Loaded for Bear — how Capitec’s stunning rise took the banking giants by surprise

2 Dec 2024

In the early 2000s a group of pioneering entrepreneurs took a motley collection of micro-lenders and from the jumbled parts cobbled together what would become South Africa’s biggest bank as measured by the number of clients – more than 20 million.

Financial journalist TJ Strydom has carved a literary niche for himself as a biographer of South African business people and businesses.

In Capitec: Stalking Giants, Strydom charts the stunning story of the bank’s improbable rise which took South Africa’s Big Four banks completely by surprise. It is a tale that is deeply entwined with South Africa’s economic history, and while some people may find banking boring, Strydom’s punchy narrative is anything but.

To wit, in the early 2000s a group of pioneering entrepreneurs took a motley collection of micro-lenders and from the jumbled parts cobbled together what would become South Africa’s biggest bank as measured by the number of clients – more than 20 million.

As the Big Four – Absa, Standard Bank, FNB and Nedbank – made cautious forays, with some prodding from the government to provide services to the “unbanked”, Capitec charged straight in. By doing so the group has provided a wider service to the South African economy by bringing millions of previously excluded people into the formal banking sector.

Capitec did so by defying conventional wisdom about cost cutting and the risks of lending to lower-income workers and households.

While other banks were downsizing, Capitec branches were springing up like mushrooms after a rain. Capitec also focused on personal service – a key consideration when your target market finds banks in many ways intimidating.

The team behind Capitec cut its teeth in the booze business and this proved surprisingly useful when it came to banking.

“In the liquor industry efficiency is the name of the game. Develop products customers want to consume and then remove all the obstacles that could hamper sales,” Strydom writes.

It was a strategy that Capitec would deftly deploy.

Slashing interest rates on loans

What products did Capitec’s customers want to consume? Well, for starters, they wanted access to credit and the norm in South Africa’s micro-lending sector two decades ago was a wrenching 30% per month interest rate.

Capitec founder Riaan Stassen’s tactic on this front was simple: significantly lower the interest rate. His view was that anyone who would borrow money at that rate was desperate, and no business can succeed if it is built on desperation.

So, in March 2002, Capitec cut its lending rate to an average of 22%. The bank would subsequently lower its rate while expanding its loan offerings, including increasing the time-frame from the standard 30 days of the micro lending sector. “Some clients were paying ‘only’ 15% per month on a 30-day loan by 2005.”

It was not all smooth sailing and at one point, when small South African banks were struggling, Stassen and co-founders Michiel Le Roux and Andre du Plessis made loans to the bank – enough to keep it a going concern for three rough months until it was back in the black.

“... imagine that. In the midst of a small bank crisis, you take your savings, or dip into your mortgage, and use it to finance a bank!” Strydom writes.

Capitec also cleverly tapped other sources of finance beyond its founders’ bank accounts. Du Plessis convinced the US Agency for International Development (USAID) that Capitec was a model for its developmental mandate – banking the unbanked in Africa was clearly a development goal.

USAID did not cough up US taxpayers’ money directly. But it provided a guarantee, enabling Capitec to raise money from South African asset manager Futuregrowth.

Capitec’s instincts would take it to the rural areas – its acquisition of cash-loan shops had taken it to far-flung areas. With head offices in Johannesburg, the big banks had become “insular” in Le Roux’s reckoning. And the platteland would prove to be a gold mine for an up-and-coming bank seeking to provide offerings to the unbanked.

By 2007, Capitec had the rural market well in hand and would launch its assault on the towering giants of South African banking in their safe urban settings. That was the year it began advertising.

Capitec also wanted to present itself as a retailer and so its branches began popping up in malls in between shops.

“Whereas banks were seen as intimidating, just about every South African was familiar with shopping,” Strydom notes. “Its clients were consumers too and it made sense to do their banking in between shopping.”

Another masterstroke was getting Capitec written into the storyline of Generations in 2009, South Africa’s most popular soap opera at the time.

“The message Capitec wanted to get across was woven into the script. Through advertising flashes during commercial breaks, product features were highlighted, and the brand emphasised,” Strydom writes.

And this for an audience of six million people, 70% of whom overlapped with Capitec’s target market.

Magnifying lens on microlending

By 2012 Capitec had opened its 500th branch. That was the year in which the Marikana Massacre took place when South African police shot dead 34 striking miners involved in a violent wildcat strike against Lonmin.

That would bring renewed scrutiny to lending practices to lower-income workers and the emolument attachments to salaries, which Strydom notes are often mistakenly referred to as garnishee orders.

The upshot was that the courts eventually ordered that legislation be amended to make it harder to collect debt in this fashion.

But Capitec’s goal, Strydom points out, was not to lend money to vulnerable clients and then claw it back through such methods. It wanted a reliable client base – as Stassen had made clear from the start, he didn’t want to build a business from desperation.

Capitec has faced headwinds. In the wake of the demise of African Bank, it was the target of a scathing report by an outfit named Viceroy that sent its share price tumbling.

Read more: Viceroy vs Capitec: It’s complicated

But Viceroy was not an impartial analytical source. It was a financial predator that shorted a stock and then profited when it attacked a company, and the share price fell as a result. This would eventually be revealed by the consultancy Intellidex and the Financial Sector Conduct Authority.

While Viceroy would escape a fine, its report was found to be false and misleading. Capitec, from the get-go, had acted professionally in its response to the report and it weathered the storm. In the end, it was vindicated.

Read more: South Africa’s financial watchdog slaps US short-seller Viceroy with R50m fine over Capitec report

Capitec is now among South Africa’s banking giants – a state of affairs that two decades ago would have seemed improbable. It is a fascinating tale, and Strydom tells it well. DM

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Slashing interest rates on loans

Magnifying lens on microlending