Capitec sued over ‘deceptive’ loan product

Cape Town – Summit Partners, which has launched a legal challenge against Capitec Bank over what it describes as its “deceptive” multi loan product, said on Wednesday that the various fees for this product push up the total cost of credit to as much as 500 percent per year.

Summit, which has filed papers against Capitec Bank in the Stellenbosch Magistrate’s Court, claims that this practice made the bank an “unjustified fortune” in 2015.

Summit Partner’s chief executive Clark Gardner said of Capitec: “I suppose one must think that a lender who spends a fortune on building banking infrastructure yet manages to return over 54 percent to shareholders consistently year on year must be charging someone incredibly high margins … well that would be the consumer who borrows from them”.

Summit also believes that the bank earns such yields while failing to apply some of the consumer protection laws in the National Credit Act, especially relating to reckless lending and initiation fees.

Initiation fees are charged for costs associated with affordability assessments, quotes and credit agreements. However, says Summit, none of these happen after the first advance on a multi-loan product.

The remaining 11 accessible advances are accessed after only three questions regarding the consumer’s circumstances are asked via an ATM or a mobile phone app.

Until October 2015, Capitec Bank was a client of Summit, a relationship that, according to Gardner, was “severed 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 says the multi-loans exploit desperate consumers and trap them in a cycle of debt. They are, it adds, clearly designed to be a credit facility but are disguised as a series of short-term payday loans, “which means Capitec can play by different rules and charge extra fees”.

Since multi loans always need to be paid back by month end, the cost of credit to consumers can be extremely high.

If, for example, a loan is taken out on the 18th of the month, around the time when many people who are paid monthly start to really feel the pinch, it must still be repaid by the 25th. The initiation fee of around 12 percent applies even though the loan period is just seven days.

This would mean that the loan comes at a cost of 1.7 percent per day or an annual rate of 625 percent, before interest charges and any monthly service fees.

If multi loans were classified as a credit facility or restructured as a standard personal loan, the bank would be able to charge only one initiation fee for the duration of the loan or facility.

Summit argues that many customers must use a large portion of their salary to settle their multi loan, leaving them needing to take out another one. This is the very type of debt that the National Credit Act’s regulations against reckless credit are designed to prevent.

Summit adds that Capitec’s financial statements showed that it issued 3.7 million loans in the last financial year, of which 3.2 million are short term loans.

With the total cost of credit on multi loans consistently landing between 150 and 500 percent per annum, says Summit, their impact on Capitec’s bottom line is clear.