Wonga denies being in a bubble

Published Sep 19, 2013

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Johannesburg - Wonga has challenged the notion that there is a bubble in unsecured lending.

The microlender, which has been advertising aggressively in the local media, said this week that these concerns were incorrect as asset-backed lenders such as motor financiers sometimes had higher default rates than microlenders.

“South Africa doesn’t have the kind of growth to talk about any kind of bubble,” Wonga South Africa chief executive Kevin Hurwitz said.

Adrian Cloete, an equity analyst at Cadiz Asset Management, said he also did not believe in putting “the bubble blanket” over the whole unsecured lending sector, adding that there should be a differentiation between providers.

Cloete pointed out that a couple of factors supported unsecured lending growth, including the decline in the extension of residential mortgages and the extension of credit to people who did not have access prior to the National Credit Act of 2007.

He said a bubble could only exist if growth continued at the same high rate, saying it was now at about 20 percent after coming down from about 40 percent to 50 percent.

“Yes, certain people in particular living standard measures have been overextended, but it also depends on how you apply your credit policy,” Cloete said.

Wonga has been labelled as a controversial lender, especially in the UK where it first started its operations. It has been accused of growing its business at the expense of the poor by giving loans to struggling consumers at exorbitant interest rates.

Hurwitz denied this, saying: “The idea that we are lending to the poor is incorrect.”

The UK market calculates loan interest using annual percentage rates, in terms of which Wonga’s rates stood at between 4 200 percent and 5 853 percent.

But the average duration of Wonga’s loans is only 25 days in South Africa and 16 days in the UK.

“If we compounded our interest every day for a year, that would be the correct rate but that’s not the case. In the UK, our interest rate is 1 percent a day and in South Africa it’s 0.7 percent,” Hurwitz said.

Last year, Wonga made £62.5 million (R975m) net profit on 4 million loans.

36One Asset Management analyst Jean Pierre Verster said because Wonga specialised in small loans issued over a short period of time, this unfortunately also meant that it could charge higher interest rates.

“If you use the calculator on their website, you see that their loans are very expensive. But Wonga has been a success in the UK and there is a good chance for it to be successful in South Africa. It’s up to the consumer to decide if they are willing to pay the high rates,” Verster said.

Since opening its doors in the UK, Wonga has dispensed more than 7 million loans in the country. Last year, the number of UK loans granted increased by 58 percent from 2011 while the amount lent grew by 65 percent.

In South Africa, the company has been operating for more than a year and it said it was dispensing ten of thousands of loans a month. - Business Report

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