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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Oct 8, 2012

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In South Africa, the nation’s largest banks have decided to put the brakes on a recent boom in unsecured personal loan lending. This comes after the South African government expressed concerns and criticism that the banks were encouraging customers to borrow money beyond their means to repay. In effect, this sounds quite similar to the subprime mortgage crisis experienced here in the United States not so long ago.

The South African National Credit Regulator (NCR) also expressed concern that too many already-indebted people were borrowing unsecured personal loans.

Despite concern from the South African government and the NCR, banks did begin these lending cutbacks following internal risk assessments. So, it is possible that the banks themselves are the cause of these cutbacks rather than any governmental pressure.

Credit analysts speculate that some borrowers only obtained unsecured personal loans in order to repay existing loans—in essence, refinances and consolidations. This was particularly true with micro-lenders and clothing retailers. Banks also expressed concern about the 76 percent debt-to-income ratio of South African households.

NCR analysis found that unsecured credit’s share of capital rose by 31 percent in the first quarter of the year to total nearly $2.5 billion.

Downplaying any government and regulatory concerns, the CEO of First National Bank, Michael Jordaan, stated that unsecured personal loan lending was down due to market saturation and more stringent lending criteria.

Peter Schlebusch of Standard Bank stated that his specific financial institution was decreasing unsecured personal loans lending because it was going to focus on qualified customers.

“We are watching closely defaults and we have definitely tightened our risk appetite in some marginal businesses in unsecured lending. It is sort of fine-tuning our risk based on recent and new information,” said Schlebusch in an interview with South African news-provider BusinessDay.

The head of Absa retail markets, Arrie Rautenbach, said that it was essential to educate consumers about both good and bad borrowing practices. He said that prospective borrowers should be informed that it was “not a good practice” to finance secured assets with unsecured personal loans.

The outgoing deputy CEO of Absa, Louis von Zeuner, concurred with Rautenbach and said that consumer education was of prime importance now that the spending season was fast approaching.

Mike Brown, CEO of Nedbank, said that his financial institution was “in good shape” to deal with any market changes within South Africa that could include an increase in unsecured personal loan defaults.