CONSUMERS’ PERCEPTION of THE COST of CREDIT DEFAULT in THE VEHICLE FINANCE INDUSTRY in SOUTH AFRICA
Keywords:finance cost, customers, financial institutions, and credit default risk
AbstractThe risk that a borrower may not fulfill his/her borrowing obligation presents the credit owner (lender) a default risk management opportunity to maximize the risk-adjusted rate of return and to maintain minimum exposure to default associated cost. This paper investigated respondents’ perception of the cost of credit default and examines requirements for default risk management (DRM) in the vehicle finance industry in South Africa. It is noted that with an increased level of consumer indebtedness, unstable economy, high unemployment, opportunistic risks like health pandemics, vehicle financing faces a higher probability of default from borrowers. This descriptive investigation utilized a quantitative approach using a survey method to collect data from 381 purposive randomly selected respondents who are vehicle finance customers in South Africa, Cape Town specifically. Data collection took place in the Western Cape over a nine-month period, utilizing personal interviews, and emails to administer questionnaires to vehicle finances’ customers as data collection instruments. Responses received were codified and quantitative data were analysed using the Statistical Packages for Social Sciences (SPSS version 25) The paper found mixed and variable respondents’ perceptions of the cost of credit default. In conclusion, it is perceived that South Africa's debt would become more costly with credit default. It can be recommended that a default risk management intervention be applied to manage credit default risk within the context of the unified credit assessment policy in South Africa.
Azariadis, C. 2018. Credit cycles and business cycles. https://doi.org/10.209955/r.2018.45-71
Basel Committee on Banking Supervision.2003. Copyright policy. http://www.bis.org/publ/bcbs98.htm
Bonfim, D. 2007. Credit risk drivers: Evaluating the contribution of firm level information and macroeconomic dynamics. Unpublished Master thesis. Economic research department, Portugal.
Brown, K. & Moes, P. 2014 Credit Risk Management. Edinburgh Business School: UK
Bolton, C. 2009. Logistic regression and its application in credit scoring. Unpublished PhD thesis, University of Pretoria, Pretoria.
Competition amongst banks good or bad? 2005. Economic perspectives for 2001. https://econpapers.repec.org.
Credit Bureau Monitor. 2017. National Credit Act No 34 of 2005. www.ncr.org.za [17 June 2018]
Crouhy, M., Galai, D. & Mark, R. 2000. A Comparative analysis of current credit risk models. Journal of Banking & Finance, 24:59-117.
Davydenko, A.S. 2007. When do firms default? A study of the Default Boundary. Unpublished Master thesis, University of Toronto, Canada.
Devault, G. 2019. Learn about using cross tabs in quantitative research. The balance small business: 19 March 2019.
Duffee, G.R. 1999. Estimating the Price of Default Risk. Federal Reserve Board, 12(1):197-226, Spring.
Dumbrava, V.2013. Using probability- Impact Matrix in Analysis and Risk Assessment Projects. Journal of Knowledge Management, Economics and Information Technology: 76-96, December.
Giesecke, K. 2005. Default of Information. Journal of Economic Dynamics &Control, 2281-2303, July.
Gilbert, A.T. 2013. Analyzing financial risk management in Banks: Evidence of Liquidity, Credit and Capital risk in South Africa. Unpublished Master thesis, University of Eastern Mediterranean, North Cyprus.
Golafshani, N. 2003. Understanding reliability and validity in qualitative research. The Qualitative Report, 8(4):597-607, December.
Gumparthi, S. 2010. Risk Assessment for Assessing NBFCs (Asset Financing) Customers. International of Trade and Finance, 1(1):2010-023X, June.
Gunduz, Y., Memmel, C., & Raupach, P. 2012. The common drivers of default risk. Deutsche Bundesbank, 36.
Heimlich, E.J. & Ardoin, M.N. 2008. Understanding behaviour to understand behaviour change. Environmental Education Research, 14(3):215-237, June.
Igwenagu, C. 2016. Fundamentals of research methodology and data collection. https://www.researchgate.net/publication/303381524 [19 April 2019].
Imbuga, M. 2012. An assessment of the effect of inflation on loan repayment among commercial banks. Unpublished Master thesis, University of Nairobi, Nairobi.
Jacobs, L. 2017. Interview with the researcher on the 20 May 2017, Cape Town.
Kealhofer, S. & Rohn, R. J. 1993. Portfolio management of Default risk. San Francisco: KMV.
