Debt relief a double-edged sword for South Africans living on loans

Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since lawmakers began looking at debt forgiveness in 2016. (Reuters)
Updated 04 November 2019

Debt relief a double-edged sword for South Africans living on loans

  • Third of population rely on loans to survive — FinMark Trust
  • New credit law aims to protect vulnerable with debt relief

JOHANNESBURG: Solani Rivele, a single mother of four, earns about 800 rand ($55) a week but owes 100 times that amount in loans. Millions of South Africans like her rely on credit to feed their families.
Rivele has borrowed around 80,000 rand since losing her job as a security guard due to injury in 2016. Now she owes around 3,500 rand in monthly instalments, more than her monthly income.
“I can’t afford to pay because I’m a single parent, I’m the one who is providing food on the table,” the 44-year-old said in a shopping center on the outskirts of her home township of Alexandra in Johannesburg.
“I can’t sleep.”
The situation of people like Rivele shows both the potential benefits — and unintended consequences — of a new law signed by President Cyril Ramaphosa in August, aimed at protecting vulnerable borrowers.
The National Credit Amendment (NCA) comes as some lenders make healthy profits on loans while many of the country’s poorest people spend huge chunks of their income on repayments. It could see some South Africans have their debts suspended or wiped entirely, and force more responsible lending.
This could be good news for many who, like Rivele, are stuck in debt traps. However, a number of big banks told Reuters that the new rules, and the potential risks entailed for lenders, meant they had or would cut back on lending to those low-income customers who might qualify for relief in future.
“You are asking yourself, do you want to play in that particular market, or do you move away?” said Gerrie Fourie, CEO of Capitec, South Africa’s fifth-largest bank.
This could cause serious difficulties for some families in a country where the unemployment rate is almost 30% amid sluggish economic growth, living costs are rising, and millions of people cannot make ends meet.
Around a third of the population rely on loans for necessities like food, according to financial inclusion organization FinMark Trust.
African Bank, a smaller lender that targets low-income consumers, said it already had and would further reduce its lending to qualifying borrowers in response to the NCA.
Arrie Rautenbach, the retail bank CEO of Absa, told Reuters it would cut back on new lending to the riskiest borrowers among those who qualify for NCA relief, while Jacques Celliers, his counterpart at another of South Africa’s big four lenders FirstRand, said it had already gradually trimmed new lending to the group in anticipation of the law.
Capitec said in August it had, over the past two years, reduced the proportion of borrowers who would qualify for NCA relief in its lending book to less than 5%.
Fourie told Reuters the figure has previously stood at 12-15%, with the reduction mostly driven by a deteriorating economy, but with the upcoming credit law also a factor.
The other two members of South Africa’s big four — Standard Bank and Nedbank — said they were watching how the situation developed.
Short-term credit, the type of credit most commonly held by the poorest borrowers, has been squeezed since lawmakers began looking at debt forgiveness in 2016.
It dropped from 3.64 billion rand in the final quarter of 2015 to 2.27 billion rand in the second quarter of this year, data from South Africa’s National Credit Regulator (NCR) shows.
Cas Coovadia, who heads the Banking Association of South Africa, said the law would either raise the cost of credit for some of the most vulnerable borrowers or stop banks lending to them.
This risks some being pushed back into the informal sector, dominated by a large network of illegal loan sharks known as mashonisas, Coovadia, bank executives and some debt counsellors say.
“You don’t want people to end up in the informal sector, that is never good,” said Absa’s Rautenbach. “It’s a very bad unintended outcome.”
This was echoed by Brett van Aswegen, South Africa CEO of payday lender Wonga. He said his company’s research showed mashonisas were already widely used, adding it would be “naive” to think consumers in need of cash would not go there.
Mashonisas like 31-year-old Dani, who operates in and around Northam, a mining town in the northern province of Limpopo, commonly charge interest rates as high as 50%, and sometimes use violence to get their money back, according to debt campaigners.
Dani, who declined to give her surname as she is breaking the law, takes identity documents and bank cards as security, and if clients don’t pay on time, hikes the interest to 100%.
It boosts her business when people can’t go to the bank for loans, she told Reuters.
“If the economy is bad, it is good for me, like if there is a strike at the bank, (customers) have to come to me,” she said.
The NCR, and Clark Gardner, CEO of consumer advice firm Summit Financial Partners, disputed that borrowers would be pushed into the hands of loan sharks and said it would not be a bad thing if they had less access to credit.
Lesiba Mashapa, NCR company secretary, said big lenders granted loan sizes he viewed as excessive.
Gardner provided Reuters with loan agreements from two big banks in 2016 and 2017 respectively, with repayment periods of three and four years, where the cost of credit — interest rate plus charges — was 60% and almost 100%.
Differential Capital, an asset manager, agreed in a report published in August that irresponsible unsecured lending was far from the preserve of mashonisas, with formal providers “preying on financial illiteracy.”
The NCR moved to protect borrowers in the wake of a leap of almost 290% in unsecured lending between 2007 and 2012 following measures to tackle racial discrimination in the credit market.
Differential Capital’s report said two-thirds of the 7.8 million, usually low-income, consumers with unsecured loans spent more than a quarter of their net income on servicing their debt, while around half are in default.
The new law will see the credit regulator take over debt counselling for indebted consumers earning less than 7,500 rand per month — who are largely unable to afford private fees — and with unsecured loans of less than 50,000 rand.
It will allow all or part of their debt to be suspended for up to 24 months and wiped entirely in some circumstances, for instance if they lose their job.
Estimates vary, but the National Treasury projected in October 2017 that up to 20 billion rand ($1.3 billion) of consumer debt could qualify for forgiveness. That’s small in an overall consumer debt stock of 1.9 trillion rand.
Brendan Pearce, chief executive of FinMark Trust, said measures to open up the credit market in South Africa had worked “almost too well.”
He said that while the NCA credit amnesty could provide some short-term relief, it was not a long-term solution because so many people depended on debt to put food on the table.
“I can’t sit here and say we shouldn’t be allowing more credit to consumers who otherwise wouldn’t be able to survive.”
More was needed to tackle the problem, Pearce added, including working to address its roots: the state of South Africa’s economy.


