|
COSATU Submission to Parliamentary Hearing onBank Charges, Microlending and the Usury ActPresented to the Portfolio Committee on Trade and Industry, 2 March 1999 |
COSATU welcomes this opportunity to make a presentation to the Parliamentary Committee on Trade and Industry on bank charges and usury regulation. We believe reflects a broader need to for public discussion on improved regulation of the financial services industry in South Africa. Workers and their families are sick and tired of bearing the brunt of high bank charges, high interest rates, under-servicing and the failure to properly regulate micro-lending.Table of Contents
These are issues of deep concern to working people throughout South Africa, as so many of us find ourselves paying large amounts of hard earned monies to banks and unscrupulous money lenders. For most ordinary people it is difficult to distinguish whether the source of these payments to banks and money lenders is due to high interest rates, high charges or due to a combination of these factors. For this reason COSATU has decided to focus broadly on the wide range of costs and charges associated with the accessing the financial services.
We are also of the view that the high cost of borrowing is made more acute by the the lack of effective competition within the banking sector and the Reserve Bank's restrictive monetary policies, we believe that these matters require more detailed consideration by Portfolio Committee members. Particularly as continuing high interest rates have a debilitating impact on our economy – draining the state coffers, increasing the cost of investment and contributing to economic stagnation and rising unemployment.
While we applaud the Portfolio Committee's decision to focus on the issues of bank charges, micro-lending and usury regulation, it is COSATU's view that these are all aspects of the broader question concerning the need for the re-regulation of South Africa's financial institutions to ensure that they are more accountable to the communities which they purport to serve and to ensure that their policies and practices are more appropriately oriented towards economic reconstruction and development.
This submission will be structured as follows. Problems associated with:
regulation of banks,
regulation of microlenders, and
high interest rates,
and will conclude with a summary of our policy recommendations.
The commercial banking sector is failing to provide an adequate service to the bulk of the South African public. It is under-servicing poorer communities and in so doing is limiting access to savings, transmission and credit facilities. A direct effect of this under-servicing is the mushrooming of the kind of formal and informal micro-lending practices, which are discussed in more detail below. A most telling fact, which says a lot about the present culture, priorities and policies of South Africa's banks is that since 1990, "the banks have opened more offices in 'hot money centers' – Panama, the Isle of Man, Guernsey, Jersey and the Cayman Islands – than in black townships where most of their potential customer base rests". (1)
Government’s response to the reality of the under-provision of properly regulated financial services to the bulk of South Africans, should be two fold:
Firstly, there needs to be a reform of the regulatory environment in which the financial sector operates, including both banks and non-bank financial institutions. Public discussion is required on an improved regulatory environment for the financial sector including questions of bank charges, fair lending criteria, disclosure requirements, and improved social responsibility. A collaborative Task Team including civil society and relevant government departments (including DTI, Housing and Finance) should be established to look at a more appropriate regulatory framework for the banking sector.
Secondly, the role of public sector entities in providing financial services to the people should be expanded. For example, the restructuring of the Post Office to provide improved public sector banking through PostBank and TeleBank is welcomed and must be explored further as it provides a basis for the public sector to involve itself in the extension of affordable and accessible services to historically disadvantaged communities and far flung rural areas.
With particular reference to bank charges:
According to the Consumer Institute of South Africa (CISA), bank charges amounted to about R8,7 billion of the total banking industry's earnings last year. CISA says that the banks are free to charge whatever they feel is in their interests on current accounts and savings accounts. If these commercial institutions are not regulated in terms of what they can charge and obliged to clearly explain charges to consumers when they open accounts with them, then this puts the consumer at the mercy of the institution.
Some of the key problems with regard to bank charges are as follows:
Excessive service charges which consume disproportionate amounts of the salaries of low paid workers,
Exorbitant increases in bank charges, estimated by some commentators to be as high as 150% in the last few months, (2)
Inaccessability of banks pushes people into the hands of the microlenders, e.g. through demanding high deposits before people can open savings accounts,
The majority of the people do not have sufficient information regarding the negotiation of banking fees with service providers, and
cheaper services, such as electronic banking, are usually only available to rich individuals who can afford to buy personal computers and modems to be connected to the bank's electronic banking system.
