Magoshi Thobejane was working as a pump attendant at Twickenham Platinum Mine in the backwaters of Mpumalanga in 2014 when he ran into financial difficulties. So he applied to his bank for a loan. The flush of new credit, however, didn’t bring the respite he’d hoped for. Instead, it kicked off a chain of events that will place Thobejane in the Cape high court, facing off against one of SA’s most profitable financial services providers, Capitec.
According to his founding affidavit filed as part of the court papers, Thobejane already had an existing credit agreement with his bank, Capitec, with an outstanding balance of just under R70,000. In this submission, he says Capitec offered him two loans in May 2014. Loan one, for R80,000, addressed the existing loan and required repayments of R3,664.84/month for 34 months. Loan two came in the form of a product called a "multi-loan": this consisted of multiple one-month loans accessed via an ATM, each treated as a single loan with an initiation fee and, naturally, interest owing.
Both parties agree that affordability assessment information was captured during the application process, though Thobejane will argue that the assessment for loan two did not reflect the new obligation created by loan one. Capitec disputes this in its answering affidavit, and the merits of both cases remain to be tested in court. Combined, Thobejane writes, his potential repayments on loans one and two exceeded his monthly income – which was paid into an existing Capitec bank account. He also claims the "defective assessment gave [him] the impression that he would be able to afford the payments".
This is the heart of the Thobejane vs Capitec case, which is due to be heard by a judge in May 2018.
It is one of several open cases against Capitec championed by Summit Financial Partners (which exposed the unlawful credit practices of the Lewis Group of furniture stores). And it is these consumer cases (along with other sources) that underpin some of the "predatory finance" claims in the January 2018 report released by Viceroy Research that caused Capitec shares to take a beating in early February.
Capitec CEO Gerrie Fourie has steadfastly rejected those claims (through public statements), as well as the implications made in the report about the sustainability of the business. But Capitec did not respond to requests to comment on this case.
"We will not be making any statements outside the formal process," said spokesman Charl Nel. He referred the Financial Mail to Capitec’s answering affidavit, which in short calls Summit’s involvement "improper" and its statements on the case "sensationalised".
Putting the contested Viceroy report aside, however, Thobejane vs Capitec is in many ways a microcosm of the fights over credit provision and regulation playing out on a grander scale in SA — and much of this centres on the concept, and effect, of reckless lending.
According to the National Credit Act (NCA), a credit provider like a bank or retailer offering store cards is obliged to conduct affordability assessments on consumers applying for credit. It places a further burden on the provider of ensuring that the applicant understands the "risks, costs and obligations" of a proposed credit agreement. Failure to do these could mean the credit agreement constitutes reckless credit — a concept introduced into law through the NCA.
If a court finds that a credit agreement constitutes reckless lending, it can suspend the "force and effect" of the agreement – essentially nullifying it. Additionally, the act considers a credit agreement reckless if it causes the applicant to become over-indebted – as Thobejane contends. His affidavit reads: "The high interest rates, fees and costs charged by the respondent, as well as the respondent’s reckless granting of credit, caused me to fall into a debilitating debt spiral where I had no option but to utilise the multiloan product."
Summit Financial Partners CEO Clark Gardner says Thobejane is "merely one of the thousands of mine employees who were harmed by the practices of Capitec, in that they received term loans and a multiloan that they could not afford". He adds: "On average, [Thobejane] was paying 200%-plus per annum on his payday loans from Capitec, and struggled to afford it. It is a very sad situation, and even worse that the [regulator] said that such practices were fair and fine. Summit now needs to go to great expense in both trying to protect these mineworkers and to provide remedies to their debt spirals."
Of course, it’s not just Capitec that has come up against these types of consumer challenges, and not all disputes end up in court. The Credit Ombud, as just one example, opened 4,123 disputes based on consumer complaints in 2016 (2017 figures are to be released in April), and 69.4% were resolved in the consumer’s favour — with R10.6m saved for consumers. But that’s just a fraction of South Africans’ consumer debt.
The latest data (Q3 2017) from the Credit Bureau Monitor (released quarterly by the national credit regulator) shows there are 25m credit consumers in SA, and in Q3 2017 alone the total of new credit granted was over R123bn. Applications for credit in the quarter also increased — to 9.87m — and over 51% of applications were rejected.
There is chronic overindebtedness among those who can least afford it
— What it means:
Critically, the report shows that almost 40% (9.87m) of existing credit-active consumers have impaired credit records. Impaired records include consumers in arrears by three months or more, consumers with adverse listings and those with judgments and administration orders. It doesn’t, however, include everyone who is behind on payments. Credit consumers who are one to two months in arrears are not considered to have impaired records, and are instead grouped in the "in good standing" category despite being behind on payments, which would suggest being credit-stressed.
