The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) has issued a directive aimed at regulating charges imposed by micro-lenders as part of efforts to reinforce consumer protection measures within the financial sector.
In a new guidance note addressed to the micro-lending sector, pawnshops, finance, and leasing companies, NBFIRA CEO Oduetse Motshidisi clarified the reasonability of charges stipulated under Regulation 14(4) of the Micro Lending Regulations. According to the directive, the amount charged in a loan agreement should not exceed 60 calendar days’ interest on the outstanding principal amount. Furthermore, the charge should only apply in cases where a borrower has opted not to provide written notice of 30 calendar days—or a shorter period as prescribed by the lender—before settling their debt.
“The Regulatory Authority hereby gives guidance to micro-lenders, through this Guidance Note, that the reasonability of the amount stipulated in the loan agreement in terms of Regulation 14(4) is that the amount should not be more than 60 calendar days’ interest on the outstanding principal amount,” stated Motshidisi.
He added that micro-lenders, pawnshops, finance, and leasing companies that choose to stipulate early settlement amounts in their loan agreements “are directed to amend their loan application forms to indicate that such a fee is applicable only where borrowers did not give 30 calendar days’ notice or a shorter notification period, and the maximum penalty shall not exceed 60 days’ interest on the outstanding principal.”
Motshidisi noted that there is currently no standardisation regarding early settlement fees across the industry, necessitating the Regulatory Authority’s intervention to provide clarity on the application of the provision.
“In addition, this Guidance Note serves as an intervention to mitigate the expected interest rate risk and the loss in expected interest income that micro-lenders incur when borrowers make early settlements, particularly for larger agreements with loan tenors of more than a year,” said Motshidisi.
He explained that there is no stipulated general procedure for charging early settlement fees in loan agreements issued by micro-lenders. “Some micro-lenders grant borrowers the option to give a notice period, whereas some do not accord borrowers that option,” said Motshidisi.
He further highlighted that micro-lenders generally apply different methods when charging fees for early settlement. “Some micro-lenders charge a prescribed standard fee, whereas others charge a fee equivalent to a pro-rated interest for the respective month, depending on the settlement date. Therefore, the methods applied by micro-lenders when charging fees for early settlement vary and are not standardised,” said Motshidisi.
The directive aims to bring consistency and fairness to the micro-lending sector, ensuring that borrowers are not subjected to excessive or arbitrary charges while balancing the financial interests of lenders.
