Explore how South African banks misrepresent fixed deposit interest rates, using simple interest to attract investors while obscuring the true returns.
Image: File photo.
The practice by South African banks of advertising simple interest rates on fixed deposits has become more widespread. Only two banks in the “Big Five”, FNB and Capitec, have not resorted to this deceptive and confusing practice, and smaller banks and other institutions are doing it.
I covered this issue in the past in the hope that the institutions concerned would do the honourable thing. They haven’t. Instead, more have clambered aboard the bandwagon, with the attitude that “if my competitor can get away with it, so can I”. The trouble with everyone doing it is that the competitive advantage gained by luring investors to invest through deceptive means is lost.
Grade 8 maths lesson
The universally accepted way of quoting interest on an investment is by using the compound annual growth rate (CAGR). Compound interest, as any 8th Grader will tell you, is when you earn interest on interest, meaning your capital grows exponentially. The banks refer to the “nominal interest rate” and the “effective annual rate”, which is slightly higher than the nominal rate because the interest is calculated daily or monthly. This is the rate you should be looking at when comparing rates from providers.
The questionable part is banks showing the “interest rate at maturity” when the interest is reinvested. It’s this rate that banks trumpet in their advertising. To arrive at this rate, which is substantially higher than the CAGR, they use a simple percentage of the original amount.
An example: R1 000 capital invested over five years at an effective CAGR of 10% will give you a final sum of R1 610. The banks then do a reverse calculation, taking the R610 you earned in interest and dividing it by five, giving you R122 per year. Converted to a percentage, this is 12.2%, which is the simple rate on the original capital. To a lay consumer, a return of 12.2% sounds better than one of 10%.
Bank rates
I compared the “Big Five” banks on a R100 000 fixed deposit invested for five years (rates as of March 11, 2025). Here is what their websites say in the small print and what your final amount would be. The calculations are mine. In brackets, I calculated what the final sum would be if the advertised simple rate were a CAGR rate.
• Absa: The “monthly” rate (“The rate associated with the investment should you choose to get your interest paid monthly.”) is 8.35%. No mention of an effective annual rate. The rate on maturity (“The rate associated with the investment should you choose to get all your interest paid when your investment matures.”) is 10.45%. Final amount: R152 250 (CAGR: R164 372).
• Capitec: The nominal rate (“The nominal interest rate is used to calculate the daily interest earned on your account balance, which accumulates until it is capitalised on an agreed date every month.”) is 8.65%. The effective rate (“The effective annual interest rate is calculated by taking into account the fact that interest is earned on capitalised interest over a period of 12 months.”) is 9.00%. Final amount: R153 862.
• FNB: After struggling to open the interest rates page on the FNB website, the bank’s media team kindly sent me their rates tables. On a five-year R100 000 fixed deposit, the nominal rate is 8.25% and the effective rate is 8.57%. No small print. Final amount: R150 851.
• Nedbank: On an electronic fixed deposit the nominal rate (“The annualised interest rate that you will earn, calculated on the daily balance of your investment if interest is paid out monthly.”) is 8.35%. The annual effective rate (“The annualised interest rate that you will earn on the money invested, compounded annually in arrears.”) is 8.67%. The rate at maturity (“The rate you get if you choose to have all interest paid when your investment matures. Calculated using the original investment amount only at a fixed interest rate, with no compounding.”) is 10.31%. Final amount: R151 547 (CAGR: R163 333).
• Standard Bank: The nominal rate (with the following bizarre statement in the small print: “This rate does not consider the interest compounding effect.”) is 8.59%. The interest at maturity (“The interest rate you will be paid at maturity of your Fixed Deposit account, assuming no interest is withdrawn.”) is 10.50%. Final amount: R152 500 (CAGR: R164 744).
Capitec outclasses its competitors in several ways. When you compare apples with apples, its rate gives you the best overall return, there is no mention of “interest at maturity”, and the explanations of the nominal and effective rates are easy to read and easy to understand. While not offering the best rate, FNB is also direct and honest with consumers.
It’s interesting to note that the correct term, “simple interest”, never appears in the other three banks’ interest-at-maturity explanations.
Apples with apples
For an apples-with-apples comparison of interest rates on products from banks and other institutions, including rates on RSA Retail Bonds, go to RateCompare (www.ratecompare.co.za) run by Walter.
On his website, Walter describes his frustration in trying to find and compare rates on fixed deposits. “I noticed a number of promising ads from banks offering anywhere between 9.5% to 13.3%. Yet, I could not help but notice that star (*) and the infamous ‘terms and conditions apply’.
“The bottom line was this – the banks could not be trusted with their advertised rates. You see, there are different ways or methods to showcase the interest rate a bank is offering. When adverts are run, banks often quote ‘simple interest’. Simple interest is not an accurate reflection and should be disallowed to be used.”
I couldn’t agree more.
FSCA statement on deceptive advertising
I approached the Financial Sector Conduct Authority (FSCA) on this deceptive practice and received the following statement in response:
"The FSCA is mandated to regulate and supervise banks' conduct regarding the financial products and services they provide. In fulfilling this mandate, the FSCA published The Conduct Standard for Banks 3 of 2020 to ensure the fair treatment of financial customers.
“In South Africa, banks are required to disclose interest rates to their customers. Section 7 of the Conduct Standard provides that before, during, and after the conclusion of a contract, a bank must take reasonable steps to ensure that a financial customer is aware of all relevant facts that could influence the financial customer’s decision relating to the financial product or financial service. Furthermore, a bank must ensure that its advertising is conducted in a way that is clear, fair, and not misleading, as outlined in section 6 of the Conduct Standard.
“Section 7(4) of the Conduct Standard further states that in the instance where a financial product provides for the payment of interest by the bank to the financial customer, the bank must appropriately describe the rate of interest concerned and also disclose to a financial customer the effective annual interest rate of the financial product.
“In conclusion, the FSCA plays a crucial role in ensuring that banks adhere to proper conduct standards in the provision of financial products and services. Banks are required to disclose interest rates transparently and to ensure that financial customers are well-informed when making decisions. By mandating clear, fair, and non-misleading advertising, and requiring the disclosure of relevant interest rate information, the FSCA aims to promote fair treatment and protect the interests of financial customers.”
My comment: The banks have been advertising simple rates for years now and, to my knowledge, the FSCA has not acted to stop this practice. I’m not holding my breath.
* Hesse is the former editor of Personal Finance.
PERSONAL FINANCE