    R150-R500 
Short Term Loan   48%/yr or 4%/mo      R150-R350 
 
Note: The initial fee may never exceed 15% of loan amount. 
The maximum monthly service fee is R50 ($7). 
 
¶6. (U) The Act tasked the NCR to conduct inspections, monitor 
compliance, and investigate problems with a number of 
additional regulations designed to protect consumers. 
Additional highlights from the Act include: 
-- Lenders must report new lending within 30 days and file 
annual reports. 
-- Any contracts should use plain language and disclose all 
fees up front. 
-- Quotations from a lender must be valid for five business 
days and lenders must allow for "cooling off" periods before 
certain contracts can be signed. 
-- Lenders' advertising must disclose all offer details in 
the same size font or larger and cannot be misleading. 
-- If a lender lends money to an over-indebted consumer, the 
National Credit Tribunal could fine the lender for not 
running proper credit checks. 
-- The NCR will monitor credit bureaus to ensure they are 
using consumer information appropriately.  Consumers can 
request a credit report for free once a year, and will not 
have to pay more than R20 ($3) to check it again. 
-- When a consumer has run into trouble, a qualified debt 
counselor will be assigned to help them pay of their debts. 
The Act also speeds up the process for consumers to regain a 
good credit standing. 
 
Unfortunate Consequences 
------------------------ 
 
¶7. (SBU) Parliament's Trade and Industry Committee admitted 
that this "bill will not please everybody but reform is 
necessary."  Democratic Alliance opposition party members 
complained of the increased costs and excessive bureaucracy 
contained within the Act.  The Banking Association is pleased 
that consumers will be protected, but noted that the Act's 
demands will have a major impact on lending.  Lender 
institutions will endure one time costs, ongoing costs, and 
time consuming procedures in order to comply with Act.  It 
will be most difficult for microlenders to adapt to the Act, 
as they have limited staff and tight budgets.  For example, 
USAID partner Kuyasa Fund, a home loan microlender in Cape 
Town, worried about having the human resources to report to 
the NCR on its lending every 30 days.  Additionally, Kuyasa 
Fund will have to look for alternative sources of financing, 
as the Act forbids its historical practice of taking cash 
deposits up front. 
 
Comment 
------- 
 
¶8. (SBU) The National Credit Act is one of the many pieces of 
legislation the South Africa Government (SAG) is applying to 
protect its citizens from powerful or predatory businesses. 
National Treasury is working on drafts of the Dedicated Banks 
Bill and the Co-operative Banks Bill, which both seek to 
create more competition and offer reliable lower-cost banking 
options.  In March, the DTI also released the Consumer 
Protection Bill for comment that should provide consumers 
protection against faulty products and unfulfilled service 
obligations.  The SAG's real challenge is to balance the need 
to protect consumers and promote competition with providing 
the poor access to affordable products and services.  For 
this reason, the SAG has taken years to draft the 
aforementioned pieces of legislation.  In due time, we will 
see if the SAG has gotten the balance right with the National 
Credit Act and if the MFRC/NCR is up to the implementation 
challenge. 
 
 
PRETORIA 00002831  003.2 OF 003 
 
 
¶9. (U) Complete text of the National Credit Act can be found 
online at 
http://www.dti.gov.za/ccrdlawreview/nationalc reditact2006.htm 
TEITELBAUM