Economic Assessment of Interest Rate Capping on the South African Economy – an Inforum Approach

2018
David Mullins, David Mosaka, Phindile Nkosi

The National Credit Act (NCA, 2005) of South Africa was introduced to “promote and advance the social and economic welfare of South Africans; to promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry; and to protect consumers”. Within this context, the Department of Trade and Industry (DTI) introduced the capping of fees and interest rates of different categories of credit in 2007. In 2015, the DTI proposed further changes to the capping of fees and interest rates, i.e. a decrease of 7.5 percentage points (from 32.7 % to 25.2 %) was proposed for unsecured lending, and a decrease of 2.5 percentage points (from 22.7 % to 20.2 %) for credit facilities. These proposed changes form the subject of this report. The point of departure for the analysis undertaken in this study is that some customers will benefit from the proposed lower interest rates; however, others would henceforth be excluded from the formal lending market by virtue of the fact that financing institutions will no longer be able to supply unsecured credit to certain high-risk customers at these lower interest rates. In practice, this implies that there will be a positive impact on the economy resulting from the fact that a category of customers will be paying a lower interest rate on credit, which means that such customers will have more money to spend on other goods and services. However, there is a conversely negative impact, in that there will be less credit available for consumer spending by a category of customers who no longer qualify for credit in the formal lending market. It is anticipated that some of these disqualified customers will turn to informal lenders for credit. The role of these informal lenders in catering for some of the credit rejected by the formal lending sector forms a critical element of this study, and it is assumed that informal lenders will charge substantially higher interest rates as compared to formal lenders. The main output of the analysis undertaken in this study is the impact that the proposed interest rate changes for unsecured credit and credit facilities will have in terms of the gross domestic product (GDP), employment, household income, and government revenue.

Atslēgas vārdi
multisectoral modelling, applied models, macroeconomy, gross domestic product
DOI
10.7250/9789934221194.004
Hipersaite
https://ebooks.rtu.lv/catalog/ekonomika-un-vadibzinatne/494/

Mullins, D., Mosaka, D., Nkosi, P. Economic Assessment of Interest Rate Capping on the South African Economy – an Inforum Approach. No: D.S.Meade, V.Ozoliņa, red. Applied Macroeconomic Multisectoral Modeling. Riga: RTU Press, 2018. 58.-75.lpp. ISBN 978-9934-22-118-7. e-ISBN 978-9934-22-119-4. Pieejams: doi:10.7250/9789934221194.004

Publikācijas valoda
English (en)