Loans via internet
WITH a R1.3-trillion consumer credit market booming in South Africa, online lending has provided a new way for consumers to dig themselves into a debt hole.
Short-term online loans have been made popular by companies such as Wonga.com, which was founded in the UK by former South African Errol Damelin and entered the South African market last year.
In 2011, the company grew faster than any other technology company in the UK to a turnover of £74m. And, in the past few months, it has been marketing itself prodigiously to South Africans through television adverts and online.
Wonga's meteoric rise has not been without controversy. In the UK, it was blamed for encouraging loans at high prices.
The Office of Fair Trading slammed Wonga for its debt-collection tactics of suggesting that its borrowers may have committed fraud, and threatened the company with fines.
David Fisher, the director of consumer credit at the Office of Fair Trading, said he wanted to ensure Wonga did not behave this way again.
"I would like to make it clear to businesses that they must not adopt aggressive or misleading practices with their customers," he said.
Presumably chastened, Wonga is now prospering in South Africa.
Wonga.com's South African CEO, Kevin Hurwitz, said: "We launched officially in May last year and are now granting thousands of loans per month. [But] we only accept around a third of applicants, as we have very stringent selection criteria."
The way it works is that first-time borrowers in South Africa can borrow up to R2000, and over time this increases to a limit of R8000.
The loan period is from a minimum of three days up to 45 days.
But it is not cheap. For example, a R1000 loan payable over 10 days incurs an interest-and-fee charge of about R250 — a quarter of the loan within two weeks.
Traditionally, lenders have justified such high interest rates by saying they were giving high-risk, unsecured loans to people who were not necessarily creditworthy.
This raises the possibility that online lenders could have a high level of bad debts.
DirectAxis, which also provides personal loans through its call centre and digital portals, said there had been a definite decrease in the credit quality of consumers.
"The beginning of 2013 started with high application volumes, but we have observed a decrease in the credit quality and scores of applicants approaching us for loans," said Mark Finlayson, a spokesman for DirectAxis.
"Over the past four years, our growth rate has lagged the market's growth rate by nearly half because we have focused on lending responsibly to customers who have conducted themselves well from a credit perspective," said Mr Finlayson.
Capitec Bank, which owes much of its success to unsecured lending, has also noticed a healthier appetite for online loans.
"Online loans are definitely growing," said Marissa Visagie, a spokeswoman for the bank.
"These days there are also many pop-up credit providers online and it's important to encourage consumers to go with trusted brands when applying for loans to protect themselves from any fraudulent activity."
Unfortunately, many websites have popped up promising quick cash with no credit checks or excessive interest rates, which may lure desperate consumers to sign up.
Signing up includes giving the lender access to your bank account, which may cause problems if the website is not registered with the National Credit Regulator.
Business Times found at least 12 websites offering easy short-term loans that could not be found on the regulator's list of registered credit providers.
Obed Tongoane, the regulator's chief operating officer, said it monitored all credit providers, including online lenders, to ensure full compliance with the National Credit Act.
Mr Tongoane said the regulator had a strategy that catered for all sectors, including companies that lend over the internet.
Riccardo Petersen, a lawyer at Norton Rose, said the National Credit Act did not contain specific provisions regarding online loans, but also had no provision that prohibited a credit provider from granting credit online.
"Provided the credit agreements are in a plain and understandable language, consumers' confidentiality is protected and credit providers comply with the provision of the National Credit Act when granting online credit, I do not foresee the National Credit Regulator doing anything different than what it is currently doing - because if online lending is compliant with the act, then there should be nothing to be worried about," said Mr Petersen.
However, he said, regulators worldwide were keeping a wary eye on the high risk to consumers who transmit personal financial information over the internet.
"Regulators are concerned about potential fraud or money-laundering," said Mr Petersen.
Given the high level of debt faced by mainstream companies such as Capitec and African Bank, online lenders seem to be walking a fine line between innovation and fuelling an unsecured lending bubble.
"Much of the vast growth in unsecured lending has been driven by traditional lenders and banks merely increasing the value and term of a personal loan and labelling it 'unsecured' in an attempt to deal with a credit market suffering from the global financial slowdown," said Mr Hurwitz.
"Obviously, it is always important to manage the level of bad debt - and we are comfortable with the level where it currently sits. As we fund the loans ourselves, we are incentivised to make accurate and reliable lending decisions and this obviously helps to keep bad debt levels down."
Mr Finlayson said DirectAxis expected bad debts to increase by 10% in the next year as "the economy experiences some stress and the global economy moves out of a period of quantitative easing".
Low broadband penetration in South Africa has restrained online loans, but this situation will change.
"As broadband becomes more affordable and tablet prices drop, one could expect these type of transactions to increase dramatically as the internet becomes more accessible to the man on the street," said Mr Visagie.
*This article was first published in Sunday Times: Money & Careers