I OWE IT ALL TO YOU - JSE MAGAZINE

I OWE IT ALL TO YOU

There is no question that SA has a debt problem, but finding a cure for it is proving to be elusive

I OWE IT ALL TO YOU

In August 2013, economist Ann Pettifor, told the BBC that the UK had an ‘Alice in Wongaland’ economy – one reliant on spending sprees financed by ‘payday loans’ and other forms of debt.

If this sounds familiar, it’s probably because over-indebtedness may have become even more common. Credit itself has long been one of the principal pillars of free enterprise and personal progress, but when its flip side – debt – cannot be properly serviced, misery is the inevitable result.

Individuals, businesses and governments fret about debt. Debt bubbles can burst with biblical proportions, as seen in the global credit market crisis of 2008, which forced the world economy into recession. As the crisis developed, lenders were wont to cross the line. Even today, six years later, the world economy remains wobbly.

In the wake of this crisis, on the one hand, many large US and UK-based banks received government bailouts. On the other hand others, such as Goldman Sachs and RBS, have since paid fines running into an aggregate of tens of billions of dollars to settle allegations of unlawful conduct in the credit markets. It’s still unclear whether any lessons have been learned from this debacle. If giant banks get so messed up, what about individuals?

While SA escaped domestic banking implosions during and after 2008, there is no question that the country has a ‘debt problem’. The National Credit Regulator’s 2012–2013 annual credit report reflects the country’s personal debt of R1.44 trillion. There are officially 13.6 million South Africans in employment, but no less than 20.8 million are classified as ‘credit-active’ consumers. People crave debt – and the lending system is highly responsive.

Describing the many aspects of debt stress is one thing; finding solutions is another. Government has shown little resolution to SA’s debt culture, which has long been recognised as a deep social problem. The credit and banking ombudsmen, the National Credit Regulator, Council for Debt Collectors, law societies and courts have all dealt with the problems resulting from debt.

There is neither a one-stop solution nor a comprehensive policy response. This may be because over-indebtedness is a chicken-and-egg situation in many ways. Was it the lender or the borrower who went too far? Governments everywhere are under pressure to deal with the debt problem – something that seems to stretch back to almost the birth of civilisation. In times gone by, defaulted debtors quickly ended up behind bars and were inevitably treated as outcasts when released – powerful themes that appear repeatedly in historical storytelling.

In modern times, these individuals may escape incarceration, but their lives are deeply altered. Judgments issued against a debtor have all kinds of unwelcome consequences, including a tarnished credit record.

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‘Assistance is more commonly needed where other forms of fraud around garnishee orders have been found’

REANA STEYN, DEPUTY OMBUDSMAN, CREDIT OMBUD

Directly or indirectly, debt plays a significant role in the lives of the majority of South Africans. Many consumers base their buying decisions – especially for big ticket items such as vehicles, furniture and appliances – on the monthly cost. For decades consumer behaviour has been conditioned by retailers who emphasise ‘monthly repayments’ in large typeface, usually drowning out the cash price that is inevitably demoted to fine print.

Has debt become an incurable disease or addiction for humankind? In 2003, SA-born Pettifor correctly predicted in a book she edited, titled Real World Economic Outlook, that the credit bubble would burst. In 2006 she published The Coming First World Debt Crisis.

But does anyone listen? Earlier in 2013, Pettifor told the BBC that the UK’s debt was ‘artificial and can’t be sustained. At a fundamental level it’s quite dangerous because household debt is still 153% of GDP. There’s nothing seriously underpinning this recovery’.

She said: ‘That’s why it’s Alice in Wongaland, the confidence fairy is out there.’ (Wonga is a credit provider.) In the UK, payday loans are typically short-term debt instruments of up to around £1 000 that can be arranged within days. These loans are offered online by Wonga and QuickQuid, and physically by Cash Converters and the Money Shop.

According to the Guardian, interest rates on these loans are high. Annual percentage (interest) rates, or APRs, are usually more than 1 000% and some of the best-known firms charge more than 5 000%. Towards the end of November, UK Chancellor George Osborne announced a cap on payday loans, saying this would apply to ‘not only’ interest rates. Similar caps are already in force in many parts of Europe, Australia and the US.

