The setting aside of proof of income for granting credit | Legal Articles


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The setting aside of proof of income for granting credit

In hopes of securing new clients, clothing, furniture, food retailers and many other creditors will be building up their credit divisions. 

This is due to a recent court ruling made by the High Court in Johannesburg against the minister of trade and industry, as well as, the National Credit Regulator. 

National Credit Regulator - Attorneys Johannesburg

Proof of Income not required

The ruling held that a proof of income won’t be needed by consumers in order to apply for credit.

While the income verification requirements were removed entirely from the National Credit Act, the rest of the National Credit Act was not changed. 

Financial Inclusion

Financial inclusion is dependant of people having access to credit, however, the 2017 Consumer Credit Index of TransUnion SA suggests that this has not been taking place. 

It showed that credit has currently only been available to 25 million of the 33 million economically active South Africans. The informal economy that doesn’t receive monthly payslips make up the remaining 8 million, who have been excluded from having credit access. 

We can expect these people to be offered credit from retailers who are trying to be the first to acquire the new customer base. 

JSE-listed retailers the likes of Truworths, TFG and Mr Price argued in court about the regulation which had been introduced in 2015 so as to improve lending prudency. 

They felt that it unfairly discriminated against poor and less privileged people and those working in the informal sector who were, as a result of the requirements, unable to qualify for credit. 

While many positively welcomed the amendment the NCR felt that it was not a wise move. This was because the regulations that were done away with served as a means for a consumer's income to be validated before credit was granted. 

Without this they felt that reckless lending and borrowing will result and security of repayment to creditors will be harder to obtain. 

The NCR are not happy that the entire regulation of 23A(4) will be set aside and feel that this could perhaps lead to the country becoming further indebted than it already is. 

Household Debt Levels

Over 72% of household income around the country is being used for the repayment of debts. 

Also, of the total 53.5 million consumer accounts that were measured, it was found that 839,000 accounts were in arrears. 

Of the 25 million active credit users in the country 39.3% have impaired credit records. From these facts it is understandable for the NCR to raise concerns with the new amendment to the Act.

Alternative methods to establish income

Despite the negative reception of the ruling by some, it seems likely it is here to stay. However, lenders are still urged to make use of other methods to determine whether or not to grant a consumer credit. 

Perhaps making use of artificial intelligence, as well as, trended data could assist creditors with doing this.

The spending and financial habits of each consumer can be analysed using trended data to help with working out the individual’s financial standing. 

Also data could be traced to determine if a consumer can pay back debt, such as their place of employment, mobile usage, and the location where the person is studying.

In countries where there is a large population in the informal economy, such methods have proven useful. But perhaps the best method would be for consumers to educate themselves as this will result in them better being able to calculate expenses in order to repay debt. 

Reasonable assessment of financial status

As section 81(2) of the National Credit Act stipulates, credit providers are required to reasonably assess the financial status of a consumer before granting credit. 

Creditors can ask for proof of income from the consumer who is still required to provide authentic documentation when requested.  

Whichever way creditors choose to approach the matter of assessing a customer we are yet to see what the effect of setting aside of these regulations will have on the country.

Van Deventer & Van Deventer Incorporated - Debt Collections Cape Town and Johannesburg

Contact us for legal advice and debt collections.

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