Last week, the Western Cape High Court issued a judgment setting aside certain sections of the National Credit Act.
It argued that they are “unreasonable and unfairly discriminate against the section of the population that largely consists of the poorer and less privileged members of society”.
At the heart of this court case is that under section 23A(4) of the act, a customer has to provide either proof of income or a bank statement to qualify for a loan.
It was brought by clothing retailers Truworths, Foschini and Mr Price against the minister of trade and industry and the National Credit Regulator.
These amendments to the act came into effect in 2015, in order to curb reckless lending and overindebtedness, especially among lower-income earners.
Retailers have felt these changes and claim they resulted in a reduction of new accounts being opened.
The judge found that the amendments discriminate against those who operate outside the formal economy.
While there are an estimated 33 million economically active South Africans, only 24 million are credit active.
In the judgment, an example was given of a flower seller in Adderley Street who did not have a bank account.
This meant the flower seller could not prove how much he or she was earning to qualify for even a small amount of credit.
Therefore, this flower seller parent, who may need to buy school uniforms for his or her child in January, but could not pay the full amount in one go, would not get access to short-term credit due to the requirements.
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While the judge argued that current affordability requirements hamper access to credit for non-banked individuals, the reality is that, in South Africa, debt levels are so high that Parliament has held hearings to try and find ways to deal with the problem, especially in low-income households.
The SA Consumer Credit Index, compiled by TransUnion, shows that consumer credit health has increased since the amendments to the act were introduced in 2015, suggesting that they have been successful in curbing credit extension.
“This is not a step in the right direction when it comes to managing unsustainable credit growth,” argued Benay Sager, chief operating officer of the IDM Group, which owns a debt counselling business.
Sager was concerned that the argument around credit access was focused on retail accounts and not asset creation, when the average individual in debt review had over two retail accounts.
The court case would have been better argued had it been brought by credit providers offering developmental loans for microbusinesses, or for education, rather than by retailers concerned about the lack of new clothing accounts, he said.
A study by the FinMark Trust found that the easier the access to credit, the less it was used for developmental loans and the more for consumption.
So should we not rather be focusing on providing savings products or mechanisms allowing individuals to plan ahead and save for clothes and shoes without having to incur interest and loan fees they can ill-afford?
The judge argued that the current act has the potential to prevent any credit being granted to those who have historically been unable to access it.
This is “discriminating against a section of the population that represents the less privileged” and falls foul of the Promotion of Equality and Prevention of Unfair Discrimination Act.
It would be a mistake, however, to interpret this judgment as an invitation to open credit lines or lessen affordability checks.
In his ruling, the judge objected to the consultation process about the amendments and the rigid requirements of having to produce a bank statement and pay slip.
Yet, he went to lengths to state that retailers are still obliged to assess affordability.
While the judge argued that the minister should have used a more flexible approach to allow for “other similar credible information”, rather than a rigid set of requirements which excludes non-banked customers, he made it clear that credit providers must use accurate information to determine affordability.
They cannot rely solely on information provided by the consumer.
“It may be that the consumer makes a mistake, or it may be that the consumer, anxious to qualify for a loan or other credit, gives deliberately false information.”
The judge argued that regulations should require assessments carried out by the credit provider based on accurate information, but that the information does not have to be a bank statement or pay slip.
TransUnion Africa CEO Lee Naik argues that the judgment does not mean more, “easy” credit, but in fact increases the obligation on lenders to ensure they do even more vigorous affordability assessments based on different sets of data.
The credit bureau recently launched CreditVision, which uses data analysis of customer behaviour to assess consumers’ creditworthiness and their propensity to pay off their loans.
Since its launch at the beginning of February, TransUnion has already identified 3 million new consumers who, although not part of the formal economy, would qualify for access to financial products such as cellphone contracts, insurance and loans.
There are many ways to assess consumers, including those without bank accounts, based on other behaviours such as how they manage their airtime and data, pay school fees or municipal bills.
One could even assess how an individual without credit pays off lay-by items.
The question is to what extent credit providers use alternative data when business imperatives are at stake.