Part of the reason for the persistently high bank charges is the lack of effective competition by the banks. Banks are not attempting to attract customers by offering lower charges. This is particularly acute for low income earners, where banks appear to be making no effort to extend their services to people at these income levels, with the result that poorer people have to pay proportionally more if they wish to get access to banking services.
An additional matter of concern is the persistent wide gap between lending rates and deposit rates – where the banks charge high interest to those borrowing money, but offer low rates for those making deposits. Not only must these be a source of healthy profit for the banking sector, but low deposit rates are also not conducive to stimulating increased savings in the economy. A similarly negative pattern will emerge if a practice is allowed to develop where banks persistently maintain lending rates significantly above the Reserve Bank's repo rate.
There is a need to consider the introduction of legislation, as in other countries, compelling banks to lend a certain proportion to low income earners and small business.
It is widely recognised that the unscrupulous practices of many operators in the rapidly expanding micro-lending industry (3) is causing hardship particularly for the poor. As Finance Minister Trevor Manuel stated in this year’s Budget Speech:
COSATU welcomes the spirit of Minister Manuel's intervention. It is a clear statement of government's intention to correct the failure of regulation and enforcement with regard to the micro-lending industry. Unfortunately, this intention is only partly reflected in the Minister of Trade and Industry's Notice with regard to the Usury Act (4) ("the Notice"). The positive aspect of the Notice is that:
it provides for the establishment of a Ministerially approved Regulatory Institution, composed of representatives of consumers and the micro-lending industry, which will seek to monitor and set standards for the industry, and
it outlines basic principles to guide the Code of Conduct to be followed by micro-lenders, including maintenance of confidentiality, information disclosure requirements aimed at empowering borrowers, limitations on money lenders charges and collection methods, and the implementation of cooling off periods.
A fundamental weakness with the Notice is that it intends to increase the size of loans (from R6 000 to R50 000) that will be exempted from the bulk of protections offered to borrowers by the Usury Act. In particular, the Notice intends removing borrowers' protection from the 'usurious interest rates' which Minister Manuel reminded money lenders were illegal and which could open them to prosecution.
COSATU believes that parliament's Trade and Industry Portfolio Committee should strongly reject a situation where, in the name of offering greater protection to the victims of unscrupulous money lenders, the protection against exorbitant, usurious interest rates is removed. Any argument that subject to the Minister's approval, the Regulatory Institution can set interest rates for loans of less than R50 000 (5), should be strongly rejected by the Portfolio Committee. When there is evidence of gross exploitation of borrowers such as there is today, it is the right and responsibility of Parliament to have the final say as to what maximum interest rates are to be paid by small scale borrowers. In fact, instead of increasing the exemption to R50 000, consideration should be given to the feasibility of reducing or abolishing the current R6 000 exemption, which was first introduced in 1992. The Usury Act should determine a limit to the maximum interest rate which can be charged, preferably across the board, or at differential rates depending on the amount borrowed.
Research shows that some poor borrowers are charged around 30% interest a month on a loan, which amounts to 360% interest per annum. This translates to the following exploitative situations:
The negative financial implications for small scale borrowers in the absence of a reasonable cap on maximum interest rates are clear. Raising the rates cap on microlending creates the potential for exploitation of small scale borrowers which is too great for Members of Parliament to ignore. It would be highly problematic, on the one hand, to offer greater regulation of micro-lending and on the other to leave borrowers unprotected from crippling interest rates. In essence it would mean that the legislature would only be offering wealthy people and large companies protection from high interest rates, while poor families are left to be ripped off by unscrupulous money lenders. The public policy priority should be to extend protection to the most vulnerable in society rather than opening the door for more exploitation. It is noteworthy that the idea to weaken the protections for small scale borrowers were initially floated by the Democratic Party, a party with a consistent track record for favouring the interests of the rich over the interests of poor and working people. (6)
We totally disagree with those who wish to argue that allowing exorbitant interest rates by micro-lenders and banks making loans at the low end of the market will help to increase access to credit to low income earners and small business enterprises (7). This is a spurious argument in that it fails to acknowledge that private sector investment levels are highly dependent on access to credit at reasonable interest rates (see NALEDI research outlined in Annexure A).
