Turismo de la zona

Although the exemption of micro-loans from the Usury Act provides no limit on the rates of interest that may be charged by registered micro-lenders that comply in every respect with the conditions of the exemption and therefore trade lawfully,91 excessive interest levels permitted by the exemption that are charged by such micro- lenders may still be challenged on the basis of the common law.92 _{The residual}

common law is still applicable, in view of the presumption that a statute alters the common law as little as possible, and the courts will interpret an act as ousting the common law only if this appears clearly from the intention of the legislature.93 _There

is nothing in the statutory history in regard to usury that indicates such an intention; rather, the converse is the case.94 _{Such court action would be possible only on a}

case-by-case basis; it could not attack the regulatory framework, and it could therefore not provide the basis for a class action.

Three such grounds for challenging high interest rates exist, namely: the application of the in duplum rule; a finding that interest rate provisions are contrary to public policy; and a contravention of common law usury law. These three potential bases for a court challenge have already been discussed at length in Chapters Two and Three above, and will therefore be outlined very briefly here in relation to micro- lending.

90 _{See the percentage increases in Tables K and L above.}

91 _{The 1999 Exemption Notice referred to in 4.2.2 above did provide for a maximum interest rate, which}

was subsequently reviewed and set aside in the Lurama decision.

92 _{These arguments are most relevant to current unlimited interest rates, but may still be relevant in}

respect of the new limits on the cost of credit in the National Credit Regulations, which will come into force on 1 June 2007 and which will be discussed in detail in Chapter Six.

93 _{Du Plessis Re-interpretation of Statutes (2002) 177–178.}

The common law in duplum rule provides that interest stops running on a debt when the unpaid interest equals the outstanding capital.96 _{Section 103(5) of the National}

Credit Act,97 _{which will come into force on 1 June 2007,}98 _{has effectively codified the}

in duplum rule. Table B (read with Appendix A) above best illustrates the potential relevance of the in duplum rule. In Item 7 of Table B,99 _{for example, if the borrower,}

as a result of unforeseen circumstances, is able from commencement of repayments to pay instalments of only R350 per month rather than the required R492,31 per month, s/he will after 12 months be in arrears with interest payments in the total amount of R1 707,72.100 _{This amount exceeds the outstanding capital}101 _{of R1}

638,102 and interest will stop running after less than 12 months has passed, when outstanding interest amounts to R1 638. When unpaid interest is less than the capital outstanding, interest will commence to run again. Given the speed with which unpaid interest can accumulate (resulting from high interest rates), and subsequent

likely default by borrowers, the in duplum rule is therefore a highly relevant

mechanism for limiting the cost of credit.

5.7.2 Interest provisions contrary to public policy

The in duplum rule is cold comfort for a borrower who is charged 30% interest per month and who diligently pays each instalment due, or whose arrears interest never reaches the amount of the initial loan. Agreements which are “clearly inimical to the interests of the community, whether they are contrary to law or morality, or run counter to social and economic expedience, will ..., on the grounds of public policy, not be enforced.”103 Public policy is now informed by constitutional values:104

“It is not difficult to envisage situations in which contracts that offend these fundamentals of our new social compact will be struck down as offensive to public

95 _{For a thorough explanation of the in duplum rule, see 3.3 above.}

96 _{See, for example, Standard Bank of South Africa v Oneanate Investments (in liquidation) 1998 (1) SA}

811 (SCA) 827H.

97 _{Act 34 of 2005.}

98 _{Commencement of the National Credit Act, 2005 (Act No. 34 of 2005) Proclamation R22, 2006,}

Government Gazette 28824, 11 May 2006.

99 _{A loan of R1 638, repayable over 24 months in equal instalments of R492,31 each.} 100 _{Monthly shortfall of R142,31 x 12 months = R1 707,72.}

101 _{Or “unpaid balance of the principal debt”, per s103(5) of the National Credit Act.}

102 _{The outstanding capital is the same as the initial loan amount, since monthly payments accrue first to}

interest and then only to capital, and the monthly interest due is always greater than R350 in the first 12 months.

