A primary school in Pimville serving roughly 1 000 pupils recently saw its bank account seized while fending off a multi-million rand claim from Sasfin Bank. Its state subsidy for the year was subsequently paid into the seized account, leaving the school effectively defunded.
The independent but state-subsidised St Peter Claver Primary School is among hundreds of schools and colleges, as well as small businesses, that have had their rental agreements for IT equipment ceded by financial middlemen to Sasfin’s South African Securitisation Programme (SASP).
(Securitisation is the financial practice of pooling various types of contractual debt and selling their related cash flows to third party investors.)
In the vast majority of Sasfin’s lease contracts there is no harm. Equipment, such as a photocopier, is delivered and instalments paid.
But when a debtor misses a payment the SASP doesn’t miss a beat and issues an immediate claim for all future instalments. Schools who have no idea they are indebted to Sasfin suddenly find themselves pitted against the formidable banking group.
When the debts themselves are seemingly the product of corruption by school officials and unscrupulous middlemen, the school can find itself paying enormous sums for shoddy equipment it doesn’t even need.
The case of St Peter is particularly egregious but shines a light on the imbalance of power between, on the one hand, ill-resourced clients like schools, and on the other, unaccountable players including hundreds of small financial middlemen inextricably linked to the prominent investment bank’s business.
School debts make up a surprisingly significant part of the R3,6-billion SASP programme which buys up and converts office equipment rental agreements into asset-backed debt securities.
Sasfin claims that schools make up only 5% of its overall securitisation business, but the proportion is far higher in specific securities studied by amaBhungane, amounting to roughly 10%. By way of example, one single security generated in December 2017 contains 198 school debts totalling R90-million.
In response to questions the bank claimed that schools are no more vulnerable to default than businesses but conceded that it “experienced a small decline in credit performance of schools during the Covid lockdown which was somewhat exacerbated by delays in payment of government grants over the last couple of years”.
Several debt collection cases identified by amaBhungane are pending, although it is hard to get a holistic view of the problem because education authorities do not keep tabs on independent schools even when they are almost entirely state-funded.
One sister school of St Peter, St John Berchman, was also sued by Sasfin but reached a repayment deal.
In Gauteng and in the Western Cape, education departments have been fighting and also settling similar, albeit generally smaller, claims. The situation is considerably more dire at St Peter which charges nominal school fees alongside the more important state subsidies it receives.
The SASP wants almost R6-million of the school’s annual R9-million state subsidy.
The case might be singular but it illustrates the vulnerability of schools and other small debtors to sharks punting rental deals as opposed to loans. Rental agreements are notably not covered by the protections offered by the National Credit Act.
What it exposes is an obscure haven for petty corruption hidden safely from view in sophisticated financial instruments where redress requires immense will and resources.
A worst case scenario
On 26 April this year St Peter got its bank account attached by SASP. It was the latest turn in two concurrent court battles with the SASP gunning for nearly R3,5-million in equipment rental debt, representing the full future instalments on a number of different contracts. With interest this has ballooned to nearly R6-million.
The school serves around 1 000 pupils and charges school fees of only R3 000 per year, supplemented by state subsidies. Its crisis began with alleged collusion between a school official and an agent for one of Sasfin’s many rental agreement providers.
In this case the school was saddled with equipment it has never used.
The goods being rented were completely out of proportion to any realistic need the low-fee primary school would have. They included 18 printer-copiers worth R70 000 a pop, sound bars, tablets, cameras and interactive white boards.
A technical report commissioned in 2020 showed that the printers were not only second-hand but apparently had internal counters measuring past use tampered with to make the machines appear newer than they were.
Auditors picked up the “glaring wastage of resources or wasteful expenditure” on equipment rentals in the school’s financial statements for 2017.
“In relation to the school’s income stream, this amount alone constituted approximately 15% (R1,934,879 of R12,599,632) and the amount seemed excessive for the size and nature of the school. As such this account was flagged as high risk necessitating an in-depth onsite review,” reads the audit report dated 10 April 2018.
Among other things it was found that the school could have bought all the relevant equipment new and paid half of the price now due for three years’ rental for second-hand equipment.
By October 2018 St Peter Claver was put under administration by the Catholic Institute of Education, which runs St Peter and other independent schools.
The administration team soon started building a case for repudiating the contracts after reversing all the related debit orders, leading to an acrimonious to-and-fro with Sasfin before the bank launched its court applications.
According to Sasfin it “repeatedly tried to settle the matters with them but have been unable to reach agreement for an affordable repayment arrangement…Instead of negotiating though, St. Peter has elected to defend one of the claims which is before the courts”.
At the heart of the battle is whether the contracts are dodgy and, if so, who is responsible?
It appears that the rental agreements Sasfin bought and securitised were bristling with red flags.
According to minutes of one meeting with Sasfin, administrator Mduduzi Qwabe complained that the leases record that board meetings took place on the same day the contracts were signed despite there being no other record of these meetings.
The contracts had largely been signed on the school’s side by the then-bursar Robert Mthembu alongside the chair of the board of governors Mkhululi Zwane.
Mthembu had no authority to sign these deals and the administrators also could not find copies of some contracts and Sasfin allegedly could not provide them, said Qwabe.
