February 14, 2017

More significant changes to the Micro Finance Industry to come

Arno Bosch

Everyone involved in the granting of credit would be well aware of the so called MFSA (Micro Finance South Africa) Rates and Fees court case that has been ongoing for the last couple of years, where the MFSA sought the review of the Regulations published by the DTI dealing with the limitations on rates and fees credit providers may charge consumers.

The new rates and fees promulgated in November 2015 prescribed the following limitations on the Micro Finance Industry:

  1. Maximum prescribed interest allowed for unsecured small credit transactions (loans less than R15 000) is RR (Repo Rate) + 21% per year, previously (RR × 2.2) + 20%. Micro Lenders are currently earning 7.4% less on unsecured credit transactions;
  2. Maximum prescribed interest for short terms transactions (loans of less than R8 000 repayable within 6 months) is 5% interest on loan per month for the first loan thereafter only 3% per month for all subsequent loans within a calendar month. It was previously 5% per month irrespective of the number of loans;
  3. Maximum Initiation Fee allowed for unsecured and short term transactions is R165 per agreement plus 10% of the amount in excess of R1 000. It was previously R150.
  4. Maximum Monthly Service Fee allowed is R60 per month on a pro rata basis if the agreement was concluded during the course of a calendar month. Previously R50 and not on any pro rata basis.

The MFSA was successful in its court application and judgment was delivered by the Pretoria High Court in November 2016 effectively setting aside the new rates and fees. This was good news to the credit industry initially. Unfortunately, both the NCR (National Credit Regulator) and the DTI launched applications for leave to appeal and although their applications were dismissed, they petitioned to the Supreme Court of Appeal requesting that the matter be referred for an Appeal.

What does it all mean?

There are many Micro Lenders who are of the view that the old rates and fees are applicable due to the MFSA’s being successful in the High Court which set aside the new rates and fees Regulations. This unfortunately is not the case. As soon as there is an application for leave to appeal and if dismissed a petition to the Supreme Court the effect of the High Court Judgment (in this instance) gets suspended.  This means that the new rates and fees Regulations as promulgated in November 2015 remains effective until the matter has been dealt with by the Supreme Court.

This means Micro Lenders must charge the lesser amount of interest, as prescribed, when it comes to unsecured small loans and short term loans.  To the consumer this is great news as costs of these types of credit have effectively been reduced.

Further amendments and publications to the NCA and other high profile court cases greatly impacting the credit industry will be discussed in the next blog.  Final Credit Life Insurance Regulations just published (end of January 2017), more relief for the consumer. Stay tuned.

Although this blog focuses on the impact recent court cases and amendments to the National Credit Act (NCA) have had on the Micro Finance Industry it should be borne in mind that the mentioned impact is far wider than the Micro Finance Industry and impacts on the credit industry as a whole.

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