Regulation of Micro-Lending Industry: briefing by Minister of Trade and Industry

Meeting report

TRADE & INDUSTRY PORTFOLIO COMMITTEE
25 September 2001
REGULATION OF THE MICRO-LENDING INDUSTRY AND THE MICRO FINANCE REGULATORY COUNCIL: BRIEFING BY MINISTER OF TRADE AND INDUSTRY

Chairperson

· In general, SA faces the vexed problem of balancing the need for micro lending while nevertheless making sure that it is not harmful to society, and that the finance is channeled into investments in durable assets and productive entrepreneurial activities.
· 'Saving' is a complex problem in a society with such wealth inequality, a history of lack of security of tenure, where normal development and asset accumulation has been curtailed for decades.
· The impact and role of gambling on indebtedness and its relation to poverty are burgeoning issues that need to be dealt with
· An important outcome of an attempt to regulate is insight into what is happening at the lower income strata of our society, and this report shows our progress and developments within this area.
· The approach of setting up a self-regulatory authority came from the 1999 Exceptions notice which amongst others exempted micro-lending from the Usury Act, made registration necessary to carry on this business, created the MFRC, created minimum criteria for the making of loans, and declared some practices illegal e.g. blank forms, handing over of bank cards and pin numbers.
· The reason for the new dispensation was that if the private sector wanted to lend money it should do it with proper risk assessment and risk relationships. On the consumer side this also required education.
· The fact that some banks have also entered the market is interesting and promising
· Investigations and prosecutions are taking place regarding irregular practices
· Studies on indebtedness have been initiated but are hampered by inappropriate national statistics which need to be more specific, though preliminary findings show that householders/ borrowers seem to be more sensible in general than they were given credit for
· The national loans register would allow a lender to check on the viability of a borrower for incurring further debt. This is patronising but necessary.
· The question of a cap on interest as mooted around 10 times prime will be decided only later next year, though the Minister is pre-disposed to this sort of measure.
· The Minister's conclusion is that self-regulation is a good process, but there has been no major change in the industry as yet.

Discussion
From the floor:
· Don't these exemptions deplete the Fiscus? Are they sensible and should regulation not focus on promoting productive loans and not consumptive loans?
· The banking industry discriminates against emerging business people because they cannot come up with security required for loans. What can be done?
· Also what role can MPs play to oversee the industry and assist the Department?
· Prof Davies asked regarding the reining of the interest rate cap to encourage the shift to productive loans.

The Minister responded:
· In principle the distinction between consumptive and productive loans and the streaming toward the productive, is to be pursued, but in practice it is difficult to regulate because of the fungibility/interchangeability of cash i.e. one can never know conclusively where the funds will be spent.

· Money lending is one of that category of the 'oldest professions', and one must act within what is reasonable and possible when regulating these. The main target for now is that of registration; if this occurs then all parties are in a more secure arena.

· As to the difficulty of security for bank loans, the average loan is R970, which is not a typical bank loan, and not linked to security against an asset, but rather to cash flow streams. Banks can actually be more facilitative to the consumer, because they could provide a whole range of loans, with different criteria for different types of loans. Business loans would require for instance an approved business plan. This assists the consumer in risk assessment.

· MPs can facilitate the legislation by helping constituents knock on doors that would otherwise be shut, by speeding up processes, finding abuse and lodging complaints.

· Micro lenders are not banks; they do not take deposits and as such have to be regulated separately.

· Further to the issue of consumptive vs. productive loans, the entrance of banks into the micro-lending arena will provide more scope and wider choice of lenders and this will facilitate a wider more productive-orientated use of the lending industry.

Further questions from the floor:
· What about the exploitation of pensioners by institutions that offer management of such funds, but take a huge cut before payout?
· On the issue of loans from employers, do these not also need to be regulated?
· Mr. Durr from the floor asked whether the DTI was indeed the most appropriate department to deal with the micro-lending regulation, as opposed to Finance. He suggested that a general citizens' advice bureau be set up and manned possibly by graduating commerce students or retired business people in conjunction with NGO's.
· Why did the courts object to the capping of the interest rate?

The Minister responded as follows:
· Both rich and poor need short term, small amounts of cash. If one operates a bank account one does this through one's bank. Most of the population looks elsewhere and the government can't prevent this, since there are genuine needs involved. But the industry will always go to the most reliable cash flow source i.e. wage earners or pensioners, and these vulnerable groups need protection e.g. the Public Service corruption in the former homelands. The regulations require that lenders must follow procedures, which protect but do not over restrict.

