In August 2014, increasing unsecured loan defaults by consumers led to the collapse of South Africa’s
largest unsecured lender, African Bank Limited (ABL). These events have prompted many policy makers
and researchers to review the dynamics of credit extension and the impact of the country’s consumer
credit legislation, the NCA. This case study contains what may be the first empirical analysis of the
impact of the NCA on South Africa’s credit markets; it is composed of four main parts
This paper provides some history on the roots of credit and interest, significance of consumer
protection frameworks, and history of credit in South Africa that led to the creation of the National
Credit Act (NCA). It examines the purpose and components of the NCA, trends in credit after the NCA
was promulgated, and main criticisms of the Act.
Part III of the study provides a quantitative analysis using econometric models to (i) identify credit
booms; (ii) model credit growth and identify the role of the NCA; and (iii) analyse credit risk, measured
as the size of bank provisions (as a proxy for non-performing loans), and determine if it was linked to
earlier credit expansions. Using a Hodrick-Prescott filter and a basic econometric model for credit
growth, we find evidence that the NCA appears to have facilitated the conditions for a credit boom in
2007. A second basic econometric model examines the determinant of non-performing loans and finds
that past credit growth affects bad loans with an average 6-quarter lag. We conclude that the NCA
contributed to a credit boom around 2007 and to the subsequent unsecured credit bust in 2013.
Lastly, Part IV highlights policy measures that might dampen the typical credit boom--bust cycles. A
balance is needed in consumer credit legislation to: create economic development while protecting
consumers, protect vulnerable low-income consumers while limiting business rigidities, and address
immediate needs of citizens while creating long-term sustainability.
This study may have lessons for other emerging economies who are struggling with similar problems of
opening credit markets to lower income consumers while needing to protect financial sector stability