This being the case, the effect of weakening the Usury Act's protection to allow for higher interest rates is unlikely to be an increase in loans to small business ventures, but would most likely lead to increased exploitation of low income borrowers, borrowing for consumption purposes and to cover unexpected expenditures. The economic implications of this are potentially disastrous as over time this will eat away at the effective demand levels of the bulk of consumers, with the effect of limiting the potential for economic growth, as producers will not have an adequate market for their products.
"[T]oo many people have become hostage to unscrupulous money-lenders. There is a place for the micro-lending industry. But we will not tolerate the blatant exploitation that appears to be taking place at the moment. It is illegal to take people’s Identity Document as collateral, it is illegal to charge people usurious interest rates and it is bad practice to lend to the point where a person’s entire wage is consumed by the repayment of the loans."
|
Amount of Loan to be paid back over 3 years |
Amount of interest paid at 33% annual interest rate |
Amount of interest paid at 30% per month interest |
|
R 2 000 |
R 1 176,02 |
R 19 601,71 |
|
R 10 000 |
R 5 880,08 |
R 98 008,54 |
|
R 20 000 |
R 11 760,15 |
R 196 017,08 |
It is widely accepted that South Africa's high real interest rates (8) have a number of negative effects on economic growth and development. As can be seen from the following chart, as of July 1998, South Africa's real interest rate of around 15% is extremely high real by international standards.
High interest rates cause various problems, including the following:
High interest rates increase the costs of productive investment. This applies particularly to enterprises reliant on external credit, such as Small, Medium, and Micro Enterprises. The dampening of productive investment has obvious negative results for employment. A survey of companies by Naledi revealed that of a range of factors listed, the high level of interest rates was by far the most significant deterrent to investment. (See attached Annexure A: Research by NALEDI.)
High interest rates put upward pressure on public debt servicing costs, thus reducing the resources available for social spending. (See attached Annexure B)
At the same time, high interest rates attract speculative investment. This is because high interest rates relative to other countries raise the short-term returns on lending money in South Africa, hence encouraging capital inflows. These inflows, however, can be destabilising and can transfer volatility in international money markets to domestic markets. The movement of short-term capital can also exert a "disciplining influence" on domestic policy options, narrowing the parameters of which policies can be pursued without destabilisation.
COSATU has long campaigned for policies which would lead to the lowering of interest rates and has, therefore, welcomed recent statements that government intends achieving greater co-ordination between monetary policy and other aspects of economic policy, including job creation and investment promotion. Such improved co-ordination could be achieved through a range of policy and institutional reforms, including inflation targeting. Whichever mechanisms are used, priority should be given to lowering interest rates and the promotion of a monetary policy, which will be conducive to employment creation. Inflation targeting should not be pursued as a tool of restrictive or inappropriate monetary policies.
While we are aware that broader monetary policy matters fall beyond the immediate scope of these Hearings, COSATU is concerned that:
Increased public scrutiny is required regarding the operation of the Reserve Bank's repurchase rate - or repo rate – mechanism. Despite certain market driven aspects of the repo mechanism, it should not be operationalised in such a way as to disempower the monetary authorities from being able to adjust the repo rate where necessary, for example, at appropriate times increases in the money supply can be used to stimulate a reduction in the repo rate; and
Certain conduct of the commercial banks – in maintaining lending rates significantly above the Reserve Bank's repo rate – contributes to exorbitant interest rate levels and thus contributes to the restrictive monetary environment. Any recommendations by the Parliamentary Committee with regard to regulating aspects of the conduct of actors in the financial sector, should directly address the problem of the persistent spread between the repo rate and bank lending rates.
It would be expected that if there were effective competition within the banking sector then competitive forces would see to it that a drop in the repo rate would be followed by a decline in the effective lending rate offered by the banks. We believe that there needs to be a public investigation as to why this has not been the case. In particular, we call on the Trade and Industry Portfolio Committee to recommend to the Competition Board that such an investigation in to competitiveness in the banking industry be urgently undertaken (9). At the same time the critical question of the Reserve Bank pursuing high interest rate policies needs to be seriously addressed.