Two days into the administration Mthembu allegedly absconded with the school’s financial records, leaving the administrators to reconstruct the school’s affairs using bank statements, according to administrator Janice Seland.
AmaBhungane was unable to contact Mthembu and Zwane, who both resigned.
In a letter Sasfin responded to the school administrators saying that it had “conducted a preliminary investigation into the allegations of misconduct by which you have alleged involves your Robert Mthembu. We have interviewed the suppliers and our employees and have determined that no irregularities have been found in respect of the various rental agreements signed with the school”.
The bank continued that “it is not our responsibility as an outside 3rd party to ensure that your corporate governance is intact and that the school is compliant with regulation. That is the school’s obligation. It is not for us (nor are we compelled to in terms of some “due diligence” process) to ask for proof or minutes of meetings held internally by the school. We are legally entitled to rely on your representations so long as we act in good faith, which we did”.
The since-departed school officials seemingly signed irregular contracts with several financing middlemen who then ceded the contracts to Sasfin.
The majority were sold to the bank by a financial middleman called Sequence Digital, trading as KM Connect.
According to the company’s managing director Ian Craig the contracts with St Peter were all generated by one agent, Nazeem Jacobs, who was not their employee.
The school administrators told Sasfin that “the agent [Jacobs] acted in bad faith by knowingly binding a poor school in Soweto just to boost their commission”.
“Some of the agreements signed have resolutions which are not even dated on your form – it makes us wonder then how your agent could have been allowed not to provide such an important detail – it can only lead to one conclusion – your agent was aware there had been no meetings. This makes your agent liable and party to the misrepresentation of facts.”
Agents on the run
The network of agents and intermediaries generating rental agreements for Sasfin is wide, nebulous and difficult to hold to account.
KM Connect’s managing director Ian Craig told amaBhungane that Jacobs seemingly “latched onto St Peter and just milked it”.
He said that after a number of meetings with Sasfin and St Peter “it was agreed by all parties that KM Connect would take back all equipment that St Peters Claver claimed they did not require”.
“At these meetings St Peter Claver also specified the equipment they wanted to keep and agreed to continue paying for. KM Connect were obliged to buy back the contracts of the equipment they no longer required.”
Craig did not answer direct questions about the equipment ordered being clearly out of proportion to the needs of the school, about whether KM Connect conducted any form of creditworthiness check on clients, and about the pricing, age and condition of the leased items.
He said, “Since our full and final settlement agreement with Sasfin/St Peters and ourselves 3 years ago we have had no further communication with either party.”
According to Craig, Sasfin was going to sue them and the repurchase meant KM Connect paying Sasfin over R2-million, begging the question of how much debt Sasfin initially intended to claim from St Peter.
In its response to us Sasfin made this seem more amicable, saying it “managed to negotiate an arrangement with one of the equipment suppliers who agreed to take back equipment which the school had ordered but subsequently decided was surplus to its requirements. The cost of that equipment has been credited to the school. This facilitation is just one way we have tried to mitigate against the burden the school faces”.
Sasfin declined to answer specific questions about the St. Peter case, saying it was before court: “Accordingly, we cannot comment further in respect of this matter.”
Qwabe says he is not aware of the deal struck between Sasfin and KM Connect.
Meanwhile, KM Connect has in turn tried to recoup the money from the agent, Jacobs.
Jacobs, who is now effectively being blamed by both KM Connect and the administrators of St Peter kicked the can back to KM Connect, saying that an agent like him is not the one that has to be convinced of the legitimacy of the resolutions that school officials provide.
“We, as in Dealers or Sales persons do not have to satisfy ourselves [that everything is in order], we have a set of requirements like resolutions or constitutions which we present to the Finance House [KM Connect] as part of supporting docs to the Credit App and they make the final decision to approve or decline.”
He strenuously denied having any personal or reciprocal relationship with Mthembu and further places any responsibility for defects with the equipment on KM Connect.
“I was sympathetic… but I was not responsible for the equipment sold.”
Meanwhile, in Sandton
According to Sasfin it has a “rigorous screening and vetting process in which it considers applications both from a credit and market conduct perspective and seeks to ensure that the monthly rentals for the relevant equipment are reasonable and affordable”.
“We also impose strict market conduct requirements in the form of warranties on equipment suppliers with whom we do business, to hold the supplier responsible for mis-selling, fraud and the like.”
It could be argued that it is impossible for Sasfin to interrogate all the contracts it routinely buys up and securitises. Any given security contains hundreds of individual contracts which are all, by themselves, relatively small parts of the multi-million rand whole.
But the company actively and very specifically pursues school debts and the special social role and vulnerability of the education system could arguably make closer surveillance imperative.
In a response to questions Sasfin said that it has been accommodating of schools struggling to honour debts by offering payment holidays and debt restructuring.
“All non-performing debtors are pursued to the extent that it is legally, economically, and socially feasible to do so. We cannot look at school debt through the single lens of debt forgiveness.”
Sasfin also suggested that part of the problem was that some of the school’s rental agreements were never vetted by Sasfin itself but rather by companies that Sasfin subsequently acquired, hence inheriting already-vetted agreements.
“They carried out equipment leasing businesses with a similar operating model and had their own contract vetting processes… Sasfin was not party to the original approval process.”