One of South Africa's most dreaded requirements apart from the infamous 'proof of residence' is 'proof of income.'
We have heard many accounts from self-employed business people with perfect credit records who can’t get finance because they don’t have official payslips. For small entrepreneurs in the informal sector, it’s even trickier because they often don’t even have bank statements to back up their income.
Giant clothing retailers Truworths, Foschini and Mr Price took the Minister of Trade and Industry to court to set aside the current requirement in the National Credit Act (NCA) – that credit applicants need to produce three months' worth of payslips or bank statements as proof of income. They won.
The three retailers' lawyer, Lauren Fine with Norton Rose's Cape Town office, tells Business Insider South Africa that credit providers will still require proof of income as part of assessing affordability.
But Fine says that they wanted the “impractical” current requirement be set aside so that they have the leeway to determine affordability using their own mechanisms, models and procedures – which they believe will still meet the obligations for assessing affordability under the NCA.
In his ruling at the Western Cape High Court, Judge Keith Engers gave the example of a flower seller who wants to apply for credit to pay for her child’s school uniform. Because she doesn’t have a bank account, she would be automatically excluded from obtaining credit due to lack of documentary evidence like financial statements to prove gross income.
Engers made the point that 20% of the South African population don’t have bank accounts. Therefore, this results in credit providers "having to decline many would-be credit-seeking customers who actually can afford the credit."
The main aims of NCA were to promote a fair and non-discriminating access to consumer credit, to prohibit unfair credit practices, promote responsible and prohibit reckless credit granting. However it seems that over time, credit providers drifted from the promotion of responsible lending to prohibiting reckless lending, mainly to comply with the Act, says Nick Dekker, a certified financial advisor with PrivateAdvisor, which has offices in Pretoria and Randburg.
“Instead of using creative ways of establishing a lender's ability to repay loans, credit providers rely heavily on salary-slips as proof of income. This created a problem for anyone that is self-employed and especially in the informal sector.
“The High Court judgement does not take away the responsibility of credit providers to establish a the borrower’s ability to repay a loan, but rather requires them to look more holistically into a person’s circumstances, rather than relying only on pay-slips.”
Still, the ruling comes amid increased concern about mounting credit and store card debt. According to numbers from the National Credit Regulator, these debts which are in arrears of over 120 days are rapidly growing towards the R18 billion mark.
High Court today issued major ruling effectively stating that there is no longer a need for credit provider to collect any specific form of document proving income when person applies for credit. Problem is this is also effectively great for those who are reckless lenders.— Delphine Govender (@Delphine_DG) March 20, 2018
Dekker warns that as a rule, consumers should not take credit from retailers. Instead, they should be saving the same amounts as they would repay on debt - and buy cash. If you borrow R1,000 at a 24% interest rate (typical rate for unsecured debt) over a 12 month period, you will pay more than R110 extra in interest.
“If you have to borrow, do it with secured debt such as a car or house. Secured debt, such as a house or a car, normally attract more favourable interest rates, because if repayment conditions are not met, the asset can be sold to stand in for the outstanding debt. Not so with food and clothing.”
The department of trade and industry (dti) did not respond to Business Insider’s request for comment on the High Court ruling. The dti is currently proposing new amendments to the NCA, which may result in some consumers (those who earns less than R7,500 with less than R50,000 in debt) having their debts completely written off.