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TRADE & INDUSTRY PORTFOLIO COMMITTEE
17 March 1999
ADOPTION OF REPORT ON BANK TRANSACTION CHARGES & SMALL LOAN ORGANISATIONS
Documents handed out:
Report on Bank Transaction Charges and Small Loan Organisations (Appendix)
This meeting has not been minuted.
Appendix: Report on Bank Transaction Charges and Small Loan Organisations
Bank charges & small loan organisations: report
Report of the Portfolio Committee on Trade and Industry, dated 17 March 1999, as follows:
The Portfolio Committee on Trade and Industry, having held hearings on Bank Transactions Charges and Small Loan Organisations, reports as follows:
Between 1 and 3 March 1999, the Committee held public hearings on, firstly, rises in bank transaction charges and, secondly, the small loan industry. The basic theme of the hearings was whether customers in general, and low-income customers in particular, are being fairly treated by financial institutions. The hearings attracted a good deal of public and media attention. Many individuals wrote to the Committee with specific complaints, and many of the most significant stakeholder organisations gave oral evidence.
1. Structural change in financial services sector
1. Structural change in financial services sector
During the course of the proceedings, the Committee became aware that there was a structural link between the two issues under examination. Formal banks are undergoing structural change, as a result, inter alia, of their increased exposure to international competition. This is leading them to introduce services to match the competition, such as fully computerised 24-hour per day, 365 days per year, on-line banking. This is requiring large investments in services, that even the Banking Council admitted were of little relevance to the majority of consumers in South Africa. This, together with a sense that the cost structure of South African banks was not as lean as the foreign competition, was leading to major revisions of service charges. Historic cross-subsidies were being eliminated and charges to customers were being raised. A more controversial issue was whether or not these increases were being loaded disproportionately on lower income people with smaller accounts, and whether or not there was a shift of formal banks out of the lower income market.
Many of those appearing before the Committee argued that the banks were unfairly treating, and indeed abandoning, lower-income customers. This was also seen as the context within which the small loans industry had mushroomed. The latter was providing much needed credit to people who would otherwise not have access to credit or banking services. The small loans industry needs to be recognised as differentiated. There are at least four discernible types of institutions serving different kinds of markets. The largest and fastest growing sector, however, is the one providing consumer credit to waged and salaried individuals. The 1993 exemption from the Usury Act for loans of R6000 or less created a gap, which were taken by many. Although this exemption had been intended to facilitate institutions providing loans to small, medium and micro enterprises (SMMEs), in fact most firms operating in this sector provide consumer credit to working people. It was here too that most of the abuses reported to the Committee seemed to occur: Exorbitant interest rates of 30% plus per month or 300% per annum; withholding of ID documents and even marriage certificates; and failure to abide by even the limited remaining regulatory requirements of the Usury Act, such as the three-day cooling-off period.
The Committee was also made aware of the fact that a number of small loans firms, including several with dubious reputations, have been granted access to direct withdrawal facilities from the government employees' payroll system (Persal). Public sector employees have as a result become a major target for such firms, and we were told that an increasing number of public servants were now having sizeable parts of their salaries deducted each month. Dubious practices by lending institutions putting pressure on clients at welfare pay-out points are further matters of concern. All of this should be viewed against the background of indications that an increasing number of poor people are falling into a debt trap.
The Banking Council stated that there was no clear pattern in the formal banks' attitude to low-income customers. They pointed out that while at least one bank was actively closing such accounts, another bank was at the same time actively targeting this market. What is important, is the trend line. Here we are not able to pronounce definitively, but feel obliged to report that there are clearly matters that ought to concern the government. It appears at the very least that the formal banking sector is not, by and large, actively positioning itself to provide an increasing range of affordable services and credit facilities to lower-income people, in particular from historically disadvantaged communities.
The Committee is of the view that there is an urgent need for a much more comprehensive examination of the needs of the community for financial services, of which institutions are doing what and of what gaps and shortcomings exist.
The Committee accordingly recommends that the portfolio committees on finance and on trade and industry of the next Parliament establish a task group to examine the structure and trends in the financial services sector, with a view to identifying options for the government to influence trends in the direction of what has been described as "lifeline" banking - ensuring that affordable services are available to an increasing number of South Africans.