Cross-comparing data sets paints an even more alarming picture: SA has more people who owe money than people who earn it. Specifically, according to Stats SA, we have around 16m employed people. With an adult population of 37.5m, then, we find that around 67% of SA adults are credit-active; while only 42.6% have some form of employment.
One silver lining is that the number of impaired credit consumers as a proportion of overall credit consumers has declined somewhat, but the data also shows that the growth in credit consumers is outpacing job growth. Our employed population has grown by 19% since Q4 2008 while the number of credit consumers grew 42.8% in the same period.
What these two data sets cannot show us is how many of the unemployed are "counted" among the credit consumers with impaired records, but the gap between these numbers is 9m — a group of people roughly equivalent to the population of greater Johannesburg. Some of those in the gap will be pensioners who still have credit owing, as well as those with alternative financial support. Additionally, social-grant recipients are not excluded from credit. In fact, as evidenced by the Sassa-Net1 deductions scandal, grant recipients are often specifically targeted by lenders.
Another blind spot in the available official data is informal borrowing. A 2014 survey-based study done by the World Bank declared South Africans the world’s biggest borrowers. Their Global Findex report (based on a representative sample of 1,000 surveyed) found that 86% of South Africans took a loan in 2014, with the majority borrowing from friends and family — meaning these debts are largely invisible to the credit bureaus and regulators. The worldwide average was just 40%.
Other indicators of credit stress include the approximately 800,000 people who have entered into debt review since it was introduced with the NCA, and Debt Rescue’s 2016 research that found that South Africans are using up to 75% of their income to service debt.
Another piece of the consumer debt puzzle falls on the rand-value side (as opposed to individual persons), comparing household debt to GDP. At what level does consumer credit — and a huge base of credit-stressed consumers — begin to pose a threat to the stability of the broader economy?
Momentum Investments economist Sanisha Packirisamy says GDP growth can be compromised "in the medium to long run if households are highly indebted and financially vulnerable" because they contribute almost 60% of GDP through household consumption spend.
Summit Financial Partners calls itself a firm devoted to “financial well-being”.
Founded in 2004 by CEO Clark Gardner, it has grown to 150 staffers. Summit offers services to private and public employers and direct to consumers, including advice, intervention with creditors (in some instances) and credit-profile improvement.
Though Summit has been involved in many projects that seem to fit more comfortably under the umbrella of activism — such as challenging the Lewis Group on credit practices and in publicly opposing the use of garnishees — it is neither an NGO nor a nonprofit entity but a commercial “for profit” entity.
— Business activists
Packirisamy cites the International Monetary Fund’s Global Financial Stability report (October 2017) that found "growth benefits start declining when aggregate leverage is high". The trade-off on rising household debt that the report highlights, she argues, is that while credit can deliver short-term growth and facilitate broader financial inclusion, risks do arise in the longer term, "raising the risk of a banking crisis and an economic recession."
So where do we stand, by that measure? Packirisamy says SA’s household debt-to-GDP ratio of 44% "looks alarming" when benchmarked against emerging markets (with a median ratio of 22%), but that it "fares better when stacked up against a range of developed markets" (with a median household ratio closer to 64%). "Arguably, given that SA is a financially and institutionally developed economy, the country may be better placed than some emerging markets in dealing more efficiently with a debt overhang."
Nedbank economist Busisiwe Radebe feels a more significant ratio to consider is debt-to-income, and that has remained relatively stable (within a 70%-80% band since 2011). "What got us out of the recession was consumers. If we look back at the historical data, growth in that category was quite brisk and has slowed down quite a bit. We see from private and household credit extension numbers that the data follows a familiar story: brisk initially as the market opened up, a brief slowdown with the NCA, significant contraction in line with the 2008 recession, and recovery.
"Now, as job growth has been so poor, we are seeing credit extension growth of a very tame 5.5% y/y. This says to me that we are not seeing massive reckless behaviour — at least in the very formal financial sector — because the data fits the larger macro story."
In terms of servicing that debt, however, further data suggests that almost a third of credit-active South Africans spend more than 30% of their income on monthly debt repayments – and that’s excluding mortgage obligations which are concentrated in upper-income brackets.
Extrapolating from research by consultancy Eighty20, presented to the parliamentary hearings on amendments to the NCA, about 32% of South Africans have monthly debt obligations (excluding mortgages) that exceed 30% of their income. For those earning less than R10,000/month, about 34% have obligations exceeding a third of their income, while for those earning in excess of R10,000 this drops to around 29%. More worrying still, approximately 5.5% of people across all income categories have debt repayments that exceed their income.
