This article is meant as an overview of the National Credit Act No. 34 of 2005. Please consult your attorney to discuss specific aspects of the Act. The National Credit Act No. 34 of 2005 (“the Act”) is the most comprehensive legislation applicable to the Credit Industry in South Africa ever promulgated. The Act has replaced and repealed all previous legislation governing the credit industry in South Africa and forms the backbone of a new era for credit.

The Act replaces, inter alia, the Credit Agreements Act and the Usury Act and now regulates legal concepts previously regulated by the common law, such as the in duplum rule and consumer confidentiality in respect of credit information.

The implementation of the Act commenced on 01 June 2006 following a stepped approach, in terms of which certain portions of the Act became applicable from the aforesaid date, but as from 01 June 2007, all the provisions of the Act, became fully operational.

Registration as a Credit Provider

Legal entities that were required to register as Credit Providers had until 01 June 2006 to register as such, even though this period was extended by the National Credit Regulator to 23 July 2006.

Broadly speaking, all businesses who have more than 100 credit agreements or have total principal credit extended under credit agreements of more than R500,00.00 must register as a Credit Provider with the National Credit Regulator (“NCR”).

There are however various exceptions to this criteria and the Act only applies to credit agreements that are regarded as credit agreement for the purposes of the Act.

Therefore if a creditor extends credit under a credit agreement as defined in the Act, then that creditor will need to comply with the Act and register as a Credit Provider.

Conversely, if a creditor does not extend credit in terms of a credit agreement as defined in the Act, then that credit agreement is not governed by the Act at all and therefore is not taken into consideration for establishing whether the creditor must register as a credit provider, even though certain other provisions of the Act may remain applicable to that credit agreement, depending on the type of agreement.

To clarify, in terms of the interpretation of the Act, it is therefore possible for a Credit Provider to grant credit to consumer in instance where some of the credit agreements entered into with consumer are taken into consideration for the purposes of establishing whether the credit provider must register as a credit provider, while other credit agreements will not be taken into consideration.

A failure to register in circumstances where the Credit Provider needed to have been registered as a Credit Provider can have substantial financial repercussions for a business in terms of penalties and further the agreements entered into at such a time may be declared null and void since inception.

It is therefore prudent of any credit provider to approach their attorney for the purposes of establishing whether they need to register as a Credit Provider in terms of the provisions of the Act.

Interest rates

Interest rates offered by credit providers are regulated in respect of different caps applicable to different categories of credit agreements and the Reserve Bank’s repo rate (“RR”) is used as a benchmark.

Variable interest rates are only valid if linked to the fluctuations as agreed to in the credit agreement and such fluctuations must be in reference to changes in the repo rate.

Variation of interest rates by credit providers may no longer be based on any other factors, other than as defined in terms of the credit agreement and as allowed in terms of the Act.

The interest rates caps applicable to the different types of credit agreements, are as follows:

Type of Credit Agreement  Maximum Prescribed Interest Rate
Mortgage Agreement [(RR X 2.2) + 5%] per annum
Credit Facility [(RR X 2.2) + 10%] per annum
Unsecured credit transaction [(RR X 2.2) + 20%] per annum
    
Developmental credit agreements:   
- For the development of small business [(RR X 2.2) + 20%] per annum
- For low income housing (unsecured)  [(RR X 2.2) + 20%] per annum
    
Short term credit transactions 5% per month
Other credit agreements [(RR X 2.2) + 10%] per annum
Incidental credit agreements 2% per month

Small, medium & large Credit Agreements
The Act has divided Credit Agreements into the following categories:

Small = R15,000.00
Intermediate > R15,000.00 and < R250,000.00
Large = R250,000.00

With regard to the disclosure of information in respect of credit agreements, the onus in respect of small and medium credit agreements are more onerous, requiring credit providers to supply a pre-agreement and quotation showing the capital, interest rate, cost complement and minimum instalment required.

The pre-agreements quotation gives the consumer a cooling-off period of five days to consider and accept the credit agreement and, if accepted, the credit provider must enter into the agreement at the quoted rates.

If the agreement is a small credit agreement the regulations to the Act prescribes compulsory forms, whereas intermediate and large credit agreements do not have prescribed forms, but have minimum criteria specified in terms of the regulations to the Act.

Applicability of the Act to juristic persons

One of the main purposes of the Act is consumer protection and for this reason the applicability of the Act to juristic persons and to large agreements has been limited in a number of respects.

In this regard, the Act is not, inter alia, applicable to a credit agreement in terms of which the consumer is a juristic person and –

  1. that juristic person has an asset value or annual turn over, together with the asset value and annual turn over of all related juristic persons, exceeding R1million;
  2. the credit agreement is a large credit agreement (exceeding R250,00.00); or
  3. the credit agreement is a mortgage agreement.

For more information regarding the content of this article, please contact our offices on +27 41 396 9200.