In July, the National Financial Ombud Scheme (NFO) raised the alarm about the increasing number of South Africans relying on credit to cover everyday expenses.
Credit had shifted from a tool for upward mobility to “a survival mechanism for basic necessities like food, rent, electricity and transport”, the NFO warned, quoting a study by TransUnion. The study found that more than 41% of personal loans from institutions other than banks were three months or more in arrears.
In 2024, South Africa had nearly 28-million borrowers, according to the National Credit Regulator. Of them, 10.9-million had “impaired credit records,” 22% of whom were more than three months in arrears.
For many South Africans, credit can become a trap from which it is nearly impossible to escape.
So what can you do to escape the trap?
Credit agreements are governed by the National Credit Act 34 of 2005. This Act places responsibilities on both lenders and borrowers to ensure responsible lending and financial health.
It introduces the concept of “reckless lending,” where lenders can be sanctioned for giving loans to those who can’t afford to repay them. Lenders must assess a potential borrower’s financial means, understanding of credit obligations, and repayment history before providing the credit.
Borrowers, in turn, must answer questions truthfully and completely. If a borrower is proved to have misrepresented their position, the lender has a complete defence against an accusation of reckless lending.
Only credit providers registered with the National Credit Regulator are allowed to charge interest on the money they lend. This, effectively, makes the informal credit industry illegal. The Act also places restrictions on what lenders can include in their agreements. For instance, lenders may not include provisions that allow them to enter your home to take goods related to the credit agreement instead of payment.
The Act also sets the maximum interest rate that lenders can charge. It is illegal for a lender to charge more than this rate, or to confiscate your ID or other documents, or to repossess your goods if you do not pay.
National Credit Tribunal
Section 26 of the Act established the National Credit Tribunal, which decides on the validity of credit agreements and has the power to help over-indebted consumers.
If an agreement is found to be reckless, the Tribunal and the courts can suspend the agreement while new terms are negotiated. During this period, the consumer need not make any payments, and is not charged any additional interest.
More significantly, the Tribunal and the courts can set aside part or all of a credit agreement, essentially writing the debt off entirely.
To approach the Tribunal, applicants should follow the steps outlined in Table 2 of the Tribunal’s Rules for Conduct. These rules set out the necessary forms, application fee, time restraints, and parties to be notified for each type of application. Legal representation at the Tribunal is allowed, but it is not necessary for you to appear. Only after approaching that Tribunal should you consider going to a court.
You can also approach the National Financial Services Ombud Scheme (NFO). This was created in March 2024, when the Banking, Credit, Long-Term Insurance, and Short-Term Insurance Ombuds combined. This independent body aims to protect consumers against reckless lending, provide financial education, and report on the state of debt in South Africa.
In its first year, the NFO closed 28,000 cases and recovered over R328-million for consumers.
The NFO will walk you through the process of filing an application against the institutions under its jurisdiction. But turnaround times can be slow for those seeking immediate relief. The average case takes nearly four months to close.
Debt counsellors
The courts or the Tribunal can also order you to work with a debt counsellor or you can approach a debt counsellor yourself. The counsellor will examine your entire credit profile and make recommendations to restructure credit, or have certain agreements declared reckless.
The terms of the re-arranged agreement can be voluntary, or the counsellor can approach the Tribunal or courts for an order enforcing the new terms. While you are undergoing debt review with a counsellor, you may not enter any new credit agreements.
The debt crisis affects millions of people, many of whom have to borrow just to make ends meet. But systems exist to protect vulnerable consumers against exploitation by credit providers and to help those find themselves too deep in debt.
- Nick Fabré is a writer at the People’s Legal Centre. Views expressed are not necessarily those of GroundUp.
