Another sell signal for Capitec, Abil – 90% of Garnishee Orders are flawed or fraudulent

As the Marikana disaster started brewing in August 2012, a couple of reporters who used to work with me went off to see what was happening on the ground at that ill-fated village near the Lonmin Platinum Mine. One witnessed the insanity which happened on the hillock where sangomas peddled “muti” the miners believed would make police bullets bounce off them. The other went into the village where he saw a dozen money lending shops in a 500m stretch. Later, a reporting team went into the Johannesburg CBD and discovered how easy to borrow large sums of money. All the borrower need do was sign papers which said if the repayments were not made then they agreed to allow the lender to deduct repayments off their salaries. In other words, agreeing to a Garnishee Order. Even if the borrower signed such a form, it’s still not legal. A Garnishee Order is a serious legal action and needs to be properly confirmed in court. But many employers are unaware and enforce Garnishees served on them. Add in rampant fraud by stamp wielding clerks in the Magistrate Courts (apparently at R100 a time) and it;s not hard to understand that the use of illegal Garnishees is out of control. If ever you needed another reason to run far away from the shares of  companies plying their trade in the unsecured lending market, this interview provides it. Clark Gardner’s company has a large business auditing Garnishee Orders for corporate clients. He estimates that 90% of all Garnishee Orders are illegal. And with Government ready to wield its customary sledgehammer to squash the flea……If you own Capitec of Abil shares, be warned. Since this story was published, Capitex released its interim results – both pieces on that are relevant. Click on the links at Capitec’s results unpacked: drop the hype, check the numbers – and be afraid  and at Capitec’s half year financial results frighten me – and I don’t even own the stock.  – AH 

To watch the video of my CNBC Africa interview with Clark Gardner, click here. 

Clark Gardner: Would "definitely not" be buying shares in a business exposed to unsecured lending market.
Clark Gardner: Would “definitely not” be buying shares in a business exposed to unsecured lending market.

ALEC HOGG: Business Connexion, listed on the JSE, has announced that it is selling its Q-LINK business to a private company for R187.5m. Well, that private company is Summit Garnishee Solutions and the founder and Chief Executive Clark Gardiner is with us in the studio. You guys have done pretty well, well enough to get R187m together. Are you being supported by private equity or anyone else in this deal?

CLARK GARDNER: Yes, we are most certainly. First of all, Summit is a group of companies. Summit Financial Partners and Summit Garnishee Solutions. There’s individuals involved in those entities and most importantly, RMB Corvest is taking a stake together with the Lily Trust which will be our empowerment partners.

ALEC HOGG: Is this a transformative deal for you?

CLARK GARDNER: It is most certainly. I think that if you have a look at the rationale for the deal we believe quite strongly and passionately, that in the current financial crisis that consumers are experiencing, one of the most effective mechanisms to manage that crisis and provide solutions is to manage the service providers. And if you give them tools and platforms to enable them to make affordable and responsible deductions both in terms of sustaining the industry and protecting the consumer, I think we have the best solution out there. To change consumer behaviour is a bit more long-term and bit trickier.

ALEC HOGG: The whole garnishee story is distasteful to say the least. You’ve been one of the good guys, though. You’ve been auditing and helping companies to find out where perhaps the employees had garnishee orders placed onto their salaries without due process. Give us an understanding of how prevalent this is in South Africa.

CLARK GARDNER: No, Alec. It’s huge. It’s significant. So if you gave me 100 garnishee orders today I would probably find 90 that will breach some sort of law, obviously fraud is…

ALEC HOGG: Clark, just stop there for a minute. 90 out of 100 are actually not properly legal?

CLARK GARDNER: Correct. But let’s define that. What is properly not legal? Some of it will be R10 per order and others will be R3 000/R4 000 per order. I’ve got ones showing R20 000 of over-deductions. There are extreme cases but there’s always a breach. This is where we got to know Q-LINK quite well because companies outsource their garnishee deductions. We make sure they’re accurate, affordable and valid and then we remove the administrative burden by interfacing with the payroll via the Q-LINK platform. Q-LINK does a fantastic job at providing a platform at interfacing into a number of collection mechanisms, including banking and payroll. By bringing those banking solutions to payroll I believe you can manage the service providers more closely and provide better offerings or group scheme type products – voluntary or involuntary – into payrolls, thereby solving the current crisis we have in South Africa and preventing it throughout the rest of Africa.

