The effects of the National Credit Act and the global financial crisis on domestic credit extension: Empirical evidence from South Africa

Abstract

This paper examines the impact of the new National Credit Act (NCA) No. 34 of 2005 and the global financial crisis on credit extension provided by all monetary institutions in South Africa. The econometric approach is estimated by way of ordinary least squares while controlling for several macroeconomic factors. The findings indicate that there was a general increase in the consumer credit provision in the period subsequent to the full implementation of the Act. The promulgation of the Act increases credit card, bank overdrafts, other conventional loans and total credit to the private sector categories. The implementation of the Act fails to reverse this trend but exerts a negative influence on lease finance and the global financial crisis has significant negative effects on most of the credit provision categories. The paper seeks to investigate an under-researched area on the interrelatedness of credit provider regulation, financial crises and credit extension.

Measuring the effect of the national credit act on indebtedness in South Africa

“…The two papers (Renke, 2011;Stoop, 2009) therefore lack the empirical evidence to suggest that the NCA has reduced the number of consumers who have become overindebted. Others papers such as Adewale (2014) and Chipeta and Mbululu (2012) investigated the effects of the NCA on the level of consumer credit lending and the effects on the overall economic growth. These papers did not investigate the NCA's ability to reduce the risk of consumers becoming highly indebted.…”

“…A second dummy variable will be introduced for the period September 2008 (Q3) to December 2009 (Q4) to account for the effect of the 2008 credit crisis on the levels of over-indebtedness (Chipeta & Mbululu, 2012). It is expected that there will be a positive relationship during the credit crisis period, as the crisis had an overall negative effect on the economy, thus negatively affecting consumers' ability to service their loans.…”

“…In order to capture the pre-and post-effect of the NCA on overdue loans, a dummy variable will be introduced. The NDUM variable will capture the effects of the macro-economic conditions on the levels of over-indebtedness after the introduction of the NCA (September, Q3 2007), (Chipeta & Mbululu, 2012). Although it is stated by Renke (2011) and Stoop (2009) that the NCA was tailored to reduce consumers from becoming highly indebted and thus reduce the number of over-indebted consumers, it is expected that the NCA will have an overall negative effect on the level of over-indebtedness.…”

“…The use of the OLS regression method will enable the use of certain tests and the introduction of dummy variables to account for the effects of the NCA on overindebtedness. Papers that employ the OLS regression model include bank credit stress testing (Kalirai & Scheicher, 2002;Zeman & Jurac, 2008;Havrylchyk, 2010), bank risk provisions (Arpa, Giulini, Ittner & Pauer, 2001), bank loan quality (Bofondi & Ropele, 2011;Shu, 2002) and determinants of credit demand (Chipeta & Mbululu, 2012). In justifying the use of the OLS regression method, the above bank credit stress testing, bank risk provisions and bank loan quality papers all employ the OLS regression model to regress a series of macro-economic determinants to their specific dependent variable in order to establish a relationship.…”

“…Although, theoretically, the tailored regulation was a suitable method of reducing the high levels of consumer credit in South Africa, the literature seems to lack the empirical evidence to prove the NCA's effectiveness in its ability to prevent over-indebtedness by reducing consumers' debt load. To the authors' understanding, only two other papers (Adewale, 2014;Chipeta & Mbululu, 2012) have investigated the influences of the NCA. Their focus was, however, on the effects of the NCA on the level of consumer credit lending and the effects on the overall economic growth; they did not investigate the NCA's ability to reduce consumers from becoming highly indebted.…”