· It is irresponsible for an employer to give cash loans, and if they do so, then the government has a responsibility to stop and/or regulate this practice.

· Regarding jurisdiction, the minister noted that Trevor Manual would certainly not be inclined to accept this task. The DTI handles broad based commercial and economic activities; the Treasury has responsibility for systemic problems within finance. Joint jurisdiction is not uncommon, and problems have occurred where there is a lack of harmonisation e.g. Masterbond. But DTI has the infrastructure of inspectors for actual commercial institutions already and is so better placed than Treasury to handle this task.

· Objective advice is crucial to the success of regulation, though it would be unwise for the regulator to advise the individual on which lending institution to choose. A network of consumer advice bureaus is essential and NGO's with a proven track record could be in spanned for this task.

· The court ruled that there was insufficient depth in the studies done to rule on the capping issue. The DTI needed to find more information and statistics. Capping is risky because it can create a distortion in the market. If one caps it wrong i.e. too low, then one encourages illegal activity.

Questions from the floor:
· Why are there still unregistered micro lenders?
· Is the micro-lending industry that important?
· What can be done about the impact of blacklisting caused by micro-lenders?
· In rural areas, pensions and other payments takes place by delivery of cheque; the only place to cash such cheques is the local general dealer. These dealers sometimes ask up to 17% commission for this service. There is vast indebtedness to such dealers and does this fall under regulation of micro lending?

The Minister responded:
· Banks in general are not really equipped to go into this field, since the cost of administering small loans is very high - e.g. too many small loans was the downfall of African Bank. Banks however who have set up appropriate IT structures etc are far less likely to exploit their borrowers than other participants.

· It is a good proposal to use commerce students to man public advice bureaus.

· The phenomenon of traders being the closest 'banks' in rural areas is a worldwide one, and departments dealing with social development must protect the pension system. It is not DTI's job to tell anyone what to do with his or her money. If there are complaints however, these can be investigated. Cashing of pension cheques needs to be regulated by the pensions authority. If however, a dealer is lending money, then he must register. One must distinguish between cash lending and pension payouts.

· The reason for unregistered lenders is that perhaps the prosecutions process is slow. The DTI is working with the commercial crime unit and specific prosecutors to speed up the process.

· The problem of debt does not only start with micro-lenders, but with other forms of debt including HP. One must be careful of making one thing illegal and creating further problems through this. Employer based lending must be regulated and the employer should register if he attempts to offer a better alternative to regular lending institutions. The problem once again is not the lending per se, but the use of fair contracts and full information to the borrower. The problems include irregular use of consents to judgment and the holding of bankcards and pin numbers. Magistrate's courts should throw out cases based on these spurious practices.

Questions from the floor:
· Are there workshops for educating citizens and organisations?
· Rural area problems must be addressed how?
· Micro finance affects the poorest of the poor; surely the interest rate must be capped - such as no more than 2.5 times the prime rate?. SA has some of the highest interest rates in the world and one should squeeze out these bloodsuckers - what is the international experience regarding capped interest rates?

· What is the impact of gambling on debt?

· How does consolidation of debt effect indebtedness? Is this illegal?

The Minister replied:
· It is impossible for DTI to reach all areas of the land, especially the rural areas. The task of education and advice falls to community leaders e.g. church leaders, NGO's and MP's, trade unions, etc.

· Together with Banking Council, we are looking for ways to change the structure of banking so as to lend to small businesses more effectively. The industry is not all bad and it would be a mistake to strangle it out of existence all together. There exists a need and Banks can't solve this problem. Banks can change their focus to lending on the security of projected income streams not necessarily only on capital security, though they are still not ideally suited to micro-lending.

· Micro-lenders do not go to the poorest of the poor, because there is no money there. The bulk of the industry goes to where short-term lending is, that is, where there is cash flow such as pension payouts. However the DTI will inspect and regulate where abuse is the greatest, especially where it affects the poor.

· On international experience the lowest interest lending rate is 7 % above prime in Brazil. One must remember that prime is linked to the blue chip borrower, and most borrowers in the micro-lending game are not. Interest rates must therefore be higher. The Minister is predisposed to capping, though 10% is not an automatic target. And for the record SA does not have amongst the highest interest rates in the world; it is the lowest in Africa by far, and comparable to South East Asia. The Usury Rate has dropped from 30% to 21% over the last 4 years.

· Regarding gambling, no study has been done to show that we are the most pervasive in this field; the Australian limited payout industry is vast as well as gambling in Hong Kong. One should be cautious with bland, unfounded statements based on out-dated situations.

