No new business can prosper without access to start-up capital, and the regulatory environment must not stand in the way of this process. In other words, South Africa’s economic future is not served by do-gooder statutory restrictions on financing. As such, significant amendments should be made to the National Credit Act, as well as the Banks Act, to ease pressure on small businesses that seek to finance their growth.
In particular, the National Credit Act’s credit restrictions and limits on interest rates should be repealed, alongside the requirement under the Banks Act that financial intermediaries register as banks before they may borrow from the public to lend to small businesses.
This is according to the authors of Laws Affecting Small Business: Finance, which is part of a series of research booklets published by the Free Market Foundation. The LASB booklets cover eight areas of government legislation and regulation that harm and hinder the establishment and growth of small enterprises in South Africa.
The National Credit Act (NCA) prohibits lenders from charging small business borrowers more than the repo-rate plus a prescribed interest rate of 27% per year. The result is that lenders often cannot recover all their overheads plus profit, meaning they avoid making loans available to higher-risk borrowers, or avoiding small loans entirely.
Aspiring small business entrepreneurs are the biggest victims of this phenomenon.
These interest rate ceilings in the NCA should be repealed. Lenders must be allowed to charge the market rate so that they no longer take an excessive risk by lending to small businesses or making smaller loan amounts available.
Of course, many people would object and claim that these ceilings protect the poor from exploitation. Lenders must just accept the risk and comply with the NCA’s restrictions, it is sometimes said. Unfortunately, this is not the reality of voluntary economic transactions. Fixing a maximum interest rate does not help the poor acquire loans at lower interest rates, but rather excludes the poor from loans per se.
If these ceilings are not repealed, the NCA should be amended to exempt small loans of up to around R175,000, adjusted annually for inflation.
The Banks Act, in turn, prohibits anyone from accepting deposits from the public as a regular feature of business unless that person is registered as a bank, and only a public company may register as such. This is a prohibitive requirement, as a bank must maintain capital and reserve funds above R250 million, or 10% of its quarterly average assets, whichever is greater.
In other words, no small business could ever register as a bank, meaning no small enterprise could ever be in the business of taking deposits from the public for the purpose of lending out. The exceptions for stokvels and savings unions are too narrow.
The Banks Act should be amended to allow aspiring lenders to take deposits from the public to fund their own lending operations – particularly when lending to small businesses – without needing to be registered as banks. This would be more risky to the public, of course, but the public would expect higher interest rates in return for taking on that risk. So long as the public is aware of the risk – transparency may be mandated – the market should be freed from government restrictions.
These are only some of the recommendations from this particular LASB. The LASB booklets represent one-third of the Free Market Foundation’s book, Radical Economic Transformation: The Legal Route to Economic Freedom, which proposes a comprehensive reform package that will get the South African economy prospering through widespread deregulation and liberalisation.
With the economy and ordinary South Africans in dire straits financially, it might be time for the political class to shelve its paternalistic attitudes, at least temporarily, while the market and the public are allowed to adapt to the crushing situation political actors locally and abroad have put us in.