The Situation in South Africa
South Africa has one of the most advanced financial systems in the world which is why we survived the global economic crisis better than most developed countries. But this does not mean there is nothing to be concerned about. The fractional reserve system is used extensively in South Africa.
According to Russell Lamberti, writing on the blog of the Mises Institute South Africa: “Since 2000, the SARB [South African Reserve Bank] probably printed about R100 billion out of thin air. This allowed the commercial banks to use about R40 billion to fractionally leverage at about 40:1 and create about R1.6trillion in additional money out of thin air (that’s R1,600,000,000,000).”
This means that South Africa has quadrupled its money supply in the last decade and, of course, the value of this new money must be derived from the money in circulation, creating inflation. He adds that: “Since 2000, the US Fed balance sheet grew 370%. Over the same time the SARB balance sheet increased from R76bn to R440bn, about 480%. In other words, since 2000 the SARB balance sheet has grown 1.3 times more than the Fed balance sheet.”
If the ownership of the debt shifts
it could mean the banks have no legal status over the debt
because they do not own the debt.”
The fractional reserve system is also used by our banks to “create” money based on the borrowers’ “promises to pay”, which raises the issues of the legal validity of the loans and legality and morality of charging interest when “nothing” was loaned, because the money “loaned” did not belong to the bank, but was“created” ex nihilo (out of nothing) based solely on the borrower’s “promise to pay”.
The Banks Act states that a bank cannot act as an agent or intermediary for a third party, such as a securitisation SPV, without the express written consent of the customer. However, according to the South African Banking Association’s website, local banks securitise loans worth about R30 billion a month.
The issue here is that if a bank securitises a loan, it loses all rights to the asset. This means the bank cannot, for example, repossess property put up as collateral on a loan which has been securitised, because the bank no longer has any rights to the debt. It could well mean that thousands of homes may have been illegally repossessed by banks in South Africa too.
The issue has already been tested in court, and on a number of occasions, it has resulted in a bank abandoning the foreclosure proceedings because it was no longer the lawful owner of the debt.
These practices are also being challenged in the High Court by NewERA (New Economic Rights Alliance), a non-profit organisation supported by 150 000 people, which argue that if a loan has been securitised, not only has the borrower’s legal status with the bank changed, but the debt with the bank no longer exists. Their case is supported by extensive evidence and research with special reference to South African economics and South African law and presented by lawyers acting pro-bono.
The banks have emphatically argued that they cannot understand NewERA’s papers and the court ruled that NewERA must amend its papers, “removing all the evidence”. NewERA has said it will apply amended documents with renewed ferocity, “to protect millions of South Africans from what we believe are blatant and unscrupulous actions of the banks.” Follow the case on www.newera.org.za.
REIM asked the banks and the major role players the following questions about securitisation.
- Can you provide us with an indication of the value of loans securitised and what percentage of these loans are home loans?
- Does a consumer have the right to know if their loan has been securitised? Or is there a clause in the credit agreement that the client signs that provides the bank with the rights to securitise the loan? If so, can you provide a sample of the wording used? If not, how is the client informed?
- Can a consumer choose not to have their loan securitised?
- How can a consumer trace the securitisation of his/her loan?
- How do the banks ensure compliance with the legislation that credit agreements that have been sold or traded are registered withthe NCR?
- How is the legal standing of a South African citizen’s loan affected if the loan has been securitised?
- How would the debt counselling process be affected by securitisation?
The Banking Association of South Africa did not bother to acknowledge or respond to numerous emailed requests for information.
The National Credit Regulator (NCR) – legally mandated to protect the interests of South African credit consumers – replied: “The NCR views this matter in an extremely serious slight and is giving it the requisite attention. For fear of compromising the project, the NCR is not at liberty to discuss any details at this stage”.
Frightening. Especially given the fact that the National Credit Act, Sec 69(4) requires that all credit agreements that have been sold or traded (i.e. securitised) are to be registered with the National Credit Regulator.
Humbulani Salani, spokesperson for FNB Legal, simply responded: “We can confirm that currently FNB does not have any homeloan securitisation outstanding in the market. When securitisation transactions were entered into by FNB in the past, it did not breach any law. Securitisation is an industry matter.”