· Debt rescheduling is a very useful exercise and is actually the only way to get many people out of their problems. Consolidation of debt is outlawed when it is done for reward, but some institutions are exempt. They can nevertheless be investigated under the Unfair Business Practices Act and the Usury Act.

· Regarding blacklisting, the Committee has started investigating the Credit Bureau and will have a report out early in the next year, which will recommend regulation and a code of conduct.

· In conclusion, the DTI's reaction must not be to root out and outlaw micro-lending, but rather to regulate and control this necessary activity. Lending is not the problem per se, but rather the fairness of contracts and misinformation surrounding the practice. Competition from Banks is good for the industry in that it provides a benchmark and a choice to the consumer. Prosecutions will get rid of the bad apples. Reckless lending is a new concept introduced by the DTI and can be prosecuted.

Appendix:
MINISTER OF TRADE AND INDUSTRY PRESENTATION ON MICROLENDING
25 SEPTEMBER 2001

INTRODUCTION
In June it was two years since the publication of the revised Exemption Notice of 1 June 1999 and the establishment of the MFRC. The revised Exemption Notice focused on the following issues:
• It defined a category of micro loans that qualify for exemption from the Usury Act;
• It required that all entities that wish to grant such micro loans register and be regulated by the
MFRC;
• It prescribed the minimum exemption criteria for microlending with the focus being on full disclosure; and
• It declared certain practices illegal, including making use of the borrower's personal information such as the retention of a borrower's bank card or PiN number and the utilisation by the lender of blank process documents.

OPERATIONAL PROGRESS (as of 3l July 2001)
Total Registrations: 1,263 Lenders (195 deregistered due to consolidations) 6,808 Branches

Type of Lenders: Includes 9 banks, Largely Close Corporations

Total Disbursements: R13, 1 billion
Average Loan R974

Total Number of loans: 13,5 million

b. Impact on Consumer Protection
Total Number of Calls Received (MFRC): 26,480

Total Complaints: 5,155

Type of complaints:
Disclosure 33%
Cost of Borrowing 24%
Unregistered lenders 19%
Payroll Deductions 16%
Cards and PIN #s 11%

c. Investigations and Prosecutions
Seven (7) small and medium accounting firms engaged by the MFRC throughout the country

Total Investigations (104)
Total Hearings (9) 1 deregistration, 8 fines(R1000- 25000)
Scheduled Hearings (30)

CRITICAL ISSUES
Issue Payroll Deductions
Action
- Payroll Deduction Regulation 2000 limits total # of deductions (25% of gross pay, min take-home pay R750)
- access to facilities dependent on willingness to consolidate loans for overextended clients

Issue Predatory Lending: retention of Cards and PINs
Action
- prosecutions by MFRC

Issue Predatory Lending: consent to judgments
Action
- Justice Department and Magistrates offices alerted and sensitized on the issue

Issue Predatory Lending: indebtedness
Action
- National Loans Register to be instituted to enable lenders to properly assess ability of clients to pay

Issue Consumer and Lender and Compliance Officers' awareness
Action
- concerted efforts on consumer education through radio, TV and newsprint;
- lender workshops (56 workshops throughout the country)
- compliance workshops for auditors and accountants

CRITICAL CHALLENGES
More effective action against unregistered lenders - Assessment of the efficiency of the Exemption
Assessment of microlending industry trends and dealing with interest rates - Understanding of linkages between lending and other areas such as microenterprises

CONCLUSION
Given the profile of the consumers that take micro loans, this higher level of regulation is appropriate. It is also worth noting that the Exemption Notice extends the regulatory net to very small loans of very short terms. We believe that our regulatory approach meets international standards. The MFRC has done a sterling job thus far.

MICRO-LENDING PRESENTATION: REPORT ON MICRO FINANCE REGULATORY COUNCIL (MFRC) AND THE DEPARTMENT OF TRADE AND INDUSTRY'S PERFORMANCE
1. Introduction
2. Operational progress
(a) Regional status
(b) Impact on consumers and consumer protection
(i) Pro-active compliance monitoring (MFRC)
(ii) Complaints resolution (MFRC)
(iii) Investigations and prosecutions (MFRC)
(iv) Complaints and inspections (Department)

3. Predatory lending and over-indebtedness
(a) Indebtedness
(b) Protective measures: National Loans Register, Reckless Lending

4. Education and Communication
(a) Consumer education
(b) Raising awareness amongst lenders, financial advisors and related parties
(c) Awareness campaigns by Department and provincial consumer affairs offices

