Multiple award-winning bank Capitec is facing two court cases, which could have an impact on its lending practices.
One of South Africa's five biggest banks, Capitec was recently crowned the best bank in the world by international banking advisory group Lafferty in its inaugural 2016 Bank Quality Rankings. Locally, the bank was ranked SA’s best bank for the fourth year running by the SA Customer Satisfaction Index (SACsi) - both in terms of how consumers experience its quality of service and value for money offered.
Consumer watchdog Summit Financial Partners served papers on the bank last week - a High Court application requesting the bank to provide consumer credit agreements based on the clients providing Summit permission to access the documents.
In the second court case Summit is taking on Capitec over its multi loan practices, which it claims amounts to reckless lending. Summit CEO Clark Gardner told Fin24 that Capitec may be the best bank in the world for shareholders, but certainly not for the consumer.
"I suppose one must think that a lender who spends a fortune on building banking infrastructure yet manages to return over 54% to shareholders consistently year on year must be charging someone incredibly high margins... well that would be the consumer, who borrows from them," Gardner alleged.
Questioning high yields
He said Summit believes such yields are earned by not applying some of the consumer protection laws in the National Credit Act, especially relating to reckless lending and initiation fees.
"The latter fees are charged in return for costs associated with affordability assessments, pre-agreement quotes and credit agreements, however none of these activities actually take place after the first advance on their multi loan product. The remaining 11 accessible advances are accessed via the ATM after a mere three questions are asked regarding the consumer's changing circumstances.
"We served our summons recently to challenge this as part of a coordinated attack to refund consumers who have been over paying for years." In 2015, Summit was working with Capitec Bank to ensure fairer credit practices for their clients and offer financial wellbeing and garnishee solutions to their employees. However, it said its relationship with Capitec was severed in October 2015 "due to irreconcilable differences over Capitec’s lending practices, their failure to accommodate consumers thrown into a debt spiral by their products and their refusal to provide documents to enable us to assess their clients’ financial situation".
Summit said it already filed multiple complaints to the National Credit Regulator over Capitec's lending practices.
Capitec's multi loan product is deceptive - Summit claims
In the case before the Stellenbosch Magistrate’s Court, Summit alleges that Capitec's multi loan product is deceptive in that it looks and acts like a facility or overdraft, but is charged like a payday or short term loan. The consumer may access the amounts each month without a new agreement or affordability assessment, but pays the 12% upfront flat fee each time they withdraw the amounts from an ATM.
Summit also charges that the Capitec loans contravene the National Credit Act in that the bank does not do the proper assessments before the multi loans are granted.
In the case before the magistrate's court, Summit alleges that the plaintiff was asked three simple questions to access multiple loans electronically (via an ATM). None of the questions determined whether the plaintiff could afford to pay back the loans. The questions listed in the court papers, requires only a yes/no answer. They are:
1. Your income did not decrease?; 2. Your expenses did not increase?; 3. You are not in arrears at any credit provider?
In a normal affordability assessment the financial institution, would among others, have to request current payslips to determine and confirm the applicant's gross and net income; recent bank statements to reflect payment of salary into a bank account; the applicant's loan obligations, credit history, any adverse listings (repossessions, loans written off, loans handed over to attorneys for collection, etc), against him/her; and the applicant's living expenses.
Summit: '10 000 Capitec loans were issued to Amplats employees during strike'
"We believe this is how it is possible that 10 000 Capitec loans were issued to Amplats employees during the strike period. How can this be responsible lending? In time, a mere 10 500 Amplats employees have accessed over 150 000 loans each attracting the 12% initiation fee. That is an average of 15 loans per employee, why not provide a term loan instead?" asked Gardner. Summit also alleges that Capitec charges a new initiation fee every time a consumer extends their multi loan, "just another term for 'pay-day' loans".
According to the National Credit Act, the purpose of an initiation fee is to cover the upfront administration costs relating to the loan application, quotation and affordability assessment. With a multi loan, consumers don’t re-apply each time they wish to access the multi loan facility. They simply withdraw an additional loan amount into their bank account, with nothing but three simple questions from an ATM or mobile app standing in their way.
"There is therefore no justifiable reason for charging a new initiation fee for each withdrawal, other than the massive profits it adds to Capitec’s bottom line," Summit said.
Capitec defends operation
Capitec told Fin24 in an emailed response that the bank is aware of the [multi loan] issue and this specific issue has gone the legal route. "We will be responding accordingly." Capitec also said it operates within the South African law and it remains committed to operate and keep operating within the laws of South Africa.
"Our unique business model has given millions of South Africans access to financial services," it added.