Steven Barker, Standard Bank’s Head of HomeLoans, replied: “Only a small portion of StandardBank’s Home Loans form part of a securisation arrangement. The customer agrees up front that the bank may cede its rights and delegate its obligations under any loan agreement to a third party. Where a loan is securitised, there is generally a cession of the rights under the mortgage bond registered at the Deeds Office. The terms and conditions of the loan agreement are not affected by the securitisation and a customer is required to repay the loan as set out in the loan agreement. The debt counselling process and any rights under the National Credit Act is not impacted. Further, Standard Bank complies with it sreporting requirements under the Act.”
ABSA noted that, currently, their total residential mortgage book amounts to approximately R233bn and only about 2% o? this has been securitised. “Worth mentioning is that the performance of South African residential mortgaged backed securitisation transactions have been superior to those in the US over the last 10 years. This is primarily due to South Africa’s very well-regulated securitisation market where transactions are monitored by the SARB, the JSE ,international rating agencies and the NCR. Fitch Ratings recently released a report confrming that EMEA (Europe, the MiddleEast and Africa) residential mortgaged backed securitisation transactions (from 2000 to 2011) had signifcantly lower losses than their US counterparts.”
With regard to the questions about the consumer’s rights, ABSA stated the following: “The customer will receive a letter from ABSA to advise the customer [in the event] of the securitisation of the loan and thereafter the credit provider’s details are reflected in all communications to the customer. Usually there is an express provision for a credit provider to transfer its rights and obligations. It should be noted that a credit provider has a common law right to transfer rights without consent. The NCA did not remove this right.”
Furthermore, ABSA notes that “the consumer remains indebted under the loan, albeit to a different creditor and, save for this, the terms and conditions of the loan do not change. The debt counselling process is not affected by securitisation and the consumer is still entitled to exercise the rights he/she has in terms of the National Credit Act.”
Deborah Solomon, founder of the DCI, the debt counselling industry portal that has become the springboard to better debt management for thousands of overly indebted consumers, offered a different view:
“The NCR is aware of the process called ‘securitisation’ and have stated that they are investigating how this fits into the National Credit Act. We have also brought the matter of securitisation to Minister Rob Davies’ attention and will hopefully get some answers from the Minister’s office.
We have also requested furthering information from the NCR regarding the compliance of the banks in terms of registering credit agreements that have been sold or traded with the NCR, but nothing has been forthcoming as yet.
In terms of the NCA, the banks must give the debt counsellors information as per their request. But the banks all have one ‘template answer’ and obviously feel that they do not have to answer these types of questions. It is another point which we have raised both with the NCR and with the Minister,” says Solomon.
She notes that from a debt counsellor’s perspective, securitisation has huge implications, as the counsellor needs to know who the debt belongs to, to ensure negotiations and payments. “If we do not know who the real owner of the debt is, how can we make a judgement call on the outstanding ownership of the debt?”
In terms of the effect of securitisation on the debt counselling process, Solomon says that it could mean that a credit agreement is illegal. “If the ownership of the debt shifts, it could mean the banks have no legal status over the debt, because they do not own the debt. The new holder or owner of the debt would also need to be a registered credit provider in terms of the NCA. Of course, a debt counsellor would look at the debt differently if they knew it was securitised and would question the legality of the action on behalf of the consumer.”
Solomon further notes that consumers absolutely have the right to know if their loan has been securitised.
“If the bank has securitised a debt, made money from your signature without your consent or knowledge, and then try to take legal action against you should you default on the loan, it is 100% your right as a consumer to know this. Maybe this could be the reason why the banks have note mbraced the NCA or tried to window dress the debt counselling process, because they know that should the truth be revealed, they could stand to lose more than what they are currently worth.”
So what to do?
How do these issues impact ordinary South Africans?
And what can we do about it?
1. Get informed
Firstly, we need to realise that we ordinary South Africans don’t know what is really going on. The “money” in the financial system is no longer backed gold reserves, nor are deposits in the bank held safely in a vault. “Money” is little more than electronic bookkeeping entries based on “promises to pay” .It is up to us to demand and ensure that our financial system operates on sound principles. As the people of Cyprus just discovered, relying on government or the financial authorities in a country to monitor and maintain the system responsibly, can lead to unimaginable consequences: government “appropriating” as much as 40% of the money in depositors’ accounts at its two biggest banks to bailout the financial institutions! We need to become informed, involved and concerned citizens who understand what is going on and what the implications are, and take the necessary action to safeguard our rights and interests, not only for ourselves, but for our fellow South Africans and our children.