5. Assessment of the MFRC's performance

6. Provision of housing and SME finance
Involvement of micro-lenders in SME and housing finance
Obstacles to increased provision of SME and housing finance

7. Funding
8. Interest rates
9. Conclusion

1. Introduction
In June it was two years since the publication of the revised Exemption Notice (Notice 713 of 1 June 1999) and the establishment of the Micro Finance Regulatory Council (MFRC). The revised Exemption Notice focussed on the following issues:-

It defined a category of micro loans that qualify for exemption from the Usury Act;

· It required that all entities that wish to grant such micro loans register and be regulated by a regulatory body, which status was granted to the MFRC;

· It prescribed the minimum criteria to which the micro loans have to conform in order to qualify for exemption, with the focus being on full disclosure to the prospective borrower; and

· It declared certain practices illegal, including the retention of a borrower's bank card or pin number and the utilisation by the lender of blank process documents.

The Exemption Notice established a set of regulations that were considered more appropriate for micro loans than what the Usury Act's requirements were. It also created - through the establishment of the MFRC - a mechanism for the enforcement of these regulations.

In assessing whether consumers are sufficiently protected when taking out micro loans, it is useful to assess it against an external benchmark. In this context, it is worth noting that the regulatory regime that was established complies with the primary requirements for consumer credit regulation which applies in the European Union (Refer EC Directive 87/102/EEC). The Exemption notice is by no means a "lower" level of regulation, but rather a simplified model with a higher level of scrutiny. It is also worth noting that the Exemption Notice extends the regulatory net beyond what would be the case in dispensations such as the European Union, in Australia and in the United States. This is particularly true for the regulation of very small short term loans, which in many of these dispensations would have been excluded from consumer credit laws.

Given the profile of the consumers that take micro loans, we believe that this level of regulation is appropriate. We also believe that our regulatory approach meets the standards set by "international benchmarks".

2. Operational progress
(a) Registration Status
By 31 July 2001 the MFRC had 1,263 registered lenders, representing 6,808 branches. These include 9 banks and 9 listed companies. The registered lenders disbursed loans to the value of R13.lbn in the year ending 31 July 2001, representing 13,491,000 loans at an average loan amount of R974. 195 lenders cancelled their registration and the MFRC rejected 58 lenders' applications for registration.

The industry experienced significant restructuring and consolidation. One of the short-term micro-lending groups has registered as a bank. There have been a number of
The industry experienced significant restructuring and consolidation. One of the short-term micro-lending groups has registered as a bank. There have been a number of take-overs, joint ventures and other business arrangements. These changes explain most of the cancellations of registration, which were mostly due to smaller lenders being taken over by larger groups.

Many of the largest financial institutions and retail groups have entered the market as micro-loan providers over the last 2 years. These entities have recognised that the low/middle income client base of the micro-lending sector represent the future middle class of South Africa. Any financial service provider that ignores this client base or which allows its competitors to monopolise this segment may risk losing its retail client base over the next decade. This level of entry into micro-loan provision may yet represent the most significant achievement of the credibility that the establishment of the MFRC has brought to the industry.

The clients stand to benefit from the competition amongst a number of financial service providers. Larger reputabIe entities have entered the market and have contributed to a significant improvement in conduct. Prospective borrowers can now choose between different lenders. Borrowers can also switch between service providers if they are not satisfied with the service or with the cost of the loan.

The impact that the competition amongst lenders has on product development and innovation is equally important. This may yet be the most likely source of a breakthrough in housing finance and SME finance provision in SA, a topic to which I will return later.

(b) What about the impact on consumers and consumer protection?
The growth in the industry raises some concern about the potential impact on indebtedness. Consumers are now exposed to aggressive marketing by a large number of lenders, and may be entering into first loan contracts, without fully understanding the financial implications thereof.

The following are some of the primary consumer protection mechanisms that have been introduced (on which I expand below):-

Compliance certificates for registered lenders;

Complaints resolution by the MFRC,

Investigations and prosecutions by the MFRC.

Pro-active compliance monitoring:
The MFRC requires that the auditor (or accounting officer in the case of Close Corporations) of each registered lender visit a selection of the lender's business premises and review a sample of the lender's loan agreements to determine the lender's compliance with the Exemption Notice. Based hereon, the auditor issues a report to the MFRC which indicates the level of compliance with the Exemption Notice and Rules.

This implies that there is a mechanism in place to do an annual assessment of the level of compliance of all registered lenders. It also implies that the MFRC can concentrate its efforts on the cases of serious non-compliance.

