Recent news reports alleging irresponsible lending and debt retrieval practices by Capitec Bank in the past have prompted me to contextualise the allegations by revisiting South Africa’s retail credit environment and reflecting on improvements in consumer protection over the years.
In the early years of our democracy, South Africa was the Wild West for consumers as far as accessing credit was concerned. Early government thinking, naively, was that extending unsecured credit to the unbanked would boost financial inclusion and miraculously uplift those disadvantaged by apartheid.
Government’s credit experiment backfired disastrously for the people it was aiming to help. In her penetrating study, “Money from nothing – indebtedness and aspiration in South Africa”, published in 2014 but based on research done in 2007 and 2008, a professor of anthropology at the London School of Economics, Deborah James, relayed heartbreaking stories of poor and working-class South Africans who had become caught in a vicious web of financial and legal woes through easy access to unsecured credit.
Capitec, founded in 2001, was a player in extending credit to the previously unbanked, but was by no means the only one. In fact, credit providers by the dozen climbed on the unsecured lending bandwagon, including the original African Bank, which collapsed in 2014 because it had unwisely concentrated almost exclusively on this market. Credit providers included retail furniture chains, which had been abusing the credit system for years, leaving thousands, if not millions, of people trapped paying off debt at exorbitant rates and subject to ruthless lawyers charging excessive fees should they put a foot wrong.
The National Credit Act came into effect in 2005, along with the office of the National Credit Regulator, and since then the credit industry has slowly come under stricter control and the criteria for granting credit have been tightened. Bigger institutional lenders, including Capitec, have generally become more responsible in granting credit – probably from a mixture of increased regulation and stricter internal risk management practices as a consequence of the 2008 financial crisis.
The regulator also introduced the “debt review” programme for over-indebted consumers, whereby a debt counsellor negotiates with credit providers for better repayment terms and consolidates your debts into a single monthly payment.
Probably the biggest wins against predatory operators have been by civil society and justice-seeking NGOs, notably the Stellenbosch University Legal Aid Clinic, which spearheaded an effort to stop the unconstitutional issuance by magistrates’ courts of emoluments attachment orders (EAOs) to claw back unpaid debts.
EAO clampdown
EAOs, widely known by the incorrect term “garnishee orders”, instruct an employer to deduct money from an employee’s salary for the purpose of maintaining children or repaying a debt.
Debt collection agencies would routinely obtain an EAO by a magistrate’s court in a district other than where the debtor lived, making it hard for the debtor to contest it, and issued by a clerk of the court instead of being subjected to appropriate scrutiny by a magistrate.
In 2016, the Constitutional Court validated a Cape High Court ruling that parts of the Magistrates’ Courts Act that allowed for these practices were unconstitutional. The effects of the judgment around the issuing of EAOs were as follows (and here I refer to a Personal Finance article of September 2016 by Angelique Ardé):
- Judicial oversight. An EAO can be issued by a magistrate only; it cannot be issued by a clerk of the court. Judicial oversight (the scrutiny of a magistrate or judge) over the execution process is required because, the judgment said, “an EAO is clearly burdensome. It severely constricts the autonomy of the debtor to decide how he or she will pay off the debt. It is also inflexible, as it does not adapt to the debtor’s changing circumstances from week to week. It goes directly off a debtor’s wages – and these wages will often form the means for the debtor’s day-to-day survival. These are all important considerations to be borne in mind when deciding whether an EAO should be granted.”
- Jurisdiction. An EAO must be issued in the same jurisdiction as the one in which the debtor lives or works. This is to ensure that the debtor is able to place his or her circumstances before the court, exercising his or her right to access justice. “You can no longer agree to a credit provider applying to a magistrate in a jurisdiction other than where you live or work for an EAO to be issued against you. If you are forced to give such consent, it will automatically be invalid,” Ardé said.
- Appropriate amount. The EAO must be of an amount that is appropriate. The judgment said a court that determines a request for the issuing of an EAO must take into account the nature of the debtor’s income and the amount the debtor needs for upkeep and to support dependants. “The validity of an EAO depends on whether the debtor has sufficient residual income to support herself and her dependants. Thus such an order may only apply to funds that are in excess of the amount (he or) she needs for the maintenance of herself and her dependants.”
* Hesse is the former Personal Finance editor.
PERSONAL FINANCE