Moneymen after gullible clients before laws change

Phumza Macanda

South Africa's credit providers are racing to sign up clients before a new law makes it illegal for them to extend credit to consumers deemed unlikely to pay back the money.

Lenders are resorting to mailing credit cards to prospective clients and offering them pre- approved loans in text messages and high-pressure phone calls ahead of the June 1 introduction of the National Credit Act.

"While the law will not limit these offers of credit, it will put the onus on them to disclose all the information about the total cost of credit and the interest rates," Gabriel Davel, head of the government's credit regulatory body, said.

Lenders could find their contracts declared void if they do not inform consumers of the charges and interest rates attached to loans.

Following decades of limited access to credit facilities, millions of South Africans, especially those in the emerging black middle class, have become attractive to lenders. But many potential customers remain handicapped by a lack of experience in understanding and using credit.

Fuelled by steady growth and historically low interest rates, South Africans have accumulated debt that amounts to a record 73,3percent of their disposable income.

Central bank Governor Tito Mboweni has referred to the consumer credit expansion as "madness" and warned that steps could be taken to curb this appetite.

Davel said reckless lending was rife in South Africa, with lenders not looking at consumers' credit records before granting them loans.

"They know that if the consumer defaults they can run to the courts and get a garnishee order, whereby the money comes right out of their [consumer's] salary," Davel said.

"We have over a million people who are financially stretched, whose way of living is compromised because of this," he said.

In anticipation of the new law, retail banks signed a code of conduct in March to curtail unsolicited offers of credit.

"So long as there is a perception that banks are being irresponsible, we want to show we are responsible," Cas Coovadia, managing director of the Banking Association, said at the time.

Research house FinMark Trust conducted a study that found that almost half of those surveyed either did not know what constituted bad debt or had never even heard of the term.

"South Africans still show little understanding of financial terms. Most still need basic knowledge about how to draw up a budget, what interest rates are," said Mark Napier, author of the study. - Reuters