Has South Africa lost touch with financial common sense?

In August the Financial Planning Institute (FPI) held a Financial Planning week to highlight the need for financial advisers in South Africa. The need for financial advice to be made available to the greatest sector of the population has been a goal of the FPI for a long time.

It is important for financial advice to be made more accessible, especially for lower income earners, if we take mishaps like the African Bank and R699 per month car deal into account.The African Bank saga was a bitter pill to swallow for many South Africans and the R699 per month car deal left a bitter taste in many people’s mouths, whether they were actually affected by the scheme or not. One has to wonder if the end result of the two sagas would have been the same if the public had access to a financial planner.

Maybe it is time to stop pointing the blame at higher powers for allowing situations such as these to happen. Maybe it is time to admit that sometimes we lose touch with our financial common sense, after all, if something seems too good to be true then it probably is.

The short end of the stick

We do not need to go into too much detail as to why the house of cards fell in on African Bank as the saga was well publicised. This story shocked the country at the beginning of August when a representative announced that the bank needed to raise R8.3 billion in new capital in order to make up for a massive financial loss. This was a result of handing out unsecured loans to people who were never able to repay them.

The concerns about the bank and its business model are not only limited to the fact that loans were freely handed out to the wrong people. It goes far deeper than that. At the time of the bank’s collapse, there were rumours that clients of the bank did not only have one loan at a time, but sometimes three or four loans with the second, third and fourth loans being taken out to pay off the other loans with the same bank. These fears were confirmed in an article on Fin24’s website where readers painted a sorry picture of the bank’s fall from grace.

One of the most common concerns in the article from readers, who were all clients of African Bank, was the significant issue about the interest rate the bank was charging clients. Because of the fact that lower income earners would probably not get a loan at one of the bigger banks, they approached African Bank out of desperation.

The role of the financial adviser is becoming more imperative than ever in the market. Concepts such as compound interest are not being taught at school anymore. In fact, basic financial literacy is not being taught. The financial adviser is in a position where he can make a meaningful difference to society by advising the public against making poor financial decisions.

A R699 per month ride into the sunset

A month before African Bank’s collapse, the public caught its first show of the true extent of poor financial decision making when the Satinsky Group announced its R699 per month for a new car deal fell apart.

There were a few significant red lights when it came to this particular deal. A report on iol.co.ca showed that when potential clients were entering into agreements for the vehicle, they had to sign two contracts. One was with the bank which was financing the car and the other was with a group in Hong Kong who would be the managing agent for the advertising payments.

The contract signed with the bank clearly stated that the client would be solely liable for the full instalment over six years, which is a normal clause in a contract when purchasing a new car. The banks financed these vehicles on the premise that clients would be receiving advertising income while driving the vehicles. The report goes on to point out that the majority of the people who entered into this deal could not afford the vehicle if the advertising revenue was not part of the deal. Did the bank make it clear enough to the person that if advertising revenue for the month was not received, then that person would be liable for an instalment?

Have we lost our morality?

This is also an example of how risk profiling and risk management within the financial services industry is lacking.

After the African Bank saga unfolded, there were obviously a lot of questions which needed to be answered. Comment from the bank was scarce, until a former top Executive of African Bank, Tami Sokutu, agreed to an interview with the Sunday Times, where he had a few colourful words for the people the bank loaned money to.

Now onto the R699 per month dealto drive a new car. Besides the fact that there are now rumours that the banks doctored clients information in order to reduce their risk profile, do the risk officers at the banks not have the same moral obligation as Sokutu. It is very easy to say that people in South Africa are corrupt, but if the shoe fits it must be worn. If the allegation about the banks tampering with clients information does prove to be true, who was directing them to do so?

Editor’s Thoughts:
Once again, the above situations prove that financial literacy in the country is needed now more than ever. There are initiatives by the FPI to increase financial literacy, but more important than this at the moment is to raise the profile of financial planners and the need for these skills in society. If not, we will just be perpetuating the cycle of poverty. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za

Comment on this Post

Name*

Email Address*

Comment*

 

Submit Comment