Viceroy and Capitec: It is not so simple

Shawn Hagedorn says unsecured debt is a problem in itself, and one that can trigger others

“Simple as that?”

Headlines are routinely crafted to be catchy. “What Viceroy did to Capitec was illegal, simple as that” appeared in Business Day over the weekend. Irrespective of our opinions about Viceroy, Capitec, the FCSA or the article, the last three words merit scrutiny.

Even if it were clear that what Viceroy did to Capitec was "illegal", we should resist regulations being conceived, or interpreted, with simplistic notions about good and evil. 

Viceroy is in the hot seat for claiming that the bank was a “predatory lender”, that its loan book was “enormously overstated” and that it used “loan shark tactics”. The article reported that allegations by Viceroy about Capitec were deemed “false, misleading or deceptive” by the FCSA. 

The regulator required Viceroy to defend its claims or issue a retraction. That sounds straightforward. The regulator can, simply, determine if the regulations were followed. Thus, adding “simple as that” feels like an insignificant, off-handed remark to round out the title. 

Some of the background factors are, however, truly complex. For instance, situational awareness can be quite poor among the regulator’s political minders. Nor are the stunting effects of SA’s massive low-income loan books on economic development adequately dissected by public commentators.

The article draws similarities between Viceroy’s alleged tactics and better known “pump and dump” operations which profit from pushing a share price higher. Perhaps that comparison is fair. But we might step back and consider how “insider trading” laws have varied across jurisdictions and over time, with pivots tracing to both court rulings and regulators’ shifting attitudes. Meanwhile, we live in a country where basic property rights are under threat.

If someone has clear legal title to a piece of land, it should be “simple as that”. Unless, of course, a new political dispensation chooses, rightly or wrongly, to disavow some title deeds - while failing administratively to provide such evidence of ownership to others. 

Resolving our political challenges becomes more elusive when opposing sides rush to presume that they have the moral high ground. Reality-grounded empathy can more easily reveal practical compromises.

Many have stood atop a figurative mountain waving their finger at those below who supported or benefited from apartheid. A more recent imagined edifice is climbed to look down on those who loot, on small or grand scales. Guilt can be assigned but progress requires transcending “simple as that” perspectives. 

When I first arrived in SA nearly thirty years ago I worked at a top accounting firm with people I liked and respected - though the business culture seemed starkly anachronistic relative to my experiences in London, New York and elsewhere. One of the younger, dynamic partners to whom I reported would later run the SA operation. It was severely shaken by scandals occuring amid his tenure.

In the mid ‘90s, I worked for a boutique finance start-up which excelled at creatively mobilising funding for important social and economic development projects. The company morphed into SA’s leading unsecured lender and later imploded. It was also led by a dynamic personality.

It is tempting to want to wave one’s finger at such fallen leaders. But unless we are specifically charged with passing judgement, we should rather not. Those who run and back today’s most robust global companies are exceedingly demanding, yet they often prefer executives and managers whose backgrounds include business flops. 

Holding people accountable and learning from their mistakes is less simple in a rapidly changing environment. In SA we must navigate the intersection of social justice, politics, economic development, commercial interests and a rapidly evolving global environment. As few are fluent in all of these areas, we must remain mindful of the limits of our narrow areas of expertise. 

Assessing today’s Viceroy-Capitec case demands wide situational awareness. I’ve been making the case for several years that SA is on track to trigger mutually reinforcing debt and poverty traps (my efforts have provoked neither rebuttals nor awareness). The pandemic has sped their arrivals. The pre-covid economy had been sputtering and our economy will soon readopt a meagre speed limit.

SA’s unemployment is so persistently high largely because per capita income has been stagnating for a decade. Meanwhile, our government and most households are perilously over burdened by expensive debt.

Government’s debt service costs have been compounding much faster than the economy is growing. Many households have followed the same path. Now, the national treasury has mooted a restructuring of Eskom’s debt. 

The IMF has a tool box for countries which have triggered debt and poverty traps. It is labeled “financial repression”. Public and private debts are restructured alongside structural reforms. Bank loans are frequently written down.

It becomes increasingly questionable to make status quo type assumptions when valuing an unsecured loan book in an economy which combines a nearly flat long-term growth trajectory with obscene levels of unemployment and poverty. Many of Capitec’s shareholders will, with justification, view it as the crown jewel among SA’s generally well-managed banks. Their investment in the bank is made safer by the presumptions supporting the valuation of its loan book being widely challenged.

There is also value in exploring whether authorised financial services providers can be adhering to pricing regulations and still be engaged in predatory lending. If the loan books to a township are profitable, it is because the dutiful borrowers are covering its high write-off and administrative costs. It means a community with inadequate spending power has brought forward its future spending power at a very high cost thus stifling its development. 

Is such lending “predatory”? By way of comparison, how “affordable” should lending rates be for low-income lenders to qualify as being ESG compliant?

Viceroy accused Capitec of using loan shark tactics while SA’s banking association has made the case that regulated lending protects borrowers from loan sharks. While loan sharks are justifiably associated with unsavoury collection techniques, they would never have created the level of indebtedness in lower income communities which now blocks their accumulating wealth. The formal sector has responded with ten million funeral policies. Instead of intergenerational wealth transferring, there will be well-funded funerals. 

The so-called loan sharks haven’t disappeared. They are frequently relatives, friends, employers and the like. With such loans the profits stay in the communities. Over time, this makes a world of difference. 

It is not ok that unsavory informal lenders break a few kneecaps. But how does this compare to how regulated lending kneecaps a community’s growth possibilities?

Ideally, there would be stable and profitable community banks which are locally owned and immune to political influences. If only it were “simple as that”.