Confidential │ Executive Summary
DRAFT
The ban may not just slow investment for existing and new companies in the industry. Foreign and local investment may also be negatively affected. In South Africa in particular, it may seem that this is just one further piece of government intervention in the all-important financial services industry.
The reduction in competition and higher perceived risks will almost certainly result ultimately in higher prices filtering through the economy. It will further increase the pricing power of the larger players in the industry. This will result in a slowdown in economic growth in other sectors of the economy and will have a general inflationary effect.
The potential effect of lower competition, reduced investment, higher prices and the general potential inflationary influences will result in a slower economic growth potential for the South African economy. The degree to which this will happen is difficult to predict and would not be measureable, but it would be a slow insidious process.
All the economic arguments suggest that it will have the long-term impact of reducing employment opportunities. The reduction in competition, impact on smaller companies and its impact on new investment will reduce transformation opportunities.
Abolishing or limiting EAOs or precluding their potential use, could actually force mispricing of risk, make loans too cheap, and create lending bubbles with high default rates.
A twin peaks model of financial regulation in South Africa places great importance on both the economy and the financial soundness of the system, the institutions concerned and the wellbeing of consumers. The protection of all parties and the system is essential. The arguments presented in this report suggest that abolishing or limiting the use of EAOs would substantially increase risks and make it more difficult to achieve the respective objectives of both the Prudential Regulator and the Market Conduct Regulator.
4. Key issues regarding over-indebtedness affecting the EAO industry
Since 2007/2008, there has been a declining trend in interest/debt service to disposable income although this has levelled out. This occurred despite an increase in the total credit/debt of consumers. The declining trend has been due to the increase in disposable income, which rose faster than the debt, as well as the reduction in interest rates. There will be serious pressure on the financial position of consumers if the pace in new credit uptake is maintained and once interest rates start increasing again.
At the macroeconomic level on average consumers are not over-indebted, as there appear to be sufficient resources to cover consumption and interest commitments.
It is clear that individual consumers are experiencing more financial pressure in terms of being able to service their debt and consumption expenditure. o
The number of over-indebted consumers (more than three months in arrears, adversely listed and with judgments) has increased sharply from 6.8 million in Q2
Potential economic Impact of abolishing or limiting EAO orders │ One Law
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