The effect of the National Credit Act, 34 of 2005 on the extension of credit by commercial banks

Abstract

Credit plays a very important role in the economy as it facilitates trade among consumers and suppliers. For businesses and suppliers, credit enables them to expand production as it gives them access to capital and allows them to take on bigger projects that they would not have taken without capital. It is also important for consumers as it allows them to obtain goods or/ and services that were out of reach without credit. Therefore, credit remains important for both consumers and businesses. Accessibility of credit determines the extent to which an economy grows. There’s evidence that economic growth is highly correlated with the country development of its financial system. Thus, it is not surprising that most developed countries have highly developed financial sectors to cater for the growing needs in the economy. However, while credit comes with many advantages for growing the economy, it also comes with its own challenges, particularly in an economy where consumer literacy and financial education levels remain low. In such instances, credit could be used as a weapon to take advantage of vulnerable and illiterate consumers. It is based on these factors that the South African government opted to enact the National Credit Act, 34 of 2005 to mainly regulate the credit market, promote access to credit and protect consumers. After the Act was enacted, there were concerns from mostly economic scholars about its impact on the extension of credit and economic growth. Moreover, some legal scholars also argued that the Act has an impact on the law of contract as it seeks to codify some of the common law positions in the law of contract. This study investigates the effect of the Act on credit agreements and credit that is extended by commercial banks in South Africa. To test the effect on credit agreements, the study assesses the available literature together with the applicable provisions of the Act which touch on credit agreements. To test the impact on credit extension, the study collected secondary data on credit that was extended by commercial banks between 1992 and 2021 issued by the South African Reserve Bank. Once collected, the data was coded and analysed through Microsoft Excel.

The study also found that the Act influences credit agreements. The Act puts certain formalities that contract drafters must adhere to when drafting credit agreements. For example, the Act prescribes that the consumer has a right to receive a document in an official language that the consumer understands, to the extent that this is practical. This use of simple and understandable language is a new requirement brought by the Act on the law of contract. The study also found that the Act comes with new procedural requirements. According to the Act, credit providers are required to provide a quotation to credit consumers specifying the full detail of the cost to the consumer. The quotation will be valid for five days, giving ample time to the consumer to receive quotations from competitors should they wish to do so. This is a new procedural issue brought by the Act. The study also found that the Act was able to curb the rate of credit extended households and stabilized the rate of increase.

Therefore, the study found that the Act was able to affect credit agreements and managed to stabilise the extension of credit in the economy.