Decreasing the maxiumum allowable interest rate

This is the 16^th edition of this weekly blog aimed at helping improve South Africa. The general idea is to make proposals that are “easy” to institute and can be done at a stroke of a pen and do not rely on officials or politicians or citizens to have perfect motives for success to be achieved.

What?

Government should reduce the maximum allowable interest rate in the national credit act to double the reserve bank rate (REPO rate). Above which rate the lender will be guilty of usury.

Why?

1)              Pay – day loans for poor employed people and credit card debt for wealthier people are a scourge. They are used to fund consumption and are not used to help EARN more. They do not, therefore, help people survive as they only help for a month or two after which the high interest traps the borrower in permanent debt. Trapping them in a downward spiral.

2)              As the rate of default on these loans is high, banks and other lenders can only profitably make them if they can earn very high interest rates on the non-defaulting loans.

3)              Decreasing the maximum interest rate allowable will make lenders choose to lend only in situations where they are fairly certain that the person or company can afford to repay it. Where the loan will help them earn more money so that they can repay the loan.

4)              The high maximum rate of interest allowable currently incentivises lenders to lend to people for consumption which is not positive for the country in the same way that a loan to a company for growth or even the loan to an individual to build a house is. 

How?

1)              Act of parliament

Why not?

Poor people need to borrow money and this will effectively shut them out of borrowing money. As above, this is not true. It will in fact protect them from predatory lenders.

Referendum

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