Court ruling keeps lid on microlenders' interest on short-term loans

Before the introduction of the cap, microlenders could charge you as much as 60% interest a year on a short-term loan. / 123RF
Before the introduction of the cap, microlenders could charge you as much as 60% interest a year on a short-term loan. / 123RF

If you take out a short-term loan, you can be charged a whopping 5% interest a month. But, this must reduce to 3% on all subsequent microloans taken in the same year.

This is in terms of regulations introduced by the department of trade and industry (DTI) and the National Credit Regulator under the National Credit Act to cap the cost of credit. They were challenged in the high court by Micro Finance South Africa (MFSA), an organisation representing most registered microlenders in SA.

Before the cap was introduced, microlenders could charge you as much as 60% interest a year on a short-term loan - a loan of no more than R8,000 repayable within six months. The cap effectively reduces the maximum to 48%.

MFSA argued that the reduction would, among others, drive microlenders out of business and consumers to unregistered loan sharks.

The high court originally ruled in favour of the MFSA.

The DTI appealed the judgment at the Supreme Court of Appeal (SCA) which granted it leave to appeal the judgment to the full bench of the high court.

The full bench ruled in favour of the DTI and the regulator so millions of consumers of short-term loans could obtain relief from higher interest rates.

But the MFSA applied for special leave to appeal the judgment to the SCA. This application has been dismissed, which marks the end of the road for MFSA, its chief executive Hennie Ferreira, said this week.

Minister Rob Davies has welcomed the SCA's decision. "The reduction of the interest rate on short-term loans is benefiting millions of consumers, many of whom are in the low-income group of the population. This group of consumers have been exposed to over-indebtedness and the high costs of credit."

NCR company secretary Lesiba Mashapa called on all credit providers to charge interest rates on short-term loans in line with regulations.

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