Affordable housing

The discussion on a South African perspective on credit provisioning largely focuses on banks, due to their dominance of the credit market. This section shifts the attention

13In this context, loyalty refers to the willingness of customers to stay with a certain bank, even at the cost of price or inconvenience (Bresler, 2013).

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to credit providers other than banks. This is a large and diverse group of credit providers, which have only the fact that they are not banks in common. The section includes information, which cannot be linked to asset-backed short-term finance directly, but which is important for a comprehensive perspective on South African credit provisioning.

It has been mentioned in section 2.2.3.1 that Denis and Mihov (2003) found in the United States that firms with a high credit value prefer public borrowing, intermediate ones prefer banks, and low credit-quality firms prefer non-bank borrowing. As public borrowing can also be defined as ‘non-bank borrowing’ (see Dennis & Mihov, 2003), this section makes a distinction between public borrowing and borrowing from private credit providers.

3.2.3.4.1 Public borrowing

Public borrowing is entered into by means of a bond, which is a form of credit in which the borrower sells or issues a bond, undertaking to buy it back at a specific date in the future (the maturity date). The lender is compensated by an annual or semi-annual coupon payment (Van Zyl, 2009, p. 272–273).

Ojah and Pillay (2009) mention that government institutions had traditionally been the only South African entities to raise money by issuing bonds (thus lending from the public), but that bonds are currently also used by parastatals and the private sector.¹⁴ However, communication costs for issuing bonds are very high, limiting bonds to only very large and profitable business entities (Ojah & Pillay, 2009).

3.2.3.4.1 Independent credit providers

The nature of independent credit providers covers a wide range – from informal, through co-operative and benevolent, to profit-driven business entities. Goodspeed (2009) refers to all non-bank financial institutions providing services to poor and low-income customers as providers of microfinance. Independent credit providers are,

14 The Bond Market Association (BMA) was formed in 1992, and became the Bond Exchange of South Africa (BESA) in 1996. In 2009, it was acquired by the JSE, and has since been known as the JSE Debt Market (JSE, 2013).

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however, not limited to microloans to vulnerable customers, as providers of asset-backed short-term finance are also independent credit providers. There are a number of categories for private credit providers that could be used to position asset-backed short-term finance, such as stokvels and micro lending.

The most informal of credit providers are the so-called stokvels, which can be regarded as the South African version of what is internationally known as rotating savings and credit associations (ROSCAs). The underlying principle is that a collective of people contribute an agreed amount to a communal fund every month and pay the full amount to each member in turn. Members may also borrow against the stokvel (Matuku &

Kaseke, 2014, p. 504). Arko-Achemfuor (2012, pp. 127–128) states that stokvels are common among poverty-stricken communities. In Ghana, he found that ROSCAs significantly contribute to the establishment of small, micro and medium enterprises (SMMEs), but in South Africa, most of the money paid by stokvels is used for domestic expenditure (Arko-Achemfuor, 2012, pp. 127–128). Stokvels operate in a market which is beyond the scope of private providers of asset-backed short-term finance, as the two types of credit providers operate at opposing ends of the socio-economic spectrum.

Financial services co-operatives and some co-operative banks is a statutory intervention which aims to regulate financial services currently provided by stokvels (Jones & Dallimore, 2009). Therefore financial services co-operatives are subject to the operatives Act (no. 14 of 2005) (RSA, 2005) and co-operative banks to the Co-operative Banks Act (Co-Co-operative Banks Act (no. 40 of 2007) (RSA, 2007).

Funds held by stokvels were estimated to exceed R44 billion (Arko-Achemfuor, 2012, p. 130), while financial services co-operatives and co-operative banks held deposits of approximately R195 million and extend loans of approximately R140 million (Supervisors, 2014). If financial co-operatives and co-operative banks are supposed to be regulated stokvels, and stokvels held R44 billion against R335 million by the other two categories in 2014 it seems to indicate that stokvels are not easy to regulate.

Microfinance, or micro lending, is another category of non-bank credit provisioning.

According to Investopedia (2017) it was pioneered in the 1970s in Bangladesh as a way to alleviate poverty. The principle is to lend small amounts (usually less than

$1 000) to poor people with employment (the ‘working poor’). Loan decisions were

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based on the applicant’s good reputation and a fixed income. These unsecured loans were used to develop micro-businesses with the potential to lift the owners out of poverty into the mainstream economy. As these borrowers were regarded as high-risk customers, microlenders offset the risk by above average interest – reportedly around 35%. Socially conscious entrepreneurs had proved this business model as viable for two decades (roughly 1970 tot 1990), after which new investors entered the market in the 1990s for purely commercial reasons (Investopedia, 2017) Globally, microfinance is a lightly regulated industry, as non-bank lenders are not deposit-taking institutions and consequently have a low effect on systemic risk (Vento, 2010).

Microfinance emerged in South Africa as a result of a ‘credit gap’ between persons so poor that they qualify for subsidies and grants on the one hand, and those wealthy enough to source credit from commercial banks on the other hand (Mahembe, 2011;

(Ellis, 2012). However, providers of microloans are repeatedly held responsible for reckless lending and exploitation of vulnerable consumers by giving unsecured loans and applying for emolument attachment (garnishment) orders¹⁵ in case of default (dti, n.d.; Moputi, 2014; Nkomo, 2013, pp. 4–5). According to Cairns (2014), the high level of emolument attachment orders in South Africa has led to hardship and acute resentment on the side of borrowers (Cairns, 2014). Resulting from this reckless lending, the National Credit Act (no. 34 of 2005 (RSA, 2005) was published, which decreed the NCR into existence, with the aim to protect vulnerable consumers from reckless lending (RSA, 2005; RSA, 2014). In an attempt to prevent the whole industry from being discredited, a group of microlenders established a self-regulating structure, opposing reckless lending practices, named MicroFinance South Africa (MFSA) (2015).

In summary, asset-backed short-term finance can be regarded as the third category of private credit providers, primarily aiming at financial gain, which feature distinguishes it from benevolent or co-operative non-bank credit providers. The

15 A legal process whereby payments towards a debt owed by an individual can be paid by a third party – which holds money or property that is due to the individual – directly to the creditor. The third party in such a case is generally the individual’s employer and is known as the garnishee (Investopedia, 2017).

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fundamental distinction between asset-backed short-term credit providers and microlenders is the nature of intended customers and measures to be taken when borrowers default on their loans. Asset-backed short-term credit providers only provide loans to juristic persons with sufficient unburdened assets to act as security for the intended loan. This category will be dealt with in more detail in the next chapter.

Section 3.2 and its sub-sections reported on the credit industry in South Africa. It was found that South Africa has a well-established and prudent financial system, which had started by serving the needs of commercial agriculture in the middle of the nineteenth century, but took part in and facilitated the mining revolution of the late nineteenth century and the industrial revolution of the twentieth century. The financial sector in South Africa is closely regulated in accordance with international and domestic requirements. Internationally initiated regulations aim at preserving the integrity of the financial system, while domestically initiated regulation aims at protection of vulnerable customers. Attention was also given to role players in the South African banking sector, which is dominated by Standard Bank, the First Rand Group, Absa, Nedbank and Capitec. Other credit providers are formal and informal co-operative financial institutions as well as commercial microlenders. This comprehensive description is essential in outlining the business environment in which private provisioning of asset-backed short-term finance must be positioned strategically. In the next section, credit management in South Africa is investigated, as credit management is a key performance area for credit providers.