JOHANNESBURG – South Africa’s newest bank pays up to 10% on deposits. This generous return has helped it to attract R85m in deposits since it opened its doors, a mere four months ago.
Finbond is a micro-lender with 170 branches nationwide. It offers small, short-term loans of between R100 to R7 000. The deposits it accepts via its mutual bank are used to fund the micro-loan business.
Finbond applied for a mutual bank licence in November 2010. The licence was eventually granted in May 2012, and Finbond opened its doors in September, after meeting the conditions of establishment imposed by the Registrar of Banks.
It was the first banking licence awarded to a South African company in more than a decade.
Finbond Mutual Bank is one of only three mutual banks in the country. The other two are: GBS Mutual Bank and VBS Mutual Bank. These are old institutions; GBS was established in 1877 and VBS in 1982. A mutual bank is owned by its depositors, and they are entitled to vote at shareholder meetings.
A mutual bank does not require as much capital as an ordinary bank in order to obtain a licence. But Finbond CEO Willie van Aardt insists that in all other aspects, the application process is as onerous as it would be for an ordinary bank.
“It’s not only about having sufficient capital,” says Van Aardt. He notes that the South African Reserve Bank scrutinises aspects such as the directors, the business plan, products, risk management policies, corporate governance, internal auditing, external auditors, anti-money laundering measures and IT capabilities.
Finbond has some high-powered directors on its board, including Neville Melville, former CEO of the Ombudsman for Banking Services, and Jasper Noeth, the former director general of the justice department.
Finbond pays depositors between 8.75% and 10% a year, depending on the term of the deposit. Fixed-term deposits of 6-11 months earn interest of 8.75%. Those of 49-60 months earn 10%.
All of Finbond’s savings products currently require a minimum deposit of R100 000. But there are plans to cater to smaller depositors. Van Aardt says that Finbond expects to launch transactional banking products in the second half of this financial year, including Visa card, internet banking and cellphone banking.
Finbond’s interest rates are significantly more generous than other banks. For example, Capitec, which has long been known for above-average interest rates, pays 8.5% on a R100 000 fixed-term deposit of 49-60 months. An equivalent deposit with one of the big-four banks would not earn more than 7%.
However, Finbond does not mind paying more than its competitors. The interest it pays to depositors is much lower than it pays other funders. Until it launched the mutual bank, Finbond was almost entirely dependent on international development funders (such as the Dutch FMO) to fund its micro-loan business. This funding was expensive, and costs Finbond 18-24%. Thus, money from depositors offers Finbond “enormous savings,” says Van Aardt.
Potential investors might reasonably ask whether a deposit with Finbond is as safe as other banks. After all, increased return is usually associated with higher risk. And Finbond lends money to low-income borrowers who are less likely to repay their loans. In contrast, big four banks have, on average, better-quality clients, and most of their loans are secured by assets such as property.
What’s more, there are concerns that the micro-loan industry is overheated.
Van Aardt responds that Finbond does not operate in the long-term micro finance market, which he says has seen disproportionate growth of the past few years. Finbond offers smaller, shorter-term loans than most of its larger competitors. For example, the average Finbond loan is around R2 500 with a term of two and a half months. In contrast, Capitec and African Bank offer unsecured loans of up to R230 000 over 84 months. The average loan offered by these players is several thousand rand with a term of three years.
Van Aardt says Finbond’s statistics show that loans with shorter terms have lower bad debt ratios and are more likely to be repaid.
Galileo Capital CEO Theo Vorster says a few of his clients have asked him about Finbond’s savings products. Vorster notes that the 10% paid by Finbond is three percentage points higher than the return offered by the equivalent government retail bond. “Investors need to ask themselves whether the extra three percentage points are adequate compensation for the extra risk,” says Vorster.
Finbond’s banking licence should certainly provide comfort to investors. The Reserve Bank does not guarantee deposits of any bank. But it monitors banks on a monthly basis to ensure that they adhere to all laws and regulations, including minimum regulatory capital and liquidity requirements. Further, the Reserve Bank places strong emphasis on the protection of depositors’ funds, which is important to maintain faith in the banking system. When Saambou collapsed in 2002, the Reserve Bank helped to negotiate a deal that saw FirstRand rescue depositors.