Abil bailout raises questions
African Bank Investments will receive a R10bn capital injection to stave off collapse.
JOHANNESBURG - The monster bailout of African Bank Investments Limited (Abil), which will receive a R10 billion capital injection to stave off collapse, has raised questions about the regulation of the unsecured lending sector.
Abil announced on Wednesday that it would need a minimum of R8.5 billion in extra funding from shareholders to continue, barely months after it gobbled up R5.5 billion in a rights issue.
A group of banks, including Barclays Africa, First Rand and fund administrator the Public Investment Corporation (PIC) agreed to underwrite the capital raising, Reserve Bank governor Gill Marcus said on Sunday.
African Bank was also put under curatorship, or administration as "a protection procedure to give the bank time to come up with rescue plan".
Part of Abil's troubles stemmed from its R9.2 billion acquisition of furniture retailer Ellerine Holdings in 2008, which prompted losses and write-downs after sales dropped.
Abil doesn't take deposits and typically disburses small loans not backed by assets to low-income earners. Many customers are struggling to keep up with repayments amid rising unemployment and inflation.
The bank had R101 million worth of depositors' money at the end of May, according to Reserve Bank information, with that money guaranteed.
Speaking to Talk Radio 702's Redi Tlhabi on Monday, Stephen Logan, a consumer advocate at Fair Credit, said the problem with the African Bank model is the expensive credit.
"There is also a gigantic materialist perspective in South Africa where we are competing with the joneses and constantly have to have things now. This fuels a huge credit demand and because our collection system is so good, banks are saying it doesn't matter if we have a debt rate that is quite high, we are still making a huge profit," he continued.
Logan added one of the biggest problems is that credit insurance is not capped and extremely expensive which makes any form of credit extremely profitable.
"African Bank also didn't have enough different sources of income and were purely dependent on a very large group of very vulnerable consumers. With the cost of credit so high, they were bound to have more and more defaults, while still continuing to lend. The question to ask is, where were the auditors in all of this?"
Logan also said the Consumer Protection Act doesn't protect consumers because the National Credit Act was excluded from its ambit.
"I think there's been insufficient auditing of banks and credit providers because there haven't been affordability assessment regulations, resulting in reckless lending."
He said even with the introduction last week of the Draft National Credit Regulations for Affordability Assessment, aimed at curbing reckless lending, it's not enough to change things.