103 _{Smalberger JA in Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) 8C–D. For a fuller discussion of the}

principle of public policy, see 2.3 above.

104 _{Cameron JA in Brisley v Drotsky 2002 (4) SA 1 (SCA) 34H–35B. See also Napier v Barkhuizen 2006}

enshrines will guide the courts in doing so.”

The development of a thorough argument in support of the contention that micro- lending contracts that attract interest rates of 360% per annum are contrary to public policy is beyond the ambit of this study, and in any event the specific circumstances of the particular case before the court would of course have to be carefully considered. Such an argument would have to be considered within the context of small loans, small incomes and the purpose of the industry made possible by the Usury Act exemption, namely to provide credit for lower-income groups who do not qualify for credit from the banking sector. It would also most certainly draw on much of the evidence of the negative socio-economic impact of high interest loans that is set out in this chapter.

The court would have to consider questions such as the following: can public policy countenance the fact that the majority of South Africa’s population who find themselves in the lowest-income groups must pay 18 times as much as higher- income groups for credit, even within the context of the difficulties that lenders experience with recovery of payments due on micro-loans?105 _{Or that after payment}

of a monthly instalment, a pensioner will have only 26% of her pension left to cover all other necessary living expenses?106 _{Or that a borrower may end up paying nearly}

11 times the initial loan amount?107 _{Or that the loan repayments after three months}

and three consecutive 30-day loans exceed the initial loan amount?108

It would seem not, especially if the loan was disbursed for consumption purposes (as are 43% of all micro-loans)109 _{and the borrower is already considered vulnerable prior}

to taking out the loan, because she spends more than 60% of her income on food, beverages, clothing and housing.110 _{The view that an interest rate of 360% per}

annum offends against public policy and the public interest is strengthened by the

scale of the industry111 _{and the fact that so many people are affected by such}

exorbitant interest rates.112 Circumstances particular to the borrower and the lender will also likely be relevant, such as illiteracy and any other significant disadvantage or disability, for example if the borrower is HIV-positive and has to pay large medical

106 _{See Note (a) to Table B above.} 107 _{See Note (e) to Table B above.} 108 _{See example 2 in Table C above.} 109 _{See Table F above.}

110 _{Ebony “Analysis on the Application of Borrowed Funds” 14.} 111 _{See 5.6.1 and 5.6.2 above.}

112 _{According to paragraphs 2.1–2.6 of DTI “Policy Framework”, 67% of South Africa’s population are}

5.7.3 Common law usury law

In terms of common law usury law, the onus is on the debtor seeking to have an interest rate declared usurious to prove that the interest rate amounts to “extortion and oppression akin to fraud”.114 _{To achieve this, evidence as to the ordinary rate}

prevalent in similar transactions, the size of the loan, the period of the loan, the purpose of the loan, the relative positions of the parties, the security and the risk, will all be relevant.115 _{Many of these factors are also relevant to a possible contravention}

of public policy, referred to above. Equally, many other factors not listed by the courts in regard to usurious loans that are relevant to a possible contravention of public policy may also be relevant to the question of whether or not the interest rate is usurious.116 _{A contract declared to be usurious will not be set aside, but a court}

may declare such a contract partially enforceable, to the extent that the interest is not usurious.117

A debtor seeking to have an interest provision declared invalid could plead that the rate of interest is contrary to public policy and therefore unenforceable, and go on to plead in the alternative that such rate is usurious, in that it amounts to “extortion and oppression akin to fraud”. It is also possible that the extortionate and oppressive (and therefore usurious) rate of interest could be pleaded as one of many other factors which render an interest provision contrary to public policy and therefore unenforceable.

5.8 The unregistered sector and the legacy of no interest