(ii) Complaints resolution
The MFRC established a complaints call centre and has received 26,480 calls from inception to 31 July 2001. Of these calls, 5,155 were complaints. The most common complaints relate to non-disclosure (33%), the cost of borrowing (24%), unregistered lenders (19%), payroll deductions (16%) and cards & pin's (11%).

The MFRC has a number of full time complaints officers who assist and advise the complainants in order to resolve the complaints. In the first instance, the MFRC thus seeks to resolve the complaints through mediation between the lender and borrower in order for the complaints to be resolved. If this approach fails, the MFRC would undertake an inspection with a view to taking disciplinary action against the lender.

Irrespective of whether or not the complaints against a particular lender are resolved, the MFRC monitors the number and the profile of the complaints against each lender. This enables the MFRC to identify those lenders that have low compliance standards or against whom certain types of complaints are frequently raised. Such cases would result in an inspection or investigation, followed by disciplinary action.

(iii) Investigations and prosecutions
The MFRC's investigation and prosecution division is managed by an Advocate, previously from the Office of Serious Economic Affairs. The MFRC has contracts with seven small to medium accounting and legal firms, to which it out sources all inspections. These firms are located in different parts of South Africa, giving the MFRC the ability to investigate institutions located in any part of the country at reasonable cost.

To date the MFRC has completed 104 investigations, most of which were completed since July 2000. Of the 104 completed investigations, 6 will not be prosecuted, 9 have been heard by the disciplinary committee, 30 cases are scheduled to be heard before the end of October and the balance will be dealt with thereafter. The cases that have been heard by the MFRC's Disciplinary Committee resulted in one lender being de-registered and the other eight receiving fines varying from R1 ,000 to R25,000.

The disciplinary hearings are conducted by an independent disciplinary committee chaired by Advocate Margie Victor of the Johannesburg Bar.

(iv) Complaints and inspections: the Department
Pro-active inspections were undertaken by the Department at more than 200 micro-lenders since 1999 and that more than 300 micro-lenders were visited following complaints lodged with the Department. Twenty-one cases against micro-lenders have been forwarded to the prosecuting authority for contraventions of the Usury Act and another 48 cases are in the process of being prepared for submission to the prosecuting authority. In some of the cases the prosecuting authority has requested the withdrawal of the matters. Further information needs to be obtained on those matters. A decision was also taken by the Department to work more closely with the commercial crime unit to ensure successful prosecutions.

Inspections were performed in cities/towns like Springs, Pietersburg, Vereeniging, Vanderbijlpark, Pretoria, Johannesburg, Steelpoort, Lydenburg, Cape Town, George, Knysna, Plettenberg Bay, Mossel Bay, Vredendal, Port Elizabeth, Uitenhage, Nelspruit and Durban.

The most common complaints are
- high interest rates (annual finance charge rates)
- consumers do not know the contents of the loan agreements (in terms of the Exemption Notice the loan agreement must be explained to the borrower)
- a copy of the loan agreement must be given to the borrower - in most of the instances the complainants did not receive their copy of the agreements.
- blank forms are still signed by consumers, resulting in the micro-lenders obtaining judgement orders against borrowers without their knowledge.
- retaining of bank cards
- non-compliance with the disclosure provisions as required in terms of the Usury Act

3. Predatory lending and over-indebtedness
One of the primary reasons for establishing the MFRC was the extent of abusive practices of lenders. This has also been one of the major focus areas since the MFRC's establishment. This include practices such as the retention of borrowers' bank cards, pin numbers and identity documents and requiring borrowers to sign consents to judgement and/ or emolument attachments orders in blank at the time of applying for a loan.

These practices are prohibited in the Exemption Notice. All nine lenders that were prosecuted were involved in one or both of these practices as are a large number of the lenders currently being investigated. A large number of the investigations that are still being processed also related to these issues.

Further to the specific action against lenders on these practices, the MFRC also conducted a special investigation into the irregular obtaining of consents to judgement and emolument attachment orders. This resulted in the Department of Justice sending a circular to all magistrates' offices in which magistrates were alerted to these practices and advised on how to deal with them.

The extent of collusion between some micro-lenders, debt collectors and court officials is alarming. It means that effective consumer protection is not dependent only upon the enforcement of the Exemption Notice, but close corporation with the Department of Justice, better enforcement of the Magistrates Courts Act and speedy implementation of the recently announced Debt Collectors Council. I am happy to note that there is close co-operation between the MFRC and the Department of Justice.

