Traditionally in South Africa loans to buy homes are issued on the security of the home itself. In the days when the building societies controlled this market, says Gavin Zinn, National Manager of Rawson Finance, in many cases the home was considered sufficient security provided that the borrower appeared to be firmly ensconced in his or her job and had a good credit record.
Then, says Zinn the banks were given permission through the new Financial Institutions Act to become involved in this field and rapidly became the dominant lending force, absorbing the building societies into their structures.
“They did, of course, make full use of the building societies’ experience and used many of their criteria to assess applicants - but the emphasis now swung away from the property as security and was instead placed on the client’s assets, earnings and future potential,” says Zinn.
“Now, since the advent of the National Credit Act, ‘credit scoring’ to qualify for a loan has become a lot more stringent. What concerns me is that it is done with very little (sometimes, indeed, none at all) face-to-face interaction. The useful skills that traditional, shrewd building society staff built up over the years in assessing clients have now been lost and in their place we have a set of ‘credit scores’ which are often interpreted differently by different banks.”
Zinn says that under the current rating systems the clients themselves often let the side down and fail to get a loan because they do not disclose their full credit situation and in many cases also neglect to support their statements with the documentation that these days is absolutely essential.
“One result of the current tightening up and ‘credit scoring’,” says Zinn, “is that it is very difficult indeed now to get a 100% loan.”
He and his colleagues at Rawson Finance would now very much like to see the reintroduction of a system widely used in the days of the building societies.
“In the 80s,” he says, “it was customary for large corporations – and others – to guarantee 10% or 20% of a home loan for their employees as a reward for good service or as part of an executive package. The security would then be the employee’s pension fund, from which they were legally entitled to deduct amounts owing if the employee left their service.”
The corporates’ deal with the building societies, adds Zinn, was not altogether disadvantageous to them because if they did advance money for this purpose it was almost invariably paid at a low interest rate.
“These traditional collateral housing schemes,” says Zinn, “were highly effective in the past and helped to create the property owning society that every South African government has said is its aim. They also helped generate considerable client loyalty and deterred people from leaving on account of trivial disappointments.
“Now, in my opinion, is therefore the time to introduce those schemes as a way of keeping home ownership going forward in South Africa.”