Unsecured Lending in South Africa May Shrink by 25%, Avior Says

South Africa’s market for loans not backed by collateral may shrink by a quarter if government proposals to cap interest rates win approval, said analysts at Avior Capital Markets who spoke with unsecured lender Capitec Bank Ltd.

“Management expect the formal unsecured credit market to shrink by about 20 billion rand ($1.57 billion) per year due to interest rate caps,” Avior analysts Harry Botha, WJ De Vries and Bjorn Zietsman said in a note to clients.

South Africa’s department of trade and industry has suggested cutting the maximum interest rate lenders can charge on unsecured credit to 24.78 percent from 32.65 percent, with the aim of reducing indebtedness among consumers. African Bank Investments Ltd., the country’s biggest unsecured lender, collapsed last year amid rising bad debts and a lack of funding. Others operating in this market include Capitec, once African Bank’s biggest rival, and retailers like Lewis Group Ltd.

Consumers accessed 82 billion rand of unsecured and short credit last year, Avior said in the report dated July 24 , citing National Credit Regulator figures. The extent of these loans underscore that a sudden reduction could harm the economy, strengthening the case for Capitec and other credit providers to lobby for lower or more gradual implementation, it said.

If the government goes ahead with its proposals, the number of loans Capitec gives out will probably drop, Avior said. South Africa’s biggest four banks, which include Standard Bank Group Ltd. and FirstRand Ltd., “are also likely to oppose the new interest rate caps,” said the research company, which has an underperform rating on Capitec stock.

“The interest rate caps will fast-track Capitec’s plans to expand into other products and services,” Avior said. “We do not expect any changes to interest rate caps to be implemented before the beginning of 2016.”

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