Note: The two extreme cases (Turkey with a real interest rate of – 20,6% and Russia with a real interest rate of 73.6%) have been omitted from this chart as their inclusion would have distorted the scale of the chart.
Source: Economist Vol.348 No.8076 July 11-17 1998.
- Overall re-regulation of the Banking and Financial services industry
Public discussion is required on an improved regulatory environment for the financial sector including questions of bank charges, fair lending criteria, disclosure requirements, and improved social responsibility. A collaborative Task Team including civil society and relevant government departments (including DTI, Housing and Finance) should be established to look at a more appropriate regulatory framework for the banking sector.
Following from the evidence put forward at these hearings, renewed consideration should also be given to establishing:
a financial ombud office to protect consumers against exploitation by financial institutions, and
a Parliamentary Oversight Committee for the Financial Sector, as envisaged in the RDP (10), and
Legislation, as in other countries, compelling banks to lend a certain proportion to low income earners and small business.
With regard to charges, a cap on all bank charges, or some form of regulation should be investigated. There must also be full disclosure and explanation of charges to clients in an accessible form and regressive charging (where the poorest clients are charged the highest rates) should be abolished.
- Increased Public Sector Involvement in Provision of Banking Services
The restructuring of the Post Office to provide a 'Public Sector Bank' like PostBank is welcomed and must be explored further as it would provide a basis for the public sector to involve itself in the extension of services to historically disadvantaged communities and far flung rural areas.
- Micro Lending
Parliament's Trade and Industry Portfolio Committee should strongly reject a situation where, in the name of offering greater protection to the victims of unscrupulous money lenders, the protection against exorbitant, usurious interest rates is removed. Any argument that subject to the Minister's approval, the Regulatory Institution can set interest rates for loans of less than R50 000, should be strongly rejected by the Portfolio Committee. Furthermore, there should be strengthened regulation of microlenders in order to protect the interest of borrowers, as part of the broader re-regulation of the private sector financial services sector.
- Interest rates
The margin between the repurchase rate and the lending rates needs to be looked at. We call on the Trade and Industry Portfolio Committee to recommend to the Competition Board that such an investigation in to competitiveness in the banking industry be urgently undertaken.
Increased public scrutiny is required regarding the operation of the Reserve Bank's repurchase rate - or repo rate – mechanism. It should not be operationalised in such a way as to disempower the monetary authorities from being able to adjust the repo rate where necessary, for example, at appropriate times increases in the money supply can be used to stimulate a reduction in the repo rate.
The following table is taken from research conducted by National Labour and Economic Development Institute (NALEDI) on what companies think is the most critical economic variable that affects their investment decision.
Firms were asked to assess the importance of different economic variables on their investment decisions. They were asked to assign a value to each variable, depending on its importance. The scale used in the interviews was as follows:
0 = not at all important
1 = somewhat important
2 = quite important
3 = critically important
The results of these questions are summarised in the following Table.
Table 1. Determinants of Investment
|
Variable |
Response = 0 |
Response = 1 |
Response = 2 |
Response = 3 |
|
Interest Rates |
0% |
20% |
10% |
70% |
|
Inflation Rates |
0% |
20% |
40% |
40% |
|
Exchange Rates |
0% |
20% |
30% |
50% |
|
Economic Growth |
0% |
0% |
40% |
60% |
|
Consumer Spending |
0% |
10% |
40% |
50% |
|
Average Wages |
10% |
20% |
40% |
30% |
|
Good Labour Relations |
20% |
20% |
30% |
30% |
|
Overall Stability |
0% |
0% |
30% |
70% |
Source: (NALEDI, 1998)
Of the different variables which could influence investment behaviour, interest rates, economic growth, and the overall stability of the economy were the most important factors.
Consumer spending and exchange rates were significant to a number of firms, while average wage levels and maintaining good labour relations were the least important of the variables. It should be stressed that different firms had very different responses to this question.