ALEC HOGG: I was talking to a friend of mine who runs a company, a big listed company, and he was very proud that only 3% of the staff had garnishee orders. Another business that I know very well; it’s probably 30 – 40% and from what you said now, maybe they should be doing an audit on how many of those 30 – 40% are valid.

CLARK GARDNER: I agree. And 90% won’t be. You’ll be saving R10 for the employee or sometimes you’ll be saving R10 000. More importantly, you can make sure that every employee can afford such a garnishee deduction. And even if it’s 3% and that 3% is stealing from your employees, I think we have a responsible role as employers to make sure that that employees get valid, accurate and affordable deductions.

ALEC HOGG: Just to take a few steps backwards: in very simplistic terms, what is a Garnishee Order?

CLARK GARDNER: It’s an order from the Magistrate’s court to the employer to make a deduction from the employee’s salary in order to pay defaulted or outstanding debts to their different debtors.

ALEC HOGG: And the reason why so many of them are actually not legal – is fraud?

CLARK GARDNER: It’s a fraud process so there’s a lot of grey areas; (1) in the National Credit Act that governs the debt and (2) in the garnishee order which is Section 65A of the Magistrate’s Court Act. People take advantage of those grey areas. It’s also not very well policed. The Magistrate’s Court is an imperfect place. The Clerk of the Court is the one that authorises most garnishee deductions as a result of a consent to judgment that is signed by the consumer. And unfortunately, therefore, there’s no-one governing that process except for the collectors themselves. So the collector tells the employer when to make the deductions.

ALEC HOGG: And if the employer doesn’t really take much interest, their employee will just have this money deducted from their salary. Clark, there was one thing that bothered me a little here. We’ve got Business Connexion which is a listed company on the market. When it breaks down what’s going to happen to its profits after the sale of Q-LINK to you…it is earnings-dilutive. So they’ve done a bad deal. The headline earnings would have been 18% lower if they had done this deal before the six months to the end of February, which would suggest  that they’re taking a view, that this is not a business that’s sustainable.

CLARK GARDNER: Look, I can’t comment on behalf of BCX and their rationale for this deal. It is a business that relies heavily on big contracts. Such contracts certainly require a longer term view of the industry, added value benefits to the employees and the consumers within those environments. It’s also heavily weighted or relies upon the insurance industry that uses this platform in order to do the affordable and valid deductions. Perhaps Business Connexion would have viewed that as in the financial services space and not in their space. And perhaps they didn’t rate their chances of getting these contracts renewed. So it certainly is a risk and it certainly is a reason for the discounted price if there is such a thing.

ALEC HOGG: Can it not also be a view that government is going to bring a sledgehammer to the whole garnishee order area? We know there are abuses and we also know that politicians tend not to use scalpels, but to use blunt breadknives when they address it. Is that not an issue?

CLARK GARDNER: I don’t think so. The reason being that garnishee revenue in the Q-LINK model is a very, very small portion of their total revenue, almost 2%. Secondly, garnishees is a mechanism that we do need here in order to sustain the unsecured credit market. And there’s good credit and there’s some bad credit and there’s some abusive practices underlying it.

ALEC HOGG:  From what you know of the unsecured credit market, given what you’ve told us now; would you be a buyer of a company that invests heavily in…or is exposed heavily to unsecured lending?

CLARK GARDNER: Definitely not.

ALEC HOGG: So you wouldn’t be a Capitec shareholder?

CLARK GARDNER: Definitely not.


CLARK GARDNER: I think the scope for growth in South Africa is very limited.

If you look at the 20 million credit active consumers, 9.5 million have already missed 3.5 debt instalments with an impaired credit record.

More importantly, in my definition, they can’t afford additional credit. And I also think that those consumers have taken on bottom-feeders or lenders at a lower level who have pushed themselves up the priority list to make those repayments because they use different techniques and perhaps more bullying techniques than garnishee deductions and fraudulent garnishee deductions. I think they’re going to push out the more scrupulous or the more responsible lenders like Capitec in terms of their payment priority. And I believe there’s a little bit more pain to come in terms of their provisioning of bad debts and on performance of their clients’ loans.

ALEC HOGG: Clark, thanks for those unique insights. It’s often good to talk to someone who’s in the industry rather than the investment community who only look at the numbers. G ood luck with your acquisition. I hope that it turns out that you’ve made the right deal. Certainly RMB Corvest are no mugs, so if you’ve got them onside, it certainly looks like you’re in the right place. I’m sure we’ll be talking to you again in future.


ALEC HOGG: That was the ‘Clark Kent’ of the garnishee order area; Clark Gardiner, the founder of Summit Garnishee Solutions.

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