COSATU backs court action against loan sharks
The Congress of South African Trade Unions supports the court action presently being taken on behalf of workers who have fallen victim to South Africa's unsecured lending industry, who see their wages disappear even before they get them, via "emolument attachment orders' (EAOs), commonly known as "garnishee orders", that force an employer to deduct money owed to a creditor from a person's monthly salary.
The market for unsecured personal loans has quadrupled over the past six years, to R164 billion, 11% of all loans in the country. And about 25% of unsecured loans were ‘nonperforming' - meaning that they hadn't been repaid in three months or more - up from 14% in March 2012.
The default rate in the past six years has hovered around 16%, but jumped by almost 10% in 2014. The African Bank has already had to be bailed out by the Reserve Bank, after it faced bankruptcy as it had too many ‘non-performing' leans, which is could not recover.
Thousands of workers' families are stuck in a debt trap, as a consequence of this reckless lending, by both established banks, and ‘mashonisa' loan sharks, who get their money back by deducting debt repayments, plus exorbitant interest charges, from the workers' wages through EAOs.
The plight of the debtors is made worse as a result of decades of financial exclusion under apartheid. Most Black South Africans don't have deeds to their homes, to use as collateral. Even other assets, such as cars, were often also bought with money from the unsecured loan market so they can't then use them as collateral either.
The loans are usually guaranteed by nothing other than a pay slip, and interest rates are as high as 40%, five times the country's average lending rate.
One of those supporting the court action, Wendy Appelbaum, owner of De Morgenzon wine estate in Stellenbosch, became involved after learning that some of her farm workers had up to 80% of their salaries attached through EAOs. COSATU agrees with her contention that "They had lost their constitutional and civil rights".
So the University of Stellenbosch's Legal Aid Clinic (LAC) is making an application on behalf of 15 consumers to have the EAOs granted against their salaries declared null and void. The LAC also seeks to have certain sections of the Magistrates' Court Act (MCA), which deals with the granting of EAOs, declared unconstitutional.
The court action is being brought against 13 credit providers and the law firm that facilitated their EAOs, Flemix & Associates, who argue that EAOs are "the only effective and humane means to enforce and protect the rights of all involved in a debt/lending relationship".
However Anton Katz SC, representing the LAC, told the court on 16 February 2015 that "a group of creditors used ‘trickery' to have EAOs served on unsuspecting consumers" and requested Judge Siraj Desai to report the legal team representing the creditors to the Law Society for non-compliance with the Magistrates' Court Act and unfair practices.
He told the court about one of the 15 consumers who is a single mother struggling to cope financially: "The deductions were almost 50% of her monthly wages ... The facts of the other applicants are just as bad. Under no circumstance can this be allowed in a court of law".
Speaking on behalf of the South African Human Rights Commission (SAHRC) as a Friend of the Court, Advocate Jason Brickhill argued that red flags should be raised when EAOs exceed 30% of a debtor's salary.
Magistrates, he said, needed to consider the portion of a debtor's salary deducted by way of an EAO in order to provide effective judicial oversight and protect human rights. There does seem to be widespread abuse of EAOs, he said, throwing into question whether the oversight of a magistrate at the judgement stage is sufficient.
Caps on salary attachment orders are common in other countries, such as the USA, Australia, Germany and Rwanda. In the US, a cap of 25% is imposed, while in Australia there is a monetary cap of $447.
One of the constitutional challenges brought by the LAC against the MCA is that it does not insist on the oversight of a magistrate when an EAO is granted. This results in clerks or court officials processing EAOs without regard to the effect that excessive deductions will have on the livelihood of the debtor which is in effect is an infringement of the constitutional right to dignity.
The EAOs in question were all granted to Flemix in jurisdictions far from where the debtors lived or worked, which are neither where the debtor lives nor works. Katz argued that this was the incorrect interpretation of the MCA, unlawful, unconstitutional and "distasteful to the extreme". He went recommended that Flemix be reported to the law society and have a punitive costs order granted against it.
Flemix's only counter-argument was that they use courts other than the local court in Stellenbosch (where most of the applicants reside) because Stellenbosch puts up "irrational requirements", which compromises its own constitutional right of access to courts.
Katz countered that if a magistrates court was found to be ‘irrational', the "logical next step" would be to bring such a proposition on review to the High Court, rather than ‘forum-shop' for a court somewhere else that suited the purposes of the debt collector.
COSATU hopes that the court action succeeds, but whatever the outcome, the federation will continue its battle against mashonisa and reckless lending practices, as part of our broader campaign for the complete transformation of the financial sector.
We have to end the stranglehold of the big four banks, their smaller rivals and the loan sharks. Our goal is a state or co-operatively owned banking system which is responsibly but democratically managed to provide affordable loans to all who need them and to serve the interest of all South Africans equally.
Statement issued by Patrick Craven, COSATU national spokesperson, February 23 2015
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