In times of financial difficulty or emergencies, many employees might turn to their employers for a loan. This may seem like a more desirable alternative to interest-loaded bank repayments that have a longer application and approval process. It might even foster some benefits for example, employees may feel more loyal and committed to their employer and would likely be able to focus on their work instead of stressing about owed money.

However, employer-employee loans may create uncomfortable predicaments:

Playing Catch-up: should an employee require financial assistance to meet regular and recurring obligations this can result in deepening debt and added stress for both parties.

Discrimination: Loan decisions can also create discrimination concerns where an employer grants a loan to certain employees for certain situations over others which could set the company up for discrimination accusations.

Performance Issues: You might land up with a good performing employee who takes a company loan, and they not very good at adhering to the repayment agreement which could result in having to sit in performance discussion even though not directly related to job performance.

The inception of the National Credit Act 34 of 2005 (NCA) has changed how the credit industry works in South Africa. The NCA serves to promote and advance the social and economic welfare of citizens and share a transparent, effective, accessible credit market and protect consumers. It does this by encouraging responsible borrowing, avoiding going into extreme debt and discouraging reckless credit granting. It has done so by requiring certain credit providers to be registered as such.

An agreement qualifies as a credit agreement if a payment obligation is deferred and a charge, fee or interest is payable to the credit provider. As a result, if a loan taken by an employee is repayable with interest this falls in the scope of the NCA and the employer will need to register as a credit provider. This includes salary advances, traditional loans and employee share ownership schemes.

The reality is that most companies don’t have the expertise to assess if employees are able to repay loans or even bother doing the income vs expense affordability exercise, so by allocating a loan is reckless lending.

Although each situation is unique, it is important to evaluate all possible outcomes. My advice is to stick to your knitting and allow accredited financial institutions to provide their expertise and services to your employees.