By Corrie Kruger
There are some dark clouds gathering over the South African banks. South Africa is still grey listed; we are awaiting court case finalisations where banks are involved covering a wide array of topics. The banks have serious deep pockets and the best legal minds will be arguing their innocence. The regulator will in instances try to mitigate damage to contain the damage.
Systemic risk and contagious diseases have may similarities. (We vividly remember Covid-19) Systemic risk is the financial risk that possibly threatens the entire business, enterprise, entity or economy, leading to its abolition. It begins with affecting units at a smaller scale and continue transmitting the effects to larger entities, thereby hampering the financial mechanism of the economy as a whole.
What Is reputational risk?
Reputational risk is a threat or danger to the good name or standing of a business or entity. Reputational risk can occur in the following ways:
⦁ Directly, as the result of the actions of the company.
⦁ Indirectly, due to the actions of an employee or employees.
⦁ Tangentially, through other peripheral parties such as joint venture partners or suppliers.
Capitec’s reputation is once again in the public spotlight.
On January 30, 2018 Viceroy Research published a research paper dated under the title Capitec – A wolf in sheep’s clothing. “Based on our research and due diligence, we believe that Capitec is a loan shark with massively understated defaults masquerading as a community micro-finance provider. We believe that the South African Reserve Bank and Minister of Finance should immediately place Capitec into curatorship.”
Some very serious allegations were made such as, “Capitec had to write-off more than 42% of the gross collectable principal debt due to it in the financial year 2017. The class action lawsuit would result in Capitec being ordered to pay R12.7 billion to its former and current clients.”
In response, the Financial Sector Conduct Authority (FSCA) in 2021 fined Viceroy Research R50 million for its false Capitec statements, after finding that it had contravened section 81(1) of the Financial Markets Act when it published false, misleading or deceptive statements, promises or forecasts regarding material facts about Capitec.
Currently Capitec’s share price is heading for the sky, but suddenly the class action lawsuit monster has once again reared its head.
Capitec Bank is locked in a legal battle over garnishee orders involving a debtor Dipholony Phefo, who was a yard supervisor at Prasa Metrorail in Braamfontein, Johannesburg, who resided in Dobsonville, Soweto.
Phefo defaulted on two separate Capitec loans in 2011, which left him with concurrent garnishee deductions from his salary of R900 and R1 200 – in each case with interest of 15.5%. The orders were allegedly procured using both most common tricks employed by the sector: they were procured at the Kempton Park Magistrates’ Court rather than one where Phefo’s home or job fell under.
In 2016, the Constitutional Court ruled that magistrates’ court clerks’ routine issuance of garnishee orders was unconstitutional.
If Capitec loses this case, it could lead to numerous claims and substantial financial liabilities for unlawfully collected debts, fees, and interest – fertile grounds for a class action lawsuit.
This as Capitec’s purchase of Avafin also has people talking.
On March 12, 2024 Capitec announced that it “is pleased to announce its proposed acquisition of a controlling interest in Avafin Holding Limited, an international online consumer lending group, subject to approval by the Polish competition authority”.
The South African Reserve Bank approved the transaction, allowing Capitec to increase its shareholding in Avafin from 40.66% to 97.69% for a purchase price of €26.3 million (approximately R540m).
Avafin reported an exceptional high provision for bad debt in the 2024 financial year as its credit impairments increased by 38.28% from R6.3bn to R8.7bn.
These are seriously big numbers; nobody can deny that such a swing in the fortunes from one’s core business in less one year must raise serious questions.
Meanwhile, Transnet has announced that it plans to institute legal proceedings against Nedbank over the bank’s role in carrying out interest rate swop transactions for the state-owned transport entity’s operations — transactions that the state-owned entity believes were corrupt and cost it billions of rand in losses.
Nedbank already faces a similar complaint from state-owned airport operator, the Airports Company South Africa (Acsa), which has referred the bank to the Special Investigating Unit over its role in the interest rate swop deals. The regulator of banks is the Reserve Bank’s Prudential Authority which is not where the buck stops. The International body the Financial Action Task Force (FATF) has the last say. The FATF has placed South Africa on the grey list. Since then, many new regulations are being promulgated and there is a scramble to comply with international standards.
Chief Justice Raymond Zondo has requested a further investigation into certain transactions following the state capture enquiry. Nedbank is obviously anxious to defend their reputation and it will be very interesting to see how they argue around the core concept of KYC – know your client. How is it possible that they thought nothing of it that a large organisation such as Transnet instruct a “bucket shop” to act as their adviser in a complex transaction such as a few billion rand interest rate swop.
Nedbank’s role in the interest rate swop deals at Transnet and Acsa is covered in the State Capture Commission reports, which in addition also examined the bank’s relationship with Regiments Capital, a financial services firm that was linked to the Gupta family.
The banks will put up a good fight in court. The public will make its own conclusion not necessarily strictly in line with the judge’s ruling. Reputation is like karma.
Corrie Kruger is an independent analyst
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