Marcucci, J. & Quagliariello, M. 2009. Asymmetric effects of the business cycle on the bank credit risk. Journal of Baking & Finance, 33(9).
Merton, R.C. 1973. On the pricing of corporate debt: The Risk structure of Interest Rates. American finance Association Meeting, December 1973. New York.
Muzicek, P. 2010. Credit risk monitoring in the Czech Banking Sector. Early warning model. Unpublished Master thesis, Charles University, Prague.
Nassaji, H. 2015. Qualitative and descriptive research: Data type vs data analysis. Language teaching research, 19(2):129-132, 2015.
Naz, F. 2014. Word of mouth and its impact on marketing. International Journal of Scientific and Research Publications, 4(1):2250-3153, January.
News 24. 2018. Explosive report into VBS Mutual Bank reveals large scale ‘looting’.
Norman, A.S. 2010. Importance of financial education in making informed decision on spending. Journal of Economics and International Finance, 2(10):199-207, October.
NUS Risk Management Institute. 2014. African Bank goes under central bank’s curatorship amidst mounting credit losses. https://rmicri.org/media/static/images/thumbnail-pdf/wcbaug05aug112014.pdf [7 August 2018].
Paddy, J. 2012. Credit risk management in banking industry, Kwame Nkrumah Unpublished Master thesis, University of Science and Technology, Kwame Nkrumah.
Qu, Y. 2006. Macro-Economic factors and probability of default. Unpublished Master thesis, Stockholm School of Economics, Stockholm.
Quarterly Overview of Consumer credit trends released by Transunion South Africa. 2019. Transunion
https://www.transunion.co.za/resources/transunion-za/doc/campaign/IIR/INT-AF-19-413140-IIR-Q1-2019/TU-IIR-Report-Q1-2019.pdf [10 March 2019].
Racine, F., Hart, J. & Li, Q.I. 2006. Testing the significance of categorical predictor variables in nonparametric regression models. Paper presented at the 2002 International Conference on current advances and trends in non-parametric statistics, Crete, 20 March 2006.
Rosch, D. 2005. The impirical comparison of default risk forecasts from alternative credit rating philosophies. International Journal of Forecasting, 21(2005):37-51.
Rossouw, J. 2009. South African Reserve Bank History, Functions and institutional structure, Pretoria.
SA Consumer Credit Index. 2018. Transunion.
https://www.transunion.co.za/resource/transunion-za/doc/campaign/CCI/INT-af-18-265801-cci-q2-2018/TU-CCI-Report-Q2-2018.pdf [18 November 2018].
Schularick, M. & Taylor, A.M. 2012. Credit booms gone bust: Monetary policy, leverage cycles, and financial crisis, 1870-2008. American Economic Review, 102(2):1029-1061.
Schwarz, A. 2011. Measuring, Monitoring and Forecasting of Consumer Credit Default Risk. Germany: Shumpeter.
Schwartz, J.A. 2002. Asset Price Inflation and Monetary Policy. National bureau of Economic Research, 52:829-852.
South Africa Government. 2015. National Credit Regulations including Affordability Assessment. Notice 202 of 2015. Government Gazette, 38557: 37, March 13.
Stiglitz, J.E. & Weiss, A. 1981. Credit rationing in market with imperfect information. The American Economic Review, 393-410, June.
Van Zyl, E. 2010. Bank overcharging black home owners. Weekend Argus: 21 November 2010.
Vassalou, M. & Xing, Y. 2002. Default risk in equity returns. Columbia: Columbia University.
Verick, S. & Islam, I. 2010. The great recession of 2008-2009: Causes, consequences and policy responses. Griffith: Griffith University.
Vlok, D. 2017. Interview with the researcher on the 16 May 2017, Cape Town.
Vojtek, M. & Kocenda, E. 2011. Default Predictors in Retail Credit Scoring: Evidence from Czech Banking Data. Paper presented at the William Davidson Institute, University of Michigan, Canada. April 2011.
Weiss, L.A. 1990. Bankruptcy Resolution: Direct costs and violation of priority of claims. Journal of Finance Economics, 285-312, July.
Wentzel, A. 2015. Financial Literary in South Africa. Reviewed in: International Handbook of Financial Literacy, 329-339, March.
Zabia, A. 2019. Managing Default Risk. www.bis.org [7 August 2019].
Journal of Economic Development, Environment and People by Authors is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Based on a work at http://ojs.spiruharet.ro/index.php/jedep/issue/archive.