Abstract
South Africa continues to exhibit high levels of debt-to-disposable income along with a high number of impaired credit records. The National Credit Act No. 34 of 2005 (NCA) was established in order to address these high levels. This study expands the limited research by investigating the NCA’s ability to reduce levels of over-indebtedness. The study employed quarterly data (2001-2013) in an OLS regression model in order to establish the determinants of over-indebtedness and assess the impact of the NCA. It was found that the macro-economic variables GDP, prime rate, property prices, consumer consumption expenditure, debt-to-disposable income and the level of unemployment were major contributors to the level of over-indebtedness. The NCA proved to have a positive significant effect on the levels of over-indebtedness, indicating that the NCA had not succeeded in its purpose of reducing the vulnerability of consumers to becoming over-indebted. The results suggest that the affordability assessment of the NCA must be improved in order to conduct a form of credit stress testing on consumers during their application for credit.
Highlights
Consumer credit plays a major role in the financial empowerment of consumers
The debt-to-disposable income (DDI) variable has a high correlation with four other independent variables, namely gross domestic product ((LOG)GDP), property prices ((LOG)PP), consumer consumption expenditure ((LOG)CONS) and unemployment (UNE)
This study contributes empirical evidence of the National Credit Act’s (NCA) attempt to reduce the level of over-indebtedness in South Africa
Summary
Consumer credit plays a major role in the financial empowerment of consumers. The availability of credit enables consumers to have the option of usage and/or ownership of an item or resource today with a delay in paying for it. Credit enables consumers to accumulate assets over time and react to possible opportunities of arbitrage. This empowering role of credit towards a consumer translates into faster economic growth of an economy. There is recognition of the advantages of consumer credit to the household sector and the overall financial and economic system, the over-usage of credit has the ability to negatively affect the consumer and the stability of an economy. The 2008 credit crisis serves as an example of how a consumer credit crisis can quickly escalate into a global financial crisis
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