In other words they must borrow just to meet their debt obligations — leaving zero for actual living expenses. Not surprisingly, this is heavily concentrated in the lowest income group — those earning R3,500 or less, where approximately 12% of credit-active consumers have debt servicing costs that exceed their full incomes.
How did we get here? Where are we going? And will we see a credit amnesty in the near future?
The above income-to-debt ratios include secured debt, but the ticking time bomb, according to activists, is the section of poorer and more vulnerable consumers without assets. Mortgages and secured lending account for the largest slices of the credit extended when viewed by rand value, naturally. But by account numbers (volume), unsecured credit, short-term credit, and credit facilities (including credit cards, store cards and overdrafts) form a much bigger proportion. This relates directly to the key consumer group that the new National Credit Amendment Bill seeks to support.
The bill — which is before parliament’s portfolio committee for trade & industry — is the latest in a series of amendments, clarifications and additions to a body of legislation aimed at getting us closer to the Goldilocks credit position: open enough to enable the borrowing that drives growth, while curtailing opportunistic practices that prey on credit-hungry people.
Since the dismantling of apartheid, there have been large-scale efforts from the public and private sectors alike to boost financial inclusion and access to credit for all South Africans.
The NCA replaced the Usury Act (1968) and the Credit Agreements Act (1980), and made the protection of the credit consumer a primary objective.
The act and subsequent amendments also established the national credit regulator (NCR) and national consumer tribunal (NCT), and brought in the affordability assessments that credit providers are now required to perform.
Another intervention aimed at consumer protection was the credit information amnesty — formally, "the Removal of Adverse Consumer Information and Information Relating to Paid Up Judgments Regulations, 2014".
This led to credit bureaus being mandated to remove (from consumer credit profiles) information on judgments, defaults, and terms like "delinquent" or "slow paying" (provided the capital amount was cleared). The net effect was to promote credit extension, but many credit providers complained the removal of this information had a negative effect on their ability to assess risk, and unfairly favoured credit applicants over providers.
This sentiment featured strongly again in public comments on the 2018 amendment bill. Eugene Bester is a director in the dispute resolution department of Cliffe Dekker Hofmeyr. He believes there are sufficient steps in existing legislation to protect the consumer and alleviate overindebtedness for consumers. "The banks give moratoriums; they restructure loans; they write off interest; they don’t collect debt that’s older than three years. We should be looking at the current act and applying it correctly, as well as staffing up the regulator and tribunal."
For Gardner, the data points in the opposite direction: "If the law is sufficiently protective [of consumers], why do we sit with 10m of our [25m] credit-active consumers with impaired credit records? Why is it that employees on the mines have average debt instalments of 60% of their income?"
Katherine Gibson is a senior adviser for financial inclusion and market conduct at national treasury. She says this is a committee-backed bill that fills a necessary gap in consumer protections. "The committee identified a problem with general overindebtedness of low-income people, and particularly those people with minimal income and no assets. So that’s where it started — recognising that there was chronic overindebtedness among a population segment who can least afford it."
Working from this assumption, Gibson explains, the committee set out to better understand the segment, and were supported in this by national treasury. They commissioned research to quantify the segment and this is the basis of the debt intervention that the bill proposes: possible extinguishing of debt (after application and adjudication) for people earning less than R7,500/month, with debts less than R50,000, who are unable to adequately address these debts. The research found that 9m people could meet the criteria, and it could potentially lead to over R20bn in credit agreements being written off the books of private credit providers.
"The implications of the bill in its current form are astronomical," says Bester. He sees several potential harmful results including increased risk pricing, and a resurgence in the use of informal lenders.
"This bill has the potential to make it more difficult for this category [of consumer] to get financial assistance, and this may revive the unsavoury practices of the past."
He added: "During the [committee] session, we were asked if we thought the bill was unconstitutional and if we would challenge it on those grounds. I believe the bill will face a constitutional challenge if passed in its current form — because it is an arbitrary deprivation of rights. The banks aren’t going to be compensated for the loans that are going to disappear off the books."
Despite this, it’s a step government seems determined to take. Gibson acknowledges the importance of the developmental role played by the financial sector and credit providers.
"We need them to grow the economy; we need a vibrant financial sector. Having said that," she continues, "there has also been significant abuse of power, with numerous examples of that. So, I would put the question back to the regulated entities: why aren’t you fixing your industry first? Why does it come to this point, with the [extensive coverage of abuses in the media], that us, as regulators and policy makers, have to go in and intervene to address these issues?"
* Reporting for this story was supported by Code for Africa’s impactAFRICA fund
Read more about the over-indebtedness of SA consumers.
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