Academic

This semester, I am having a great time teaching a seminar on Microfinance.  This week, we explored microfinance in South Africa.  As part of that inquiry, we looked at the National Credit Act of 2005, which was promulgated in part as a response to some perceived abuses in expanded credit access, including microfinance.  We looked at two different topics within the Act:  a maximum rate of interest ceiling and the concept of "reckless credit."

First, the Act allows the cabinet minister charged with consumer matters to set a maximum rate of interest for various types of loans (Chapter 5, part C, section 105).  The maximum rate of interest for development loans used in small businesses (what we are talking about as microfinance) is based on the reserve rate there and is currently about 32%.

Second, the Act requires creditors to make a determination of whether a prospective consumer borrower is "over-indebtedness."  This determination is positive if "the preponderance of available inforamtion at the time a determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, having regard to that consumer's financial means, prospects and obligations; and probable propensity to satisfy in a timely manner all the obligations. . . as indicated by the consumer's history of debt repayment."  If a creditor makes a loan to an overindebted borrower (or one who becomes overindebted after the making of the loan), then that loan is considered "reckless credit."  Should the borrower default on that credit agreement, and the court finds that the agreement was reckless, then teh court can set aside the agreement.

We had a great time in class discussing the pros and cons of such a rule.  Though normally it would not be in a lender's interest to make loans to the overindebted, we have certainly seen where such incentives might get skewed so that such loans are made.  And, these loans not only hurt the borrower, but other creditors, who get lined up in bankruptcy, perhaps on equal footing with the "reckless lender."  Should careless lenders share the risk of default with careless borrowers?