As the UN Human Rights Commission zooms in on the threat to human rights posed by the explosion of private debt, we, as South Africans, should do the same.
Experts are concerned that the adverse socio-economic impact of unsecured loans — loans which are not backed by an asset such as a house — vastly outweighs the benefits of bringing a historically excluded population into the formal financial sector. These loans may be worth as much as R350 billion.
A recently published report on private debt and human rights, to be presented to the UN Human Rights Council (UNHRC) in March, seeks to focus on the human cost of lending.
By framing the debate within the context of human rights, the UN report questions not whether our lending systems are beneficial to shareholders of banks and financial institutions, but whether they are beneficial to society as a whole.
South Africa’s unsecured lending industry exploded into existence after the promulgation of the National Credit Act in 2007 and has fundamentally altered the composition of the domestic credit market.
Between 2008 and 2011, unsecured and short-term credit to consumers grew by 260% to a peak of R28,3 billion, according to data published by the National Credit Regulator (NCR). Levels declined slightly in 2014 and 2016 but are soaring again.
In the second quarter of 2019, R31 billion worth of unsecured loans was granted to consumers, representing 23% of the total value of all loans granted, and surpassing, in nominal terms, (not taking inflation into account) the peak levels last seen in 2011. This excludes a further R21 billion granted in credit facilities, including credit cards, store cards and bank overdrafts which are defined separately in NCR data. Combined, the two categories represent nearly 40% of all credit issued in the period.
If fees and interest owed by borrowers are added to the debt, the outstanding value of unsecured loans may be as much as R350 billion, according to a recent analysis by asset managers, Differential Capital.
Because unsecured credit and short-term credit are not backed by a form of security, and are typified by high levels of consumer default, these forms of credit tend to be far more expensive than other forms of private credit.
“The question is when is debt good and when is it bad?” asks former banking executive turned investor and shareholder activist, David Woollam.
Differential Capital estimates that a whopping 63% of new unsecured loans are being used to refinance debt, as consumers “borrow from Peter to pay Paul”.
Erin Torkelson has shown how social grants were “transformed into collateral for credit and encumbered by debts” by Net1 which was contracted to pay social grants. Social grant recipients formed a very secure market for lenders who nevertheless charged them costs similar to those prescribed for unsecured credit in the National Credit Act.
It is “mostly an expropriation of workers’ income for the benefit of the rich. The vast majority of consumers in this space are technically insolvent, with few assets and lots of debt, and are having to work harder and harder just to stand still. The headwinds and lack of growth faced by our economy are bound to crack open this uneasy situation at some point in the near future”.
The recent growth in unsecured lending has regulators nervous, with the South African Reserve Bank ringing early warning bells.
Debt collections abuse features prominently in the UNHRC report with specific attention afforded to the South African case.
A 2018 ruling by Judge Murray Lowe, read alongside the Desai ruling, ensures that borrowers have collection judgments issued at courts they are able to access. Before these judgments, debt collections attorneys had routinely opted to secure orders against borrowers in courts far from their homes or places of work, and where court clerks were uncritical – a practice known as “forum shopping”.
“There is a ray of sunshine” in terms of SA’s private debt industry, says senior attorney at the Stellenbosch Clinic, Stephan van der Merwe. He argues that in legislation tied to the Constitution and bill of rights there has been a clear intention to protect borrowers from abusive practices. The recent judgments serve to tighten this legislative framework.
“The same outcome is being achieved, it’s just the method of doing it that has changed”, he says. “Seeing the poor as a commodity that you can pile up with credit as a way to extract value from them is the exact opposite of extending human rights.”
“The South African unsecured lending market is not sustainable in its current form. To have a sustainable market means having cheaper credit and lower defaults. Currently you have the opposite”, he says.
As citizens, too, we need to ask whether the profits we make today have come at the expense of the financial futures of poor people.