It is commonly said, not least by COSATU General Secretary Zwelinzima Vavi, that South Africa's high levels of unemployment constitute a ticking time bomb. Another ticking time bomb though - and one that has received far less attention than it deserves - is the massive growth in unsecured lending to working class wage earners.

One concern is that working class South Africans are being enticed by lenders into taking out credit to make short term consumer purchases - without fully understanding the costs involved or the full long term financial implications. This is not to mention the problem of the widespread abuse of the garnishee system or the possible systemic risk such lending may pose to the banking system at some point down the road.

Perhaps the journalist who has done most to highlight the various aspects of the problem of unsecured lending is Malcolm Rees of Moneyweb. One of the companies he has singled out for scrutiny is the JSE listed Lewis Group, which owns the Lewis, Best Home and Electric and My Home stores (see here and here). There are 468 Lewis stores, 52 of which are in Botswana, Lesotho, Namibia and Swaziland.

In its recently released final audited results for the year ended March 31 2013 the Lewis Group reported revenues up 6.8%, a gross profit margin of 38.3% and an operating profit margin of 24%. The company noted that it was successfully expanding its credit sales: 

"Credit sales increased from 71.4% to 75.3% of total sales with the continued focus on attracting credit customers through exclusive merchandise offerings and targeted customer promotions. Credit sales have shown an increasing trend in recent years, growing from 68.5% in 2010. The group will continue to benefit from the resultant annuity income into the future."

The company also reported that it had 688 543 debtors, of whom 478 093 were fully up to date with their instalments.

An obvious question is why any retail company would prefer credit sales to cash sales - with all the concomitant problems of monthly collection and bad debt. Part of the answer can be found in a Lewis catalogue (the one used for this article is dated April to May 18).

The catalogue is headed "Champion Deals", promises "super-low prices" and says customers have "36 months to pay (on purchases of R3999 or more!)" The image below, for a "Hudson 2 Piece Bedroom Suite", contains a typical offer:

Arrow "A" points to the amount (only R364) you would pay monthly if you were to purchase on credit (over 36 months.) The amount is presented in large white lettering against a red background. It "includes all costs". (On the bottom of the page these are explained to be: "damage insurance", "theft insurance", "death insurance", "disability insurance" and "same day delivery" as well as an "interest rate of 21%".)

Arrow "B" points to the cash price of the item (R4 999.99). This is in still large black type against a light grey background, and is always positioned next to the monthly amount. Generally, the cash prices on offer appear to be competitive - and are presumably the "super low prices" being referred to.

The catch is that there is very little relation between the cash price ("B") and the monthly credit amount ("A) when the latter is multiplied by 36 instalments. Arrow "C" points to the "total amount" (R13 104) a customer would pay over 36 months if they took out the credit option. This information is conveyed in tiny black writing on a yellow background right next to the physical description of the item on offer - well away from both "A" and "B".

Effectively then the total amount a credit customer would pay for this offer is 2.6 times the cash price. At R364 per month a customer would have covered the cash price sum of the item (including the 21% interest on it) in around 16 instalments. Add in the cost of delivery, upfront, and they would have paid this sum off in about 19 instalments.

From a sample of other offers in the catalogue - including in different product categories - it seems that the "total amount" paid by credit customers is usually between 2.4 and 2.6 times the "cash price" of the item. This applies to the smaller and cheaper items (for which delivery would not be required), that have to be paid off over a 24 month period.

Take for example the "Gourmet Gold 12 piece master cookware set" offer on the left. The cash price is listed as R2 199.99. The credit price is R219 x 24, amounting to R 5 246 in total (2.39 times the cash price). At an instalment of R219 per month the customer would've paid off the cash price sum (including 21% interest on it) in about twelve instalments.

On the face of it then the offers in the catalogue appear to be exploiting the fallacy, noted by Aristotle, that "if each part is little, then the whole is little." The monthly instalment is much less than the cash price. But taken as a whole - over 24 or 36 months - it is far more.

Politicsweb contacted the Lewis Group for comment. Noting that the credit price was generally two-and-a-half times the cash price in the catalogue we asked, firstly, why there was such a discrepancy. "What exactly are the credit customers paying for - over and above the actual cost of the item they're purchasing?" And, secondly, "is Lewis confident that their customers are making an informed decision when they go the credit rather than the cash route - even though the cost is over twice as much?"

The Lewis Group's answers were as follows:

Question 1: In terms of the difference between cash and credit sales, the cost of credit is calculated based on the following:

1. Cost of merchandise purchased

2. The total of all initiation fees, monthly service fees and interest payments due for the term of the contract and regulated by the provisions of the National Credit Act

3. Optional customer protection insurance for the term of the contract

4. Delivery fees, and

5. VAT where applicable

The total cost of credit is fully disclosed and discussed with the customer before a contract is entered into.

Question 2: In response to the question whether customers are making informed decisions when buying on credit:

At Lewis all costs and charges are fully disclosed in all brochures and store advertising which clearly reflects the difference between the cash and credit price. When concluding a contract customers are served by branch staff who are from the communities and speak the local language. Lewis contracts are available in five language options.

The store manager interviews all customers prior to the contract being signed and explains the elements of the deal, including the total cost of credit. Customers have the right to delay signing the contract for a period of up to five days while they consider the details of the contract and the costs.

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