Higher Interest Rates and Over-Indebtedness: A Comparison of Conventional and Islamic Banking

• Jurisdiction: South Africa
• Pages: 405-416
• Author: Phumudzo S Munyai
• Date: 25 May 2019
• Published date: 25 May 2019
• Citation: (2010) 22 SA Merc LJ 405

Higher Interest Rates and Over-Indebtedness:

A Comparison of Conventional and Islamic

Banking*

PHUMUDZO S MUNYAI**

University of South Africa

1 Introduction

As the variable interest rate lending system has resulted in higher interest

rates and therefore over-indebtedness in South Africa during the recession, a

f‌ixed and stable interest rate system in the debtor’s repayments of his or her

obligations can be mooted as more secure.

1

The biggest problem to emerge as

the single cause of over-indebtedness in South Africa after the National Credit

Act (NCA)

2

came into force is higher interest rates. The spate of interest rate

hikes between 2006 and 2008 left consumers having to deal with higher

monthly repayments. Those with small and f‌ixed earnings found themselves

incapable of making repayments because of their inability to deal with

unforeseen changes.

3

We have been inundated with reports of a signif‌icant

number of consumers losing their homes and facing repossession of other

valuable items purchased on credit, mainly cars. To protect themselves from

continued default by borrowers, some lenders took drastic steps such as

appropriating the debtor’s entire salary to recover outstanding payments, a

practice described by the Banking Ombudsman as ‘morally repugnant’.

4

The

debt crisis during this period of higher interest hikes also led to a higher

number of insolvencies for individuals. A report by Statistics South Africa

indeed revealed a substantial increase in the total number of individual

insolvencies recorded between 2007 and 2009, the period during which the

effects of higher interest rates were greatly felt by consumers.

5

Our consumer laws, notably the NCA and the Consumer Protection Act

6

(the CPA) fail to provide adequate measures against over-indebtedness,

*This article is an improved version of a conference paper entitled ‘How to Curb Consumer Debt:

Lessons From Islamic Finance Law – A SouthAfrican Perspective’, presented at the 12th International

Conference on Consumer Law held at NALSAR University of Law, Hyderabad (India) from 25-27

February 2009. This article does not seek to argue for the abolition of the interest-based lending system;

instead, it seeks to argue for a f‌ixed interest-based system with maximum rates set by law to protect

consumers against higher interest rates and over-indebtedness.

**LLB (UP). Lecturer, Department of Mercantile Law, School of Law, University of South Africa.

1

Financial Mail (10 October 2008) at 21.

2

Act 34 of 2005.

3

See PJ Aronstam Consumer Protection, Freedomof Contact and the Law (1979) at 65.

4

See ‘The Ombudsmen are Clearly not Impressed’ The Star (13 October 2008) at 7, available at

http://www.thestar.co.za/index.php?fSectionId=234&fArticleId=vn20081013054915853C453810 (vis-

ited on 26 August 2010).

5

For recent information, see Statistics of Liquidations and Insolvencies P0043 (June 2010), available

at http://www.statssa.gov.za/publications/P0043/P0043June2010.pdf(visited on 24 August 2010).

6

Act 68 of 2008.

405

(2010) 22 SA Merc LJ 405

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