I also want to point out that considerable non-compliance was found amongst large lenders and micro-lending banks. In many cases this related to insufficient disclosure and to lenders "loading" the cost of credit with charges such as administration fees and credit life insurance. To deal effectively with credit life insurance will require changes to the Usury Act and Credit Agreements Act. This is receiving attention.

Indebtedness
As result of the ongoing concern with the levels of indebtedness the MFRC appointed the University of Cape Town's Development Research Unit and Ebony Consulting International to conduct research into this area. At the outset one needs to take cognisance of the Researchers' reservations with the statistics that are available on household indebtedness. The national household statistics do not allow for consistent and reliable assessment of household indebtedness levels. This is an area that requires attention.

Some of the most notable conclusions from the research were the following:-
· That there are clear indications of financial deepening in the South African financial sector, with broadening access to financial services;

· That there is no indication of general over-indebtedness and that, in particular, low income groups do not appear to be generally over-indebted;

That certain sub-categories in the population were highly indebted, such as government employees with loans that are repayable through payroll deductions.

The research highlighted the fact that micro-loans are only one part of a larger picture. Repayments made on hire purchase accounts, repayments on consumer credit accounts, repayments on car finance and short term insurance installments all commands large component of the low and middle income population's expenditure.

Part of the objective with future research will be to better understand the relative magnitude and consumer protection considerations related to each of these categories. This would assist in ensuring that these different categories of credit provision are regulated in a consistent and holistic manner.

(b) Protective measures: National Loans Register, Reckless Lending and "truth in lending" disclosure
The concerns with over-indebtedness and predatory lending have a common feature, being the tendency of lenders to advance loans beyond a borrower's ability to meet the loan repayments. Predatory lending is not unique to South Africa. In Japan, similar problems have lead to extensive reform of the regulatory structure for consumer lending. In the United States it was the focus of Congressional Hearings that took place during last year.

With the establishment of the National Loans Register, the MFRC responded to the primary concern in dealing with predatory lending, being the tendency to advance loans without having taken cognisance of the borrower's ability to meet the loan repayments. The MFRC has also proposed changes to its Rules in order to accommodate the National Loans Register and to deal with "reckless lending". This would mean that lenders would be compelled to assess a borrower's ability to meet the loan repayments, with reference to the borrower's commitments.

These changes are to be complemented with the introduction of a standard one-page loan summery. This will contain the essential features of each loan agreement and is based upon the "truth in lending" disclosure requirements which apply in the United States.

We have taken note of a number of lending practices that may potentially be "predatory" and undermine consumer rights. These include the manner in which credit life insurance is levied. Appropriate responses will be considered.

I believe that the introduction of the National Loans Register, the reckless lending rules and the "loan summary" represents a credible response to the treat of over-indebtedness. I will support the MFRC in their effort to do further research on the levels and trends in indebtedness. This will also allow us to assess the effectiveness of the measures that have already been implemented, to identify specific vulnerable groups and to expand the regulations where necessary.

(c) Awareness campaigns by Department and provincial consumer affairs offices
The Department and the nine provincial consumer affairs offices have distributed various documents and brochures in an effort to educate consumers about their rights and obligations in applying for loans and after the loans have been granted. The theme of International Consumers Day (15 March) in 2000 was the sensitisation and the creation of an overall awareness of their rights and obligations in the sphere of microlending.

Education & Communication
(a) Consumer education
The extension of access to credit to the broader population is only sustainable over the long term if consumers are provided with the information and financial skills to enable them to make financial decisions that are in their own best interest. This requires a concerted and on-going consumer awareness and consumer education.

The consumer representatives on the MFRC's Board of Directors have played an important role in ensuring that the MFRC gives appropriate attention to this area. The MFRC has endeavored to achieve this part of its mandate through the following strategies:-

· It developed consumer awareness material for radio and television broadcasts which were screened as 'public service announcements';

· As result of on-going interaction with the media, micro-lending issues have received a reasonable level of exposure in print and electronic media;

· Over the last nine months, the MFRC has conducted and participated in 56 consumer education workshops aimed at employers, trade unions, NGO's and provincial consumer desks. These were attended by more than 1000 delegates. Through these workshops the intention is to raise the level of awareness amongst parties that have regular contact with consumers and whom borrowers may approach with micro-lending problems.

Although consumer education is not a short-term solution for the problems that are occurring in micro lending, it may be the only feasible strategy over the long term. The MFRC thus envisages a continuation of these strategies.

