Steps to Isolate Unscrupulous Money Lenders

We are always on the lookout for useful articles to help you grow, fund, and manage your business. This article, written by Kabelo Khumalo of IOL, was originally published on their Business Blog.

Johannesburg – The South African SME Finance Association (Sasfa) announced on Friday that it has taken steps toward self-regulation to isolate unscrupulous players in the industry. The association has published a code of conduct outlining its roles and responsibilities to protect customers.

The founding members of Sasfa include Retail Capital, Merchant Capital, and Lulalend. These organizations provide financial products to small and medium enterprises (SMEs) to support growth, expansion, and urgent cash flow needs. The code of conduct is built around four key principles:

1. Clear Product Explanation
   SME finance providers must clearly explain the nature of the products offered to merchants.
2. Credit Risk and Affordability
   Finance providers must implement thorough underwriting policies to ensure appropriate credit risk and affordability criteria are met.
3. Debit Order Processing
   Finance providers must adhere to the rules set by the Payments Association of South Africa when processing debit orders.
4. Fair Marketing and Sales Practices
   Providers must monitor marketing and sales practices to ensure a transparent, truthful, and fair process for customers.

Retail Capital CEO Karl Westvig highlighted the challenges of offering fair financing to SMEs, noting that the code of conduct will ensure small businesses receive fair treatment. "The industry has low barriers to entry and can be high margin, which makes regulation crucial as these deals often fall outside the National Credit Regulations," said Westvig.

A survey by the Banking Association South Africa a few years ago sought to identify the challenges finance providers faced when funding SMEs and suggested solutions. The results showed that while all categories of SMEs were funded, higher-turnover SMEs required less support and had higher approval rates compared to smaller SMEs.

Dov Girnun, CEO of Merchant Capital, emphasized the need for safeguards to prevent entrepreneurs from putting their businesses at risk when seeking funding. "It's crucial to have best practice guidelines for pricing, disclosure, risk assessment, and collection," Girnun stated.

Last month, a group of UK lenders formed the Association of Alternative Business Finance (AABF), which aims to promote best practices in SME funding. One of their key initiatives is a centralized database for personal guarantees to prevent over-commitment by borrowers and identify potential fraudulent activity.

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