Alibaba confirms huge Hong Kong public listing worth at least $13bn

Updated 15 November 2019

Alibaba confirms huge Hong Kong public listing worth at least $13bn

  • Over-allocation options could take the total value to more than $13 billion, making it one of the biggest IPOs in Hong Kong for a decade
  • Alibaba Chief Executive Officer said the group wanted to participate in Hong Kong’s future

HONG KONG: Chinese technology giant Alibaba on Friday confirmed plans to list in Hong Kong in what it called a $13 billion vote of confidence in the turbulent city’s markets and a step forward in its plans to go global.
The enormous IPO, which Hong Kong had lobbied for, will come as a boost for authorities wrestling with pro-democracy protests that have tarnished the financial hub’s image for order and security and hammered its stock market.
Alibaba will offer 500 million shares at a maximum of HK$188 apiece to retail investors, the company said. The number eight is considered auspicious in China.
Over-allocation options could take the total value to more than $13 billion, making it one of the biggest IPOs in Hong Kong for a decade after insurance giant AIA raised $20.5 billion in 2010.
Alibaba had planned to list in the summer but called it off owing to the city’s long-running pro-democracy protests and the China-US trade war. The US and China are now working on sealing a partial trade deal.
Daniel Zhang, Alibaba Chief Executive Officer, said the group wanted to “contribute, in our small way, and participate in the future of Hong Kong.”
“During this time of ongoing change, we continue to believe that the future of Hong Kong remains bright,” he said.
The firm’s shares are already traded in New York. A second listing in Hong Kong is expected to curry favor with Beijing, which has sought to encourage its current and future big tech firms to list nearer to home after the loss of companies such as Baidu to Wall Street.
In the statement, Zhang said that when Alibaba went public in 2014 it “missed out on Hong Kong with regret.”
Mainland authorities have also stepped up moves to attract such listings, including launching a new technology board in Shanghai in July.
The listing comes after the city’s exchange tweaked the rules to allow double listings, while Chief Executive Carrie Lam had also been pushing Alibaba’s billionaire founder Jack Ma to sell shares in the city.
“The listing in Hong Kong will allow more of the company’s users and stakeholders in the Alibaba digital economy across Asia to invest and participate in Alibaba’s growth,” the company said.
It has long been expected to launch a multibillion-dollar stock listing in Hong Kong but appeared to postpone the offering because of political and economic turmoil.
Hong Kong’s key Hang Seng Index rose 0.48 percent in morning trading following the announcement
Chinese shoppers set new records for spending on Monday’s annual 24-hour “Singles’ Day” buying spree, despite an economic slowdown in the country and the worries over the US trade war.
It said consumers spent $38.3 billion on its platforms over that stretch, up 26 percent from the previous all-time high mark set last year.
Alibaba also said it saw record amounts of cross-border sales, underlining its plans to expand globally.
“Globalization is the future of Alibaba Group. We firmly believe the marriage of digital technology and commerce will bring about unprecedented change that will not be limited by borders,” Zhang said.