The following is a table of the companies interviewed and their respective sectors. The ten firms and their respective sectors are as follows:
Table 2: Responses from the companies interviewed
|
FIRM |
SECTOR |
IMPACT OF INTEREST RATES |
|
Stocks and Stocks Civil Engineering |
Engineering/Construction |
Moderate impact |
|
Nampak Limited |
Packaging |
High Negative impact |
|
Pick ‘n Pay |
Retail |
High Negative impact |
|
AECI |
Chemical manufacturing |
High Negative Impact |
|
Premier Foods |
Food processing |
High Negative Impact |
|
Unitrans |
Transportation |
High Negative Impact |
|
Toyota South Africa |
Motor vehicles |
High Negative Impact |
|
Sun International |
Hospitality/Leisure |
High Negative Impact |
|
Perskor |
Printing/Publishing |
Moderate Impact |
|
Allwear |
Clothing manufacturing |
Moderate Impact |
Source: (NALEDI, 1998)
From table 1 above, one can deduce that the much talked about labour costs are not the reason why we are having an economic slump but the high rates of interest that is affecting the ability of companies, and individuals alike, to borrow more and expand operations.
Further Evidence: Impact of high interest rates on SMMEs
In a study commissioned by the Executive Deputy President's Office, titled Poverty and Inequality in South Africa, interest rates were also found to be an impediment to the growth of investments and development of the Small Medium and Micro Enterprises (SMME) sector, home ownership and that they undermine export competitiveness in the broader economy.
In a report released last year (April 1998) by the Department of Trade and Industry (DTI) titled Financial Access for SMMEs, the department recognises the fact that high interest rates in the country are a structural impediment to the development of investments in the SMME sector. This then suggests that something must be done with the levels of interest rates in the country.
Annexure B: Impact of high interest rates on Budget
Last year the Finance Ministry was forced to revise its medium term budget because of high rates of interest payable towards the state debt. The following is a statement taken from this year's Budget Review, "Unanticipated high interest rates over the past year have impacted sharply on the fiscus, adding about R2,7 billion to projected state debt costs in 1999/00 and it further states that "a reduction in interest rates will lead to a reduction in cost to the fiscus of government debt, and that this will lead to or contribute to a formulation of fiscal policy that will encourage investments and employment creation in the wider economy". It is through these high rates that government spending in relevant or important areas is impeded because of high debt service cost that takes about 22,1% of our national budget (R48,5 billion from a budget of R219, 6 billion for the year 99/00).
Comparison items in the Budget that are in cost close to the interest bill of R 2,7 billion that the government had to pay because of increases in interest rates are as follows. The interest bill was:
More than the Justice Department Budget (R 2, 545bl) for the year 1999/00;
More that the Trade and Industry Department Budget (R 2, 065bl) for the year 1999/00;
More than the Department of Foreign Affairs budget for the years 1999/00 and 00/01 combined;
Almost equal to the Public Works Budget (R 2, 875bl) for the year 1999/00; and
Almost equal to the Budget allocated for the Training and Research on health for the years 1999/00 and 00/01 combined and the provision of primary school nutrition programme for 1999/00.
The interest on the State Debt is the fastest growing item on our budget and this year it was our second highest item on the budget behind Education. The following Table is an analysis of the interest bill in our Medium Term Expenditure Estimates:
|
Table 3: |
|||||
|
98 / 99 |
99 / 00 |
00 / 01 |
% change |
%change |
|
Interest on State Debt |
42 727,50 |
46 061,70 |
49 703,80 |
7,80% |
7,91% |
|
State Debt |
682,90 |
2 110,30 |
66,20 |
209,02% |
-96,86% |
|
Cost of raising loans |
2,70 |
50,00 |
50,00 |
1751,85% |
0,00% |
|
Servicing of State Debt |
43 413,10 |
48 222,00 |
49 820,00 |
11,08% |
3,31% |
|
National Budget Expenditure |
204 293,00 |
216 780,00 |
230 722,00 |
6,11% |
6,43% |
|
Interest as % of total budget |
20,91% |
21,25% |
21,54% |
1,59% |
1,39% |
Source: National Expenditure Review, p.13 and p.55
Footnotes
