It’s in nobody’s interests for African Bank (Abil) to fail. It will not be good for the market or the country for it to lose the battle that it is currently fighting.
But there is no escaping the hard truth that the company is in big trouble.
It is not telling anyone anything to say that Abil seriously needs to re-evaluate its business model. The company’s chief financial officer, Nitha Nalliah, admitted as much at the group’s operational update last Wednesday.
But is he and the rest of Abil’s management prepared to do some really serious self-reflection on just how far they have to go?
It is now obvious that the business it has been running is not just unsustainable, it is wrong. It is wrong for generating long term profits, it is wrong for the borrowers being buried in repayments they can’t afford, and it is wrong for the economy.
Of course it’s easy to be wise after the fact, and it’s equally easy to put the boot in to Abil while it is down. But at the same time, we shouldn’t miss the opportunity to perform on honest assessment of what has led to this point.
Abil can bemoan the weak economic environment, strikes and the pressure that consumers are under, but is it willing to entertain the question that it and businesses like it are not just victims? They may also be a part of the problem along with Eskom and the petrol price.
The really deep trouble that the local consumer is under is not just down to the high cost of living. It is debt – heaps and heaps of debt from credit that has been extended by the likes of Abil.
We are now in a situation where a very significant number of South Africans are spending the majority of their incomes servicing debt. In such an environment, Abil cannot assume that a few tweaks to it’s business model will be enough.
It cannot expect South Africans to go on living in this manner. Because it is inevitable that many such people will take on more debt to service the old debt and build themselves into, effectively, their own ponzi schemes.
And when the bottom drops out of the whole thing, there are no winners.
Abil can talk dispassionately about how the protracted platinum sector strike caused a big increase in bad loans. But is it willing to ask itself some hard questions about the motivation behind the strike and its potential complicity in that?
Why were miners demanding such high salary increases? How much of that can be put down to their need to service debt from the likes of Abil?
This is not a flippant question. When people become more desperate, they also become more reckless and more angry. The tone of the industrial action we are seeing in South Africa demands that we interrogate how much the average worker is spending on paying back debt, and how much that affects what they ask for when it comes to negotiation time.
Anecdotally, there are stories across the country of how debt collectors wait at the doors of factories and workshops on pay day and collect their dues as people go out. We are hearing stories of workers quitting their jobs just so that they can collect their retirement savings to pay off debt and then immediately trying to find a new job.
Business owners are telling of how many of their employees are in constant battles with lenders and finding it impossible to keep up with repayments. This disrupts the workforce and the economy.
We know that there is an argument for unsecured lending – that it can stimulate economic growth by giving more people access to credit. But is it doing that in South Africa? What do we have to show that unsecured lending has been any benefit to the country’s economy?
It certainly doesn’t seem like it has. And is that because lenders are lending to the wrong people for the wrong reasons on the wrong basis?
The model that Abil and others like it have been running has been predominantly to lend money to people to fund their lifestyles. That is not the type of microlending that builds economies.
The kind of microlending we need in South Africa is that pioneered by Nobel Peace Prize winner Muhammad Yunus, the founder of Bangladesh’s Grameen Bank. Grameen focuses on lending money to those with no collateral, mostly women, to start their own businesses or buy assets like cattle that will have a payback.
Abil has the opportunity now to turn its back on the reckless model it has been running and acknowledge that it doesn’t work. The company should use this chance to turn itself into something that will really benefit the local economy.
Because it is not enough for Nallia to stand up on Wednesday and say:
“We are going to take this business back to what it used to do at a very profitable return to shareholders. We remain convinced there’s a significant market for unsecured lending in South Africa…Abil has a proven track record in that regard, generating a return on equity (ROE) of 50% prior to its Ellerines acquisition.”
He is kidding himself and his shareholders if he thinks that Ellerines is the only problem Abil has. He needs to go a lot further than that.