South African Court Of Appeal Finds in Favor of Micro Finance Regulatory Council

The Supreme Court of Appeal in Bloemfontein, South Africa unanimously decided in favour of the Micro Finance Regulatory Council (MFRC) on 21 September 2005, upholding an appeal against a 2004 decision of the Pretoria High Court. In overturning the 2004 decision, the Supreme Court of Appeal thus confirmed the validity of the MFRC’s Rules. These Rules include the MFRC’s rule against reckless lending, which requires a lender to do affordability assessments prior to lending.

The Supreme Court of Appeal upheld the appeal with costs and set aside the 2004 order of the High Court.

In May 2004 the Pretoria High Court declared the MFRC Rules to be invalid. However, the Court also granted leave to appeal to the MFRC and reinstated the MFRC’s original Rules pending the outcome of the appeal. The effect of today’s judgement by the Supreme Court of Appeal is that both the original and revised Rules have been declared valid and that the legal and regulatory framework has been declared legal an enforceable. The Supreme Court unanimously confirmed that the MFRC conducts business as a private regulator of lenders, who choose to submit to its authority by agreement. The Court stated that the MFRC in exercising its function to regulate micro-lenders does not purport to be exercising legislative or other public powers requiring a constitutional or legislative source.

The MFRC welcomes the judgement as it provides clarity and legal certainty and strengthens the role of the MFRC. The judgement ensures that the MFRC can protect borrowers against unscrupulous lending practices. It similarly creates certainty for lenders who comply with the MFRC Rules and the Exemption Notice.

The CEO of the MFRC, Gabriel Davel, indicates that the MFRC’s efforts to stamp out reckless lending were hampered by the legal uncertainty. With the validity of its rules confirmed, the MFRC will step up its efforts to root out reckless lending and similar unscrupulous lending practices.