The Behaviour of South African Consumers Under Debt Counselling

Abstract

Purpose: The National Credit Act, No. 34 of 2005, introduced debt counselling as a means to relieve consumer over-indebtedness in South Africa. This South African experience can inform the current regulatory interest in consumer protection within financial services. Why do many consumers who enter debt counselling subsequently fail to make the agreed payments as they enjoy legislated advantages under debt counselling? The consequential exit from debt counselling can ultimately lead to default on the underlying credit agreements and possible sequestration. Approach: Access to a large proprietary dataset allows this question to be answered. Expectations and techniques from consumer credit scoring were used to make sense of the data. Findings: Overall the results show that the behaviour of consumers under debt counselling is similar to consumer behaviour in consumer credit, yet more rational. South African consumers only persist with debt counselling whilst the benefits outweigh the costs indicating that debt counselling accomplished a partial transfer of power from financial institutions to consumers. Social implications: The results show that low-income consumers are not benefitting from debt counselling, in contrast to the aims of the National Credit Act, No. 34 of 2005. This is because they are not often taken on as clients by debt counselling firms and because low-income consumers rationally choose to withdraw from the debt counselling relationship by skipping payments. The results also show that the minority of a consumer’s credit agreements are included in their debt counselling arrangement. The evidence shows that consumers derive benefit from the lengthening of payment terms available under debt counselling. Limitations: Only data from a single debt counselling firm was considered and might not be representative of the entire population of debt counselled consumers. Variables related to exit from debt counselling could have been omitted from the regressions.