Garnishee orders are another part of the debt industry that have caused some significant problems. This arises from ‘garnishment’ where (should the facts permit), a court orders a third party (the garnishee who is typically an employer) to collect money payable to a defendant (usually an employee) and to pay the cash directly to the plaintiff (typically a creditor).

There have been serious allegations concerning falsification of garnishee orders in SA. Atlas Finance CEO Jack Halfon spoke informally through a statement about allegations his company faced. ‘Neither Atlas Finance nor any of its subsidiaries have ever been involved in the production of fabricated court orders or documents as alleged in recent media reports.

‘We have reported the allegations to the Hawks and have been assisting the relevant authorities with their investigations since it first came to light just over a year ago.’

Reana Steyn, deputy ombudsman at the Credit Ombud, says assistance is provided, where possible, to victims of fraudulent court orders. She says, however, that ‘assistance is more commonly needed where other forms of fraud around garnishee orders have been found, such as forged signatures on the consent to judgement, and garnishees for loans that the consumers had not taken out in the first instance’.

SA’s attempts to regulate abuse in its microlending sector has had limited success

Over-indebtedness has even been identified as a possible reason for the explosion of tensions at Marikana, which precipitated the massacre in which 34 were killed in August 2012. During its immediate aftermath, the National Credit Regulator descended on microlenders working in the area and unearthed serious irregularities. There are a wide range of microlenders from formal, registered credit providers to ruthless loan sharks. The severe financial burdens faced by mineworkers were aggravated by allegations of serious irregularities, if not fraud and corruption, in the ‘enforcement’ of debt collections.

As for loan sharks, SA’s attempts to regulate abuse in its microlending sector has had limited success. Reports that emerged from Marikana examined informal lenders, or ‘mashonisas’, who employed various lending ‘strategies’. The common denominator was sky-high interest rates. These are typically 50% (based on capital), with R150 repayable for every R100 borrowed.

CEO of Summit Garnishee Solutions Clark Gardner says everyone should agree that SA’s debt problem is significant. ‘We’ve all been shocked by the statistics, saddened by desperate consumer stories … now it is time for regulators, industry players and other stakeholders to start applying our energy to finding and implementing real solutions.’ Gardner, who works at the interface between debtor and creditor, has identified five areas that need attention to ensure meaningful solution.

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Financial literacy education in itself is of little value. Gardner says that over-indebted consumers need more than just information – they need relief. Consumers need to trust. ‘Before punting debt counselling we need consumers who have experienced the value of debt counselling first-hand to become ambassadors to their friends and family,’ he says.

More than ‘information’ is required. Gardner says that ‘consumers need enough savvy to reject aggressive salesmen, resist endless media advertising and rebel against social pressures’.

He says: ‘An ignorant society is harder to reach than an irresponsible credit industry. The credit crisis is a result of both reckless borrowers and lenders; change needs to come from both sides.’ Consumer protection laws must be improved and ‘implemented’. ‘We have many great laws protecting consumers, but they can only work if they are fully implemented,’ he says.

In SA, the Department of Trade and Industry (dti) travelled the country towards the end of 2013, consulting members of the public and ‘stakeholders’ on the Removal of Adverse Credit Information Project.

Input was sought on the proposed removal of adverse credit information from profiles of consumers who would qualify in terms of proposals published by the dti on 30 September.

The magnitude of the issue is easily illustrated by the terminology alone. Adverse credit information, according to the dti, includes classifications of information such as ‘delinquent’, ‘default’, ‘slow paying’, ‘absconded’, ‘not contactable’, ‘handed over for collection or recovery’, ‘legal action’, ‘write-off’. The proposal also includes the removal of paid up judgements.

The project, according to Minister of Trade and Industry Rob Davies, ‘will be beneficial to both consumers and the industry’.

While this may be the case, the project deals with only a small part of the country’s giant debt industry. SA has three deficits: the government budget, the balance of payments (the country’s balance with the rest of the world), and its net household balance.

By Barry Sergeant
Image: Fredrik Broden/reneerhyner.com