n SA Mercantile Law Journal = SA Tydskrif vir Handelsreg - Higher interest rates and over-indebtedness : a comparison of conventional and Islamic banking

Volume 22, Issue 3
  • ISSN : 1015-0099
  • E-ISSN: 1996-2185



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. The biggest problem to emerge as the single cause of over-indebtedness in South Africa after the National Credit Act (NCA) 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. 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'. 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.

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