2. Become part of the solution
We also need to understand that the fractional reserve system is dangerous and inherently unsustainable. As Russell Lamberti, head strategist at EFM Analytics, wrote in an article published in the Mail & Guardian:
“The current financial crisis is no accident. It is the predictable and logical result of fractional reserve banking and the political-legal privileges that make this system possible.”
Because the “credit” or “money” loaned by banks is not backed up by actual deposits in the bank, but simply on ever-more “promises to pay”, it is creating a credit pyramid that drives unsustainable over-consumption.
This is patently clear in South Africa. While our financial system is strong and highly regulated, the reality is that debt levels in South Africa are frightening. There are 19.69 million active credit consumers, of which 46.9% – almost half – have impaired credit records. Our 75.8% debt-to-disposable income ratio is extremely high by our own historic standards, and this at a time of prolonged, low interest rates. The value of outstanding credit balances in the South African household sector showed growth of 9.8% year-on-year (y/y) to R1.311 trillion up to the end of February 2013. The components of installment sales and unsecured credit (comprising personal loans, micro finance, credit card debt and overdrafts) continued to record relatively strong growth of 19.6% y/y and 27.4% y/y respectively in February.
The rise of unsecured lending in particular has raised alarm bells.
Many experts are deeply concerned about the level of debt defaults that could occur if interest rates begin to rise.
We cannot deny that our excessive debt levels are a part of the problem – our demand for credit is driving an ever-more unsustainable and shaky financial system. We need to understand the system, and we need to use it responsible and intelligently. And, simultaneously, we need to demand that those in power also use the system responsibly and intelligently to protect us from the financial disasters that are playing out across the globe.
Be part of the solution by drastically reducing the number of your valuable “promises to pay” floating around in the financial system. In other words, avoid making debt, especially the kind of short-term, high-interest debt that enslaves us to the financial system.
3. Take action
We are far too comfortable and complacent in South Africa. And complacency is dangerous – we hardly notice how our freedoms and our values as a society are being eroded – like a frog that is slowly boiled to death. When organisations such as the DCI, NewERA or the Free Market Foundation alert us that our rights are under threat, we need to take action.
If banks are enforcing “loans” that have no legal validity and are charging interest on these “loans” that do not legally exist, we need to take action. If banks are repossessing homes and other assets illegally when the debts in question have been securitised, we need to stand up against a violation of human rights that is destroying thousands of people’s lives. If our government and financial institutions are “creating” money in a way that threatens our entire financial system, we need to do something.
Investigate the claims and efforts of a growing number of organisations and “common law movements” that are working to bring transparency and fairness to the government and financial systems. These decentralised and non-violent organisations have been around for years across the globe and they certainly have impressive numbers of followers. In the US, they are called “Sovereign Citizens” and in the UK they are called “Freemen on the Land.” Some local examples include NewERA; the newly-established Ubuntu political party formed on the principles of absolute equality, abundance for all and Unity Consciousness; and the One People’s Public Trust (OPPT), which now has a South African branch, formed to “free the people of South Africa from the shackles of a corrupt government and a tyrannical banking system”.
We need to start getting involved. We need to join and support organisations that are remaining vigilant and are working to protect our rights.
Most importantly, understanding that the“money” in the system is essentially worthless, because it is not backed by gold reserves or even deposits held, we need to shift our attention away from making and saving “money” and begin to focus on acquiring real assets. And to do this, you need to follow the system of building real, tangible wealth that is as old as the financial system itself: securing real assets in a trust. We are not talking about cash in a bank account or a fancy car. We are talking about real, tangible assets that not only increase in value over time, but also – at the same time – produce an ongoing, passive and inflation-linked income. These assets include, for example, a sustainable business run by an independent management team; royalties,copyright and patents; and of course, the cream of the crop: income-producing properties, especially those that are sustainable, featuring alternative energy, a rainwater tank and a vegetable garden.
These assets must be safeguarded in a well-structured trust, managed by professionals, to ensure superior protection of the assets against the many risks we face in the current unstable financial system, so the wealth is preserved from generation to generation. We are not simply victims of an ongoing conspiracy between big corporate financial entities and government. The truth is more likely that we have become victims of a system we have helped create through ignorance, blind compliance and greed. But we can help create a more transparent, fair and stable system, if we are willing to get informed, become part of the solution and take the right action to defend our rights vigorously, build real wealth and protect it for the future generations.
[Money Grows on Tree
first appeared in SA Real Estate Investor Magazine (REIM)
and was written by Monique Terrazas – kudos to them!]