The cost of credit default in the vehicle finance industry in South Africa

Abstract

The risk that borrowers may not fulfil borrowing obligation presents credit owners (lenders) with a default risk management opportunity to maximize risk-adjusted rate of return and maintain minimum exposure to default associated cost. This study investigated respondents' perception of the cost of credit default and examines requirements for default risk management (ORM) in the vehicle finance industry in South Africa. It is noted that with increased level of consumer indebtedness, an unstable economy, and high unemployment, vehicle financing faces a higher probability of default from borrowers. This descriptive investigation utilised both the quantitative and qualitative approaches using the 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 months period, utilising personal interview, and emails to administer open-ended questionnaires for credit managers and close-ended questionnaires, for the vehicle finances' customers, as data collection instrument. Responses received were codified and quantitative data was analysed using the Statistical Packages for Social Sciences (SPSS version 25) while qualitative data was analysed using the content analysis of percentage of word similarities. The study found mixed and variable respondents' perception of the cost of credit default. In conclusion, it is perceived that in South Africa the cost of credit would become more costly with credit default. It can be recommended that a default risk management intervention could be applied to mitigate the risk of credit default within the context of unified credit assessment policy of South Africa.