The National Credit Act (34 of 2005) states, inter alia, that a credit agreement between a credit provider and a consumer (the recipient of the credit) can constitute reckless lending if any one of three conditions are met at the time of the agreement, or at the time the amount approved is increased. 

The conditions are:

1. if the credit provider failed to conduct a detailed assessment before granting the credit or raising the amount, or, in the event that the credit provider did conduct an assessment, entered into the agreement despite the fact the information indicated that;
2. the consumer did not generally understand or appreciate the consumer’s risks, costs or obligations under the agreement; or
3. entering into the agreement would make the consumer over-indebted.

If reckless lending did occur, the court can prescribe certain remedies to the consumer who has fallen victim to such lending practices. When determining the remedy, there must be sufficient relationship between the purpose of the remedy (to discourage reckless lending and to rectify the damage caused) and the effects thereof on the credit provider. The remedy should neither go further than is necessary to rectify the prejudice suffered, nor unjustifiably enrich the consumer.

The reach of the Act, however, is limited. In most cases, credit extended to a juristic person – that is, an entity that is not a natural person but is regarded by law to have the status of a person, such as a company – is excluded. Note, there are some special exclusions for small companies where the Credit Act is still applicable. By the letter of the law, or in a de jure sense, no credit agreement to (most) companies can thus be considered as reckless lending.

But what about the spirit of the law? If there is sufficient evidence, whether explicit or implied, that the credit provider knows that the consumer will be exposed to an undue array of risks and/or costs, or is likely to be or become over-indebted due to the risks and/or costs, such lending could constitute reckless lending in a de facto sense.

Let us consider an example: within the context of global change – including climate change – change is a daily reality. All practices that either advance and/or fail to mitigate and adapt to such reality will invariably increase the risk to the consumer and add to the general cost burden. This is well illustrated within the agricultural sector. Credit extended to a farmer who applies conventional practices such as deep tillage, mono-cropping and practices that excludes cover crops, to name but a few, often advances the release of carbon in the atmosphere and destroys soil life and biodiversity. It does not enhance long term sustainability, on the contrary. 

These practices neither mitigate the effects of climate change nor do they adapt to changes therein, or enhance biodiversity and system-wide resilience. It could be argued that credit-lending practices that advance such production methods are irresponsible and reckless. Especially since such credit extension must consider the long term implications of the lending activity in its due diligence. 

What is more, the protection of natural resources, environmental security and food security are all matters within the ambit of the definition of national security. By supporting conventional agriculture thus directly and unequivocally endangers the country’s national security. 

It is the long term that matters since credit in agriculture, unlike seasonal commodity financing, affects the quality and quantity of natural resources that are aeons old, and that are supposed to support life for centuries to come. 

The irresponsibility of such lending practices is furthermore accentuated by the fact that profitable alternatives – that heal the land while reducing the carbon footprint of farming and build biodiversity, protect natural resources, and enhance resilience – are available. These practices can be lumped together under the broad umbrella of being aligned to climate-smart conservation and regenerative methods – to which a supporting policy environment is also required.

Given the change in external conditions, increases in the cost of external inputs such as chemical fertilisers, pesticides and herbicides and the deterioration of the quality of the soil, the profit margins of conventional agricultural practices are, in most cases, declining while the risk burden is increasing. Lending institutions must be acutely aware of this cost spiral and risk burden, given the vast amount of literature on the topic. Lending agreements are thus potentially subject to reckless lending practices in a de facto sense. 

Although reckless lending cannot be argued by the letter of the law, and there is thus no legally imposed remedial action possible, clearly it is not in the spirit of the law. The inevitable outcome of such lending practices is a further deepening of the degree of farmer indebtedness leading to an escalation of the number of financially distressed farmers.  

With the debt burden increasing and the external conditions deteriorating, farmers are increasingly unable to honour their debt repayments. This puts financial pressures on lending institutions, such as the Land Bank is currently experiencing. The Land Bank is thus subsequently unable to honour its commitments to its creditors. 

Advancing credit to support and advance conventional practices can thus place pressure on the farmer and the financial system, and in the process advance the mismanagement of the country’s natural resources through soil erosion and biodiversity loss because of inadequate resources – and it jeopardises food security. 

What is more, the protection of natural resources, environmental security and food security are all matters within the ambit of the definition of national security. By supporting conventional agriculture thus directly and unequivocally endangers the country’s national security. 

There could have been mitigating circumstances for the persistence of such funding practices if alternatives were not available. However, more than sufficient proof, at all scales and in all contexts, exists in South Africa. Climate-smart conservation and regenerative agriculture are also strongly supported by the UN and FAO Decade of Family Farming, the UN’s Decade of Ecological Restoration, and the UN’s 17 Sustainable Development Goals (SGDs) – agreements that are underwritten by the South African government. 

Lending institutions should reconsider funding conventional agriculture that constitutes reckless lending in a de facto sense, while escalating the risk of the country’s national security profile. Rather, lending institutions should actively support the nationally endorsed sustainable alternatives, and promote sustainable and regenerative practices using existing policies and frameworks. DM