Business In Motion

South Africa's National Credit Act (NCA) has become a hit with policymakers around the globe as the international credit crisis tilts the world economy towards the worst recession since the 1930s. 

The ongoing credit turmoil, the architect of which is the world's financial powerhouse, the US, has laid bare to the global community how greedy and heedless lenders can ruin the world economy and its financial markets.

Around the world as much as $435 billion (about R4.1 trillion) has been lost by major banks and financial institutions that had invested heavily in the US's $1.3-trillion subprime mortgages sector.

Subprime lenders granted mortgage loans to risky, over-extended home buyers but when interest rates started to shoot up the subprime market collapsed, choking off credit and sending famous Wall Street banks like Bear Stearns and Lehman Brothers to the graveyard.

Global interest in the NCA

Peter Setou, a senior manager at the National Credit Regulator (NCR), said that in the light of the global credit crunch many African and European nations had been soliciting advice from South Africa to help them with strengthening their credit policies.

"There has been a lot of interest from mainly African and European countries wanting to study the Act," said Setou. "For instance, we are currently assisting the Namibians to develop legislation similar to what we have."
He said the NCR had received delegations from Botswana, China, Mongolia and the European Coalition for Responsible Credit (ECRC) wanting to learn about the Act.

On November 12 Setou traveled to London to address a two-day conference hosted by the ECRC, a powerful coalition of non-profit organisations whose main objective is to press western European governments to adopt legislation that encourages responsible credit granting. The NCR's global reach has also taken it Brazil where its chief executive, Gabriel Davel, spoke about the NCA at the third Global Credit Reporting Conference.
"I think other countries are interested in the Act because of what is happening internationally and how irresponsible lending contributed to it. We get a lot of invitations to address conferences all over the world," Setou said.

The NCA; a buffer against the lending crisis

Experts agree that the subprime crisis, the root cause of which was reckless lending, was worsened by weak regulation of the financial system in the US, the world's richest economy. But in South Africa the NCR is keeping a watchful eye on the local credit industry, which has an estimated value of more than R1.1 trillion.

After the introduction of the Act in June last year car dealers and estate agents complained that the legislation was depressing sales as banks were approving fewer loans.

Part of the reason for the slowdown in credit extension was that the Act had changed the credit approval process. In the past, consumers would qualify for home loans if their monthly repayments did not exceed 30% of their monthly salaries. However, the new legislation made it mandatory for banks to take into account the consumer's total disposable income before approving a mortgage. The banks had to ensure that the borrowers could afford the loan by closely inspecting expenses against the entire disposable income.

The Act also introduced the concept of debt counselling for over extended borrowers to mitigate an increase in defaults. Experts say it is SA's shield against credit woes, such as the one plaguing the US.

"The South African banking system has effectively been insulated from the global financial crisis mainly as a result of the prevailing exchange control regulations," said First National Bank spokesperson Xolisa Vapi.

"Having said that, the Act has had its benefits for us in that it has improved the way we look at a customer before granting credit.

"Whereas in the past we would have looked at creditworthiness, there is now more emphasis on the customer's cash flow to accurately determine the level of affordability to repay a loan," he added.

First Published in City Press
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SOURCE: SA GoodNews