Allowing poor people access to credit is high on the developmental agenda globally. The success of the Grameen Bank, set up by Mohammed Yunus in Bangladesh in 1976, inspired similar initiatives around the world – including in South Africa. Give poor people affordable loans and they will invest the money in productive initiatives, escaping the poverty trap. That is the theory.
The reality is often different, especially in South Africa where the cash often goes on bare survival – paying for food or paying off existing debts – or lifestyle. And the provision of high-cost microcredit has proved a risky business for those who venture into the territory.
Attempts by the government to provide affordable finance have been limited and only partially successful. And private sector initiatives have proved temporarily profitable but hard to sustain because of the dangers that emerge when judgements prove faulty.
These were highlighted last week when African Bank Investment Limited (Abil), the country’s leading microlender, forecast a full-year headline loss of R4.6 billion for its banking unit, citing a build-up of non-performing loans.
In a Stock Exchange News Service statement, Abil predicted the group as a whole would show “a basic loss of at least R7.6bn and a headline loss of at least R6.4bn for the full year”. The share price reportedly fell 62 percent over the next few hours. By Friday’s close it was down to 31c.
Ten years ago, Abil was flying high, reporting a return on equity of more than 27 percent, steered by Leon Kirkinis, the founder of the bank in its present form and chief executive.
Kirkinis, who resigned on Wednesday, was one of the pioneers in the field of developmental finance. He first became involved in the mid-1980s when he worked for what was then the merchant bank UAL. In 1993 he set up Theta Securities, which five years later bought African Bank. Established in 1975 as a savings and loan institution, the original bank had already hit some rocky patches and was emerging from its second curatorship.
Under Kirkinis, it recovered to survive the microcredit bubble of the late 1990s and sail through the banking crisis of 2002, which swept away the country’s sixth largest retail bank, Saambou – a casualty of a failed micro-lending venture – among others.
The secret of success in this field is to price for risk and accurately assess borrowers’ ability and willingness to repay.
For many years this wisdom prevailed at Abil. But in recent times, facing competition from the major banks, managers compromised on these principles.
Last year the bank was fined R20 million by the National Credit Regulator for reckless lending. In other words it was judged guilty of lending to people who could not afford to repay their debts.
This was not the only problem.
The purchase of the non-performing furniture retailer Ellerines in 2008, slow growth since the 2008/09 recession and the troubles in the strike-ridden mining sector in the past two years have burdened the bank with non-performing loans and dragged it into a loss position.
Abil has been forced to ask investors to put in “a minimum” of R8.5bn in fresh capital at a time when its share price is tanking. This followed a R4bn rights offer last year.
Banking business is highly politicised. Banks are often castigated for lending too freely to poor people, for short-term profits generated by the very high interest rates. In 2012, the SACP general secretary, Blade Nzimande, made a bitter attack on the banks because of “a huge increase in the number of unsecured credit transactions” they were ganting and warned of a pending bubble.
However, banks’ critics, often the same people, are equally ready to lambaste them for making credit inaccessible to low-income households.
The immediate question is: will there be a contagion effect on the banking system? The Reserve Bank, the custodian of local banks, thinks not. “South Africa’s banking sector remains healthy and robust, and there have been no indications that other South African banks have been affected negatively by Abil’s trading update,” the central bank said on its website.
Yesterday the bank stepped in to rescue Abil, placing it under curatorship, a legal protection measure that gives the Reserve Bank the “necessary space” to implement a resolution plan, as well as announcing plans for a R10 billion capital injection.