Back to ABSA, the first thing you will notice if you read the T&Cs (terms and conditions) is that the stated 13% is not compounded interest but simple interest. This means that the 13% is the rate earned on the initial capital invested per annum. Let me illustrate this point with a mathematical example:

R100 000 investment at 13% is R13 000 interest in year one, again R13 000 in year two and year three and year four and year five for a total of R65 000 (R13 000 * 5). If it was a compounded rate you would have earned interest as follow:

Year 1: R100 000 @ 13% = R13 000 & Year 2: R100 000 + R13 000 = R113 000 @ 13% = R14 690 & Year 3: R127 690 @ 13% etc.

At the end of the term total interest earned would be R84 244 (if compounded at 13%) versus R65 000 (simple interest). Many market commentators accused ABSA of misleading the public but I will comment on this a bit later. If you calculate the actual compound rate of interest offered by ABSA this equates to only 10.05% which is markedly less than the perceived marketed "13%".

Now you might argue that 10.05% is still significantly higher than inflation (CPI), or many other investment opportunities currently available in the market. This brings me to my second point which is that you only receive this rate if you do not receive any interest pay-out during the term and not access any capital before the end of five years. In other words, you have to invest and leave the funds and only at the end of five years will you receive your capital plus all interest earned.

But the finer detail does not stop there, you also need to keep in mind:

You might wonder how it is possible for ABSA to offer “13% per annum” given the current state of market returns? The answer is actually very simple. During times of economic and financial hardship consumers/ the public come under significant financial pressure. One way to temporarily relieve the pressure is to access short-term debt. ABSA pay investors “13% per annum” on capital invested and then lend the capital at rates ranging from 16% to 20% and more (when last did you have a look at your credit card agreement, interest rates on credit cards easily go up to 27.5%) depending on the term and size of loan etc. In order for ABSA to fund these loans they are required to hold a percentage cash relative to the value of their debt. This brings me back to my comment regarding the term and why investors are required to stay invested the full 5 years.

One can argue that ABSA’s marketing campaign of “13% per annum” is misleading and that they should have stated more clearly that this is not compound interest. As I have communicated in the past cash carries risk for investors as it is not an inflation hedge over the long-term. However, we need to consider the risk and return requirements of investment opportunities against investment objectives within each client’s investment portfolio. Once you have all the relevant information you can make an informed decision regarding the appropriateness of each investment component when evaluating different investment options.