When one is watching rugby in a pub, with a frothy Amstel, while awaiting a wood-fired pizza, you occasionally see adverts spin across the Supersport screen for Cambist. Cambist offers you a 19.5% return on your money, and is generally responsible for this type of obscenity:

So what is Cambist?

Cambist is an online platform, that allows you to buy someone else’s debt contract.

To explain that, let’s step back a moment and start this story at the very beginning.

The World Of Micro-Credit

Meet Xolani, a hypothetical platinum miner and a hypothetical member of AMCU. Freshly excited by the end of the strike, and the new rise in his salary, he decides that the time is right to go and purchase a new flat screen TV. So he approaches Makro for financing, only to discover that Makro does not offer financing to platinum miners without a lot of contracts and proofs and collaterals.

Undeterred, he approaches a micro-lending institution (let’s call it “Bridge Loans”), and asks for a R4,000 loan to buy a flatscreen TV. They happily grant his request after getting some particulars about his employer, charge him a fat loan origination fee, and Xolani walks away with R4,000 and a three month R4,500* loan commitment at 5% per month.
*including the loan origination fee.

As it turns out, Xolani failed to realise that he would only be taking home R10,500 per month in three years’ time. So when he got his first paycheck after his return to work, and saw that the amount was lower than expected, he tried to forget that he had ever made that foolish decision to buy that flatscreen.

Bridge Loans duly noted that Xolani had not paid his first instalment. And after allowing the debts to accrue and the interest to compound for some months, they handed his debt contract over to a debt collector (let’s call them OneLaw).

OneLaw spent some time trying to call Xolani in order to discuss a repayment plan. Xolani, however, was still trying to forget about his flatscreen – and took it upon himself to ignore any and all calls that might remind him of it. Meanwhile, the debts and the interest continued to wrack up, subject to those limits in the National Credit Act (limits of ±60% interest per year, I might add).

Exasperated, OneLaw eventually handed the debt over to a law firm (let’s call them “Flemix and Associates”), and asked them to initiate legal proceedings against Xolani. An industrious attorney at Flemix quickly obtained an Emolument Attachment Order (affectionately known as a “garnishee order”) from a local magistrate, and sent it to Xolani’s employer. The garnishee order imposed a repayment plan on Xolani, and instructed the employer to deduct it from his paycheck directly.

Xolani’s employer is now sending Flemix and Associates a stream of income out of Xolani’s paycheck. That income then gets paid back to OneLaw (less a commission), who then on-pay it to Bridge (less a further commission).

The trouble is – now that R4,500 loan has grown into a R18,000 loan (and upwards, what with all the compounding and penalties), it’s going to take an awfully long while for everything to get repaid. Even if that process if fairly safe now that it’s an employer-deduction from the payroll – that doesn’t help the timing.

In the meanwhile, Flemix, OneLaw and Bridge are all big receivables and no cash.

Enter: Cambist

So the various people at Flemix, OneLaw and Bridge put their heads together and ask themselves: “How do we make this less of a cash-flow crisis?”

#IDEA

“Let’s securitise the debt! Or, rather, let’s see if we can sell this debt to someone in such a way that we don’t have to register as a Financial Services Provider or as a Credit Provider or any such regulatory onerousness. But think of all the free cash that’s sitting with the general public and, in particular, retirees who are looking for a fairly safe investment? We want the money – they want somewhere to put the money for a time. Let’s sell it!”

And, well, that’s where the online platform came from. You can go onto Cambist, and purchase a debt contract that’s secured by:

1. A garnishee order; and
2. Some kind of trust arrangement* (?)
   *Seems like there is a trust that holds these debt contracts in reserve, and if for some reason your particular debt contract stops performing (ie. your Xolani stops paying because he got fired), then you can return it to the trust and exchange it for a performing one.

And to be honest, on the face of it, it sounds like a properly sensible business idea.

Sure – it’s a little scummy with the 60% interest rate being charged to the low-income workers, and the obnoxious size of the loans now that they’ve compounded – but that’s an ethical issue, not a financial one.

That said – I am particularly suspicious of a trust arrangement that basically guarantees the debt.

Because why?

So I gave it more thought, and did more research, and of course there is some Cambist scandal.

What is all the scandal around Cambist?

Moneyweb has a few articles laden with rhetoric on this particular issue. Their main gripe: Bridge, OneLaw, Flemix and Cambist are all basically the same person.

An excellent infographic:

And almost all the Moneyweb articles (here and here) make some kind of complaint along these lines:

• “this is so unethical”
• “the abuse is widespread”
• “oh the abuse”
• “look at these interest rates”
• “oh the abuse”
• <insert heavy insinuations of wrongdoing here>

To which Mr Aldum gave a fairly stinging response (see here), which consisted mostly of:

• this is all very defamatory
• there is no “very cruel circle of lending and collections” – this was actually just a natural progression of business. You see, we started doing some micro-lending; this grew into Bridge; then we realised that we needed debt-collectors, so we formed a separate debt collection agency (OneLaw); then we wanted lawyers, so we found some (Flemix); then we needed to free up some cash flow, so we started Cambist. Initially, there was a strong connection – there is still a connection today, just less of one. We’re honest businessmen serving a need.
• We really don’t do that many garnishee orders.
• In fact, in the national statistics, the number of garnishee orders have actually come down over time.
• If you think we’re abusing the system, show us proof. Just give us the case numbers of 100 examples. We challenge you, you Moneyweb charlatans.

Some Thoughts

I think that Moneyweb and the various Cambist critics have entirely missed something here. They are harping on about the abuse of garnishee orders and the terrible awful hideous high interest rates.

And even if it is a bit gross – the business practice is legitimate and that’s all fine. But the real problem in my mind, and allow me to emphasize this:

MICROLENDERS MAKE MORE MONEY ON LOAN ORIGINATION FEES THAN THEY DO ON INTEREST.

If you go back to the post I wrote on payday loans some time back (Willy Wonga.com’s Choke-a-Lot Factory), you’ll notice that 72% of the total interest+fees came from the loan origination fee. And that’s because even high interest rates on low value loans don’t amount to that much actual cash – the real return in the business of microlending is the upfront origination fee that gets earned as Xolani (or whoever) signs his name on the line.

Which means that microlenders would like to give out as many loans as possible (not for the interest – but for the origination fees). They are only limited by the amount of cash-on-hand as to how much they can lend.

But Cambist – Cambist allows Bridge to monetise their outstandings (with your money). They can then take that money and make more loans, earning more origination fees (and, hey, also more interest!).

Let’s go back to my story

In fact, they could even go back to someone like Xolani, just before he gets handed over to OneLaw, and say to him:

“You know what, bud? This debt is out of control. Tell you what – let’s consolidate your debts into one big debt, at a lower rate of interest. Say, well, 50% instead of 60%. How’s that for reasonable? We’ll take an origination fee, obvs. But here is some money that we obtained from a nice girl called Nanette, a business developer in Pretoria that’s in the business of financial freedom, etc. We’re only paying her 19.5% for this money. Deal?”

Is this part of the plan?

I have no idea.

But I’m just observing that there is no need for Bridge/Cambist/OneLaw/whoever to break any laws here. They could make more than enough money simply by taking your money and turning it into more loans. And, like, they have a captured lending base with which to do it. Sure – it has the potential to create a giant unsecured lending bubble. But whatevs, right?

Again – I am just posing the hypothetical. And noting that the whole debt consolidation process does sound a lot like a Ponzi scheme (because if we’re talking financial schemes, why not include a Ponzi scheme, amirite?).

But ethical concerns aside, wouldn’t you at least consider doing it?

*sits back*

*waits for criticism*

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.