Cash Converters’ Practice and Annual Reports
Cash Converters International limited is a worldwide franchise based company specializing in business of buying and selling second hand goods through its stores all over and also offering loans to people Cash (Converters international limited, 2017). The company was incorporated in PERTTH, South Australia, in 1984. In November 2015 Cash Converters were alleged that some of its borrowers were charged up to 633 per cent interest on short term loans during July 2009 to Jun e 2013, despite the laws which restricted interest on pay day loans to 48 per cent including any upfront fees or charges (Fed Court, 2015). It was further; found that the company was taking advantage of vulnerable people who don’t have other choice. The company was not following responsible lending system as it was hard to find any client who was in a position to repay the loan, which clearly indicates that the company was only making profits from vulnerable people. The main agenda of the proceedings was the Brokerage Fees, which the customers were charged mainly by the franchisees, against service of introducing the customers to the company’s subsidiaries, which provided the loans. However the company was satisfied that the charge of brokerage was not against any legislation of Queensland. The class action was settles against a cash payout of $23 million to class members i.e. to those who took loan from the company during July 2009 to June 2013 (Chalrmers, 2015).
Cash Converters ltd was in practice of charging interest over 633% and also other charges like brokerage fees which the company accounted in its financial reports as interest income on short term loans. However there is no mention of brokerage fee in the annual reports which might be grossed under other heads such as income from franchise services. However the charge of brokerage was not against any legislation applicable at that time, charging interest of 633% simply an overstatement of financial workings as later the company had to admit a payout of $23million for the settlement of class action proceedings (Cash Converters international limited, 2017).
Unethical, the word itself suggests something which lacks Moral Principles or not correct. Thus, morally It was unethical on behalf of Cash Converters to engage in such a practice of charging such extortionate interest rates by targeting people in need, having no or limited choice (Badiou, 2002). It was very clear from the proceedings that the company was not carrying out its lending activity responsibly i.e. loans were provided without investigating the ability of borrower to repay the loan. The objective of any business is to earn profits, and those profits should be achieved by long term sustainable practices. There were thousands of cases on pay day loans were lenders would find out ways to recover increased amount from borrowers. Thus to protect customers right without compromising justifiable return to lenders bill was drafted by Government which proposed 10% establishment fee and 2% per month cap on a SACC and a maximum rate of 48% on other loans. However it was argued that responsible lending could be a solution but the proposed bill will harm the business. On this argument the lenders won and the rates were further increased to below 250% (Australian Government, 2017). However, lending companies were directed to regulate the lending procedure more responsibly. Despite the regulations by the government directing responsible lending practice and a limit on interest and other charges to be recovered from borrowers, Cash Converters International limited charged borrowers far above the set limit. On this ground the practice was unethical as people felt morally cheated and also loss of their trust in financial system of the economy.
Ethical Analysis of Cash Converters’ Practice
During the period from 2009-2013 that is post the practice of charging high interest Cash Converters business growth was regressive. Year 2009, disclosed a record profit of $16.2 million followed by revenue growth of 27% driven by increase in Loan establishment fees of $5.2m, and also increases in financial service commission of $600000 (Cash Converters international limited, 2017). The company was making huge profits every quarter. The company has disclosed all time high profits for consecutive years in a row. 30 June 2010 was recorded as the most successful year in company’s history with a record net profit of $21.6m. The personal loan book in Australia saw a growth of 28% to $67.6 million in the financial year 2012. The growth of online personal loan business in Australia embarks a growth of 126.7% to $14.2 million as compared to $6.3 million in 2011 (Cash Converters international limited, 2017). It was seen that that the company’s online strategy was a massive success and record loans were advanced online. Again in 2013 Cash Converters reported a growth of 20.8% to $134.9 million in its revenue followed by growth in Australian Personal Loan Book by 32.7% for the corresponding period. The Australian Loan book generated an EBITDA growth by 37.5% to $ 40.7 million for the period 30 June 2012 to 30 June 2013. During this period the Loan book also grown by 35.4% to $67.6 million. During this period a record growth of 16.4% to $272.7millio, in revenue was booked. However, the loan book saw growth in subsequent years also but revenue growth was not at same. In 2015 the Australian Loan Book saw a downtrend to $107.4 million after it peaked a record $115.7 in the previous year. However the Personal Loans and cash advances continued growing (Cash Converters international limited, 2017).
