The dynamics of consumer credit and household indebtedness in South Africa

Doctoral Thesis


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University of Cape Town

Consumer credit has become an important element of the South African economy. Given the limits on state social security payments, and the chronic absence of substantial household savings, consumer credit has come to play a vital role as a substitute for income support and/or a complement to low wages. This gives the credit market its microeconomic and welfare objectives. However, consumer credit can be a dangerous product if households allow themselves to get over-extended. Such concerns brought forth the argument for tight regulation of the credit market, resulting in the enactment of the National Credit Act (NCA) in 2006. This study explores the nuances of consumer credit use in South Africa. It draws on the consumer credit regulatory framework, participation in the consumer credit market, and the debt problems of consumers. Analysis of the NCA shows that it has the potential to deliver both individual and social protection from over-indebtedness (primarily through its provisions on disclosures, registration, public awareness, etc.), but desperately inadequate in its potential to alleviate consumer over-indebtedness. In practice, it is also not clear that the regulations are having a fundamental effect on consumers' decision-making as policy makers might have hoped. Analysis of variation in participation in the consumer credit market shows that participation was driven largely by life cycle consumption needs, present and expected future resources. The consumer debt-service burden was positively related to the size of the debt load and experiences of shock. While the empirical results suggest that the market was relatively secure from wide spread default losses, there are pockets of vulnerability among consumers with regard to indebtedness which might increase delinquency rates. Such consumers might benefit from reduced access to credit. Consumer debt repayment problems are, for the most part, explained by unfortunate events (shocks) that disrupt income streams, more than by excessive spending, even when controlling for debtors' creditworthiness. This suggests that even where credit is used responsibly, repayment problems might still occur. The implication is not that credit must be regulated tightly, but rather that there is a need for tighter debt relief and rehabilitation framework. The available mechanisms under NCA are not up to the task of providing meaningful relief and rehabilitation. Given the importance of shocks in debt problems and the high risk of such shocks in South Africa, this study concludes with proposals for a tightly regulated, but simple mechanism for debt discharge akin to the contemporary 'fresh start' debt relief measures.