The hearings provided only a partial look at what is clearly a complex issue. The following were some of the options proposed to the government to influence the industry in the desired direction:
(1) Moral suasion: The Banking Council admitted that the industry had an image problem. This, it seems to us, might create the possibility for a fruitful dialogue on the banks' social responsibilities.
(2) Using decisions on where to place accounts: The government - nationally, provincially and locally - could put its own bank accounts out to periodic tender, and make decisions on where to bank, partly on the basis of how particular banks respond to community needs. The representative of the Catholic Bishops' Conference told the Committee that, in his view, the churches would be willing to make a similar move. This suggests the possibility of the government entering into dialogue with the churches and other forces in civil society to develop criteria to put to the banks.
(3) Community reinvestment legislation: Several participants suggested the introduction of legislation along the lines of the United States' Community Re-investment Act. This would require disclosure of, and set guidelines for, involvement by financial institutions in the provision of services to low income communities. This is a matter that in the Committee's view merits urgent consideration.
2. Short-term measures
2. Short-term measures
The hearings established that there is a clear and urgent need for more effective regulation of a number of aspects of the operations both of formal banks and small loans institutions. A degree of consensus exists on a number of issues, while other matters seem to the Committee to merit urgent attention. These include the following:
(1) The creation of a credible ombudsperson for the banking industry, who is independent of the industry and can be effective in dealing with customers' complaints.
(2) Greater disclosure and transparency by all financial institutions, with clear obligations to inform customers what they will be charged for various services and when charges will be levied.
(3) A review of which institutions should have access to direct deductions from the government employees' payroll system (Persal), and of the access to, and conduct of, lending institutions at welfare pay-out points.
(4) Stricter enforcement of existing regulations, including disclosure and cooling-off provisions for loans under R6000, and prohibitions on the holding of identity and other personal documents - a more serious attitude by prosecutorial authorities to cases referred to them.
(5) Possible investigations by the Business Practices Committee of the micro-lending industry, and by the Competition Commission of the banking industry, with a view to ensuring fair competition for the entire financial service industry and identifying barriers to entry of new institutions.
3. Towards effective re-regulation
3. Towards effective re-regulation
A longer term challenge to develop an effective regulatory environment clearly exists. It is the Committee's view that self-regulation has not worked. Some micro-lending associations have codes of practice, but there is no obligation on institutions to abide by them - they can simply leave the association if they deem it fit. It is also not entirely clear that the input of consumers of credit services and other relevant stakeholders into existing codes has been adequate. During the hearings concerns were expressed that the proposed Regulatory Council may not be effective.
An evident need for legislation to provide for appropriate and enforceable regulation of consumer credit exists. This will have to provide for norms of conduct applicable to all service providers that are widely acceptable to all stakeholders, including consumer representatives. It will also have to develop enforcement mechanisms that do not depend on the government developing expensive new bureaucracies. The Committee is of the view that some of the proposals put forward during the hearings for more effective enforcement merit careful consideration, including the creation of more effective complaints mechanisms, giving inspectorates the power to levy significant administrative fines and making greater use of consumer courts. There is clearly a need also to define a role for consumer associations.
A more controversial issue was whether future legislation should impose a cap on interest rates. The Committee is of the view that while it is important to ensure that access to credit by low-income people is not curtailed, and this requires accepting that loan providers have to be able to operate on a sound and fair economic basis, there is too high a level of abuse and exploitation of low-income consumers to contemplate abandoning interest rate caps at this point. Indeed, it is our view that future legislation should provide for an appropriate and fair cap on all loans, including those of R6000 or less.
4. Encouraging alternative institutions
In addition to acting to influence formal banks, and regulating existing small loans providers, the Committee is of the view that more attention needs to be paid to encouraging the emergence of alternative institutions that may have greater potential to provide appropriate financial services to lower-income people. These include credit unions, stokvels, equity, quasi-equity and venture-capital institutions, as well as parastatal banking institutions, like the Postbank and the Landbank. The fact that the Postbank will from 1 April 1999 be transformed into a fully-fledged savings bank, offering basic banking services to historically disadvantaged communities, is to be welcomed. An investigation into legislative changes that may be necessary to encourage such institutions, and remove barriers to their effective functioning is, in our view, urgently needed.
The Committee would like to thank all those who participated in the hearings.