As far the share price is concerned, the share price of the company was growing steadily at the same rate during the period of 2009 to 2013. There was no massive impact of the practice was experienced in the share price during the period. From trading at $0.30 in the beginning of 2009 the share price increased slowly to $ 0.45 during June 2009 it steadily increased to $ 0.905 in March 2011, followed by a downward trend reaching low at $0.455 during December 2011, after which a slow recovery was seen in prices and the shares managed to reach a price of $1.02 during November 2012 (refer graph below). The shares kept trading between price range of $0.80 t0 $1.88 till 2014. However in 2015 a downside trend was developed and the shared price traded below half the price during 2015. This might be the impact of the outcome of class action where the company was directed to repay the money of the clients who took loan during the period of July 2009 to June 2013. This was how the financial position as well as share price of the company reflected the impact of the practice that prompted class action (ASX, 2017).
Financial Impacts of Cash Converters’ Practice
Below is the graph showing movement in share price in the period concerned 2009-2016
A financial institution is socially responsible for the welfare of the economy. It is important for a financial institution to make sustainable competitive profit and to achieve lasting values for the investors (Matei and Voioca, 2013). In recent years Corporate Social Responsibility has seen enormous increase in awareness and control globally. It is necessary for a financial institution to employ ethical strategies to conduct their business, which has societal benefits and is positive to development. A financial institution apart from their objective to earn profit and grow their business should show some interest in welfare of society as well as environment by taking into account the impact of their activities on shareholders, customers, suppliers, stake holders and the society. Considering the role that financial institutions plays in financing the developmental activities around the world its contribution to sustainability becomes incomparable. A Financial institution is responsible to protect the interest of its investors as well as customers, ensuring them satisfactory return (Matei and Voioca, 2013). The activities of financial institution should reflect their concern for Human Rights. The financial responsibility of financial institution may include:
- Energy conservation
- Environment
- Education
- Healthcare
- Emerging markets
- Donation and sponsorship
The best way to implement a sustainable CSR initiative is by aligning CSR with business strategy. This can be done through a well defined business strategy for instance contributing a percentage of the product price to CSR activities. This brings multiple benefits like Enhancement in brand value, building trust and confidence of customers and investors, improvement in financial position, and an increase in growth of the business (Mallin, 2009).
Like any other financial institution the social responsibility of Cash Converter is same. It is the responsibility of cash converters to protect the interest of its customers, however unethical practices like charging interest over legal limits is a threat to CSR and welfare of society (Mallin, 2009). The company should not indulge in practices like this which results in loss of its reputation affecting its financial position and overall business growth. The company should follow ethical strategies to maximize its profit which is the prime objective of any business organization but without causing any harm to the welfare of society and economy. However it is also the responsibility of the business organization to provide maximum profit to its shareholders and stakeholders that should not be at the cost of losing its customers (Mallin, 2009).
References
ASX. 2017. Share Price list. [Online]. Available at: https://www.asx.com.au/ [Accessed on: 31 March 2017].
Australian Government. 2017. National consumer credit protection amendment. [Online]. Available at: https://www.legislation.gov.au/Details/F2014L00701/Explanatory%20Statement/Text [Accessed on: 31 March 2017].
Badiou, A. 2002. Ethics: An Essay on the Understanding of Evil, Page 2. Verso.
Cash Converters international limited. 2017. About the company.[Online]. Available at: https://www.cashconverters.com/CompanyOverview/LatestNews?page=2 [Accessed on: 31 March 2017].
Cash Converters international limited. 2017. Documentation in Annual Report. [Online]. Available at: https://www.cashconverters.com/CompanyOverview/LatestNews?page=2 [Accessed on: 31 March 2017].
Chalrmers, M. 2015. Cause and outcome of the class Action. [Online]. Available at: https://newmatilda.com/2015/10/15/disgraced-cash-converters-cough-ups-23-million-after-class-action-alleging-dodgy-lending/ [Accessed on: 31 March 2017].
Fed Court. 2015. Cash converters NSW class actions. [Online]. Available at: https://www.fedcourt.gov.au/__data/assets/pdf_file/0003/26544/Notice-to-Group-Members-Sch-A.pdf [Accessed on: 31 March 2017].
Mallin, C.A. 2009. Corporate Social Responsibility: A Case Study Approach. Edward Elgar Publishing.
Matei, M. and Voioca, M.C. 2013. Social Responsibility in the Financial and Banking Sector. Economic Insights – Trends and Challenges, II(1), pp. 115-223.
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