'Abil failure could have hit confidence’

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BR African Bank  0190 Independent Newspapers African Bank's microlending model was successful until the economy slowed, economist Azar Jammine says. Photo: Simphiwe Mbokazi

Although not a traditional deposit taker, allowing African Bank Investments Limited (Abil) to collapse would have risked significant contagion in terms of a decline in confidence in the financial sector, according to Azar Jammine, the chief economist at Econometrix.

In a note to clients, he said it would have been sad and damaging to witness the disappearance of yet another smaller financial institution, reminiscent of the experiences of a decade ago, which had resulted in a huge concentration of power in the hands of five major banks.

Jammine said at least Abil provided competition.

“The failure of African Bank is attributable to a multitude of factors. More generally, although the model of microlending proved very successful for a three-year period between 2010 and 2012, the growth in the loan book was unsustainable.”

He said economic growth had slumped in the wake of an increase in the incidence of strikes in the mining and other sectors from the second half of 2012 onwards.

Pressure had also built up on the government to control its wage bill and overall spending.

“As a result, the rate at which microloans could be issued contracted by about half in the ensuing two years. Together with the increase in impairments associated with the earlier unsecured lending boom, the microlender’s business levels could not keep pace with costs any longer and this resulted in huge losses. Had the growth in the economy not contracted to the extent that it did, the fallout would probably not have been as severe.”

African Bank received emergency support from the Reserve Bank after parent Abil lost most of its market value over three days last week. The lender would be split to create a bad bank with soured loans, while senior and wholesale debt instruments would be transferred to another bank at 90 percent of face value, the central bank said on Sunday.

Investors in money market funds holding Abil securities face capital losses as money managers slash interest payments to offset write-downs of the debt. Funds could use one day’s worth of accrued interest to offset losses, the Financial Services Board (FSB) told money managers yesterday.

The funds could also cancel units rather than impair their value, the FSB said.

Andrew Canter, the chief investment officer at Futuregrowth Asset Management, said: “Some customers are going to wake up with less money than they had the day before. Some funds will be more affected than others.”

Money market funds overseeing about R270 billion had 1.3 percent exposure to Abil debt, the FSB, which regulates financial services companies excluding banks, said.

Local money market funds keep net asset values at R1 a share, meaning that a rand invested can always be redeemed for a rand. A drop of net asset values below that level would risk shaking investor confidence in a market seen as low-risk and used by companies to raise short-term cash.

“We won’t break the buck,” said Paul Hutchinson, the head of retail business development at Cadiz Asset Management, a reference to the net asset value of shares falling below R1.



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