(b) Raising awareness amongst lenders, financial advisors and other lender-related parties
Apart from the consumer-focused education campaign which is described above, the MFRC conducts a number of other activities aimed at increasing the awareness amongst micro-lenders and related parties of requirements of the Exemption Notice and consumer rights. These activities include:-

· Annual micro-lender workshops. (The last round of workshops were attended by more than 650 lender representatives).

· Workshops for the auditors and accounting officers of registered micro-lenders. 12 such workshops were conducted in different parts of the country.

Workshops with the compliance officers of registered micro-lenders.

Through these activities the MFRC endeavors to raise the level of awareness of the regulatory requirements amongst micro-lenders and a range of parties that are related to the micro-lending industry.

5. Assessment of the MFRC's performance against the Exemption Notice requirements
Clause 1.6 (I) of the Exemption Notice requires that the MFRC "review its own effectiveness and the effectiveness of this notice and to recommend appropriate changes to the Minister'. With funding by USAID the MFRC contracted the IRIS institute of the University of Maryland to conduct a review, with the following 2 objectives:-To assess the MFRC's performance against its mandate, and

To evaluate the state of SME and housing finance in South Africa, to identify potential obstacles to increased provision of SME and housing finance and to advise the MFRC on its role in this regard. We will return to this issue in the next section.

In terms of its legal mandate as represented by the Exemption Notice, the consultants concluded that "the MFRC had generally met or exceeded Exemption Notice requirements with regard to the operations of a micro lender regulatory institution. Its Board, structure, staffing, operations, and relations with both lenders and consumers are sound."

The consultants indicated that there are two areas in which the MFRC has not met its mandate: The MFRC did not meet Exemption Notice requirements in two minor areas:
lack of annual publishing of information regarding types of charges and average annual charges levied by each lender (clause 1.6.i of the Exemption Notice), and lack of clearance of the loan agreements (clause 2.3 ofAnnexure A of the Exemption Notice).

The consultants further indicated that:-

1. "The MFRC exceeded the requirements of the notice (but not its mandate as a regulatory institution) in a number of areas, including establishing the National Loans Register, collecting complaints on unregistered lenders and passing relevant information to DTI's Inspectorate, piloting mechanisms to enrol unregistered lenders, training magistrates, advising government on housing and SMME lending, setting up a highly relevant applied research agenda, and contributing substantively to the debate on modernising low-end financial legislation and regulation."; and

2. The consultants further suggested changes to the Exemption Notice "to name the MFRC as Inspector so it can deal with unregistered lenders, add a research and legal development function, and substantially increase the Exemption amount and time frame for housing and SMME lending. Other areas for consideration in the Rules and Annexure involve joint operations by microlenders and debt collectors, and a truth in lending requirement for all loans".

The MFRC has taken steps to address the areas where the consultants assessed it not to have complied with the Exemption Notice requirements.

Reinforcing the consultant's recommendation in respect of unregistered lenders, the MFRC has indicated its concern with the level of action against unregistered lenders. Given the level of scrutiny of the activities of registered lenders, there is a great need for more effective action against unregistered lenders. The level of scrutiny on registered lenders, cost of compliance and penalties for non-compliance is already creating incentives for registered lenders for "going underground". It is of critical importance at this stage of the industry's formalisation that there must be effective action against unregistered lenders. This would create a further impetus for the formalisation of the industry and for adherence by registered micro-lenders to the rules that governs the industry.

Provision of housing and SME finance
(a) Involvement of micro-lenders in SME and housing finance
The MFRC has been investigating the level of involvement of registered micro-lenders in SME and housing finance, and potential obstacles to increased provision of these types of finance.

The investigation highlighted that a number of lenders are involved in innovation and experimentation related to SME lending. The following are some examples:-

· Unibank is involved in a joint venture with one of the leading international micro-finance consulting groups in setting up a dedicated micro-enterprise finance company in the Northwest Province;

· African Bank is financing emerging contractors and has a loan book estimated at
around R210 million; African Bank also has a credit guarantee facility for the purchases of spaza shops from wholesalers

· One of the short term lenders are experimenting with an application of smart card technology for the provision of finance to small contractors and vendors;

· Capitec CBS (established from the amalgamation of a number of short term lenders) is in the process of setting up a finance facility for township-based vendors, which integrates the provision of working capital finance with the vendors' supply chain;

· Provident Financial, which is a subsidiary of a major US based consumer lender, has successfully targeted the informally employed and is already serving more than 35,000 clients.

