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FINANCE PORTFOLIO AND SELECT COMMITTEES & TRADE AND INDUSTRY PORTFOLIO COMMITTEE: JOINT MEETING
20 June 2003
INDEBTEDNESS OF SOUTH AFRICANS: HEARING
Chairperson: Ms B Hogan (ANC)
Co-Chairperson: Dr R Davies (ANC)
Documents handed out:
The Economy and Debt (PowerPoint Presentation)
A Framework for Addressing the Debt Crisis (PowerPoint Presentation)
Micro Finance Regulatory Council (MFRC): Submission
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Micro Finance Regulatory Council (MFRC): Appendix to Submission
All three presentations drew attention to increasing levels of indebtedness among lower income households. Spending patterns appeared to suggest that this was largely a result of lifestyle choices. A more regulated system of debt administration was recommended, particularly in respect of the fees charged. Placing a limit on the total value of monthly garnishee orders as a percentage of take-home income was also mooted. The need for consumer education on responsible credit management was emphasised.
The Economy and Debt
Mr M Schussler (TRADEK) presented his data on the indebtedness of South Africans, explaining indebtedness from both a macro- and micro-economic standpoint.
The macro-economic picture was generally good. South African GDP had outperformed the world's average gross domestic product (GDP) in both 2001 and 2002. Annual growth in productivity between 1990 and 2000 was double that of the United States. Generally, South African inflation and short-term interest rates were declining. Private debt as a percentage of GDP was very low compared to other countries. Household debt as a percentage of household income was also declining.
However, the micro economic picture was less positive. While South Africa's private debt as a percentage of GDP was relatively small, a larger percentage of the population was in debt. This was evidenced by a decline in the demand for financial products and an increase in the number of civil summonses and judgements.
There had been more than a fifty-four per cent increase in judgements against debtors during the past eight years, while the average value of a civil judgement had fallen by twenty-one per cent in nominal terms to R5 500. Since judgement values were a reflection of the sector of society affected by these judgements, the burden of debt had clearly moved from the richer population to the lower income groups. A larger number of people were being burdened with a smaller amount of debt.
Meanwhile, total employee remuneration, as a percentage of GDP was the lowest since 1960. However, there was evidence that the difference between management salaries and the salaries and wages of ordinary employees had never been geater. Many benefits that employees had been used to receiving, such as medical aid and pension fund contributions, were no longer available.
Of the forty-nine countries surveyed for the World Competitiveness Report, South Africa was lowest in economic literacy and second lowest in financial education. Education was therefore part of the solution, together with broader access to cheaper financial products. Government might also need to limit the value of garnishee (monthly debt repayment) orders automatically deducted from an employee's salary. The Usury Act should be enforced and there should more co-ordination between regulatory authorities and Government departments in this regard. Micro judgements of less than R100 should be disallowed.
Mr M Tarr (ANC) suggested that garnishee orders be limited to fifty per cent of an employee's take-hoe pay and that micro judgements of less than R200 should be disallowed.
Mr B Mnguni (ANC) asked about the role of debt administrators.
Mr R Easton-Berry, Easton-Berry and Associates, explained that the collapse of what had, for several years, been a flourishing micro-lending industry had led to a significant increase in debt administration. It was difficult for Government to monitor and regulate the fees charged by debt administrators.
Dr R Davies (ANC), in his capacity as Co-Chair, asked for guidance in devising a way forward. In addition to regulating debt collection and administration, the Committee might need to examine ways of regulating lawyers. Someone attempting to recover R300 could pay ten times as much in legal fees. What could the Committee could do to address this?
Mr Schussler replied that creditors should also be regulated. Responsible organisations examined client risk before approving credit.
The Chair asked to what extent the move toward restructuring the energy sector had impacted on indebtedness.
Mr Schussler commented that salaries in the energy sector might need to be investigated since they were often far higher than the national average for the type of work conducted. Appropriate restructuring was the issue.
Prof B Turok (ANC) commended Mr Schussler on the quality of his research. He asked for clarity on the discrepancy between South Africa's positive-looking macro-economic performance and its apparently ailing micro-economy.
Mr Schussler replied that, in his view, inflation targeting was not an appropriate macro-economic tool for countries like South Africa, with so many uncontrolled monopolies.
Ms J Moloi (ANC) asked about the role of banks in debt recovery.
Mr Easton-Berry replied that debt recovery through a debtor's banking institution tended to be a long process that was not generally used.
Ms L Mabe (ANC) asked whether limiting garnishee orders could affect child maintenance payments.
The Chair enquired whether it was, in fact, possible to interfere with a garnishee order for child maintenance.
Mr Easton-Berry confirmed that maintenance payments would be excluded from any steps taken to limit garnishee orders on monthly income.
Mr Schussler commented that any steps taken to regulate credit would need to respect the confidentiality of information held by the credit bureaux.
The Co-Chair said that the Department of Trade and Industry (DTI) had drafted regulations for credit bureaux that could be viewed on the DTI website.
Mr P van den Heever, CEO: General Union, said that financial decisions tended to be driven by lifestyle choices. The various changes that had occurred in South Africa during the previous ten years had stimulated an increased demand for credit among lower- and middle- Income South Africans. This had created a debt crisis impacting on social stability, productivity and domestic growth and had even caused some banks to fail.
The General Union then made recommendations on how to address the crisis. Consumers needed to be educated to behave more responsibly. Employers needed to become involved in debt management programmes for employees and might need to be offered tax incentives to do so. The ability of creditors to garnish salaries needed to be curtailed and excessive interest rates on loans curbed. Debt administration fees needed to be capped and a limit placed on the value of monthly garnishee orders as a percentage of take-home pay.
A system of creditor intervention, providing advice on financial planning, might also need to be introduced.
Micro Finance Regulatory Council (MFRC)
Mr G Davel, CEO: MFRC briefed the Committee on overall trends in indebtedness by income category, once again drawing attention to the alarming increase in indebtedness among lower income groups.
The Chair noted the similarities between presentations that had been made by General Union and the MFRC.
The Co-Chair said that, while there was clearly a need for debt administration to be regulated, the three committees to whom the presentations had been made might not necessarily be the best platform from which to take this forward. He noted that the debt crisis among low-income households appeared to be associated with expenditure on gambling, cell phones and similar items rather than with small business or home loans. Perhaps Government needed to intervene in shifting the focus of credit available to low-income households? He then asked for comment from the presenters on the merits or otherwise of an interest rate cap.
Mr Davel replied that an interest rate cap was essentially a price control mechanism. There tended to be little or no correlation between indebtedness levels and the cost of credit. Trends among organisations offering credit and the sectors of society targeted needed to be monitored. Short-term, high-interest housing loans for lower-income families were generally perceived to entail less risk than longer-term, lower-interest financing.
Mr Van den Heever said that, in his view, there should be reasonable limits on interest charged for credit.
The Chair commented that most committee members would probably agree.
Mr Tarr said that the presenters had made a compelling case for something to be done. As a Committee they needed to find a mechanism for taking the matter forward.
The Chair agreed.
The meeting was adjourned.