Sipho* [*not his real name], in his late twenties, from Limpopo, was window shopping at Ellerines, the furniture retailer owned by African Bank, when an Ellerines employee approached him.
She asked Sipho what he was interested in, and he told her he needed a bed. When Sipho said he didn’t have the cash to buy a bed, the salesperson told him not to worry, all she needed was his details and he could get a loan easily and quickly. “I was three months into a work contract, where I was to intern for 6 months. I got the bed, and they gave me 36 months to pay,” Sipho says. The double bed cost Sipho about R5 000 excluding interest and administrative charges.
Soon after being made a permanent employee – with a salary increase of a couple of hundred rands a month – Sipho got a call from African Bank, offering him a fridge. The fridge cost about R6 000 [excluding interest and administrative costs]. At the time Sipho was earning just over R4 000 and the money he owed African Bank was way in excess of his monthly salary.
“In November of 2013 I lost my job and couldn’t pay back the money I owed the bank. I struggled to get a new job, and when I did it wasn’t enough to cover what I owed. Sometimes I paid the bank and then didn’t have enough money to eat, or to even catch a taxi to work. I was suffering,” he says. Sipho, prone to severe depression, eventually lost his job.
“I am working now, but all the time I am worrying. And I must look for a new job because I still don’t have enough money to pay back this money.” Asked if African Bank did an affordability assessment with him when he took out his first loan, Sipho says: “No.”
Yet the National Credit Act stipulates that before a contract is entered into an affordability assessment must be done.
Several experts say this practice – reckless lending – was common at African Bank and especially in the Ellerines division.
“We certainly believe the unsecured lending industry was providing loans that were not affordable, fuelling a debt spiral, or [that were] not in the best interest of the consumer,” says Clark Gardner, chief executive of Summit Financial Partners, which helps public and private organisations manage employee debt problems.
“African Bank were certainly the market share leaders in providing unsecured debt and therefore part of the undesirable industry behaviour. We have many examples where we believe African Bank were reckless,” he says.
But whether the bank breached the National Credit Act is hard to assess because the law gives banks and other lenders a great deal of discretion in making an affordability assessment, he says.
The Act requires the lender to take reasonable steps to determine the ability of a consumer to afford a loan, but allows the lender to decide how to do this, as long as the process is fair and objective, Gardner adds.
A former employee of African Bank explains that sales staff worked to targets and were paid only on commission.
The former sales consultant, who lives in in Orange Farm near Johannesburg, says clients were sold up to five loans.
“You can understand it is too much for the client. The people were struggling. They were looking for the money, so they took more than three or four loans.”
The consultant, who asked not to be identified, says that sales consultants were put under pressure to perform and to meet high daily, weekly and monthly loan targets.
Her supervisor would give her client lists, and she would make calls to ask people if they wanted a new loan or to increase their existing loan. She would phone existing clients and also seek out new clients.
“I worked for African Bank for six years. We worked really hard but only got commission. That company made billions but they didn’t want to pay us,” she says.
“African Bank was acting recklessly and lending contrary to the intentions of the National Credit Act,” says consumer credit law specialist Stephen Logan. He says the bank would often give new loans to clients who were in default on existing loans, through a practice called novation.
In legal terms a novation is the practice of cancelling an existing contract and replacing it with a new agreement.
When consumers defaulted on old loans, African Bank would pay off the existing loan with a new loan, Logan says. “They did this over and over again. On African Bank’s books this looks good because it shows that the consumer’s loan is paid off in full, and that another, bigger loan has been taken out,” he says.
“From an African Bank perspective it looked like the bank was collecting well on its debts,” says Logan, who assisted in drafting the recently published Affordability Assessment Regulations, part of the Act’s new National Credit Regulations, aimed at curbing reckless lending.
“African Bank was hiding the fact that the loan hadn’t been paid well or at all by extending more credit to the consumer. This practice seems to have been well established and pervasive.”
The National Credit Act lays down that if consumers are over-indebted or failing to make payments on loans, banks or other lenders may not get them deeper into debt.
GroundUp spoke to two African Bank clients in Grahamstown with the help of activist Ayanda Kota of the Unemployed People’s Movement. Both asked not to be identified. Both say no affordability assessment was done before their credit agreements were signed.
One man, who worked as a petrol attendant, says he got a loan on the basis of his identity document and payslip. He has since lost his job, and says African Bank hounds him regularly for the money he still owes. He has suffered major depression and believes his adverse credit record is making it hard for him to find a new job.
The other man, a municipal worker, took out a loan for R3 000 to solve “private problems in my family. African Bank wanted my ID book and my pay slip,” he says. He took the loan out in 2013 and now owes African Bank some R4 500.
The manager of a financial company that provides funds to microlenders in rural areas says African Bank would even lend to people that his clients, the microlenders, had refused.
“We were told about the problem with African Bank, about the bank being excessively lenient with consumers, close on two years before the problems with African Bank came to light,” he says, speaking on condition of anonymity.
“African Bank was giving money to people that our clients wouldn’t touch.”
“It was widespread, but we got the most complaints from the Eastern Cape and KwaZulu-Natal. We were told by the microlenders that they expected African Bank to ‘blow up’ because ‘their bad debts were going to come round and smack them’. It wasn’t a surprise at all when African Bank got into trouble.”
A Durban-based debt counsellor says that African Bank was also misled by consumers who knew how to ‘work the system’, and that staff at the bank would show people how to work the system.
For instance, he says, a wife would deposit her salary in her husband’s bank account to achieve a bigger loan while applying for a loan on her own account also.
In August 2014, the share price of Abil, the holding group of African Bank, plunged 95%, after the bank announced that it needed R8.5-billion to stay afloat. The Reserve Bank bailed African Bank out soon afterwards.
But this does not mean any relief for the borrowers. George Roussos, Group Executive Core Operations at African Bank told GroundUp in a written statement, “There is no payment holiday for anyone owing on a loan from African Bank and no one was released of their debt obligations.
Roussos said, “The Bank does not and has not lent credit recklessly and where instances arise due to errors or manipulation by either staff and or customers, these matters are investigated and are dealt with accordingly.”
When the bank was put into curatorship, he said, the bad debt book was valued at R17-billion, for which the SA Reserve Bank is to pay R7-billion. Collection of bad debts would continue and be strengthened, he said.
Regarding novation, he said: “The term can be used to describe a situation where a customer falls into arrears and a new agreement replaces the old one, the new agreement novates the old agreement with different terms on the same amount of debt. African Bank does not apply this practice as described above. The Bank allows customers to consolidate debt that they have acquired, and this process is typically accompanied by an additional disbursement to the customer.”
Roussos said this was a “feature of the industry” that had grown and was “prevalent since 2011.” He said, “With a consolidation, the Bank consolidates third party debt into one debt instrument. The customer has to comply with the Bank’s credit policy and affordability calculations and must therefore undergo the Bank’s affordability test based on that consolidated debt amount in order to qualify. Consolidation loans have typically been skewed towards the bank’s lower risk customers, as repeat consolidations could suggest financial distress of a customer.”
GroundUp approached the National Credit Regulator several times over more than two weeks for comment. Phone calls and emails to chief executive Nomsa Motshegare yielded no response. Stakeholder Relations Officer Didi Sebothoma undertook to get a response from Motshegare, but did not do so.
Meanwhile Mail & Guardian reports that Advocate John Myburgh’s report into African Bank is complete, but in terms of the Banks Act and the Inspection of Financial Institutions Act may never be made public.
This article first appeared on GroundUp.