These are only a hand full of examples of the growing interest in developing products outside of the conventional payroll based lending. Further indications of the commitment to this area is a project that the Micro Lenders Association launched to encourage SME lending amongst its short term lending members. The MLA, Banking Council and a number of individual lenders have sent delegates to the micro-enterprise finance conference in Frankfurt in Germany. A survey amongst the largest lenders registered with the MFRC indicated that over 90% regarded SME and low cost housing lending as a priority area, and that a five fold increase in the volume of such lending is quite possible if existing obstacles are removed.

(b) Obstacles to increased provision of housing and SME finance
However, a number of obstacles to increased provision of SME and housing loans by registered micro-lenders have been identified. Amongst these, the following are the most significant:-

· The combined effect of the R10,000 limitation on the Exemption Notice and the level at which the Usury Act interest rate cap is set, is to make a range of potentially viable housing and SME finance products unprofitable;

· Access to loanable funds is a major obstacle to increased SME and housing lending by non-bank lenders. Existing funding sources are mostly of a short term, high cost nature. This places severe restrictions on the type of lending that the entities can engage in;

· The MFRC has identified a lack of access to the payment system for non-bank lenders, unequal treatment by banks of different payment types and a lack of access to certain types of credit risk information as some of the other obstacles.

The MFRC has made certain proposals for removing some of these obstacles. A range of stakeholders is affected and we believe that further consultation is required to improve the understanding of the nature of the obstacles and the implications of the suggested regulatory changes. The consulting team to which have been referred before provided a detailed overview of the international experience in these areas. Their report will provide a basis for further discussion of these issues.

It is worth noting that a Task Group of the Policy Board on Financial Regulation (Chaired by Ms Gill Marcus) is also looking at the constraints to increasing the provision of SME finance. These different projects should lay the basis for addressing any legislative or regulatory obstacles that may inhibit the sound and desirable development of the micro-finance industry.

Funding
The MFRC is currently being funded from two sources: registration fees paid by the registered micro-lenders and an annual grant by Ford Foundation. It has indicated that it cannot expand the extent or intensity of its regulatory activities within its current funding limitations.

The Department has indicated that it is receptive to providing funding for certain parts of the MFRC's operational expenditure, which would relieve this funding constraint. The Department has requested the MFRC to present a business plan and funding request for consideration, prior to the next budget allocation.

Interest rates
The interest rate cap that was proposed in the Exemption Notice was rejected by the court. In response, the department undertook a study on interest rates which was to inform the introduction of a new cap. We took notice of the recommendations of the consultants, namely that the factors that determine cost and interest rates across different segments of the micro-lending market differs significantly. We were also hesitant to impose a cap that may have the effect of driving a section of the micro-lending industry underground, thus removing all protection from that section of the clients.

However, the Department is closely monitoring the position. It has also received a number of proposals for a special interest rate dispensation for SME and housing lending, while certain aspects of the current regulations on the calculation of the 'nominal annual rate for the total cost of credit' has not proved effective from a consumer disclosure point of view.

We are reconsidering the approach to interest rate regulation and will in due course be making suggestions in this regard.

9. Conclusion
The MFRC's mandate requires that it keep its eye on two different balls: the protection of consumer rights and the development of the micro-lending industry s~ as to increase the provision of high priority finance. The major priority is increased provision of housing and enterprise finance. We believe that the MFRC has made sound progress in all these areas and have confidence in its ability to address the challenges that remain.

The extent to which the MFRC is breaking new ground in its approach to regulating this emerging financial sector has been recognised by the MFRC having been asked to do a presentation at an International Seminar on Development Finance in Frankfurt, Germany.

I would like to complement the MFRC's Board of Directors on the role that it has played over this formative period. The consumer representatives that are represented on the MFRC's Board of Directors have played a major role in ensuring that consumer protection receives on-going attention. While the role that the micro-lending industry plays in extending access to finance is recognised and should be supported, this can only take place in an environment where lenders' respect for consumer rights is clearly demonstrated.

I also want to take the opportunity to congratulate the Micro Lenders Association (MLA) on the constructive role that it has played over the last 18 months. After initially having challenged certain aspects of the Exemption Notice in court, the MLA has clearly demonstrated their commitment to improving lender conduct and played an invaluable role both on the Board of Directors of the MFRC and in various projects that it is undertaking to foster sound industry development.

I am confident that the work of the last 2 years has laid the basis for rapid progress in all areas of the MFRC's mandate over the next year.

ALEC ERWIN
MINISTER OF TRADE AND INDUSTRY
25 SEPTEMBER 2001